A corporation is a creature of statute, an artificial “person.” Corporations can have one or more shareholders. Owners can be natural persons or

A corporation is a creature of A corporation is a creature of statute, an artificial “person.”statute, an artificial “person.”Corporations can have one or

more shareholders.Owners can be natural persons or

other businesses.Corporation substitutes itself for

shareholders.

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Corporations are recognized Corporations are recognized as legal “persons” and enjoy as legal “persons” and enjoy virtually same rights and virtually same rights and privileges under our privileges under our Constitution as natural Constitution as natural persons.persons.


Responsibility for overall Responsibility for overall management of company management of company rests withrests with board of directors board of directors (elected by shareholders).(elected by shareholders).

Board of directors makes Board of directors makes policy decisions and hires policy decisions and hires officers to run corporation on officers to run corporation on a daily basis.a daily basis.


Shareholders can sue Shareholders can sue corporation and be sued by corporation and be sued by corporation and bring suit for corporation and bring suit for corporation in some corporation in some instances.instances.


One of the key advantages of One of the key advantages of corporations is the limited corporations is the limited liability of shareholders liability of shareholders

In certain situations, the In certain situations, the corporate “veil” of limited corporate “veil” of limited liability can be pierced, liability can be pierced, holding the shareholders holding the shareholders personally liable. personally liable.


Corporate profits can either be Corporate profits can either be kept as kept as retained earnings retained earnings or or passed on to the shareholders passed on to the shareholders as as dividends.dividends.

Corporate TaxationCorporate Taxation: corporate : corporate taxes can be taxes twice, first taxes can be taxes twice, first to the corporation, then to the to the corporation, then to the shareholders via dividends. shareholders via dividends.


Holding Companies (parent Holding Companies (parent company): company whose company): company whose business activity consists of business activity consists of holding shares in another holding shares in another company.company.

Typically holding company is Typically holding company is established off-shore (Cayman established off-shore (Cayman Islands, Hong Kong, etc).Islands, Hong Kong, etc).


Corporation is liable for the Corporation is liable for the torts committed by its agents torts committed by its agents or officers within the course or officers within the course and scope of their and scope of their employment under the employment under the doctrine of doctrine of respondeat respondeat superiorsuperior. .


Corporation can be liable for Corporation can be liable for criminal acts, but only fined. criminal acts, but only fined.

Responsible officers may go Responsible officers may go to prison. to prison.


Domestic Domestic corporation does corporation does business in its state of business in its state of incorporation.incorporation.

ForeignForeign corporation from X corporation from X state doing business in Z state. state doing business in Z state.

AlienAlien Corporation: formed in Corporation: formed in another country doing another country doing business in United States.business in United States.


Public and Private Public and Private Corporations.Corporations.

Nonprofit Corporations.Nonprofit Corporations. Closely Held Corporations:Closely Held Corporations:

More informal management, similar to a partnership.

Restriction on transfer of sale and transfer of shares.


Closely Held Corporations Closely Held Corporations (cont’d).(cont’d).Management of Closely Held

Corporations.Transfer of Shares Shareholder Agreement to Restrict

Stock.Misappropriation of Closely Held

Corporation Funds.


““S” Corporations: S” Corporations: avoids avoids federal tax under IRS Code federal tax under IRS Code “Subchapter S.” “Subchapter S.” Avoids federal “double taxation”

of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income.


““S” Corporations: S” Corporations: avoids avoids federal tax under IRS Code federal tax under IRS Code “Subchapter S.” “Subchapter S.” IRS requirements: Corporation is

domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.

Professional Corporations.Professional Corporations.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

The process of incorporation The process of incorporation generally involves two steps:generally involves two steps:Preliminary and Promotional

Activities; and The Legal Process of

Incorporation.


Before corporation is formed, Before corporation is formed, promoterspromoters are the persons are the persons who take the preliminary who take the preliminary steps of organizing the steps of organizing the venture and attracting venture and attracting investors via investors via subscriptionsubscription agreements. agreements.


Promoter’s Liability: Promoter’s Liability: Promoter Promoter is personally liable for pre-is personally liable for pre-incorporation contracts on incorporation contracts on behalf of the corporation, unless behalf of the corporation, unless 33rdrd party agrees to hold future party agrees to hold future corporation liable. corporation liable.


Promotion

Name Search

File Articles of Incorporation

Subscribers

1st Organiza-tional Meeting

State Charter


Select State of Incorporation.Select State of Incorporation. Secure the Corporate Name.Secure the Corporate Name.

Must include words that disclose corporate status.

Cannot infringe on another’s trademark name.


Prepare the Articles of Prepare the Articles of Incorporation: Incorporation: which deals with which deals with shares, the registered agent and shares, the registered agent and office, incorporators, duration office, incorporators, duration and purpose, and internal and purpose, and internal organization. organization.

File the articles with the state.File the articles with the state.


Adopt Bylaws:Adopt Bylaws:After the corporation is

“chartered” (created) it can do business.

At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.


De Jure:De Jure: substantial statutory substantial statutory requirements are met; cannot be requirements are met; cannot be attacked by state or 3 attacked by state or 3rdrd parties. parties.

De FactoDe Facto: : statutory statutory requirements requirements notnot met, but met, but promoters made good faith effort promoters made good faith effort to comply with corporate law; to comply with corporate law; can only be attacked by state.can only be attacked by state.


Corporation by Estoppel: Corporation by Estoppel: If it acts like a corporation,

cannot avoid liability by claiming that no corporation exists.

CASE 19.1 Brown v. W.P. Media, Inc. (2009). Why couldn’t W.P. Media deny Alabama MBA’s existence?


Express Powers.Express Powers.Found in the corporation’s

articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.

Corporate by-laws may also grant or limit a corporation’s express powers.


Implied Powers.Implied Powers.To perform all acts reasonably

necessary to accomplish its corporate purposes.

A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.


Ultra Vires Ultra Vires Doctrine.Doctrine.Corporate acts beyond the

express or implied powers of the corporation (by statute of articles of incorporation).

Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation.


In certain situations, courts In certain situations, courts will “pierce the corporate will “pierce the corporate veil” and hold shareholders veil” and hold shareholders personally liable in the personally liable in the interests of justice and interests of justice and fairness. fairness.


Factors a Court Considers:Factors a Court Considers:A party is tricked into dealing

with a corporation rather than the individual.

Corporation is set up never to make a profit or remain insolvent or is under capitalized.


Factors (cont’d):Factors (cont’d):Corporation is formed to evade

an existing legal obligation.Statutory formalities are not

followed. Commingling of personal and

corporate interests or assets.


A Potential Problem for A Potential Problem for Closely Held Corporations.Closely Held Corporations.CASE 19.2 Schultz v. General Electric Healthcare Financial Services (2010). Why was Schultz personally liable?


The Alter-Ego Theory. The Alter-Ego Theory. Corporation is “alter ego” of

majority shareholder and personal and corporate interest are commingled such that the corporation has no separate identity.


Roles of Directors:Roles of Directors:Individual directors are not agents

of corporation. Only the board itself can act as a “super-agent” and bind the corporation.

A director can also be a shareholder, especially in closely-held corporations.


Election of Directors. Election of Directors. Generally, Generally, the number of directors is set the number of directors is set forth in the articles of forth in the articles of incorporation:incorporation:Directors appointed at the first

organizational meeting. In closely held companies, directors are generally the incorporators and/or the shareholders.

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Election of Directors (cont’d).Election of Directors (cont’d).Removal of Directors: directors can

be removed for cause.Vacancies on Board: if director dies

or resigns or new position created by the articles or bylaws.


Compensation of Directors.Compensation of Directors.Inside director (officer), vs. outside

director. Often the same person is both an officer and director, and receives compensation as an officer.

Board of Directors’ Meetings.Board of Directors’ Meetings.Quorum must be present to

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Rights of Directors.Rights of Directors.Participate in corporate decisions

and inspect corporate books and records.

Compensation (usually a nominal sum). Corporation should guarantee reimbursement or purchase liability insurance to protect the board from personal liability.


Committees of the Board.Committees of the Board.Executive Committee.Audit Committee.Nominating Committee.Compensation Committee.Litigation Committee.


Officers serve at the pleasure of Officers serve at the pleasure of the Board of Directors but have the Board of Directors but have fiduciary duties to company.fiduciary duties to company.Their employment relationships are

generally governed by contract law and employment law.

Officers may be terminated for cause.


Directors and officers are Directors and officers are fiduciaries and owe the fiduciaries and owe the company ethical and legal company ethical and legal duties.duties.

Duty of Care.Duty of Care.Duty to Make Informed Decisions.

Directors are expected to be fully informed on corporate matters.


Duty of Care (cont’d).Duty of Care (cont’d).Duty to Exercise Reasonable

Supervision. Directors are expected to supervise officers when delegated work.

Dissenting Directors: rarely held individually liable to the corporation.


Immunizes a director or officer Immunizes a director or officer from liability from bad from liability from bad decisions.decisions.Court will not require directors or

officers to manage “in hindsight.” As long as decision was

reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.


Duty of Loyalty: subordination Duty of Loyalty: subordination of personal interests to the of personal interests to the welfare of the corporation.welfare of the corporation.No competition with Corporation.No “corporate opportunity.”No conflict of interests.No insider trading.


Duty of Loyalty (continued). Duty of Loyalty (continued). No transaction that is detrimental

to minority shareholders..CASE 19.3 Guth v. Loft, Inc. (1939). What were the two parts of the duty test the court used to determine whether the corporate executives had violated their duty of loyalty?


Directors and officers must Directors and officers must provide full disclosure of any provide full disclosure of any potential conflicts of interest and potential conflicts of interest and abstain from voting on any abstain from voting on any transaction that may benefit the transaction that may benefit the director/officer personally.director/officer personally.However, if transaction was fair and

reasonable, it can be approved by majority of disinterested directors.


Directors and officers may be Directors and officers may be liable for crimes and torts liable for crimes and torts committed individually and/or committed individually and/or those committed by employees those committed by employees under their supervision.under their supervision.Shareholder derivative suits where

shareholder(s) sue directors on behalf of corporation].


Shareholders generally have no Shareholders generally have no right to manage the daily affairs right to manage the daily affairs of the corporation, but do so of the corporation, but do so indirectly by electing directors.indirectly by electing directors.

Controlling shareholders owe a Controlling shareholders owe a fiduciary duty to minority fiduciary duty to minority shareholders.shareholders.


Approving all fundamental changes to the corporation.

Amending articles of incorporation or bylaws.

Approval of mergers or acquisition.Sale of all corporate assets or

dissolution.Shareholders also elect and remove

the board of directors.


Must occur at least annually. Must occur at least annually. Voting requirements and Voting requirements and procedures are:procedures are:Notice of Meetings. Proxies.Shareholder Proposals.


Quorum Requirements: shareholders representing more than 50% of shares must be present to conduct business.

Voting Lists: record of stock ownership.


Cumulative Voting: allows minority shareholders to get a board member elected.

Other Voting Techniques. Shareholder Voting Agreements. Voting Trusts—Trustee votes the shares.


Shareholders may have Shareholders may have various rights, depending on various rights, depending on the articles and bylaws:the articles and bylaws:Stock Certificates.Preemptive Rights: allows each

shareholder to maintain his proportional control.

Stock Warrants: buy at a stated price.


Dividends: Dividends: distribution of distribution of corporate profits or income corporate profits or income ordered by the board. ordered by the board. Illegal Dividends.Directors’ Failure to Declare a

Dividend. Inspection Rights.Inspection Rights.


Transfer of Shares.Rights on Dissolution.Shareholder’s Derivative Suit.

Shareholders sue a third party on behalf of the corporation, if the Directors fail or refuse to correct the wrong or injury.

Shareholders must first ‘make demand’ on the board which then has 90 days to decide.


Shareholder’s Derivative Suit. When shareholders bring a derivative suit, they are doing so in the name of the company, not individually.


Shareholders are generally Shareholders are generally not liable for the contracts or not liable for the contracts or torts of the corporation.torts of the corporation.If the corporation fails,

shareholders generally cannot lose more than their investment.


Watered Stock: Watered Stock: worth less than worth less than fair market value. Shareholder is fair market value. Shareholder is personally liable for difference. personally liable for difference.

Breach of Fiduciary Duty: Breach of Fiduciary Duty: can can occur when a shareholder has occur when a shareholder has enough shares to control the enough shares to control the corporation.corporation.




Documents

A corporation is a creature of statute, an artificial “person.” Corporations can have one or more shareholders. Owners can be natural persons or