Click to edit Master title style Fall 2013 Introduction to Company Law & Commercial Law An Examination of Business Enterprises J. Robert Stoll Mayer Brown

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  • Click to edit Master title style Fall 2013 Introduction to Company Law & Commercial Law An Examination of Business Enterprises J. Robert Stoll Mayer Brown LLP Visiting Professor University of Belgrade Faculty of Law David Curry Aaron Gavant Mayer Brown LLP U.S. Workout/Insolvency Law Course University of Belgrade Faculty of Law FALL 2014
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  • Click to edit Master title style Examination of Business Enterprises Part I: Introduction to the Legal Forms for Business Enterprises Selecting the legal form for a business enterprise, and the key attributes sole proprietorship, corporation and partnership Part II: Focus on the Corporation Characteristics of the corporation, role of shareholders, directors and management Capitalization of a corporation and use of equity and debt capital Part III: Limited Liability for Shareholders and Piercing the Veil Meaning and significance of Limited Liability Abuse of corporation and piercing the corporate veil; examples 1
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  • Click to edit Master title style Selecting the Form for Ownership of a Business Comparing the Business Structures and Key Attributes Individual ProprietorshipPartnership /Limited PshipCorporations/ LLCs Persons RequiredOne and only oneAt least two persons or entities Only need one entity to form; but can be unlimited FormationNo formalities except local licenses No written agreement required for general pship Limited partnership requires written agreement Formal document and filing required to create corporation Liability for DebtsFull liabilityEach general partner liable for all debts of the partnership. Limited partners have limited liability Shareholders not personally liable, except to prevent abuse. ControlIndividual ControlEach general partner as agreed; no control for limited partners Board of directors and officers (Managers under LLC law) TaxIncluded in individual's tax responsibility Flows through to partners Separate taxpayer 2
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  • Click to edit Master title style Sole/Individual Proprietorships Advantages Easiest and least expensive form of business enterprise Owner reaps all the rewards of ownership Owner has complete control over business decisions Disadvantages No protection from liability for business failure No ability to attract equity capital from 3rd parties interested in investing in the business Limited duration ceases upon death of the owner Sole/Individual Proprietorships 3
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  • Click to edit Master title style Partnerships Advantages Ability to add capital by increasing number of partners e.g., law firms; accounting firms Recognized as a separate legal entity may help in raising funds Not separately taxed Disadvantages No protection from liability for business failure except for limited partners Death or bankruptcy of one partner may cause termination unless otherwise agreed Shared control may cause disputes complexity to draft around Partnerships 4
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  • Click to edit Master title style Corporations Advantages Shareholders not liable for business failure more later Can have perpetual existence Great flexibility to expand by raising equity and debt capital Disadvantages Relative expense and complexity to form and maintain Complexity in withdrawing capital from the business Shared control may lead to owner disputes same as partnership Taxed as a separate entity Selecting Form of Ownership 5
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  • Click to edit Master title styleFocus on the Corporation More on key characteristics of a corporation Corporation is a statutorily created entity Owns assets and has liabilities as separate legal entity Enters into contracts and conducts its own business Can sue and be sued - same as an individual Can have perpetual existence Subject to civil and criminal laws 6
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  • Click to edit Master title stylePerpetual Existence of Corporate Businesses The Coca-Cola Company incorporated in 1892 Procter & Gamble founded in 1837, and is now one of the largest sellers of consumer products in the world Lehman Brothers formed 150 years ago, but now being liquidated, due to managerial failure 7
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  • Click to edit Master title styleCriminal Liability for Corporations Corporation cant be imprisoned, but can be fined for criminal conduct Botox maker, Allergan, pleads guilty to criminal charges for marketing Botox for unauthorized uses; must pay $600 million fine Accounting firm, Arthur Andersen, found guilty in criminal jury trial 8
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  • Click to edit Master title style What is Capitalization? Exchange between owners and the corporation Shareholder contributes assets cash or other assets to company and receives, in return, shares representing ownership What does it mean to contribute assets to corporation? An irrevocable transfer by shareholder to the corporation; similar to a sale, except shareholder receives ownership in return The Corporate Form Capitalization 9
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  • Click to edit Master title style What are shares of common equity? Represents ownership of the corporate entity What are the characteristics of common shares? Common shares have the right to the profits the corporation distributes to shareholders the dividends Have the right to control certain aspects of the corporation Common shares have residual value of the corporation Its residual because its the value left after creditors are paid The residual value is called the equity of the corporation The Corporate Form Capitalization 10
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  • Click to edit Master title style Fundamental rule of law is that creditors are given priority in right to payment over the rights of ownership So, if corporation is liquidated debts owed to creditors must first be paid in full before any value can be returned to owners Same rule limits right of corporation to make distributions to owners if doing so will impair ability to repay creditors Cardinal Rule of Commercial Law: Creditors Claims Come Before Owners 11
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  • Click to edit Master title styleRole of Debt in the Capital Structure Owners often add debt to the capital structure Why add debt to the capital structure? Because debt is paid only an interest rate, while equity capital gets all increase in businesss value So, debt capital can create greater profits and returns for owners 12
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  • Click to edit Master title styleLehman Brothers Risky Capital Structure Assets and Liabilities in 2008 Total Assets: $640 Billion Total Liabilities: $614 Billion Total Equity: $24 Billion $30 of debt for every $1 of equity! No margin for error Why did Lehmans managers allow this capital structure to occur? 13
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  • Click to edit Master title styleDebt in the Capital Structure Owner Debt Owners often invest as debt to better protect their investment particularly when banks wont lend If owners capital is invested as debt, then as a general rule they are entitled to be paid the same as other creditors if the company fails However, abuse of the corporate form by inadequately capitalizing the corporation can adversely affect the owner 14
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  • Click to edit Master title styleOwnership and Management of a Corporation A key feature: ownership is separated from management Right to control is shared by: (1) shareholders, (2) directors, and (3) officers Shareholders: Own corporation benefit from distributions of profits and increase in value of shares Have right to elect directors, and to vote to remove directors Have right to vote on major transactions such as sale of business, merger, liquidation But dont have right to operate the business as shareholder 15
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  • Click to edit Master title styleOwnership and Management of a Corporation Board of Directors: Elected by shareholders annual or staggered terms; majority or cumulative voting Have the right to control the business and affairs of the corporation Model Act: All corporate powers shall be exercised by or under the authority of the board of directors... And the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight of, its board of directors Board selects the CEO, President and key officers of the corporation Mostly serve a supervisory role but must be actively engaged to meet duties 16
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  • Click to edit Master title styleOwnership and Management of a Corporation Officers Executive officers appointed by directors Carry out the corporations business on day-to-day basis Model Act: Each officer has the authority and shall perform the duties set forth in the Bylaws or, to the extent consistent with the Bylaws, the duties prescribed by the board of directors... Corporate Governance and Duties: Directors and officers have duty of care and duty and loyalty, requiring them to act in best interests of corporation and shareholders 17
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  • Click to edit Master title styleVoting Rights Voting common shares Usual rule is one share one vote Usually, only a majority is required; but can require a super majority (e.g., 66%) for some decisions (e.g., to merge or liquidate) Some laws OK different classes of shares with super voting rights Zuckerberg has iron grip control of Facebook It has two class of shares: Class A with one vote per share and Class B with 10 votes per share He also gets control through voting agreements with others Zuckerberg owns under 20% of Facebook, but has control over almost all shareholder decisions director