Chapter I. Formation 227 results (showing 5 best matches)
- What gives the internal affairs doctrine its practical impact is that corporation statutes typically allow persons to form a corporation pursuant to the statute (in other words, incorporate in the state) without regard to the residence of those who intend to participate in the venture and without regard to where the parties intend to conduct business. For example, one can form a Delaware corporation and have Delaware corporate law govern the corporation’s internal affairs even if the only tangible contacts the corporation will have with Delaware are the presence of an agent for service of process and an in-state “office” (both of which the corporation might obtain for a fee from one of the firms which sell this service to thousands of other corporations). What this means is that parties forming a corporation simply can select which state’s law they wish to govern their corporation’s internal affairs.
- By contrast, courts generally have taken a different approach when it comes to the rules governing the so-called internal affairs of a corporation. Broadly speaking, “corporate internal affairs” refers to the powers and obligations of a corporation’s managers vis-a-vis the corporation and its shareholders, and the rights and duties of the corporation’s shareholders vis-a-vis the corporation, its management and the other shareholders. Put differently, corporate internal affairs pretty much encompass the subject matter of those state laws typically referred to as corporate law. In dealing with a corporation’s internal affairs, courts, for the most part, have looked to the law of the state of incorporation for the governing rule. Courts often refer to this choice of law principle as the “internal affairs doctrine.”
- How can parties forming a corporation, and their attorney, decide which state’s law would be better to regulate a corporation’s internal affairs? Attorney’s often look to four criteria. To begin with, there is flexibility. Specifically, parties generally want a state which will not prevent them from governing the corporation in the manner they desire. Recall that early corporations laws contained significant restrictions on the activities and governance of corporations. These fell by the wayside as parties chose to incorporate in jurisdictions whose laws did not contain the restrictions, in other words, jurisdictions whose laws allowed greater flexibility.
- As we discussed above, corporations exist by virtue of state statutes. These general incorporation laws both enable persons to form a corporation and provide rules concerning this entity. This, in turn, raises the question of which state’s law fills this role. A simple-minded answer might be the state within which the corporation does business. Alternately, perhaps we could look to the law of the state in which most of the corporation’s owners reside. As we shall see, however, neither of these simple-minded solutions are the rule. Instead, persons forming a corporation can choose which state’s law will establish the corporation and will provide rules governing the company’s internal affairs, and this choice is largely unfettered by limitations based upon where the participants in the venture actually intend to conduct business or even where most or any of the participants reside. This provides an important planning tool for the attorney and clients forming a corporation. It also...
- When a corporation does business in a state, it must observe the state’s laws generally applicable to persons doing business there. These laws deal with such issues as worker safety, consumer protection, pollution, and so forth. Hence, a Delaware corporation cannot claim that
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Chapter VI. Securities Fraud and Regulation Part 2 95 results (showing 5 best matches)
- At the other extreme, the law could take a sledgehammer approach to the problem. This would be to prohibit insiders, such as officers and directors, from trading in their own corporations’ stocks. Many law firms adopt this sort of approach as a matter of internal ethics by adopting firm policies prohibiting lawyers in the firm from owning stock in corporate clients. The problem, however, with the law prohibiting officers and directors of corporations from buying and selling stock in their corporations is that this could create strong disincentives for officers and directors to own stock in their companies. After all, even if the law made an exception to such a no purchase or sale rule to allow officers and directors to buy stock from the corporation under certain controlled conditions, how much stock will officers and directors want to own if they cannot resell it? Yet, the general view is that the law should encourage, not discourage, officers and directors owning stock in their
- , Walton v. Morgan Stanley & Co., 623 F.2d 796 (2d Cir.1980). In many cases, corporations provide information in confidence to members of a firm—a law firm, an accounting firm, an underwriting firm, a consulting firm, and so on. In this event, various employees of the firm will have access to the information. For example, information provided to lawyers also might be seen by secretaries and paralegals who work for the law firm. Such employees should also be considered temporary insiders of the corporation. , SEC v. Musella, 578 F.Supp. 425 (S.D.N.Y.1984). This, in turn, might lead the reader to ask why Chiarella was not a temporary insider, since the printing company received information with an expectation that the information be confidential. The answer is that the printing company’s customers were the acquiring firms, whereas Chiarella bought stock in the target corporations. Hence, Chiarella was not a temporary insider of the corporations whose shares he purchased.
- There are sound policy reasons to reject an interpretation of Rule 10b–5 under which mere possession of material information would trigger a disclosure obligation for those who do not trade stock—even if the person in possession of material information is the corporation or another party with a fiduciary relationship to the corporation’s shareholders. To begin with, if possession of material information triggers such a general disclosure obligation, then the Supreme Court’s refusal in to consider a bright line test for materiality becomes much more questionable. After all, it is one thing to tell corporate managers, who are uncertain as to whether an event is material, that they can always keep silent and abstain from trading; it is quite a different matter to refuse to provide workable guidance if the corporation is supposed to announce developments as soon as they become material. ...required corporations to disclose events when the events became material would need exceptions...
- Another circumstance in which some courts seem willing to take an expansive view of when non-disclosure renders statements false involves the need to correct rumors or other market chit-chat. In this circumstance, the underlying issue is whether statements nominally made by other persons somehow become statements by the corporation, thereby creating a duty for the corporation to correct, or otherwise to disclose, in order to prevent such statements from being misleading. There are several possibilities for attributing rumors or market chit-chat to the corporation. One is if the rumors come from corporate personnel. Another possibility is if corporate officials have involved themselves in discussions with stock analysts to such an extent that mistakes in an analyst’s report concerning the corporation can be attributed to the corporation. ...notion that investors might interpret silence from the corporation in the face of rumors or stock analysts’ reports as confirmation of the...
- The defendants also argued that corporate recovery would tread upon an area regulated by the federal securities laws, and created the prospect for overlapping damage claims by the corporation and by other traders in the market. The Court of Appeals’ response was anything but prescient, as the court expressed skepticism that federal laws would provide much relief against those trading on inside information—which, as we shall see later, turned out not to be the case. The court was on more solid ground in pointing out that the federal securities laws did not preempt state corporate law, and in stating that the court could deal with problems of overlapping recovery when and if the problem actually arose.
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Chapter VII. Mergers and Acquisitions 149 results (showing 5 best matches)
- Every state’s corporations statute contains a provision allowing two or more corporations to merge into one corporate entity. This entity could be one of the corporations which existed before the combination. In this event, the corporation which continues to exist after the merger is known as the surviving corporation; the corporation which ceases to exist as a legal entity as a result of the merger is variously referred to as the disappearing or merged corporation; and we often say that the disappearing corporation merged into the surviving corporation. Alternately, the corporate entity emerging from the merger could be a new corporation created by the transaction—in which case, some statutes refer to the transaction as a consolidation rather than a merger. As we shall discuss a little later, the surviving corporation (or new corporation in a consolidation), by operation of law, generally obtains all of the assets, and becomes liable for all of the debts, of the disappearing
- As stated above, corporate law establishes no formal gatekeeping role for the target corporation’s board of directors when an acquirer makes a tender offer to the shareholders of the target corporation. Nevertheless, various techniques exist whereby the target corporation’s board of directors might seek to exercise an effective veto over the acquisition of the target corporation though a tender offer.
- Thus far, our focus has been on the impact of the merger on the shareholders of the merging corporations. Now let us take a closer look at the impact of the merger on the corporation which emerges from the transaction. As stated above, the central concept is that this corporation (be it the surviving corporation in a merger or the new corporation in a consolidation) succeeds by operation of law to all of the assets and liabilities of the disappearing corporations
- One possibility is for the shareholders of the selling corporation to be liable for claims which mature after dissolution. After all, the basic rule is that the shareholders are not supposed to receive the assets of their corporation unless the debts are satisfied. Following this logic, courts applying the common law have held that the former shareholders can be liable for debts which only come home to roost after corporate dissolution —at least to the extent of the distribution the shareholders received from the corporation. Now, however, special provisions in corporation statutes usually regulate this subject. These provisions typically attempt to reach a compromise of the two competing interests at stake in this situation. One interest is that of the creditors, who could not assert claims which the creditors did not yet have, or know they had, at the time of the corporation’s dissolution. Against this is the interest of the shareholders, who reasonably might ask for some finality...
- A triangular merger simply means that the merger takes place between one corporation (commonly called the “target corporation”) and a subsidiary of another corporation (this other corporation commonly being called the “acquiring corporation”), rather than between the target corporation and the acquiring corporation itself. This subsidiary might be either an existing corporation which is actually conducting some business before the merger, or, commonly, a new corporation set up just for purposes of the merger. The corporation surviving the merger might be either the subsidiary, in which case the transaction is referred to as a “forward triangular merger,” or the target corporation, a so-called “reverse triangular merger.”
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Appendix 99 results (showing 5 best matches)
- Corporation Law
- The following chart lists selected Westlaw databases that contain information pertaining to corporation law. For a complete list of corporation law databases, see the online Westlaw Directory or the printed
- • If you find a topic and key number that is on point, run a search using that topic and key number to retrieve additional cases discussing that point of law. For example, to retrieve federal and Delaware state cases containing headnotes classified under topic 101 (Corporations) and key number 589 (Succession to Rights of Original Corporations), access the DEBUS database and type the following query:
- The fields discussed below are available in Westlaw case law databases you might use for researching issues related to corporation law.
- Selected Corporation Law Databases on Westlaw
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Chapter V. Special Problems of Closely Held Corporations Part 2 74 results (showing 5 best matches)
- Del. Gen. Corp. Law §§ 341–356. California’s corporation code provisions dealing with electing close corporations illustrates a different stylistic approach. Perhaps to make things challenging for persons reading the code, California scatters the provisions dealing with companies electing close corporation status throughout the state’s corporations statute.
- , Cal. Corp. Code § 1800(a)(2). Special treatment of closely held corporations under entirely different laws sometimes leads individuals into confusion as to the scope of elective close corporation statutes such as Delaware’s. For example, as discussed earlier in this chapter, some courts have adopted a special rule of fiduciary duty for shareholders in closely held corporations. Elective close corporation statutes following Delaware’s approach generally do not address fiduciary duty (beyond imposing the duties of directors on shareholders who control the board’s actions). Nor do elective close corporation statutes such as Delaware’s provide special income tax treatment (under Subchapter S) or exemptions from securities law requirements; those are subjects of entirely different legislation.
- Riblet Products Corporation v. Nagy
- This book uses the term “closely held corporation” to refer to corporations with few shareholders. Many courts and writers also refer to such corporations as “close corporations.” A number of state corporation statutes, including in such important jurisdictions as Delaware and California, however, use the term “close corporation” to refer to closely held corporations which elect special treatment under the statute. To avoid confusion, this book sticks to the term closely held corporation to describe the generic corporation with few shareholders, and only uses the term close corporation to describe corporations which elect special treatment under these statutes.
- N.Y. Bus. Corp. Law § 620(a) (validating shareholder voting agreements as long as in writing and signed), N.Y. Bus. Corp. Law § 620(b) (validating shareholder agreements restricting the board in the management of the corporation only if the agreement is placed in the certificate of incorporation, all of the shareholders agreed to the restriction at the time it was made, later shareholders receive notice of the restriction, and the corporation’s stock is not publicly traded).
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Chapter I. Formation Part 2 184 results (showing 5 best matches)
- The Delaware corporations statute does address one impact of defective attempts to incorporate. Section 329 of the Delaware General Corporation Law prevents either the corporation or a third party from using the defect as an excuse to get out of a contract entered into between a defective corporation and a third party.
- Model Business Corporations Act § 3.02(10). The view that a corporation can be formed in any jurisdiction regardless of where the company actually does business is not accepted in all nations. Instead, many nations following the civil law tradition have operated under the view that corporations must be formed in the jurisdiction in which the company has its headquarters. This approach is variously called the , or seat theory. Under this approach, a nation would reject the effort to incorporate under its law if the corporate headquarters would be in another nation, and a nation in which a firm has its headquarters would refuse to recognize the firm as a corporation—meaning, for example, the firm would lack the capacity to sue in this nation’s courts and its owners might face personal liability—unless the firm incorporated under this nation’s, rather than another nation’s, laws.
- Actually, the state of incorporation for publicly held corporations commonly results from a reincorporation. For example, a smaller corporation, when it is first going to sell shares to the general public, often will reincorporate in a new state which it desires to become its state of incorporation. Technically, a reincorporation entails forming a new corporation in the desired state and then transferring the existing corporation’s operations to the new corporation through a sale of assets or merger. The existing corporation’s directors initiate this process (and, in any event, they must initiate the transfer of the operations to the new corporation). While the shareholders of the existing corporation must approve the merger or asset sale, if the corporation is preparing to issue the first shares to the public, those anticipating the role of manager will have most or all of the shares at the time of the shareholder approval. Even if the corporation already has minority public...
- This sort of externalization of accident costs is not what limited liability should achieve. Viewed both historically, and in terms of economic efficiency, limited liability is principally for the protection of shareholders in a widely held corporation. It is acceptable for closely held corporations dealing with contracts creditors since, in this context, parties could always contract in or out of a limited liability regime regardless of corporations law. Limited liability is even acceptable for the closely held corporation which faces tort liability that its owners did not reasonably foresee. After all, without a limited liability regime, one presumably would not have insured against unforeseeably large claims. Hence, the firm’s goods or services would not have reflected those costs anyway. The use of limited liability by owners of a closely held business to deliberately externalize foreseeable accident costs, however, simply undercuts the goals of tort law.
- To determine what approach courts should follow, it is useful to go back to the rationales for the internal affairs rule. One rationale is shareholder choice. If shareholders do not like the laws of the state of incorporation, they do not have to invest in this corporation (or, to be more sophisticated, they can discount the price they are willing to pay for the stock to offset the added risks they face from inferior state law protections). The second rationale is the practicality problem created if corporations must comply with potentially inconsistent state law rules for their internal governance. Do these rationales apply to piercing?
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Chapter V. Special Problems of Closely Held Corporations 158 results (showing 5 best matches)
- What must occur in order for a corporation’s shareholders to have the right to use cumulative voting? In most jurisdictions, to allow cumulative voting, the corporation’s articles must contain a provision stating that shareholders may vote in this manner. A few jurisdictions go beyond this to require that corporations give their shareholders the right to vote cumulatively regardless of what the articles provide. Indeed, some states have felt this is such an important right, that the state’s constitution, rather than just the state’s corporation statute, requires corporations to allow cumulative voting. At one time, state laws which require corporations to allow cumulative voting were fairly common. However, laws requiring corporations to allow cumulative voting have waned considerably in recent years.
- A number of statutes contain remedies short of dissolution to break deadlocks. For example, Section 226 of the Delaware General Corporation Law authorizes a court to place a custodian in charge of a deadlocked corporation. Unless the court orders liquidation, the custodian’s task is to continue the business. Section 353 of Delaware’s corporation statute expands the options available to a court when dealing with a deadlock in a corporation which has elected special close corporation treatment under Delaware’s law. Under Section 353, a court can appoint a provisional director, who can break a tie on an evenly divided board.
- the Delaware Supreme Court drew a negative implication from the statute in resolving a case dealing with a corporation which did not make a close corporation election. Actually, the court’s invocation of Delaware’s close corporation statute in is curious, since nothing in the statute would have been relevant to the issue in the case even had the shareholders elected close corporation treatment under Delaware’s law. The case involved a challenge made by minority shareholders who were left out of share repurchases funded by the corporation. The minority shareholders urged the Delaware court to hold that shareholders in closely held corporations owe a special fiduciary duty to each other. We explored this issue earlier in this chapter. For now, what is interesting about is the fact that a portion of the court’s rationale for rejecting a special fiduciary duty is the notion that Delaware’s close corporation statute preempts the field of special rules for closely held corporations....
- In discussing choice of business form in Chapter I, we noted that corporate law governance and exit rules work well for corporations with numerous, widely scattered shareholders. In the widely held corporation, it makes sense to limit the shareholders’ role in governance largely to the election of directors who will manage the corporation, to provide for majority rule, and to follow a free-transfer approach to deal with the departure of existing shareholders. These rules, however, can lead to problems when the corporation has only small number of shareholders—in other words, when the corporation is closely held.
- As discussed earlier when dealing both with forming and financing a corporation, corporation statutes typically provide that a company’s articles may authorize classes of stock with different voting and other rights. As a result, courts generally uphold the sort of classified stock schemes outlined above. ), courts have also rejected arguments that such schemes violate state laws requiring corporations to allow cumulative voting.
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Chapter VI. Securities Fraud and Regulation 100 results (showing 5 best matches)
- Thus far in this book, our focus has been almost entirely on state corporate law. One of the primary problem areas we have discussed is how state corporate law seeks to protect shareholders from the danger posed by incompetent or disloyal directors and officers. We saw that the basic approach of state corporate law is to focus on the conception of the shareholders as the owners of the corporation, and to impose duties of care and loyalty upon the directors and officers both toward the corporation and toward the shareholders as the corporation’s owners.
- In any event, in order to trigger the fraud on the market presumption, the stock must be traded in a well developed securities market. After all, it takes the action of numerous persons who pay attention to developments at a corporation, and who buy or sell the corporation’s stock in accordance with those developments, in order for false statements about a corporation to impact the price of a corporation’s stock paid or received by traders who themselves may be unaware of the false statements. In evaluating whether a stock is traded in a well developed market, courts might look at the trading volume, how many stock analysts follow the stock and how many professionals make a market in the stock, how rapidly the stock price has moved in response to corporate news in the past, and the corporation’s eligibility to use federal securities law registration statements adapted to more widely traded securities. ...for the corporation’s stock, not the general stock market in which the...
- In the years before the federal securities laws became the focal point for lawsuits dealing with trading on undisclosed inside information, a number of courts confronted the question of whether such trading constituted common law fraud. The typical scenario entailed a director or officer of a corporation purchasing stock from a shareholder of the corporation, without disclosing to the shareholder highly favorable developments regarding the corporation. When the former shareholder later learned of the favorable developments and regretted his or her sale, the former shareholder would sue the director or officer who bought the shares, claiming fraud. Such suits provoked a mixed reaction from the courts.
- In this chapter, we shift our focus in a couple of ways. To begin with, in large part, we will be dealing with federal rather than state law. More fundamentally, this chapter involves a conceptual shift in the law’s approach to protecting shareholders from incompetent or disloyal directors and officers. Instead of looking at the shareholders as owners entitled to ongoing obligations from their agents, we now look at the shareholders as investors, who make decisions to purchase or sell stock. Seen in this light, one danger posed by incompetent or disloyal directors and officers is that such individuals might induce investors to become shareholders by false or incomplete statements about the company and its prospects. A second danger is that disloyal directors and officers might take advantage of their knowledge of what is going on inside the corporation to buy out some shareholders before these shareholders learn of favorable developments at the corporation. Given such dangers, what...
- is factual rather than doctrinal. Specifically, the court suggested that the corporation suffered reputational harm from its officials trading on inside information. While, at first glance, this suggestion might seem to be a make-weight, in fact, it captures one of the principal policy reasons often asserted for laws to prohibit trading on inside information. As we shall discuss in some detail later, such trading presumably causes investors to discount the amount they are willing to pay for a corporation’s stock, and thereby raises the corporation’s cost of capital.
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Chapter IV. Duties of Directors and Officers 130 results (showing 5 best matches)
- This, however, leads us to ask why should having the corporation engage in illegal activity, in and of itself, breach the directors’ or officers’ duty to the corporation. It may not be enough to answer that such conduct exposes the corporation to sanctions for breaking the law. After all, it may be that what the corporation could gain through the violation exceeds the loss the sanctions will entail, when discounted for the probability that the corporation will get caught.
- In addition, it is unheard of for a court to suggest that a director or officer could possibly breach his or her duty to the corporation by refusing to have the corporation engage in illegal activity. In other words, there may be situations in which, from a purely profit maximizing standpoint, it might make sense for a company to disobey a law. This would occur if the profits the corporation could make from engaging in the illegal conduct, multiplied by the probability of not getting caught, exceeded the sanctions the company would face under the law, multiplied by the probability of getting caught in the illegal conduct. Even so, it is difficult to conceive that a court would hold that directors or officers breached their duty to the corporation if they refuse to have the company go ahead and break the law.
- We can start our discussion of this topic with two well-established propositions. To begin with, corporate directors and officers who violate laws, including by ordering the corporation to break the law, face the sanctions which the particular law imposes on those who violate it. For example, if a corporate director or officer has the corporation enter a conspiracy to fix prices, the officer or director personally is subject to a fine or imprisonment for breaking the antitrust laws.
- is to return to a view that imposing fiduciary duties upon directors in favor of more than one stakeholder would make life impossible for directors by placing them in unresolvable conflicts, and that stakeholders other than the shareholders can protect themselves through contracts or by other legal doctrines. Yet, if the court wanted to follow this view and leave the law entirely clear, then why did the court recognize the possibility of suits by creditors on behalf of the corporation alleging breach of fiduciary duty after insolvency? One unspoken concern may have been to reconcile Delaware law with court opinions, particularly in bankruptcy cases, which have spoken of a duty of directors towards creditors in the context of insolvent corporations. , one might explain the result there as flowing from the ability of the corporation’s trustee in bankruptcy to enforce fiduciary duties owed by the director toward the insolvent corporation for the benefit of the company’s creditors. Yet,...
- In the previous chapter, we looked at the powers of corporate directors and officers. With power often goes responsibility. Hence, in this chapter, we look at the duties of directors and officers. From time to time as corporate law evolved, courts and writers have spent some effort discussing whether directors and officers of a corporation are more analogous to a trustee or to an agent when it comes to the determining what duties directors and officers owe to the corporation. Such discussions have long since ceased, perhaps based upon the recognition that it really does not matter. Like both trustees and agents, directors and officers act for the benefit of another, in this case the corporation. As such, just as trustees have a fiduciary duty to their beneficiaries, and agents have a fiduciary duty to their principals, directors and officers have a fiduciary duty to the corporation. This fiduciary duty, in turn, encompasses two more specific duties: A duty to exercise care in...
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Preface to the First Edition 4 results
- In addition, I hope this treatise might be of interest to courts and commentators in seeking the appropriate resolution of issues of corporations law. In teaching corporations law for almost two decades, I confess that I have developed some strong opinions as to what the law is and what the law should be. In several areas, I already had expressed my viewpoint in law review articles, from which this book draws. In numerous other areas, I have taken advantage of the opportunity of writing this book to provide a more efficient forum for setting out my views.
- This book is intended for several audiences. As with all books in the “hornbook” series, a primary audience is law students; in this instance, students taking courses variously labeled Corporations or Business Associations. The book corresponds to the advice I give to students who ask for recommendations on secondary reading. This advice is to go beyond sources which simply provide pithy recitals of rules, and seek a source which provides a careful explanation of what the rules mean, the context and policies out of which the rules arise, and how the rules might apply to different situations. Otherwise, the result all too often is an examination answer consisting of recitals of rules, followed by sentences which demonstrate that the student has little idea as to the meaning of what he or she just said, much less how to apply the rules to analyze the problem at hand. Keeping in mind that the goal of this book is to clarify rather than simply recite, the text pays particular attention...
- A second audience consists of members of the practicing bar; particularly those who only encounter corporations law problems on an occasional basis. A work of this size cannot hope to duplicate the sort of jurisdiction-specific research found in a multi-volume treatise. Instead, the goal of this book is to meet the type of request made by practitioners who have contacted me from time to time and explained that they had read all of the relevant cases on the particular issue facing them, but, lacking an overall context, they were not sure how the cases fit together.
- Finally, a few words of thanks are called for. My colleague, Michael Malloy—who, being the author of West’s hornbook on banking law, has some experience with this sort of work—graciously gave his time to review the manuscript for this book. My research assistants, Ryan Herrick and Anne Sherlock spent long hours cite checking the manuscript. Not to sound like a PBS commercial, but this work was made possible by generous financial support from the McGeorge School of Law. My wife, Carmen, deserves credit for her encouragement when it seemed like this project would never finish. Even my daughter, Sara, lent a hand by typing in all of the internal cross references.
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Chapter III. Governance 163 results (showing 5 best matches)
- In addition to its narrower and broader common law rationales, the court in pointed to a provision in New Jersey’s corporation’s statute which expressly empowers corporations to contribute reasonable sums to charitable and such institutions. Indeed, at first glance, the presence of such provisions in the corporation statutes of virtually every state seemingly renders the common law rationales in Such statutes, however, might not have quite this decisive an impact. The limitation lies in an ambiguity in the structure of most of these statutes. Typically, the provision in the corporation statute authorizing charitable contributions is part of a broader section which lists various powers of the corporation (such as the ability to bring a lawsuit, to own and convey property, and the like). As discussed above, the fact that a corporation possesses the power to perform a type of action, however, does not prevent the action from being ultra vires if the purpose for the action in a...
- The divergence between the reality of corporate governance and the traditional model no doubt has significance for those interested in organizational theory. The reader whose interest is more narrowly focused on the law of corporations, however, might be tempted to ask “so what?” In fact, the gap between the corporate governance model and the way things work in the real world has a number of implications for corporate law. For example, courts and legislatures have made a number of adjustments to the rules applicable to closely held corporations in order to comport with the realities of how such corporations operate. We shall address this in a later chapter dealing with closely held corporations. For now, let us focus on the publicly held corporation.
- To begin with, there seems to be no entirely coherent rationale distinguishing the corporate actions which the law requires the directors to submit for shareholder approval, from the corporate actions which do not require such approval. It is common to state that the law requires shareholder approval of “fundamental” transactions. Yet, the law typically requires a shareholder vote in order to amend the corporation’s articles, even though the amendment (say, changing the par value of the corporation’s stock) might have only a trivial impact upon the company or the shareholders; while directors might completely restructure the nature of a corporation’s business and the shareholders’ risk (say, changing from a telephone company into a financial services company through a series of corporate acquisitions or internal expansions) without putting the change to a shareholder vote.
- An issue of practical importance raised by proxy voting is who pays to solicit proxies from shareholders in a public corporation. The importance of the issue lies in the fact that contacting numerous scattered shareholders to obtain their proxies can get quite expensive. As a result, persons soliciting proxies might seek to have the corporation pay for the solicitation. The law in this area is unsettled to a remarkable extent.
- The right of shareholders to inspect corporate records exists both by virtue of court opinions applying the common law, and by provisions in the corporation statutes of most states. An unfettered application of a right to inspect corporate records, however, might impose two burdens upon the corporation. The first is simply the hassle of making records physically available to the requesting shareholder. So long as the shareholder must go to the corporation’s office to see the records (rather than being able to demand that the corporation bring the requested records to the shareholder), the significance of this hassle factor may depend largely upon the quantity of requested materials, and where and how the corporation maintains the requested records. ...An obvious example would be if a shareholder of Coca Cola demands to see the secret formula for the famous beverage with the goal of starting up a competing soft drink company. The law with respect to shareholder inspection rights has...
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Chapter II. Financial Structure 240 results (showing 5 best matches)
- Corporate borrowing is primarily a matter of contract law, much as any other lender-debtor relationship. The primary corporate law rule, which we have examined elsewhere, is limited liability for the corporation’s owners. Nevertheless, another aspect of corporate debt often introduces issues different from the run-of-the-mill loan. Instead of going to a lending institution, such as a bank, large corporations (like government entities) often borrow by issuing bonds. Essentially, what this means is that the corporation (or government entity) is borrowing a large amount of money by having numerous persons make relatively small loans to the corporation on the same terms. The IOUs which these numerous lenders receive from the corporation commonly are called bonds—albeit, to be more precise, the term “bonds” traditionally refers only to such multiple IOUs when the corporation pledges some of its property as collateral to secure the loan. “Debentures” is the traditional term to describe...
- Actually, the question of whether a corporation can raise the price of its out-standing stock by repurchasing shares is more complicated than it would first appear. Superficially, it would seem that by creating more demand (or less supply), corporate repurchases should increase price. Yet, the effect of corporate repurchases is also to decrease the corporation’s assets, making the company worth less. If the corporation repurchases shares at their value, presumably these two impacts ought to offset each other and the end result should be a wash. Only if the corporation can repurchase stock at less than its value should the price of the remaining shares go up. Assuming that the corporation’s shares are traded in a fully informed, efficient trading market, it is questionable whether corporate repurchases on the market will be below the shares’ value. Of course, the key assumption here is that the market is fully informed and efficient; an ill-informed market might undervalue the
- For many years, rules governing the consideration which corporations must receive in exchange for issuing stock occupied an important role in corporate law. There are a couple of reasons for this. To begin with, given the principle that the shareholders’ liability for corporate debts ordinarily only extends to the loss of whatever the shareholders paid for their stock, it seemed natural to create rules governing the amount which shareholders must pay in order to purchase stock from the corporation. In addition, the history of corporations is strewn with cases in which persons in control of a corporation had the company issue to themselves large quantities of stock, while paying little or nothing for the stock. The temptation for such conduct is especially strong since issuing stock is a little like printing money, in that, other than the impact on the value of other shares of stock, issuing stock generally does not cost the corporation anything. The traditional approach to address...
- Two parties might face liability when a corporation pays a dividend in violation of statutory dividend limits: the directors who voted to declare the dividend, and the shareholders who received the dividend. This liability might exist by virtue of express liability provisions in corporation statutes, by virtue of common law, or by virtue of provisions in creditor protection laws of general applicability (such as the fraudulent conveyance acts). An important issue is whether this liability exists without respect to fault. After all, directors may have acted in reliance upon corporate financial statements when declaring an illegal dividend, while shareholders (especially in a publicly held corporation) might have little idea as to whether the corporation’s financial status renders a dividend impermissible.
- Given the narrow reach of the typical corporation statute as far as shareholder liability—in that the typical statute only creates liability for shareholders if, first, a director is found liable, and then the director pursues the shareholders for contribution—creditors may seek to come up with other theories of liability against the shareholders. Under the common law, courts required shareholders to return improper dividends. There is a critical difference under the common law depending upon whether the impropriety involved the corporation being insolvent when it paid the dividend, or whether the dividend violated the statute because the dividend exceeded the corporation’s surplus. In the case of insolvency, courts hold that shareholders are liable without regard to fault, whereas in the situation of exceeding surplus, courts generally came to hold that the shareholder would be liable only if he or she knew that the dividend was improper. ...with the law of fraudulent conveyances—...
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Chapter IV. Duties of Directors and Officers Part 2 216 results (showing 5 best matches)
- To some extent, the law might deal with the concern about the multiplicity of actions from shareholders suing on their own behalf through the device of the class action. Yet, the class action presents many of the same problems of abuse which, as we shall discuss, have plagued the derivative suit. The concern about creditors illustrates a broader point: Harm to the corporation impacts more than just the shareholders. It impacts creditors, employees, those who do business with the corporation, and the community in which the corporation operates. If the law allows the shareholders to sue for indirect damages, why not allow all these other parties to sue for indirect damages? To ask this question is to illustrate why the law generally does not allow suits for indirect damages. Finally, it is no answer to say that the law can allow both derivative and direct claims in this context, since that would create the prospect of double recovery.
- Yet, in many cases, the party who takes the opportunity is in control of the corporation. This may have been the case in since the defendant, and another corporation owned by the defendant with members of his family, held 66 percent of the corporation’s stock. Here, one might argue that it is pointless to force the defendant to present the opportunity to the corporation so that the defendant can decide to have the corporation turn down the opportunity for lack of funds. Still, there might be something said for the American Law Institute’s approach. In a closely held corporation, such as in forcing the majority owner to seek corporate rejection often means forcing disclosure of the defendant’s action to minority shareholders. A person who is confident that the corporation lacks funds should have no problem with a requirement of disclosure. Conversely, the secretive taking of an opportunity, such as occurred in ...us that the defendant really does not believe the corporation...
- Finally, corporate officials might argue that they can seize a corporate opportunity because it is ultra vires or it is otherwise legally impermissible for the corporation to take the opportunity. The ultra vires justification is not common. As we discussed before, modern corporation articles typically do not limit the businesses in which the corporation may engage. Still, regulatory statutes may prohibit certain types of corporations from engaging in various activities—for example, banking laws traditionally have limited the non-banking activities of bank corporations. In any event, if an opportunity is ultra vires or prohibited by regulation, it typically would not fit within the various tests for a corporate opportunity anyway.
- chose to follow the approach recommended by the American Law Institute’s Principles of Corporate Governance. Under this approach, financial inability of the corporation to take an opportunity is not a justification, in itself, for an official personally taking the opportunity. Unlike the broader interpretation of however, this does not mean financial inability can never be relevant. Instead, financial ability can become relevant if the official offers the opportunity to the corporation, the corporation turns down the opportunity, and then the plaintiff challenges the decision to reject the opportunity. In that case, under the American Law Institute’s approach, directors who vote to turn down an opportunity, and then take the opportunity for themselves, might attempt to prove that the rejection is in the best interest of the corporation—in other words, fair—because the corporation cannot afford the opportunity. In ...the opportunity to the corporation meant, under this approach...
- Probably the most frequent conflict-of-interest transaction is the corporation’s payment of compensation to its managers. Interestingly enough, at one time, courts generally expected directors to serve without fees. Indeed, individuals normally still serve without expecting fees on the governing boards of non-profit corporations (for example, as university regents, trustees of non-profit hospitals and religious congregations, and the like). Moreover, large shareholders (as in a closely held corporation) often wish to be directors, even without fees, in order to protect their investment. Nevertheless, few persons today regard serving on the board of General Motors to be community service worthy of doing pro bono. Moreover, such widely held corporations are unlikely to have many shareholders with a large enough stake to motivate their serving as directors just to protect their investment. At the same time, as we discussed when dealing with the duty of care, the law expects directors...
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Chapter III. Governance Part 2 143 results (showing 5 best matches)
- As discussed in Chapter I, corporate law, for better or worse, is for the most part a matter of state law. Accordingly, the prior section of this chapter dealt with the division of power over the corporation under state statutes and state common law. In several areas, however, federal statutes and rules have made inroads into the normally state domain of corporate law. One inroad of relevance to the structure of corporate governance is the federal regulation of proxy solicitations involving public corporations.
- One potential added burden might arise, however, from the fact that the corporation’s books show the record owners of stock. As mentioned above, the record owners are often nominees for shares held in street name. Accordingly, a shareholder might request to see a list of the actual owners. If the corporation lacks this information, then the company should have no obligation. Federal proxy rules discussed later in this chapter, however, require record owners to provide public corporations who request with the names and addresses of the actual owners who do not object to such disclosure (so-called non-objecting beneficial owners, or “NOBOs”). Courts applying state corporation law, in turn, have required corporations, which have used the information from record owners to construct a list of the NOBOs, to allow stockholders (who have a proper purpose) access to the NOBO list, rather than just the record owner list. ...658 (Del. Ch.1986). Yet, suppose the corporation has not...
- Because Honeywell was a Delaware corporation doing business in Minnesota, there was some question as to whether Minnesota or Delaware law applied to shareholder inspection rights. The court decided that the result was the same under either law.
- As we shall discuss later in this chapter, federal law requires a public corporation to include, in the company’s proxy solicitation materials, proposals which shareholders wish to submit to a vote at the annual stockholders’ meeting. However, the corporation does not need to include the proposal if the proposal is not a proper subject for shareholder action under state law or falls within certain other exceptions.
- at § 16.02(b). Shareholders, however, still may have common law rights to inspect other documents. at § 16.02(e)(2). Another type of record that creates an issue is a record that belongs, not to the corporation whose shareholder makes the demand for inspection, but rather to the corporation’s subsidiary. Del. Gen. Corp. Law. § 220(b)(2) (allowing inspection when parent has the records in its possession or can obtain them through control of its subsidiary).
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Chapter IV. Duties of Directors and Officers Part 3 196 results (showing 5 best matches)
- Section 626 of New York’s Business Corporation Law now states that an action is derivative only if the action seeks a judgment in the corporation’s favor.
- Security for expenses statutes allow the corporation to require that the plaintiff in a derivative suit post security to cover the expenses which the corporation reasonably expects to incur in the litigation. requirement has two impacts. The first is that the plaintiff shareholder who loses a derivative suit ends up reimbursing the corporation for much or all of the expenses which the company incurs in the action. This includes the corporation’s attorneys’ fees, as well as the attorneys’ fees of the corporation’s directors or officers which the company indemnified. This is in marked contrast to the normal American law rule that all parties pay their own attorneys’ fees. The corporation’s right to this reimbursement does not depend upon finding that the action was frivolous or malicious. The second impact of these statutes comes from the requirement of posting security. Because the plaintiff must post security (in other words, put up a bond) early in the lawsuit, the plaintiff faces...
- Corporations commonly purchase insurance covering directors’ and officers’ liabilities (often called “D & O” insurance). Such a policy typically covers two types of claims. First, the policy commonly reimburses the corporation for the corporation’s costs of indemnifying the corporation’s officers and directors. In addition, the policy typically reimburses directors and officers for expenses and liabilities for which the directors and officers do not obtain indemnity from the corporation. Indeed, corporation statutes often expressly empower a corporation to purchase insurance to cover directors’ and officers’ liabilities, whether or not the corporation legally could indemnify the directors or officers for those liabilities.
- Corporation Law and the American Law Institute Corporate Governance Project
- her employment. Interestingly, some common law cases had denied indemnity in this situation. These courts reasoned that the corporate official had no claim to indemnity (at least in the absence of an express contract) because the corporation does not benefit from the defense of litigation in which the corporation is not a defendant (particularly if a shareholder had brought the litigation against the official in order to obtain a recovery for the corporation). Still, such a result seems unfair to the official who would not have faced the often considerable expense of becoming a defendant in litigation but for his or her role with the corporation. Moreover, lack of indemnity might deter individuals from serving as directors or officers (albeit, if persons were so concerned, perhaps they would have made an express contract covering the point as a condition of taking the position as director or officer). Besides, it is not clear that the corporation obtains no benefit if its officials...
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Chapter VII. Mergers and Acquisitions Part 2 173 results (showing 5 best matches)
- Since, going into the merger, the new corporation is a shareholder in the previously existing corporation, the new corporation could be entitled to cash or securities in exchange for the stock it owned in the previously existing corporation. Yet, this simply means having the surviving corporation pay itself. Accordingly, the plan of merger just will cancel the stock in the previously existing corporation owned by the new corporation.
- One common type of state takeover legislation places limits upon the ability of a party, who recently acquired a large percentage of a corporation’s outstanding stock, to enter into a merger or other business combination with that corporation. For example, Section 203 of the Delaware General Corporation Law establishes a moratorium period of three years after the acquisition of 15 percent of a corporation’s outstanding voting stock during which the buyer cannot complete a merger or other business combination with the corporation unless one of three conditions is met: (1) the board of the target corporation approved either ...3) two-thirds of the stockholders other than the buyer approved the merger or other combination. A number of other states have added provisions to their corporation statutes which do not contain a moratorium period, but require either a supermajority vote by the target’s shareholders (or possibly by disinterested directors), or the shareholders’ receipt of at...
- , N.Y. Bus. Corp. Law § 903(a)(2) (requiring a two-thirds vote for corporations in existence prior to 1998, unless the corporation’s articles expressly calls for only a simple majority vote). As we shall discuss when dealing with tender offers later in this chapter, however, a number of states have adopted takeover statutes which raise the vote needed for a merger with a company which recently obtained a substantial percentage of the other merging corporation’s outstanding stock. , Del. Gen. Corp. Law § 203.
- The most popular freeze-out technique, however, is through a merger in which the plan of merger calls for the minority shareholders to receive cash (or even debt securities) from the surviving corporation in exchange for surrendering their shares. If the majority shareholder is itself a corporation—in order words, we are dealing with a parent corporation which wishes to remove minority interests in its subsidiary—then the freeze-out merger can be between the majority shareholder and its subsidiary. Suppose, however, the majority shareholder is an individual (or there is a cohesive group of individuals holding a majority of the shares). Alternately, suppose a parent corporation does not wish to assume its subsidiary’s liabilities, as would occur in a parent-subsidiary merger. In either event, the majority shareholder(s) can set up a new corporation just for the freeze-out merger. The majority shareholder(s) then can transfer the majority of stock in the previously existing
- This is because the alternative transaction, in which a corporation simply buys another corporation’s assets without assuming the selling corporation’s debts, normally would require payment of the selling corporation’s debts prior to distribution of the remaining proceeds to the selling corporation’s shareholders—thereby leaving the disappearing or selling corporation’s shareholders the same net return in either case.
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Title Page 2 results
Index 73 results (showing 5 best matches)
Table of Contents 27 results (showing 5 best matches)
Preface to the Second Edition 2 results
- It has been a decade since publication of the first edition of this “hornbook” in 2000. Despite some predictions, the start of the Twenty-first Century did not mark “the end of history for corporate law”. On the contrary, the first decade of this century witnessed epic corporate scandals, which challenged the conventional wisdom in the field, led to some changes in the law, and even allowed corporate law professors to claim the media attention typically reserved for constitutional law professors. Hence, it was necessary to write a new edition.
- This edition updates the first edition to reflect the significant changes and events in corporate law since publication of the first edition in 2000. This includes both developments after 2000, as well as earlier developments whose significance exploded in the last decade. My research assistant, James Bothwell, deserves special thanks for his work on this project.
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Copyright Page 1 result
- Thomson Reuters created this publication to provide you with accurate and authoritative information concerning the subject matter covered. However, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. Thomson Reuters does not render legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
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- Publication Date: August 30th, 2010
- ISBN: 9780314159793
- Subject: Business Organizations
- Series: Hornbooks
- Type: Hornbook Treatises
- Description: This book clarifies rather than simply recites corporations law, while paying attention to correcting common misconceptions held among students about the subject. This book is also appropriate for courts and commentators seeking the appropriate resolution of issues of corporations law. Citations in this book are kept to a minimum and written in a user-friendly style. The second edition incorporates the major developments in corporate law in the decade since the first edition was published.