The Law of Corporations in a Nutshell
Author:
Freer, Richard D.
Edition:
7th
Copyright Date:
2016
26 chapters
have results for The Law of Corporations in a Nutshell
Chapter 2. The Corporation in Theory and in History 56 results (showing 5 best matches)
- In Chapter 3, we will see how we form a corporation—that is, a legal corporation, one recognized in the eyes of the law. In this Chapter, we discuss what that means as a theoretical matter. At different times, and for different purposes, scholars have viewed the corporation in various theoretical ways. Throughout the discussion in §§ 2.2–2.4, keep in mind that these theories are simply attempts to explain what a corporation “really” is. You might see them as metaphors for the corporation. None is totally correct, none is totally wrong, and each has its place in defining the concept of the corporation. In § 2.5, we turn to the question of whether businesses—particularly public corporations—have any role beyond making money. Specifically, do they have social responsibility? The answer to that question may be affected by the theoretical view one takes of what a corporation is. In §§ 2.6–2.8, we trace the development of American corporate law, including the primacy of state law and the...
- In recent years, the Supreme Court has extended both the constitutional protection of corporations and their status as “persons” under the law. In , 558 U.S. 310, 343 (2010), the Supreme Court held that corporations do have free-speech rights under the First Amendment. In that case, the Court struck down a federal ban on corporate “electioneering communications.” The ban meant that corporations could not spend money to advocate the election or defeat of a candidate in a federal election.
- As a general matter, the trend in corporation statutes—reflected in the MBCA—is toward simplification and the elimination of formalities that have little substantive effect. In particular, modern law routinely permits the shareholders of a closely-held corporation to customize management procedures to their needs. § 10.3. Modern statutes show a trend toward “enabling” rather than “regulating.” This movement reflects the influence of the law and economics scholars, as discussed in § 2.4.
- One argument was that a corporation could not be a “person” under RFRA because the corporation exists only to “make money.” The majority opinion rejected the argument as “fl[ying] in the face of modern corporate law,” which recognizes that corporations need not “pursue profit at the expense of everything else.” If, for example, corporations can pursue pro-environment policies, they ought to be able to “further religious objectives as well.”
- That means that incorporation has been the purview of the states. In this course, we will deal with some federal law. Specifically, in Chapters 11 and 14, we will study the Securities Act of 1933 and Securities Exchange Act of 1934. But when it comes to the law forming and governing corporations and the various players in the corporate world, we will be dealing with state law.
- Open Chapter
Chapter 3. Formation of Corporations 55 results (showing 5 best matches)
- As we saw in § 3.2, the internal affairs doctrine provides that the internal relationships of a corporation are governed by the law of the state of incorporation. Thus, if a Delaware corporation qualifies to do business in California, and is sued there, the California court will apply Delaware law on issues of internal affairs.
- In this Chapter we cover how one forms a corporation—that is, a corporation recognized by law. Today, it is a very simple process, undertaken by an . For starters, she will need to choose the state in which to incorporate; this decision will determine the law that will govern the corporation’s internal affairs (§ 3.2). A corporation formed in one state can do business in others—but it will have to satisfy the requirements for “foreign” corporations in each of those other states (§ 3.7). Though there is some variation from state to state, the basics of formation are similar, and consist of filing a document usually called articles of incorporation (§ 3.4) and taking various organizational acts (§ 3.5). If a corporation engages in activity beyond that stated in its articles, it acts
- The choice of state of incorporation determines the substantive law that will govern the business’s internal affairs. Each state has adopted the “internal affairs doctrine,” which means, for example, that Delaware law will govern the workings of a corporation formed in that state, even if the company does no business in that state.
- In , 871 A.2d 1108, 1109–10, 1113 (Del.2005), the Delaware Supreme Court refused to apply the California statute. In that case, California law would have permitted stockholders to block a proposed merger, but Delaware law would not. The Delaware court applied the internal affairs doctrine and thus held that Delaware law governed. The court concluded that the internal affairs doctrine is more than a choice-of-law rule. It is rooted in constitutional guarantees of due process, because officers, directors, and shareholders have a “significant right … to know what law will be applied to their actions.” Moreover, the court concluded, the commerce clause of the Constitution forbade California from applying its law to the internal affairs of a Delaware corporation.
- In the corporate world, “domestic” refers to the state in which the corporation is formed, and “foreign” refers to every other state. A corporation formed in New York is a “domestic” corporation in New York and is “foreign” in every other state. We will see in § 3.7 that a corporation can transact business in a state in which it is not incorporated; to do so, however, it must qualify to transact business as a “foreign” corporation.
- Open Chapter
Chapter 15. Derivative Litigation 103 results (showing 5 best matches)
- The New York Business Corporation Law has an interesting provision that allows a director or officer to sue another director or officer to force her to account for breach of a duty to the corporation. Such a plaintiff sues in her own name, though any recovery goes to the corporation, and need not satisfy the prerequisites of a derivative suit. NY Bus. Corp. Law § 720.
- Is the corporation a party in the derivative suit? Yes, it must be joined. And though the suit is brought to assert the corporation’s claim, the corporation is joined as a defendant. This is because the corporation did not actually sue, and the law has always been reluctant to force the joinder of an involuntary plaintiff. In the litigation itself, the corporation may play an active role or may be passive. It may side with the individual defendants and urge that their conduct did not harm the company, or it may champion the plaintiff’s cause.
- The Second Circuit, applying New York law, reversed, and held the claim was direct. This meant that the plaintiff was not required to post the bond, and the case could proceed. The court emphasized that a derivative suit is one regarding injury to the corporation. Here, the injury (if any) was to minority shareholders. The court discussed , 119 N.E.2d 331, 339 (N.Y. 1954), in which the New York Court of Appeals held that a suit to force the board to declare a dividend was derivative. That court concluded that the failure to pay dividends was a failure to discharge a duty owed to the corporation, not the shareholders. The decision in
- If the plaintiff filed the derivative suit after the board rejected her demand, § 7.44(c) requires that she allege in detail facts showing either that a majority of the board was tainted or that the underlying requirements of § 7.44(a) were not met. More interestingly, § 7.44(d) allocates the burden of proof in a way reminiscent of the “demand required” and “demand excused” bifurcation under traditional law. If, when the board rejected the demand, a majority of the board was qualified, the plaintiff must prove that the underlying requirements of § 7.44(a) were not met. If, however, a majority of the board was tainted (and thus not qualified), the corporation must demonstrate that the requirements of § 7.44(a) were satisfied.
- In some cases involving close corporations, the derivative suit model does not make sense. For example, suppose a corporation has three shareholders—X, Y, and Z—each of whom owns one-third of the stock and each is a director. Let’s say X is also president of the corporation, and has the company buy supplies from another business, which she owns. And suppose this interested director deal causes the corporation to overpay for supplies by $30,000. X has breached her duty of loyalty to the corporation, and has caused damage of $30,000. If another shareholder brings a derivative suit and wins, the $30,000 judgment will go to the corporation. Because X owns one-third of the corporation, however, this recovery in essence returns one-third of the judgment to X, the wrongdoer.
- Open Chapter
Glossary 145 results (showing 5 best matches)
- is a method of amalgamation of two corporations in which the disappearing corporation is merged into a subsidiary of the parent corporation. Shareholders of the disappearing corporation receive shares of the parent corporation. In a reverse triangular merger the subsidiary is merged into the disappearing corporation so that the corporation being acquired becomes a wholly owned subsidiary of the parent corporation.
- is a contract principle by which a person agrees to assume a contract previously made by someone else for her benefit. Adoption is effective only from the time such person agrees, in contrast to a “ratification,” which relates back to the time the original contract was made. In corporation law, the concept is applied when a newly formed corporation accepts a pre-incorporation contract entered into by a promoter for the benefit of the corporation to be formed.
- CORPORATION BY ESTOPPEL
- may mean (i) the document filed with the Secretary of State, to create a corporation, or (ii) the grant by the state of the privilege of conducting business in corporate firm. “Charter” may also be used in a colloquial sense to refer to the basic constitutive documents of the corporation.
- is an offer to buy a specified number of unissued shares from a corporation. If the corporation is not yet in existence, a subscription is known as a “pre-incorporation subscription,” that is enforceable by the corporation after it has been formed and is irrevocable despite the absence of consideration or the usual elements of a contract.
- Open Chapter
Chapter 9. Fiduciary Duties 153 results (showing 5 best matches)
- Most of the law of business opportunities is judge-made. As we will see, there is substantial variation among states concerning several aspects of the law. When it comes to remedy, however, courts seem in accord—the corporation is entitled to a constructive trust on the property usurped. That means the fiduciary who usurps must put the corporation in the position it should have been in absent her breach. Specifically, there are two possibilities—(1) if she still has the property, she must sell it to the corporation at her cost; and (2) if she has sold it at a profit, the corporation is entitled to recover that profit.
- A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.
- • Mid-level employees engage in illegal price fixing while working for Corporation. Corporation and the employees are prosecuted under the antitrust laws. The individuals are jailed and Corporation is fined $10,000,000. Now a shareholder brings a derivative suit against the directors to recover that $10,000,000 on behalf of the corporation. The theory is that the directors failed to monitor what the employees were doing, and thereby breached the duty of care.
- The older version of the MBCA—still in effect in some states—defines a self-dealing transaction as one “with the corporation in which the director of the corporation has a direct or indirect interest.” MBCA (1975) § 8.31(a). It provides that she had an “indirect interest” if the deal was between the corporation and “another entity in which [she] has a material financial interest” or in which she is a general partner, officer, or director. If the director had an “indirect interest,” the transaction should be considered by the board of directors.
- The concern in cases of this sort is that X, in her role as director of XYZ, Inc., has an incentive to have XYZ overpay because doing so lines X’s pockets in her role as owner of Supply Corp. Recognizing this conflict, the common law allowed XYZ to void the contract at will. But this rule did not fit business needs. Many self-dealing transactions are good for the corporation; a fiduciary may give her corporation a benefit it cannot get elsewhere. For example, a director might lend money to a corporation when its credit rating makes it impossible to get one from a bank. Such transactions should be encouraged.
- Open Chapter
Chapter 10. Special Issues in the Close Corporation 130 results (showing 5 best matches)
- The “close” or “closely-held” corporation has few shareholders and there is no public market for its stock. Because they have relatively few owners, close corporations resemble partnerships in some ways. In particular, the owners may try to run the business as informally as one may run a partnership ( § 10.2). The problem is that the traditional model of the corporation ( § 5.6) is not very flexible. The tension between the way proprietors may want to run a close corporation and the requirements of corporation law surfaces in three areas, on which we focus in this chapter.
- Common Law Recognition of a Fiduciary Duty.
- Proper planning will also address the transferability of shares in a close corporation. Close corporations often employ stock transfer restrictions to ensure that “outsiders” may become stockholders only in limited circumstances ( § 6.8). In some states, the statutory close corporation laws make certain restrictions automatic, such as a right of first refusal. In other states, these restrictions are not automatic and must be spelled out. So, as with pre-emptive rights, election of the statutory close corporation may affect the default provision on such matters.
- Several states have rejected the principle that shareholders owe each other a fiduciary duty in the close corporation. For example, in , 626 A.2d 1366, 1377 (Del. 1993), the Delaware Supreme Court concluded that creation of such a claim should be left to the legislature. Similarly, in , 387 S.E.2d 725, 734 (Va. 1990), the Virginia Supreme Court rejected a common law claim for oppression. The legislature had provided a right to petition for involuntary dissolution of the corporation in cases of “oppression.” According to the court, this amounted to a legislative determination that dissolution was the exclusive remedy; courts were not free to fashion a common law right of action for oppression. In many states, it is unclear whether shareholders in a close corporation owe each other a common law fiduciary duty.
- • A “close corporation” is one formed under a state’s general corporate law, the stock of which is not registered for public trading. There is no maximum number of shareholders, and much of the important law about governance and liability may be common law. A “closely-held corporation” is the equivalent.
- Open Chapter
Chapter 5. The Distribution of Powers in a Corporation 42 results (showing 5 best matches)
- Statutes generally do not define the authority of officers. A typical statutory provision states that each officer “has the authority and shall perform the functions set forth in the bylaws or, to the extent consistent with the bylaws, the functions prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of other officers.” MBCA § 8.41. In theory, officers administer the day-to-day affairs of the corporation subject to the direction and control of the board. In fact, their authority is often considerably greater, at least in public corporations. Officers are not required to operate in groups, and are individual agents of the corporation (
- There are three groups with responsibility in the corporation: shareholders, the board of directors, and officers. The first two can perform acts only as groups. That is, individual shareholders have no power to do anything on behalf of the corporation. So whatever shareholders do on behalf of the business, they do as a group. The same is true of directors. Individual directors have no power to decide anything for the corporation or to bind it to agreements. Whatever directors do, they do as a group, as a board. That is why there are rules in every state’s corporation law for determining whether there is a quorum at meetings of these groups and concerning what vote is required. We will discuss these voting requirements in detail in the later sections on shareholder voting (
- Officers, in contrast, do not operate in groups. Individual officers—like the president, secretary, and treasurer—are agents of the corporation. Agency law ( § 1.9) governs the relationship between the principal (the corporation) and the agent (the officer). As agents, officers may have authority to bind the corporation to contracts or to speak for the corporation in various ways.
- We said above that the corporation statutes are basically one-size-fits all. The model they embrace best fits the mid-sized corporation. In the real world, most corporations are not mid-sized. The overwhelming majority of corporations are close (or closely-held) companies. These have few shareholders and the stock is not publicly traded. Many close corporations are modest family businesses, but many have considerable assets and sizable economic clout. There are millions of close corporations in the United States. We discuss issues relating to close corporations in Chapter 10. These are juxtaposed with public corporations, which are corporations whose stock is registered for public trading. There are fewer than 20,000 such companies. We discuss issues relating to public corporations in Chapter 11. The present purpose is to sketch how these corporations actually operate, and how that operation differs from the traditional model.
- The small close corporation resembles a partnership. Shareholders, like partners, usually anticipate that they will be employed by the business. Therefore, shareholders of close corporations often look to the business not only as an investment, but as a source of salary. In the partnership, proprietors are largely free to structure management as they see fit. They can appoint a managing partner and delegate authority to her. In contrast, the traditional corporation model imposes rigid requirements: the board of directors and shareholders must hold meetings, for which proper notice is mandated. This formality does not fit a corporation that has only a handful of participants. Yet, according to the model, failure to abide by formalities was dangerous, since it is a factor that may influence a court to “pierce the corporate veil” and hold shareholders liable for business debts (
- Open Chapter
Chapter 8. Officers 46 results (showing 5 best matches)
- Given that officers are agents of the corporation, can their knowledge be imputed to the corporation? Generally, the answer is yes. Knowledge acquired by an officer while acting in furtherance of the business or in the course of employment is imputed to the corporation. So if the president knows of a transaction, and the corporation accepts benefits of it, the corporation may become liable through estoppel, even though the directors and other officers were ignorant of the transaction. Similarly, service of process on an authorized agent of the corporation supports a default judgment against the corporation even though the agent fails to forward the papers to the corporation or its attorney.
- Officers are agents of the corporation (and, of course, other employees may be agents of the corporation as well). As we saw in § 1.9, agency is the law of delegation, by which a principal (P) permits an agent (A) to act on its behalf in deals with a third party (TP). Here, the corporation is P and the officer is A. The officer, like any agent, may have any of the three types of
- The modern view, reflected in MBCA § 8.40(d), is that “[t]he same individual may simultaneously hold more than one office in a corporation,” without restriction from the corporate law. Moreover, contemporary statutes tend not to require three or four officers. Section 8.40(a) of the MBCA basically leaves the matter up to the corporation, providing that “[a] corporation has the offices described in its bylaws or designated by the board of directors in accordance with its bylaws.” MBCA § 8.40(c) requires the existence of only one officer, who shall be responsible for “preparing minutes of the directors’ and shareholders’ meetings and for maintaining and authenticating the records of the corporation….” Though these functions describe the corporate secretary, the MBCA does not require that the person be given that title.
- What happens, instead, if the corporation does nothing? Generally, ratification requires an affirmative act by P. So if the corporation does nothing, it will not be bound by ratification. On the other hand, if the corporation accepts a benefit of the contract, a court will probably find that the corporation is liable on the contract. In doing so, the court may use terms such as “estoppel” or “unjust enrichment.” Courts can be rather imprecise in using these terms, but the results of the cases are usually consistent with common sense. Suppose an officer enters a deal with TP that is beyond her actual authority—say, to purchase supplies greater than a certain dollar figure. The corporation then accepts and uses the supplies. Common sense tells us that the corporation should be liable on that deal.
- In dealing with a representative of a corporation, TP has an interesting dilemma: how does she know whether the person can bind the corporation? If the corporation is not bound, TP can only look to A for satisfaction on the contract, and A may be a person of limited means. The best way is to insist that the putative agent produce a certified copy of a board resolution authorizing the deal. If the corporate secretary executes the resolution and affixed the corporate seal, the corporation will be estopped to deny the truthfulness of the facts stated. This method will not help TP on the many small transactions for which there is no board approval. In those cases, TP may be taking a bit of a chance. On the other hand, if the corporation accepts a benefit of the contract, it will be held to have ratified the deal and thus be liable.
- Open Chapter
Chapter 1. Modern Forms of Business and the Importance of Agency Law 118 results (showing 5 best matches)
- Though the requirement of filing with the state is similar to that for forming a corporation, there is at least a theoretical difference. Historically, forming a corporation has been seen as receiving a charter or franchise from the state. The same is not true with the LLC. The only practical difference of consequence, however, is that in some states an LLC—because it does not receive a franchise from the state—is not subject to state franchise taxes; a corporation always is. Beyond that, some courts have been sloppy in equating LLCs and corporations, referring, for instance to the state in which an LLC was “incorporated.” And there has been some confusion about whether certain aspects of corporate
- There has been considerable academic debate about whether the law should recognize inherent authority or power. The common law, reflected in the Restatement (Second) of Agency, which was promulgated in 1958, recognized inherent agency power, as noted above, in § 8A. The Restatement (Third) of Agency, however, promulgated in 2006, rejects it. This rejection is not a matter of great importance in the real world, though. Why? The Restatement (Third) expands the notion of what constitutes a manifestation by P to TP and thus expands the applicability of apparent authority. For instance, by representing (essentially to the world) that someone is the “president” of a corporation, the corporation is manifesting to third parties that this person has apparent authority to bind the corporation to deals in the ordinary course of business. So the Restatement (Third) would reach by
- , the corporation is managed by the board of directors. Note, then, that the corporation separates ownership from management—the shareholders are the owners and the directors are the managers. (It is possible that the shareholders and the directors will be the same person(s), but their
- First, Subchapter C applies to corporations generally. It considers the corporation to be a separate entity independent of its shareholders. I.R.C. § 11(a) thus imposes a tax on the income of the corporation. In addition, § 301 imposes income tax on the distributions (such as dividends) paid by the corporation to its shareholders. This results in “double taxation”: there is federal income taxation at the corporate level and a second time at the shareholders’ level. Every public corporation is subject to Subchapter C.
- The limited liability partnership (LLP) is a form of general partnership. It developed in the early 1980s in Texas, as a legislative response to the liability faced by partners of law firms and accounting firms for failures of savings and loan associations.
- Open Chapter
Chapter 12. Financing the Corporation 116 results (showing 5 best matches)
- We need two more terms. First, a “security” is an investment. So we will speak of “debt securities” (which are loans to the corporation) and “equity securities” (which are ownership interests (stock) in the corporation). Second, when a corporation takes a loan or sells an ownership interest, it “issues” the security. So “issuance” is a sale by the corporation itself, and the “issuer” is the corporation. The corporation may issue debt securities or equity securities (or both).
- the corporation is actually formed can constitute services “performed for the corporation.” For instance, can a corporation issue stock to lawyer as compensation for doing the pre-incorporation work to form it? Some courts may conclude that the answer is no, because when the work was done, there was no corporation in existence. Most courts, however, appear to conclude that the answer is yes. In New York, a statute expressly provides that a corporation may issue stock as payment for pre-incorporation services. NY Bus. Corp. Law § 504(a).
- The corporation can have non-voting stock. The corporation can have weighted voting stock—for example, with two votes per share, as opposed to one. While this usually happens in close corporations, it can be used in public corporations as well. A good example is the corporation that published the New York Times. Though publicly traded, this corporation was long associated with a single family. The corporation had a special class of stock, held by family members, with super voting power. This helped ensure that the family could continue to run the business. The Securities and Exchange Commission adopted rule 19c–4 (the “one share one vote rule” or “all holders’ rule”) to prevent such unequal divisions in voting power in public corporations, but did not affect companies that were already doing such things. The District of Columbia Circuit held the rule invalid, though, as exceeding the power of the Commission.
- Form of Consideration for an Issuance.
- As noted three paragraphs above, the three classic forms of consideration (money, tangible or intangible property, and services already performed for the corporation) are acceptable in every state. In addition, in most states today, it is also permissible to issue stock for promissory notes and future services. This is because the majority view is that an issuance can be made for “any tangible or intangible property or benefit to the corporation.” MBCA § 6.21. (In some states, the relevant provision says simply “tangible or intangible benefit to the corporation,” which obviously includes property). So today, in most states, promissory notes and future services are acceptable, as is the discharge of a debt, and release of a claim— that constitutes a benefit to the corporation.
- Open Chapter
Chapter 11. Special Issues in the Public Corporation 101 results (showing 5 best matches)
- Things are different in the public corporation. For any shareholder meeting for any kind of corporation, there must be a quorum. That is, a majority of the shares entitled to vote must be represented at the meeting ( § 6.4). Otherwise, no action can be taken. In public corporations, usually the shareholders who show up do not represent anything close to a majority of the shares entitled to vote. Therefore, management must solicit proxy appointments to ensure that there will be a quorum. When management does this, it will be asking the shareholders to vote in a particular way on the various issues to be considered at the meeting. Federal law attempts to ensure that the corporation provides accurate information in this process.
- State Law.
- A “public” (or “publicly-traded” or “publicly-held”) corporation is one whose securities are registered under federal law for public sale. Public corporations include what most people think of when they hear the word “corporation”—millions of dollars in assets, thousands of employees, and millions of shares owned by tens of thousands of shareholders. The 500 largest companies in the world, measured by revenue, comprise the “Fortune 500,” which includes such iconic businesses as Ford, McDonald’s, and Procter & Gamble. Not all public corporations are this large. Many are mid-sized and even smaller. In this chapter, we address the public market for stocks and special problems faced by public corporations.
- The expenses of a proxy contest—of soliciting thousands of shareholders for their proxies—can be daunting. It seems clear that the corporation should pay for printing and mailing the notice of meeting, the proxy statement required by federal law, and the proxy appointments themselves. These are legitimate corporate expenses, because without the proxy solicitation it is unlikely that the quorum requirement can be met. Many courts have allowed the corporation to pay the reasonable expenses of defending against the bidder. If the bidder is successful, it may ask that the corporation reimburse it for its expenses. Some courts have allowed this if the dispute involved policy rather than personalities and if the shareholders approve. In such cases, the corporation ends up paying the expenses of both sides of the dispute, because the losing management will normally reimburse itself before leaving office.
- In the wake of the financial crisis in the first decade of the twenty-first century, some corporations received government “bail outs.” For instance, under the Troubled Asset Relief Program (TARP), the United States Treasury purchased assets and stock of companies that had lent money on “subprime” mortgages. (These were mortgages that were unlikely to be repaid.) TARP was aimed at keeping such companies afloat and allowing them to restructure so they could make money and repay the federal funds. One aspect of the law limits compensation of the five highest-paid executives of corporations that received significant TARP funds. Federal law now requires that public corporations have compensation committees consisting of outside directors. These committees are required to develop performance criteria at the beginning of the performance period. The compensation arrangement must be adequately disclosed to, and approved by, shareholders. In addition, the outside directors must
- Open Chapter
Copyright Page 5 results
- Nutshell Series, In a Nutshell
- The publisher is not engaged in rendering 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.
- West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license.
- Printed in the United States of America
- © West, a Thomson business, 2000 © 2016 LEG, Inc. d/b/a West Academic
- Open Chapter
Chapter 14. Potential Liability in Securities Transactions 116 results (showing 5 best matches)
- , § 16(b) creates a claim
- In Chapter 11, we addressed aspects of federal securities law in the public corporation: registration and reporting requirements ( § 11.5). We noted that the underlying policy of federal securities law is disclosure. The idea is that truthful information protects the investing public. In this chapter we focus on state and federal law aimed at fraudulent behavior in the trading of securities—not only the initial issuance by the corporation, but in the secondary market for re-selling as well.
- The development of the law of insider trading under Rule 10b–5 has implicated different policies. The SEC originally asserted that the prohibition of insider trading was based upon equality of access to information. The Court rejected this assertion in , and shifted the focus from equal access to preventing a breach of fiduciary duty owed to the company whose securities are traded. With misappropriation, liability is imposed on one who takes information in breach of a duty owed to someone unconnected with the corporation in whose securities she traded. Disclosure to the person on the other side of the trade is irrelevant. The breach of duty under this theory is the failure to disclose the proposed trading to the person with the proprietary right to the information. In other words, O’Hagan would not have committed a criminal violation if he had advised his law firm and Grand Met that he proposed to speculate in Pillsbury stock.
- In New York, the corporation may sue insiders who trade in its stock on a public market. In , 248 N.E.2d 910, 911 (N.Y. 1969), a director and an officer had inside information of impending bad news for the corporation. They unloaded their stock on the public market before the bad news was made public. They sold at $28 per share. After the bad corporate news became public, the stock price fell to $11. The New York Court of Appeals held that the two insiders had breached a duty owed
- Second, there is no liability in a private Rule 10b–5 case for “aiding and abetting.” Suppose a corporation violated 10b–5 by making misleading statements in its prospectus. Defrauded investors can sue the corporation. Because the corporation might have no assets, plaintiffs for years sued “secondary” or “collateral” participants, such as the accountants and bankers who may be said to have aided the corporation’s fraud. The Supreme Court put a (surprising) end to the practice in
- Open Chapter
Chapter 16. Fundamental Corporate Changes 85 results (showing 5 best matches)
- But even if a corporation is engaged in one of these changes, there is an important limitation on the availability of the right of appraisal. In most states, the right of appraisal is not available if the company’s stock is publicly traded or if the corporation has a large number of shareholders (usually 2,000 or more). This means that the right of appraisal exists in close corporations. And this makes sense. If the corporation’s stock is publicly traded, or if there is a large number of shareholders, the disgruntled shareholder does not need a right of appraisal. She can simply sell her stock on the public market. This is why appraisal statutes speak of a shareholder’s recovering the “fair value,” and not the fair
- It is important to scour the relevant statutes to determine which fundamental changes will trigger the right of appraisal. This varies from state to state. For instance, in some states, an amendment of the articles (at least, one that will harm a class of shareholders) gives rise to a right of appraisal (for the shareholders harmed). In most states, though, amendment of the articles does not trigger the right of appraisal. In some states, shareholders of both corporations in a merger (the disappearing corporation and the surviving corporation) have the right of appraisal. In others, however, only the shareholders of the disappearing corporation will have it. In most states, only shareholders who were entitled to vote on the fundamental change will have the right of appraisal. In a few states, though, even holders of non-voting stock will be able to exercise the right.
- A merger is always a fundamental change for a corporation that will cease to exist. Thus, the transaction must be approved not only by the board of directors, but by the shareholders of that corporation, under the procedure detailed in § 16.2. Increasingly, as reflected in MBCA § 11.04(h)(1) (in prior versions this was 11.04(g)(1)), a merger or consolidation is not considered a fundamental change for the surviving corporation. Under the MBCA, then, the shareholders of that corporation will have no voice in whether the merger is approved. They cannot vote and will not have the right of appraisal. In some states, however, the merger or consolidation is a fundamental change for the surviving corporation unless specific statutory factors are met. For example, in Delaware, shareholders of a surviving corporation do not vote if the transaction will not amend that company’s articles and if the corporation will not issue an additional 20 percent of stock in consummating the deal. Del. § 251...
- A involves two existing corporations, with one combining into the other. For instance, X Corp. merges into Y Corp. X Corp. disappears and Y Corp. survives. Technically, a involves two existing corporations, both of which disappear to form a new entity: X Corp. and Y Corp. consolidate to form Z Corp. X Corp. and Y Corp. disappears and Z Corp. survives. Increasingly, states consider the consolidation obsolete, because it is usually advantageous to have one of the extant corporations survive, and if a new entity is desired, it can simply be created and the existing corporations merged into it. Accordingly, the law in many states, and in the MBCA, simply does not provide for consolidations. On the other hand, Delaware retains the consolidation. Del. § 251(a). (Throughout this section, we will refer to “mergers,” but the discussion applies to consolidations as well.)
- Many mergers are between parent and subsidiary corporations. If the parent will be the surviving company, it is an . If the subsidiary survives, it is a . A downstream merger can be used to change the state of incorporation of a publicly held corporation. The corporation creates a wholly-owned subsidiary in the new state and then merges itself into its subsidiary. The stock and financial interests of the parent are mirrored in the stock and financial structure of the subsidiary. When the merger occurs, each shareholder and creditor of the old publicly held corporation incorporated in State A automatically becomes a shareholder and creditor of a corporation incorporated in State B.
- Open Chapter
Chapter 4. Pre-Incorporation Transactions and Problems of Defective Incorporation 47 results (showing 5 best matches)
- In Chapter 3, we saw how a corporation is formed. In a perfect world, proprietors would form a corporation on Monday and have the corporation commence business on Tuesday. In the real world, however, things are often not that smooth. People (called “promoters,” § 4.2) often take steps on behalf of the business before the corporation is formed. This chapter deals with the legal problems raised by such efforts. Sometimes the efforts are undertaken when everyone knows that no corporation has been formed. Examples are when a promoter gets a third party to offer to buy stock after the corporation is formed ( § 4.3), or enters an agreement to form a corporation ( § 4.4), or enters a pre-incorporation contract (
- corporation is a broad doctrine—it is applied in contract and tort. Indeed, it can apply in any case except one brought by the state. The state could file a “quo warranto” action to demand “by what right” the proprietors purport to act in the name of a corporation. Outside of that, though, from the proprietors’ standpoint,
- The uncertainty is exacerbated by the fact that in many states there is no definitive case law on corporation survives the negative inference in the legislation. Today, then, states are all over the lot: in some states corporation has been abolished, in others it has been recognized, and in many (perhaps most), the status is not clear.
- Mere formation of the corporation does not make the entity liable on the deal. The corporation is liable only if it the lease. Even then, Patti remains liable on the lease until novation. In other words, the corporation’s adoption of the contract will not relieve Patti of liability; only a novation will do that.
- re corporation, Louise and Leslie are acting as partners in a partnership. As such, they are personally liable on the contract. But under the corporation doctrine, they may escape liability. This common law doctrine provides that a court may treat the situation as though there was a corporation. Doing so saves the proprietors from personal liability. To invoke the doctrine, Louise and Leslie must show three things.
- Open Chapter
Chapter 13. Dividends and Other Distributions 80 results (showing 5 best matches)
- at a specified price. The redemption is usually at the behest of the corporation and allows the corporation to force the holders of redeemable stock to sell their shares to the corporation at the price set in the articles. When the board exercises the redemption power, the shareholders’ rights shift from holding an equity interest in the corporation to holding a contractual right to receive the redemption price. Preferred stock may also be made redeemable at the option of the
- A distribution is a payment made by the corporation to a shareholder she is a shareholder. Suppose a shareholder also happens to be an employee of the corporation. The corporation’s paying wages to her is not a distribution, because it is not being paid in her as a shareholder. There are four generic types of distributions: dividends, repurchases of stock, redemptions of stock, and a liquidating distribution. In this Chapter, we deal with the first three. (The fourth, the liquidating distribution, is made to shareholders during dissolution, after creditors have been paid. We discuss it in § 16.8.)
- Dividends may also be paid, however, in additional shares of the corporation itself. This “share dividend” is not a true distribution because no assets leave the corporation. With cash and property dividends, the corporation is actually giving up something of value. With share dividends, it is not. Instead, the share dividend merely increases the number of ownership units outstanding without affecting the corporate assets and liabilities. If a shareholder receiving a share dividend sells the new shares, she may view the transaction essentially as a cash dividend, because she will end up owning the same number of shares as before and has, in addition, the cash received from the sale of the new shares. In fact, though, she now owns a slightly smaller percentage of the enterprise than she owned before the dividend (since the number of outstanding shares has increased by the number of new shares distributed). In most cases, this dilution will be so slight as to be unimportant.
- • Corporation has assets of $250,000 and liabilities of $200,000. Corporation has a class of stock of 1,000 shares with a $5 liquidation preference. If Corporation dissolved today, it would need $5,000 to pay the liquidation preferences (1,000 shares multiplied by $5 preference). The balance sheet test for insolvency equates liquidation preferences with liabilities. So Corporation has $250,000 in assets. It has liabilities of $200,000 and the liquidation preference would be $5,000. Assets ($250,000) minus liabilities plus liquidation preferences ($205,000) equals $45,000. So under this test, Corporation can make a distribution of up to $45,000.
- Instead of a share dividend, the corporation might issue “rights” or “warrants.” These are options to buy additional shares from the corporation at a set price (usually below the current market price). Like share dividends, these are also not true distributions. The shareholder who exercises the option must give capital to the corporation to maintain her percentage of ownership. If she does not do so, or if she sells the option (there is a public market for rights and options in public corporations), her interest in the business will be diluted.
- Open Chapter
Chapter 6. Shareholders 105 results (showing 5 best matches)
- As a practical matter, cumulative voting in a factionalized close corporation may be of considerable importance. It is irrelevant, of course, in one-shareholder corporations or when parties readily agree upon who should serve on the board of directors. In large, publicly held corporations, cumulative voting is generally thought to be a nuisance. It complicates voting by proxy and rarely affects the actual outcome of an election.
- As noted, a common STR in close corporations is the “buy-sell” agreement, which requires either the corporation or other shareholders to buy one’s stock upon the occurrence of a specified event. Frequently, such provisions are triggered by a shareholder’s leaving the business by retirement or death. The choice of whether the corporation or other shareholders will purchase the stock is a matter of preference. Often, the corporation’s purchase of the stock is the better option. Not only might the company have readier access to cash, but the corporation’s purchase of the stock does not affect the proportional ownership of the other shareholders. Such a repurchase by the corporation is a distribution, and will have to satisfy the legal requirements for such transactions (
- In other states, such as New York, the remedy for breach of a voting agreement is not clear. Though the New York Business Corporation Law allows voting agreements, it is silent on remedies for breach, nor is there definitive case law.
- This procedure bears no semblance to reality in public corporations today. Few shareholders of publicly-traded companies ever see a stock certificate. In the 1960s, faced with a daunting volume of daily trades, firms developed the “book entry” or “street name registration” system. Under this system, stock certificates are largely irrelevant. Most stock certificates are stored in the vaults of the Depository Trust Company (DTC) and its clearing offices. Most of the shares are registered in the name “Cede & Co.,” which is the registered owner of most publicly-traded stock. Stock ownership is recorded by brokerage firms, like UBS or Charles Schwab, and not in the share transfer books of the corporations. More recently, the SEC approved a variation that permits direct book entries of ownership in the records of the corporation itself.
- Another common STR in close corporations is the buy-sell agreement, which the corporation or other shareholders to buy a shareholder’s stock. This is helpful, for example, when a shareholder retires from employment with the corporation or when a shareholder dies. Because there is no market for the stock of a close corporation, a buy-sell agreement allows the departing shareholder (or her estate) to receive a return on investment. We discuss this further in subpart C below.
- Open Chapter
Foreword 4 results
- The centerpiece of any such course, and the centerpiece of this book, is the corporation. We follow the life-cycle of business, from formation through dissolution. We cover the theory of the firm but focus on the nuts-and-bolts of business law, including chapters devoted specifically to particular issues raised by closely-held corporations and by publicly-traded corporations.
- Whatever the name of your class—from Business Organizations to Business Associations to Corporations—this book will help you. It provides background on all forms of business organization, including partnerships, limited partnerships, LLPs, LLLPs, and LLCs. In addition it emphasizes the transcendent importance of agency law, in general and as applied in the corporate form.
- This material intimidated me in law school, in part because I had had no exposure to business. It seemed to me that everyone in the class had majored in business in college—and there I was, a sociology major! The goal of this book is to make business law accessible to everyone—and, hopefully, even fun.
- This work includes securities law and Sarbanes-Oxley, and addresses business finance as well. Throughout, examples and hypotheticals (with answers) are used to explain the doctrine.
- Open Chapter
Chapter 7. Directors 70 results (showing 5 best matches)
- Directors’ compensation was long paid in cash. Increasingly, public corporations pay directors in stock or options to buy stock. The theory is that stock ownership aligns the outside directors’ interest with that of the shareholders. In Chapter 9, we discuss the duties directors owe to their corporation. Breaching a duty can expose a director (inside or outside) to significant potential liability.
- In public corporations formed under Massachusetts law, a staggered board is required, apparently to promote this sort of continuity. On the other hand, shareholders usually can remove directors before their terms expire without cause ( § 5.3). Thus, the new majority shareholder would be able to purge the board and elect “her” people as directors. To counteract this, some states permit removal of directors in corporations with staggered boards only for cause.
- Remember that people may wear more than one hat at a time. A director who is also an officer is entitled to compensation as an . Here we speak of compensation as a . Traditionally, directors were not paid for ordinary services in that role. The idea was that directors were acting as trustees or were motivated by their own interest in the corporation. The common law evolved, however, to permit director compensation if it was agreed to in advance or if a director performed some extraordinary services.
- These corollaries make little sense in a close corporation in which the (few) shareholders are active in operating the business. There, even the requirement of a formal meeting of the board will likely be considered a meaningless formality. Accordingly, today, statutes permit shareholders in close corporations to abolish the board and adopt more informal decision-making. When this is not done, management rests in the board, and the proprietors and their lawyers should be scrupulous in following the rules.
- The board can act in only two ways. One, addressed in the next section, is to approve a resolution at a meeting. The other, permitted in all states, is unanimous written consent to act without a meeting. Section 8.21(a) of the MBCA provides that unless the articles or bylaws require a meeting, a board action “may be taken without a meeting if each director signs a consent describing the action to be taken and delivers it to the corporation.” Such consent is an act of the board, just as if the action had been taken after a formal meeting. MBCA § 8.21(b). Note that though all directors must agree to the action, not all need sign the same piece of paper. For instance, in a corporation with multiple directors, each could sign and file with the corporate records a separate document agreeing to the board act.
- Open Chapter
Title Page 3 results
Outline 79 results (showing 5 best matches)
- Chapter 5. The Distribution of Powers in a Corporation
- § 10.2 Characteristics of a Close Corporation (and “Statutory Close Corporation”)
- Chapter 2. The Corporation in Theory and in History
- Chapter 10. Special Issues in the Close Corporation
- Chapter 11. Special Issues in the Public Corporation
- Open Chapter
Acknowledgments 3 results
- And I am continually grateful for the friendship and support of the Emory Law faculty and administration. It has been my honor to be a member of that community my entire academic career. DeWitt Perkins and Bunny Sandefur, Emory Law class of 2016, provided terrific research assistance.
- I owe a special debt to David Epstein, who got me interested in teaching in this area, and who recruited me (and has put up with me) as co-author of our casebook B (West Academic 4th ed. 2015). George Shepherd and Mike Roberts fill out the team on that book, and I am proud to be on that team.
- RINCIPLES OF
- Open Chapter
Advisory Board 11 results (showing 5 best matches)
- Distinguished University Professor, Frank R. Strong Chair in LawMichael E. Moritz College of Law, The Ohio State University
- Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law
- Professor of Law Emeritus, University of San Diego Professor of Law Emeritus, University of Michigan
- Robert A. Sullivan Professor of Law Emeritus, University of Michigan
- Professor of Law, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles
- Open Chapter
Index 131 results (showing 5 best matches)
Table of Cases 12 results (showing 5 best matches)
- Publication Date: September 20th, 2016
- ISBN: 9781634597012
- Subject: Business Organizations
- Series: Nutshells
- Type: Overviews
- Description: Completely revised and updated, conversational in tone, the book features hypotheticals to illustrate key concepts. Comprehensive yet concise, it addresses the theory of the firm as well as the nuts-and-bolts of corporate law, including separate consideration of specialized issues raised by closely-held and public corporations. With updated discussion of Sarbanes-Oxley, Rule 10b-5, and Section 16(b), it gives broad background. Financial concepts are explained with helpful examples, so that even sociology majors need not fear them.
