The Law of Corporations in a Nutshell
Author:
Freer, Richard D.
Edition:
8th
Copyright Date:
2020
26 chapters
have results for Corporations in a Nutshell
Copyright Page 7 results (showing 5 best matches)
- Nutshell Series, In a Nutshell
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Chapter 3. Formation of Corporations 54 results (showing 5 best matches)
- 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.
- In this chapter we discuss how one forms a corporation—that is, a corporation recognized by law. Today, this is a very simple process, undertaken by an “incorporator ” 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 will need 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 everywhere, and consist of delivering a document (often called the articles of incorporation) to the appropriate state officer (usually the secretary of state) and paying the requisite fees (§ 3.4). After formation, the corporation completes the process of organization (§ 3.5). If a corporation engages in activity beyond that stated in its articles, it acts ...corporations today generally may state...
- A corporation formed in one state may transact business in another state only if it satisfies the requirements to act as a “foreign corporation” in that other state. (Remember from § 3.2 that “foreign” refers to a state other than the one in which the business is incorporated.) Historically, the requirement was that the foreign corporation needed to “qualify” to transact business in the other state. Increasingly today, as reflected in MBCA (2016) § 15.02, the foreign corporation must “register” to do business as a foreign corporation. Generally, the requirements of the older “qualification” statutes and the newer “registration” statutes are very similar.
- Many states also require a statement of . In the nineteenth century, states required that the articles state specific purposes for which the corporation was formed. In a few states, corporations could only list one purpose. These requirements reflected mistrust of the corporation; permission to form a corporation was given grudgingly and only for a limited purpose. If the corporation acted beyond the stated purpose, it acted , which is discussed in § 3.6.
- Any corporation may be incorporated in any state. As we saw in § 2.7, most public corporations are formed in Delaware (even if they do little or no business in that state). As a practical matter, smaller corporations will rarely find it worthwhile to incorporate in Delaware. It will be more economical for them to incorporate in the state in which they will operate.
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Glossary 140 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.
- CORPORATION BY ESTOPPEL
- 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.
- is a lucrative contract given to an executive of a corporation that provides additional economic benefits in case control of the corporation changes hands and the executive leaves, either voluntarily or involuntarily. A golden parachute may include severance pay, stock options, or a bonus payable when the executive’s employment at the corporation ends.
- in a close corporation involves conduct by controlling shareholders that deprive a minority shareholder of legitimate expectations concerning roles in the corporation, including participation in management and earnings.
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Chapter 8. Officers 42 results (showing 5 best matches)
- Given that officers are agents of the corporation, can their knowledge be imputed to the corporation? Generally, yes: knowledge acquired by an officer while acting in furtherance of the business or in the course of employment is imputed to the corporation. Thus, 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.
- The board of directors is responsible for monitoring the officers. The level of detail involved in monitoring will depend upon the size and structure of the corporation. In public corporations, the board cannot engage in a hands-on monitoring; the company is simply too big to permit the board to look over each officer’s shoulder day to day. In close corporations, however, the board can engage in more direct monitoring. In any corporation, however, the board must engage in appropriate review. Failure to do so can constitute a breach of one of the board’s fiduciary duties (
- 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 look only to A for satisfaction on the contract, and A may be a person of limited means. The best way for TP to protect herself is to insist that the putative agent produce a certified copy of a board resolution authorizing the transaction. If the corporate secretary executes the resolution and affixes 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.
- As a general rule, an officer’s wrongful intentions may also be imputed to a corporation, which can open the business to civil liability or even criminal prosecution. Often, any criminal prosecution will be for “white collar crime.” There are some examples of corporations being indicted for “personal” crimes such as murder, but actual prosecutions are very rare. For a corporation to be prosecuted for such conduct, the conduct itself must have been connected with, or in furtherance of, the corporation’s business and the officer’s position with the corporation must have been such as to justify imputation of criminal intent to the corporation.
- is created by manifestations from P to A ( § 1.9). In the corporate context, such manifestations may be in the bylaws or by board act. Typically, the board will pass a resolution authorizing A to do something on the corporation’s behalf, such as negotiate and enter into a deal with TP to purchase supplies for the corporation.
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Chapter 2. The Corporation in Theory and in History 63 results (showing 5 best matches)
- In Chapter 3, we will see how we form a corporation—that is, a corporation recognized by 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 attempts to explain what a corporation is. You might see the theories 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 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 important role of Delaware. Finally, in § 2.9, we address...
- The populist movement that developed primarily in the agricultural states in the Midwest viewed corporations in general (and railroads in particular) with suspicion and mistrust. In many of these states, legislatures restricted the size, duration, purposes, and capital investment of corporations. These restrictions were ineffective. Because a corporation formed in one state can qualify to do business in any state ( § 3.7), companies simply incorporated in states that did not have such restrictions. Over time, states have removed such limitations.
- Another metaphorical view is that the corporation is a privilege from the state, which permits the owners and investors to conduct business in the corporate form. Sometimes, people use the terms “concession,” “charter,” “grant,” or “franchise” to refer to this privilege. This theory may have been more important in earlier times, when states made it relatively difficult to incorporate. Now, as we will see in Chapter 3, incorporating is so easy that the privilege theory seems less relevant. On the other hand, the theory still has some impact in the ongoing debate over the social role of corporations. § 2.5. Moreover, the notion that a corporation receives a “franchise” from the state is the theory on which states apply their franchise taxes to corporations.
- Though well-ingrained, the artificial person theory is formalistic. The corporation has no will of its own and cannot do anything by itself. A corporation is a device by which Professor Hohfeld famously summarized a century ago: “[I]t has not always been perceived * * * that transacting business under the forms, methods, and procedure pertaining to so-called corporations is simply another mode by which individuals or natural persons can enjoy their property and engage in business. Just as several individuals may transact business collectively as partners, so they may as members of a corporation—the corporation being nothing more than an association of such individuals * * * .”
- If the role of the corporation is solely to create wealth for its owners, these considerations would be irrelevant (except insofar as they created a greater return for shareholders). Many argue, however, that corporations benefit from society’s laws and ought to benefit that society broadly. The corporation codes in some states reflect this notion. One of the earliest in this regard was passed in 1990 in Pennsylvania. It provides that corporate managers may consider the effects of their acts on “all groups affected,” including shareholders, employees, suppliers, customers, creditors, and communities in which the business operates. 15 Pa. Cons. Stat. § 1715(a)(1). Moreover, managers are not required “to regard . . . the interests of any particular group affected by such action as a dominant or controlling interest or factor.” 15 Pa. Cons. Stat. § 1715(b).
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Chapter 10. Special Issues in the Close Corporation 131 results (showing 5 best matches)
- A close corporation is a “real” corporation, formed under the statutes we discussed in Chapter 3 and subject to the requirements for shareholders, directors, and officers discussed in Chapters 6, 7, and 8. Historically, there has been no magic number of shareholders for defining a close corporation. Many of the cases in your casebook involve corporations with a handful (say four or five) shareholders.
- There are two relatively minor areas in which statutory close corporations differ from close corporations, depending upon the state. First, in some states, in a statutory close corporation, pre-emptive rights exist if the articles are silent. In contrast, in a non-statutory close corporation, pre-emptive rights exist only if the articles say so. (We discuss pre-emptive rights in § 12.4). Thus, in some states, election of the statutory close corporation will change the default provision on whether the shareholders have pre-emptive rights.
- Ultimately, statutory close corporations are now far less important than they were. This is because the general corporation codes of all states now embrace a flexible management structure in close corporations. Accordingly, today, one need not form a “statutory close corporation” to provide for management by shareholders or by a third party. Statutes applicable to “regular” close corporations permit this flexibility.
- Let us return to § 10.2, to the Example involving X, the minority shareholder in a close corporation. She owns stock but has no voice in corporate management because she was fired. She is receiving no return on her investment and no salary. And because it is a close corporation, she has no way out. (If things go badly in a public corporation, at least a shareholder can sell her stock and get some return on her investment. But in the close corporation, there is no public market on which to sell one’s stock.)
- Corporation is incorporated in State A, where it is difficult for the plaintiff to invoke PCV. Corporation does business in various states, including State B, where it is relatively easy to PCV. Plaintiff’s claim arises in State B, and she sues in State B on a PCV theory. Which state’s law applies regarding PCV?
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Chapter 1. Modern Forms of Business and the Importance of Agency Law 113 results (showing 5 best matches)
- Historically, members of “learned professions” could not practice the profession through a general corporation. Today, however, in many states, professionals requiring licensure (including, of course, lawyers, physicians, certified public accountants, and architects) may practice in a “professional corporation” (known in some states as a “professional service corporation” and in some as a “professional association”).
- A professional corporation is formed as any corporation is: by preparing a document (usually called the articles) that is filed by the secretary of state. The articles must state that the business is formed as a professional corporation and that the purpose is to practice a particular profession. The business name must include a specified phrase (often “Professional Corporation”) or abbreviation (often “P.C.”). In many states, the officers, directors, and shareholders must be licensed professionals in the profession.
- Subchapter S status is available only to corporations that (1) are formed in the United States, (2) have no more than 100 shareholders, (3) the shareholders of which are not corporations, but are individuals, decedent’s estates, or certain types of trusts, (4) have no shareholders who are nonresident aliens, and (5) have only be one class of stock. An S corporation is a true corporation with all attributes of a corporation other than advantageous tax treatment.
- 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 law should apply to the LLC. The best example of that is with the corporate doctrine of “piercing the corporate veil” (
- Over time, however, the IRS changed its approach. In 1997, the IRS adopted “check the box” regulations. These require that corporations choose either Subchapter C or Subchapter S. “Check the box” gives great flexibility to business forms other than the corporation, including the LLC. Such a business that has at least two members can elect to be classified for tax purposes either as a corporation (Subchapter C or S) or as a partnership (Subchapter K) simply by making an election at the time it files its first tax return. If the entity does not formally elect to be taxed as a corporation, it will be taxed as a partnership. A non-corporate business with only one owner (a sole proprietorship) may elect to be taxed as a corporation or it will be taxed as a “nothing”—that
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Chapter 13. Dividends and Other Distributions 77 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.
- 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;
- 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. Under this test, then, 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.
- Corporation declares a dividend of $40,000. It has a class of preferred stock with a dividend preference of $2 ; there are 2,000 outstanding shares in this class. Corporation also has 10,000 common shares outstanding. The corporation does not pay a dividend in 2019, 2020, and 2021. It finally declares a dividend in 2022. Those 2,000 shares of preferred cumulative stock are entitled to be paid first (before the common shares), and they are entitled to be paid for . Their $2 preference was adding up for 2019, 2020, and 2021—plus the corporation owes them the preference for 2022, when it declared the dividend).
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Chapter 4. Pre-Incorporation Transactions and Problems of Defective Incorporation 49 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 may not be 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 third party offers, before incorporation, to buy stock once the corporation is formed ( § 4.3), or enters into an agreement to form a corporation ( § 4.4), or enters into a pre-incorporation contract ( § 4.5), or, after incorporation, enters into a deal with the corporation itself (
- Corporation by estoppel, like corporation ( corporation has been formed and is available only for those who act in the good faith belief that a corporation had been formed. Further, like corporation, it will allow proprietors to avoid personal liability that would attach under partnership principles. Corporation by estoppel is narrower than corporation, however, in that it generally applies only in contract (not tort) cases.
- Here and in the next section we deal with transactions that take place while the parties are under the mistaken belief that a corporation existed. Without a corporation, the proprietors will be nervous. Why? Because they are operating a partnership, and all partners are liable for partnership debts. corporation (here) and corporation by estoppel ( § 4.8) allow the proprietors to avoid personal liability in this situation. It bears emphasis that these are equitable doctrines and are available only to persons who were unaware of the failure to form a corporation.
- Mere formation of the corporation does not make the entity liable on this contract. 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.
- In § 4.3, we saw contracts between a promoter and a third party. In this section, we deal with a contract between a promoter and the corporation itself. Specifically, the corporation has been formed and now a promoter sells something to it. We are nervous that the promoter might get a sweetheart deal because she had served as a promoter. Courts in such cases often use overly broad language about “fiduciary duty” and “promoter’s fraud.”
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Chapter 16. Fundamental Corporate Changes 81 results (showing 5 best matches)
- A merger is always a fundamental change for a corporation that will cease to exist. Thus, the transaction must be approved not only by that company’s board of directors, but by its shareholders, under the procedure detailed in § 16.2. Increasingly, as reflected in MBCA (2016) § 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 (2016), 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 instance, 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....
- Historically, the merger has been a stock-for-stock transaction in which two similarly sized corporations combine. The shareholders of the disappearing corporation give up their stock in that company and receive stock of the surviving corporation. For generations, that was the only form a merger could take. Modern statutes are far more flexible, and permit paying off the shareholders of the disappearing corporation in stock or other securities, in options to acquire stock or other securities, or in cash, other property, or a combination thereof. MBCA (2016) § 11.02(d)(4).
- Generally, a shareholder petition for involuntary dissolution is made in a close corporation. Indeed, under MBCA (2016) § 14.30(b), the shareholder petition is available in close corporations. In some states, only specified percentages of shares of a close corporation (e.g., 20 percent) can seek involuntary dissolution.
- 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.
- But even if a corporation undertakes 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, which 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 or to one of the other numerous shareholders. This is why appraisal statutes speak of a shareholder’s recovering the “fair value,” and not the fair value of her stock. In a close corporation, there is no
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Chapter 9. Fiduciary Duties 166 results (showing 5 best matches)
- The older version of the MBCA (2016), 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.
- Though controlling shareholders are more likely in close corporations, a public company may have a controlling shareholder. A common example is the parent corporation, which is the controlling shareholder of its subsidiary corporation. In the case of a wholly-owned subsidiary, the parent owns all the stock of the subsidiary. When this happens, there is no minority shareholder of the subsidiary to complain about what the parent does. However, when the parent owns less than all the stock of the subsidiary, there may be disputes between the parent corporation and the minority shareholders of the subsidiary.
- This case raises another point on which courts have different views: whether the fiduciary must offer the opportunity to the corporation before taking it. Courts that require this in essence treat an opportunity as something in which the corporation has a right of first refusal, which makes sense.
- Employees of Corporation engage in illegal price fixing on behalf of Corporation. The actions violate antitrust laws and expose the employees and the corporation to criminal liability. Corporation is fined $10,000,000 for the violations. 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. Further, that breach caused the corporation to lose $10,000,000.
- This last phrase addresses the problem of “interlocking directorates”—when one person is on the board of directors of both parties to a transaction. It recognizes that routine business transactions between large corporations should not be subject to attack simply because the two corporations happen to have a common director. In large corporations, even transactions involving millions of dollars may be routine, and not be reviewed by the board of directors.
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Chapter 15. Derivative Litigation 106 results (showing 5 best matches)
- 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 generally 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 larger question concerns the amount D spent to settle the case. Settlements are inherently ambiguous; we do not know who would have won had the case been tried. Allowing D to recover the $50,000 she paid to settle the claim results in a strange circularity. D was accused of breaching a duty to the corporation. To settle the claim, she wrote a check to the corporation for $50,000. If the corporation reimburses her for this, the corporation receives nothing to compensate it for the breach of a duty owed to it. Indeed, if the corporation pays D the full $275,000, it is actually worse off than if no suit had been brought; the corporation is out-of-pocket $275,000. If no suit had been brought, the corporation would have that $275,000 in its coffers.
- Anytime a shareholder sues in her capacity as a shareholder (as opposed, for example, to her capacity as an employee), her suit will either be “derivative” or “direct.” In a derivative suit, she is suing to vindicate the corporation’s claim. In such a case, the corporation is the real party in interest. In contrast, a direct suit asserts the shareholder’s own personal claim. If it is a derivative suit, the shareholder must satisfy the procedural requirements imposed in such cases ( § 15.4). In a direct suit, in contrast, the plaintiff need not jump through any special procedural hoops.
- Indemnification means reimbursement; the corporation reimburses its director or officer for expenses and attorney’s fees incurred in the suit against her. Usually, she will have been sued “by or on behalf of the corporation.” This means that she was sued by the company or in a derivative suit for allegedly breaching a duty owed to the corporation. Indemnification statutes may apply in other cases as well, such as criminal prosecutions of a director or officer. But we are concerned here with civil litigation brought against someone as a director or officer.
- Even if there was no monetary recovery (for example, a case that resulted in equitable relief) the shareholder plaintiff may be entitled to recover her attorney’s fees from the corporation, so long as the suit conferred a benefit on the corporation. , MBCA (2016) § 7.46(1) (court may order the corporation to pay plaintiff’s expenses, including attorney’s fees, if the case “has resulted in a substantial benefit to the corporation.”).
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Chapter 12. Financing the Corporation 119 results (showing 5 best matches)
- Movie Star agrees to make a film in exchange for a 20 percent interest in the film. Though a bank would probably lend millions of dollars to a new corporation to make the film, the historical rules on consideration would not permit the corporation to pay Movie Star in stock. Today, in almost all states, the issuance would be proper.
- Two more terms will help us. 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. “Issuance,” then, is a sale by the corporation itself, and the “issuer” is the corporation. Again, the corporation may issue debt securities or equity securities (or both).
- A.
- As discussed three paragraphs above, the three classic forms of consideration (money, tangible or intangible property, and services already performed for the corporation) remain 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 overwhelming majority view is that an issuance can be made for “any tangible or intangible property or benefit to the corporation.” MBCA (2016) § 6.21(b). (In some states, the relevant provision says simply “tangible or intangible benefit to the corporation,” which obviously includes property even though the word “property” is absent.) Accordingly, today, in almost all 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.
- Form of Consideration for an Issuance.
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Chapter 6. Shareholders 103 results (showing 5 best matches)
- Why would anyone do this? In public corporations, STRs may be used to ensure that an issuance of stock remains exempt from the requirements of registration for public sale ( § 11.2). STRs are more commonly found in close corporations. For example, a STR is helpful to keep outsiders out. The founders of a close corporation (like partners in a partnership) are often family members or friends; their personal relationship is important, and they do not want to deal with outsiders. One common form of STR is the “right of first refusal,” which requires that a shareholder offer her stock first to the corporation (or to other shareholders) before transferring it to an outsider. Such an agreement can also ensure that a shareholder does not jeopardize S Corporation’s status for income tax purposes, such as the requirement that S Corporation cannot have more than 100 shareholders (
- 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 point further in subpart C below.
- Corporate management may see a demand for access, particularly to sensitive records such as financial books and director actions, as hostile. For many years, corporations routinely rejected such demands, which forced the shareholder to seek a court order for access. Now, many statutes dissuade corporations from doing this by imposing a fine for improper denial of shareholder access. If the corporation denies access, the shareholder may go to court to litigate the issue. In this litigation, the corporation generally bears the burden of proving that the shareholder lacked a proper purpose for demanding access.
- 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 change the proportional ownership of the other shareholders. Such a repurchase by the corporation is a distribution and will need to satisfy the legal requirements for such transactions ( § 13.6). Some close corporations carry life insurance on the shareholders. When a shareholder dies, the company can use the life insurance proceeds to buy back the decedent’s stock.
- Cumulative voting is of no importance in corporations owned by one shareholder. Moreover, as a practical matter, it never exists in large, publicly-held corporations; it would simply be unwieldy. This means that cumulative voting is instrumental in close corporations of several shareholders. Such companies often feature disagreements among shareholders, and cumulative voting may be of considerable importance in ensuring minority representation on the board of directors.
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Chapter 14. Potential Liability in Securities Transactions 117 results (showing 5 best matches)
- Corporation lies in its prospectus. Plaintiff reads the document and is induced by the lie to buy stock in Corporation. Later, Corporation suffers huge losses for some totally unrelated reason, perhaps a downturn in the macroeconomic market because of a pandemic. Plaintiff cannot show loss causation here. True, her investment has decreased in value, but that decrease had nothing to do with Corporation’s lie.
- , § 16(b) creates a claim
- As we saw in § 14.3, the in a 10b–5 case need not have bought or sold securities. So, for example, a corporation that issues a misleading press release violates the Rule and can be sued by all who buy or sell in reliance on the press release. (Indeed, reliance will be presumed in this type of case under the “fraud on the market” theory (§ 14.3, subpart C(2)).)
- Second, there is no liability in a private Rule 10b–5 case for “aiding and abetting.” Suppose a corporation violated Rule 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 an end to the practice in
- Because it applies to “any person,” 10b–5 is implicated in securities transactions of business, including partnerships, close corporations, public corporations, and sole proprietorship. (This is different from § 16(b), which, as we will see in § 14.5, applies only to trading stock in public corporations.)
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Chapter 5. The Distribution of Powers in a Corporation 40 results (showing 5 best matches)
- 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 to take various acts. We will discuss these voting requirements in detail in the later sections on shareholder voting ( § 7.5). When a group (of shareholders or directors) approves an act, it does so by passing a “resolution.”
- Historically, corporation statutes have been “cookie-cutter” efforts that seem based on an assumption that every corporation has the same characteristics: that one size fits all. In the real world, though, corporations distribute authority quite differently. The main distinction is between “close” and “public” corporations. We will define these in § 5.6, and discuss the tension between the traditional model and how things actually work, especially in close corporations. This tension has led to legislative change, and statutes governing corporations in the twenty-first century recognize far greater flexibility than the traditional model. To
- In the early 1930s, Professors Berle and Means, in a famous book,
- 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 literally 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 4,000 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.
- 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.
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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). Without a quorum, no action can be taken at a meeting. 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 issues to be considered at the meeting. Federal law attempts to ensure that the corporation provides accurate information in this process.
- Originally, only companies with securities traded on a “national securities exchange” were required to register. The requirement was expanded in the 1960s. In addition to those traded on a national exchange, a corporation must register a class of securities that has (1) at least 500 stockholders and (2) $10,000,000 in assets. It is not the total number of security holders that is significant, but the number of holders of the specific class of security for which registration is required. For example, a corporation with 400 shareholders of one class of stock and 450 shareholders of a different class of stock is not required to register either class.
- Registration is part of the federal regulation of securities. When a corporation sells securities, it makes an “issuance,” and the corporation is called the “issuer” or “issuing company.” When you and I sell stock, that sale is not an issuance; a sale of stock is only an issuance if the company is selling its stock ( § 12.3). Whenever there is an issuance—whether to the public or to a few people, in a private placement—the consideration goes to the corporation. Indeed, the company issues stock expressly for the purpose of raising capital. But subsequent sales of that stock do not bring money to the company. It’s like buying and selling a car. If you buy a new Ford Explorer from a Ford dealer, Ford Motor Company gets the net income from that sale. But when you sell that car to your cousin, Ford does not get that money; you do.
- These entities must go through a rigorous process to register their securities for public trading and must routinely make detailed financial disclosures to the public ( § 11.2). Managers of public corporations are under considerable pressure to ensure that the price of the stock remains high. This pressure has given rise to some spectacular cases of fraud, which led to passage of federal regulation of § 11.3). Because stock ownership of public corporations is so widely dispersed, most shareholder voting in these companies is done by proxy. Federal proxy regulations are an important area of potential civil and criminal trouble for public corporations ( § 11.4). Section 11.5 addresses methods by which one corporation may take over another, and the fireworks that can result from such efforts. Finally, § 11.6 addresses executive compensation in public corporations.
- Proxy fights for public corporations cannot be undertaken with stealth. A solicitation from more than ten shareholders requires compliance with the SEC proxy regulations ( § 11.4). Other SEC regulations require that “participants” (other than management) file information with the SEC and the securities exchanges at least five days before a solicitation begins. “Participant” includes anyone who contributes more than $500 to finance the contest. The information that must be disclosed relates to the identity and background of the participants, their interests in the corporation, participation in other proxy contests, and understandings with respect to future employment with the corporation. In addition, the Williams Act requires anyone who acquires more than five percent of the voting stock of a public corporation to file a disclosure statement within ten days. These requirements reflect the theory underlying the ’34 Act generally: that widely circulated information provides the best...
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Chapter 7. Directors 65 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 one of these duties can expose a director (inside or outside) to significant potential liability.
- These corollaries make little sense in a close corporation, with a handful of shareholders, all of whom are active in operating the business. In such a business, 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, however, management rests in the board, and the proprietors and their lawyers should be scrupulous in following the rules.
- Things have changed, especially in the public corporation. Early in the twentieth century, corporations started paying small honoraria to “outside” directors for attending meetings. (Outside directors are those who are not employed by the company for their full-time job. “Inside” directors are those whose day job is with the corporation (invariably as an officer, such as the CEO).) This practice grew, as did the payments. It is now universal for public corporations to provide substantial compensation to outside directors. Indeed, today such compensation in large corporations averages over $300,000 per year. Some corporations also provide retirement plans for outside directors. The sense is that the business “gets what it pays for,” and such compensation improves the quality and interest of outside directors.
- Remember that people may play more than one role in the corporation at a given 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 service.
- Ordinarily, the entire board of directors is elected at the annual meeting of shareholders. Accordingly, the usual term for directors (unless the articles provide otherwise) is one year. We will see in the next section that directors will serve longer terms if the corporation has a . Whatever the length of the term, however, in all states a director holds office (even after expiration of the term) until her “successor is elected and qualifies or there is a decrease in the number of directors.” , MBCA (2016) § 8.05(e). As a result, the failure to hold annual meetings of shareholders does not affect the power of a corporation to continue to transact its business; directors continue in office, with power to act.
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Outline 27 results (showing 5 best matches)
Foreword 3 results
- 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 benefit corporations, 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.
- The centerpiece of any such course, and the centerpiece of this book, is the corporation. We address 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.
- 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 who didn’t know a balance sheet from a doughnut. The goal of this book is to make business law accessible to everyone—and, hopefully, even fun.
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Index 39 results (showing 5 best matches)
Table of Cases 8 results (showing 5 best matches)
Acknowledgments 2 results
- I am continually grateful for the support of the Emory Law faculty and administration. It has been my honor to be a member of that faculty my entire academic career.
- (West Academic 5th ed. 2019). The four of us are good friends and it has been a delight to work on that book through the years. Doug Moll, my co-author on our concise hornbook
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- Publication Date: August 18th, 2020
- ISBN: 9781684672394
- Subject: Business Organizations
- Series: Nutshells
- Type: Overviews
- Description: Completely revised and updated, conversational in tone, the book summarizes all major forms of business, not simply the corporation. It features numerous examples to illustrate key concepts. Comprehensive yet concise, it addresses the theory of the firm, including the emergence of greater concerns for constituencies other than shareholders, as well as the nuts-and-bolts of corporate law. It offers separate consideration of specialized issues raised in closely-held and public corporations. With updated discussion of recent case law, particularly about controlling shareholders and takeovers, the book offers detailed comparison of Delaware and other leading corporate law legislation. The book also covers relevant federal law, including Sarbanes-Oxley, Rule 10b-5, and Section 16(b). Financial and accounting concepts are explained with helpful examples, so that even sociology majors need not fear them.