Biz Orgs Outline – Corporations
Spring 2013
Professor Beckerman
BASICS
I. Organic Documents
a. Hierarchy: (1) State’s Laws —– (2) AoI —– (3) ByLaws
b. Articles of Incorporation (AoI)
i. MBCA §§ 2.01-04; 10.01; 10.03
ii. DGCL §§
iii. “One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the secretary of state for filing” (2.01)
iv. What must be in the articles § 2.02
v. 2.02(2)(b) – What may be in the articles (usually these provisions will have to be contained in the articles if the desires of the interested parties are to be fully carried out)
vi. § 2.03(b): the secretary of state’s filing of the articles is conclusive proof that the incorporators satisfied all conditions precedent to incorporation
c. Bylaws – details of corp’s internal goverance arrangements; cannot conflict with statute or articles of inc.; not available to the public, but they might be for certain corps subject to required disclosures by the SEC; can change the default rules found in the statutes.
i. MBCA §§ 2.06; 10.20;
II. Shareholders – own stock in the corp that creates Economic Interests and Voting Interests.
a. Economic Interests – the value the shareholder can get from sale of their shares.
b. Voting Interests – can only vote on matters defined in the statute.
i. MBCA 7.21 – each share, regardless of class, is entitled to vote on each matter voted on at a shareholders’ meeting, unless the AoI say otherwise.
ii. Normally shareholders vote for mergers, fundamental changes, and directors who are delegated the normal day-to-day of the business
c. Fiduciary Duties are owed to the shareholders by directors abd managers
d. Derivative Suits – shareholder(s) may bring actions for the benefit of the corporation agaist directors/managers for breaches of fiduciary duty.
i. FRCP 23.1 – allows for derivative suits
ii. Defendants: (1) managers who breached fiduciary duties; (2) third parties who aided and abetted fiduciaries; (3) corporation is a nominal defendant
iii. Futility: P must make a demand on D to fix what it has done, but if it would be futile to make such a demand then P must say why.
iv. Recovery belongs to the corporation
v. Attorney recieves court approved payment for fee
III. Stake Holders include creditors, employees, customers, and the community.
a. creditors are not owed the same fiduciary duty by managers and directors as shareholders are because they are assumed to have the benefit of their contract bargain, which protects them instead.
IV. Fiduciary Duties
a. Duty of Care – directors must act in the corporation’s best interests and exercise reasonable care in making business decisions and overseeing the corporation’s affairs.
i. Managers must inform themselves reasonably about the implications of the transaction that come before them and their decisions thereon
ii. Managers must know about the business of the corporation
iii. The care and the diligence required of an agent or of a fiduciary is proportioned to the occasion. Fraud is not the orbit of liability. The manager cannot act as a dummy/figurehead. The degree of care a manager must use to exercise judgment is the kind of care that one would give in similar situations to the conduct of our own affairs. Bayer v. Beran
b. Duty of Loyalty – the fiduciary must subordinate his individual and private interests to his duty to the corporation whenever the two conflict.
i. “Constant, unqualified fidelity to the corporation”
ii. In re El Paso Shareholder Litigation – Foshee, target’s (El Paso) CEO was supposed to be getting the highest price possible under Revlon. After the sale of El Paso, he wanted to approach the Aquirer, Kinder to buy the exploration and production business that Kinder was not really interested in. This translated into an incentive not to negotiate too aggressively because if he were too aggressive in negotiation, Kinder would not be too receptive to his deal. Furthermore if he sold it to them for a higher price, then he would have to pay more for it later on down the road.
1. implicated the fiduciary duty of loyalty. Requires the fiduciary to put the corporation and shareholder interest before his own.
2. Prohibits the fiduciary from self dealing, dealing in a way to deal for himself at the expense of the corporation and shareholders.
c. Business Judgment Rule (BJR) is a rebuttable presumption that in making a business decision, the fiduciaries of a corporation acted in good faith and in the honest belief that the action taken was in the best interest of the corporation and its shareholders. Courts will defer to the judgment of the board of directors absent highly unusual circumstances such as conflict of interest or gross inattention.
i. To rebutt, P must show a GROSS failure by the managers to inform themselves or a breach of loyalty.
ii. Ordinarily, a claim relying solely on the duty of care will not overcome the BJR presumption.
iii. Duty of Loyalty Challenge: burden shifting analysis
1. P must plead facts that overcome the BJR presumption (gross negligence by failure to inform or breach of loyalty/self dealing)
2. Burden shifts to D to show the fairness of the transaction in questions
3. court will scrutinize the transaction for both procedural and substantive fairness
iv. Bayer v. Beran – Celanse paid $1 mil / year to advertise on a classical music radio station. The CEO’s wife was Jean Tenison (married to Camille Dryfus) who was one of the artists on the radio program that was being paid for. P brought a lawsuit against the directors claiming that the advertising program was not brought to enhance the interests of the company, but to advance the career of Mrs. Dryfus. (duty of loyalty). P claimed that the directors breached their duty of loyalty by putting Mr. Dryfus’s interests before the corporation. The court held that the advertising plan was not the best deal for the corporation but their was not a breach of the duty of loyalty because the wife’s rates were not excessive and the BoD was not completely aware that she was the wife of one of the directors.
v. MBCA §8.31
d. Duty of Disclosure
e. Duty of Good Faith – requires fiduciary to not condone illegality/things done in bad faith or obviously intended to harm the business.
f. Revlon v. McAndrews and Forbes Holdings – held that when the sale of a company becomes inevitable (board decides to sell), the responsibilities of the directors change from running the continuing enterprise with a view toward the future to trying to get the best price reasonably available to the shareholders.
ECONOMICS OF THE FIRM
I. DILUTION = when more shares are issued by the corporation, those who already own shares end up with a lesser percentage of the shares outstanding unless they are able to offset the effects of dilution
a. Voting Dilution = shareholder has less power to influence the outcome of a vote
b. Economic Dilution = shareholder’s piece of the pie is reduced, their shares become worth less
c. MBCA 6.21(f) – shareholders must vote on stock issuance if the resulting shares will have 20% or more of the voting
individual shareholders (certain tax exempt entities can be shareholders); shareholders must be US citizens/residents
h. C – Corps
II. Partnerships
a. General Partnership – all partners liable for the business to the full extent of their personal assets. Each partner has full managerial power and the ability to bind the partnership and all of the partners to deals. Partners are equal unless provided for otherwise. Partners can enforce right to profits by getting an accounting. No right to compensation for services unless otherwise provided
i. a profit sharing agreement creates a presmption of GP even if parties do not intend to be partners
ii. no filing necessary – start to do business for proift = deemed to be general partners by operation of law
iii. partnership automatically terminates upon the death, withdrawal, or bankrupcy of any partner (default) —> normally the partnership agreement will specify what happens on the death of a partner – how their equity is paid out, divided up.
1. withdrawaling partner can demand that business be liquidated and net proceeds distributed to the partners (without an agreement)
2. death of partner – survivors have the option to buy out shares without dissolution
iv. liable beyond the extent of your investment
v. all partners have the ability (under the default law) to bind the entire partnership to contracts; incur tort obligations
1. in practice no GP would ever do this b/c they are governed by partnership agreements
vi. Partners owe eachother fiduciary duties
vii. Meinhard v. Salmon – manager and financier enter into a joint venture (like partnership) leased and developed a tract of land on 5th ave. in Manhattan. There was a hotel on the property. when the lease ended, Salmon was offered an extra peice of land to make a larger peice of land. Salmon took the land without informing Meinhard, and Meinhard sued. “Joint adventurers, for the life of the venture, owe eachother the duty of the finest loyalty, cannot act like your operating at arms length.” (paraphrased)
b. LLP – Limited liability partnerships are created by registration with the state – LLP statutes protect the partners from negligence and malpractice of other partners
c. Limited Partnership – limited partners have no managerial authority, and no liability beyond what they have invested. Business is managed by the general partners. Limited partners just provide the money, which is the extent of their liability
d. Limited Liability Partnership – no partner is liable for the malpractice of other partners
e. Tax Treatment – All partnerships act as flow-through entities. Profits and losses are treated as realized directly by the investors and each investor is taxed accordingly.
i. Partnerships must report, but they do not pay taxes.
III. LLCs – members not personally liable for the LLC’s debts
a. arises with a filing of a certificate or AoI /w the state
IV. Sole Proprietorship – no limited liability
