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Business Organizations
Rutgers University, Camden School of Law
Beckerman, John S.

Beckerman Biz Orgs Spring ’11 Outline – Corporations Law and Policy, 7th Edition
·         Public
o    Reasonably large corp whose stock is available to the public on a stock exchange (NYSC, NASDAQ)
o    Stock must be registered under the federal securities law
o    Capital markets – markets in which firms or enterprises raise capital – raise capital for capital investments, etc
o    2 kinds of capital – (1) debt (borrowing money i.e. a bond) it will specify duration of the loan and interest payments and (2) equity (issuing shares of stocks) – public offering of stocks, first time they do this is called an initial public offering (IPO)
·         Private – company whose stock is not traded publicly, re. closely held corporations (i.e. close)
o    Owned by a small number of stock holders for which there is a public forum for their stock
·         Sole Proprietorship – no steps taken to organize, register with a state, no distinction b/t owner’s personal assets and business
o    Not ideal type of business
·         Partnership
o    General Partnerships – similar to sole proprietorships because there is no limited liability
§  Any general partner can act for the partnership, liability is unlimited
o    Limited Partnership (LP) – has one or more general partners with one or more limited partners who are passive investors
·         Limited Liability Company (LLC) – originated in WY in the early 90s
o    Taxed the same way partnerships are taxed, which is different from corporations
§  Partnerships are not taxed as entities, treated as conduits or as flow throughs meaning any profit or loss earned by the partnership is passed through the partnership to the owners (partners), if there are profits the owners pay tax on the profits
§  LLCs have the ability to choose how they want to be taxed, as entities or as partnerships. Most choose to be taxed like partnerships.
§  Now most law firms are LLCs – they are typically only liable for their own tort liability and not for the malpractice of their partners
Limited Liability – liability of the owners is limited to the amount of their investment
To start a corporation or business with limited liability you have to register with the state
·         Why? – in order to inform creditors and the public that you are a limited liability company and also to conform to state regulations requiring a name (a corp. must include the word corp. or inc., a limited partnership needs LP, etc…)
Shareholder Democracy
·         Stock Holders (SH) elect the directors, officers report to the directors
·         If there is an issue in which the corp. loses $$$ can the officers and directors be held liable? No, you want directors and officers to engage in making profits for the enterprise
o    Why do own stock? – (1) capital appreciation i.e. to make $$$ – buy low, sell high and (2) Dividends – periodic dividends – if the co. makes $$$ they will pay periodical dividends to the shareholders
·         Correlation between risk and return- greater return on riskier investments than safe investments
·         One basic feature of corp. law is that we want officers and directors to take risk in order to make profits as well as making well-informed decisions
·         Business Judgment Rule – is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company – Ryan
o    protects directors and officers when a derivative suit is brought after corp. loses $$$ based on a bad decision
·         Sometimes there is liability for the officers and directors when they breach their duty to the shareholders
·         Derivative claims – stockholder asserts claims that belong to the corporation saying the corp. was damaged as the result of certain decisions made by the officers or directors
o    Fed rule of Civ Pro and DE Law – Rule 23.1 (Shareholders derivative suits)
·         Both Tyson and Ryan are derivative suits
Shareholder Derivative Suits
·         Vindicate the rights of a corporation against the people who control the corporation i.e. directors and officers
·         1st step is to require the board to make a demand of the board to bring suit
·         Make sure the plaintiff is a stockholder at the time that the harm complained of occurred, at the time of the complaint being filed and stockholder must own throughout the litigation
·         Both Ryan and Tyson involve the board breaching their fiduciary duty to their shareholders
·         Fiduciary – lawyers, trustee, executor
o    Corp directors are also fiduciaries for corporations – they have a duty to put someone else’s interest before their own i.e. the corporation’s
·         Fiduciary Duty of Care – behaving prudently and attentively, don’t be asleep at the wheel, know about the decisions they are making, inform themselves adequately before making a decision
Corporate Stock
·         What is stock? An equity investment – corporations have assets (things of value), certain liabilities (a claim on the assets of the company by some 3rd person) – equity is a claim on the assets of the company after the liabilities are paid off
·         Equity – proportionate share after the liabilities have been paid off
·         Stock investment riskier than purchasing bonds but there is the opportunity to make a lot more $$ in return
·         You want corp. directors to hold stock in that company if you do as well, they will act in the best interest of the company
·         Restricted Stock – cant sell it for two years – a transfer restriction – usually given to directors if they do well, fulfill performance criteria
·         Stock option – an option is a right to buy or sell something at a particular price – the price is called the “issue price”
o    Call option – right to buy at a certain price – if granted to an executive, it gives him the right to purchase stock at a particular price which was set at the time the option was granted when options grow they are “in the money” when they are down they are “under water”
o    Put option – right to sell at a certain price
Ryan v. Gifford
·         Issue – Plaintiff claims defendant executives backdated 9 stock options
·         Issue price should have been at the date the option was granted, but P alleges the Ds backdated the options so that the exercise price was set at a price below the market price at the time of the option, guaranteeing the option would be in the $$ at the time they received the options
·         Backdating is lying to the shareholders- they promised the options to be given at the fair market value on that date, not the backdated, cheaper date
·         Backdating also includes an injury due to the company not receiving what it should receive due to the price actually given to the executive – executive is given a gift
·         Economic delusion is a difficult concept – stocks sold to executives at backdated price caused economic delusion
·         Case was brought fourth in DE Chancery Court – Chancery courts are equity courts. Issues today before courts of equity are usually matters involving trusts and fidu

§  One tension – deals with the question as to whose company is this anyway?
§  We want corp. managers and directors to take risk – they need freedom and discretion in order to do this. Does this mean that we will allow directors to do whatever they want? No we need them to be responsible and accountable to the shareholders. There is a tension between discretion and accountability. Law uses the fiduciary duty of loyalty and care to mediate this tension.
Bayer v. Beran
·         Case is about the corp.’s decision to advertise on the radio
·         Corp wanted to sponsor a music hour which featured a board member’s wife as a singer
·         Shareholder brought a lawsuit challenging this decision to advertise based on the amount of $$$ they are spending on the campaign and the fact that the wife of the board member was featured – this was a breach of the duty of loyalty because they had a conflict of interest and their decision to advertise by sponsoring the music hour was not motivated by the desire to enhance the corp. but to enhance the career of the singer who was the wife of the director
·         Court said the advertisement campaign was fine under the business judgment rule – if the claim was brought under a duty of the care, the court will say it is protected by the business judgment rule
·         The BJR is a presumption that the directors act honestly in the ordinary course of their duties and absent something else to rebut the BJR courts will not second guess directorial decisions – “It is only in the most unusual case that directors are held liable for negligence in the absence of fraud, or improper motive, or personal interest.”
·         When someone so close to the board is hired and it is challenged, the court must look at this with a rigorous scrutiny and the courts traditionally shift the burden of proof to the D to prove the fairness of the transaction
Back to Chesapeake Marine
·         Directors would not be subject to liability for recommending a new plan in which they increase the amount of stock
·         What is another option for them to raise $$$? – take a loan (that is out of the question in this case). Another way is to sell debt securities – a bond
·         Bonds have long durations and they also tend to be secured
·         Secured debt – security in the collateral i.e. a mortgage
·         2 other kinds of corp. debt – (1) debenture – unsecured loan with a maturity of over 10 years (2) note – unsecured loan with a maturity of less than 10 yrs
o    another kind – commercial paper – maturity in less than 9 mos – does not have to be registered under the securities act
·         How do we know if a security is good – security rating services
·         Mortgage Back Security – Collateralized Debt Organization (CDO) – a security which is collaterized by a pool of assets of mortgaged
·         Corp security – Corp. either pays it back or takes out a new loan