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

I.            Main Forms of Business Organizations
a.       Corporations
                                                  i.      Two Types
1.       Large Publicly held organization (Ex. Tyson Foods)
2.       Small Private (close/closely) held organization
b.       Limited Liability Company
                                                   i.      Enables investors to take limited risks in the hope of receiving unspecified rewards
1.       Capital Appreciation (or loss)-money earned through buying stock
a.       Dividends- income stream
                                                 ii.      Encourages and benefits capital formation 
c.       Sole Proprietorship
                                                   i.      Will be liable for everything (nothing is protected), unlimited liability
d.       General Partnership
                                                   i.      Unlimited Liability for each partner
                                                 ii.      Two or more people enter into an agreement to do business together
e.       Limited Partnership
                                                   i.      Partnership organized with one or more general partners and also consisting of limited partners
1.       Limited partners don’t have management powers of general partners but do not have the liability of the general partners
II.            Terms/Misc
a.       Board of Directors- generally supervise the company, shareholders generally cannot manage the company
                                                   i.      Generally do not manage the company’s day to day operations
1.       CEO, CFO, etc manage the company
a.       The highest of them are hired/fired by the board of directors
b.       Shareholders- passive investors, limited role (in public corporations) 
c.       Delaware is the preeminent jurisdiction for corporate law
                                                   i.      Most companies are incorporated in DE
                                                ii.      Race to the bottom- benefits managers at the expense of the shareholders 
d.       When there is parallel cases one in federal, one in state what does a court do?
                                                  i.      The judge that gets the case first typically get the case, the other court usually stays the case until the outcome of the first case
e.       Authorized/issued/outstanding shares
                                                  i.      Authorized-number of shares that a company can issue based on articles of incorporation
                                                ii.      Issued- shares are sold to individuals
                                              iii.      Outstanding-shares are in the hands of the public
f.        Form 10Q-quarterly report that reports earnings 10K-annual report
g.       Form 8k- it is really a press release when the company has to release material information to the public
h.      Stock Split
                                                  i.      Same money value of the stock owned, but more of that stock (ex. 1 share=$100 total, now 4 shares=$100 total)
i.        Business Judgment Rule
                                                  i.      Presumption that directors acted in good faith, adequately informed about the decisions they make 
                                                ii.      It is a rebuttable presumption
                                              iii.      Why have it?
1.       Courts do not want to be in the position of second guessing business judgments
j.        Fiduciary Duties
                                                   i.      Fiduciary- a trustee, must subordinate their own interest to the interest of their clients or beneficiaries
1.       Directors of companies, executives are fiduciaries 
2.       Stockholders can be fiduciaries
                                                ii.      Duty of Care
1.       Duty to “pay attention”, be diligent
                                              iii.      Duty of Loyalty
1.       Duty to prevent self interests from interfering with decisions
2.       Comes from Delaware common law augmented by statute 
                                               iv.      a majority shareholder would owe a fiduciary duty of loyalty to not oppress the minority shareholders
                                                 v.      Why have this? Purpose
1.       Because the managers/directors goals may not be the same as the shareholders
a.       Employed to mediate this controversy of competing interest
2.       Managers want to maximize profit
a.       To maximize profit, more (hopefully calculated) risk has to be taken
b.       Safest possible investments are bonds which have the lowest interest rate
                                               vi.      Bayer v. Beran (company invests in radio advertising, president’s wife is on the program)
1.       Stockholders brought suit against company (duty to care, duty of loyalty)
a.       Court ruled that business judgment rule was not rebutted
2.       The nature of advertising and to undertake advertising are under the business judgment rule and are not to be interfered with by the court
3.       Claim becomes a duty of loyalty claim (conflict of interest, self dealing transaction)
a.       When self dealing is alleged, the transaction must be subjected to the most rigorous scrutiny to determine whether the actions of the directors was intended or calculated to “sub-serve some outside purpose, regardless of the consequences to the company in a manner inconsistent with its interests
                                                                                                                          i.      Shifts burden to Defendants to prove entire fairness (both procedural and substantive fairness)
b.       Other directors did not know, and no evidence showed that it helped the wife
                                             vii.      Bove v. Community hotel (company trying to merge to circumvent preferred stock holders’ dividends)
1.       Nothing forbids a merger between a p

rice is higher than strike price
b.       Underwater-Market price is below the strike price
                                                 v.      Can use it to reward managers or employees for their performance
                                               vi.      May have options that have vesting schedules
1.       Keeps employees from using options right away, provides incentive to keep maximizing profits/performance
m.    Securities Act of 1933
                                                  i.      Dealt with initial issuance of securities (stock)
1.       Ex. initial public offering of stock
                                                ii.      State and federal courts have concurrent jurisdiction with claims brought under this act
n.      Securities Exchanges Act of 1934
                                                  i.      Deals with trading of stocks, etc on secondary markets like NYSE
                                                ii.      Also regulates proxy disclosures
1.       Ex. Concerned with false and misleading disclosures of employee stock options
o.       §141 of DE statute
                                                  i.      Business and affairs of corporation shall be managed by board of directors
p.       Derivative Suit
                                                  i.      Shareholder acts as a representative of the corporation
                                                ii.      The shareholder brings an action in the name of the corporation against the parties allegedly causing harm to the corporation
                                              iii.      Elements
1.       Must have standing to sue or must own stock at the time the act or omission occurred
2.       Demand Requirement
a.       Shareholder must make a written demand on the corporation so that they may take action
b.       Futility Requirement
                                                                                                                          i.      Can allege futility (asking directors/executives for demand is futile because they are not going to help sue themselves)
c.       Dominated by director exception
3.       Burden of proof is on the shareholder unless a majority of the directors have a personal stake in the dispute
                                               iv.      When you see this or class action, shareholders are the “security cops” and the attorneys are the “clerk cops”