Business Associations/Corporations Outline

Corporations Outline–Rosin–Fall 2013

I. THE CORPORATE FORM

A. Incorporation

1. Big Picture

a. A corporation is a separate legal entity that can make and sign contracts, own property, violate the law, commit torts, etc. It is a legal fiction but can do these things through the activity of the managers or others who operate within it. From a business perspective, there are agency costs involved in running the business. The corporation, along with corporate law, gives us off-the-shelf solutions to these agency problems.

2. Choice of Entity Factors

a. Liability

b. Continuity

c. Powers and Management Structure

d. Transferability of Interests

e. Taxation

3. Characteristics of the (Publicly Held) Corporation

a. Limited Liability

i. Shareholders (S/H) not personally liable for corporate obligations

ii. Managers not personally liable for corporate obligations, provided:

a. They act on the corporation’s behalf; and

b. Within their authority

b. Free Transferability of Ownership Interests

i. Partnership: transfer of interest requires consent of all partners

c. Continuity of Existence

i. Perpetual life unless specified otherwise in Certificate of Formation (COF)

a. Prevents unexpected early termination (i.e. sudden death of partner)

b. Allows for long-term planning

d. Centralized Management

i. Power to manage is vested in Board of Directors (B/D)

ii. S/H have no right to participate in management

e. Entity Status

i. The Corporation is a legal person; it can exercise powers and have rights in its own name

a. Right to own property

b. Right to make contracts

c. Right to sue and be sued

ii. Federal income tax: the corporation is taxed as a separate entity; it files its own tax return showing profits/losses, and pays its own taxes independently of the shareholders.

a. Firm taxation – if a business firm has income or expenses, those items go into the firm’s taxable income, not into the taxable income of the firm’s owners. If the firm then pays out dividends to its owners, then the owners will pay taxes on those dividends (referred to as “double taxation”).

b. Flow through taxation –the firm’s total income and expenses are taxable directly to the firm’s owners, and dividends are not taxed, so no “double taxation” (e.g., a partnership is not a taxable entity so the partners only pay income taxes once).

iii. Employment taxes – distinguish between income earnings, and income capital. Only have to pay on income from earnings.

4. Architecture of Corporate Law

a. Conflict

i. Traditional Conflict: self-interested transactions between managers and the corporation

ii. Positional Conflict: actions by managers to maintain and enhance their positions within the corporation

b. Sources of Law

i. State Statutory Law

a. Enables organization; provides endowments; facilitates corporate transactions

b. Texas Business Organizations Code (TBOC)

i. Was Texas Business and Corporations Act (TBCA) prior to 12/31/06

ii. 1/1/07 to 12/31/09 applies to:

a. New corps being organized

b. Corps. that adopted TBOC early

iii. As of 1/1/10: TBOC applies to ALL corps. (whenever organized)

a. Except as to disputes arising under earlier law

iv. “Hub and Spoke” structure

a. Hub: Title 1 (general provisions)

b. Mini-hub: Title 2 (corporations)

1. Ch. 20 (gen provisions)

2. Ch. 21 (for profit)

3. Ch. 22 (non-profit)

c. Spokes: discus particular types of entities

ii. State Judge-made Law

a. Sets level of care required for officers and directors; regulate conflicts of interests; provide substance of law regarding S/H rights and claims

iii. Federal Law

a. Directly regulates certain conflicts; insider trading rules; proxy voting rules

iv. Private Ordering Rules

a. “soft law;” such as stock exchange rules for listed companies

b. Require independent board and committees to monitor executives

5. Internal Affairs Doctrine

a. RULE: A corporation’s internal affairs are governed and determined solely by the law of the state in which the corporation was incorporated

i. e.g. CA applying CA corp. law to “pseudo-foreign” entities held unconstitutional

b. Common-law Principle

i. Internal Affairs (Texas corp. statutes contained entirely in TBOC)

a. Rights powers, duties of governing authority (B/D), governing persons, officers, owners and other members

b. Matters relating to membership or ownership interests

c. Liability of owners/obligators to entity

ii. Policy: more consistency; protect the justified ex