Select Page

Business Associations/Corporations
South Texas College of Law Houston
Carson, Loftus C.

EVOLUTION OF THE LAW OF CORPORATION
I. History
A. Separation of Ownership & Control – The essence of the Problem?
1. As corporations have grown beyond the local level, with a small group of owners limited to their personal wealth’s growing into the mega-corp, ownership has been separated from control, with a wide dispersion of limited ownership interests, and a concentrated group of plutocratic (governance by wealthy) managers exercising power and control.
2. This separation has removed many of the checks which formerly operated to curb the misuses of wealth and power. The result is a new Feudal System.
3. Burle and Means doctrine- underscores fundamental problem with public corp- the agency cost problem. Those who manage the public corp don’t own it, so the maj of fortune 500, the top 5 execs collectively would own decidedly less than 1% of share (there are a few exceptions). It is a problem b/c those who own do not control it, and those who control it will run up agency cost expenses, which will not come out of their hide, but those of the shareholder (big vacations, slack management, big bonus’); these agency cost present a big problem. But in a closely held corp it is not a big problem (they are not going to run out of the door with a computer b/c it is their computer).
B. Regulatory Responses to fears: Anti-Trust, Environmental, OSHA, Securities Laws, EEOC
II. State Competition
A. Commercial development of U.S. led to loosening restraints on corporate activities
1. Interstate Commerce Clause led to judicial decisions limiting the State control over certain aspects of corporations.
2. Led to expansions of corporation powers now codified in MBCA § 3.01 – any lawful business & § 3.02, general powers
3. Internal affairs doctrine- the law of the state of incorporation shall apply to the corporate affairs of the corporation no matter where the dispute is.
B. Race to the Bottom
1. Advantages of having a corporation locate in a state came from employment, support of other business, filing fees, tax revenues. Thus, states actively compete for corporate locations – States increasingly changed corporation laws to allow management maximum freedom, and the judiciaries responded with favorable decisions.
2. A suggestion has been made that active competition between states is healthy for the development of corporate law.
C. Delaware – Winner of the Race?- Substantive reasons for DE’s success:
1. DE corp law is flexible and simplifies many corporation activities.
2. Larger body of case law, more sophisticated case law, thus less uncertainty
3. Experienced bar and bench, and state bureaucrats.
4. Attys in other states have become familiar w/ DE corp law and steer clients there
5. Sometimes management needs friendly place:
a. numerous, active shareholders
b. asset rich target for bust-up raiders
D. CA Law considered most “shareholder friendly”
1. CA has attempted to assert control over corp incorporated in other states by reg corps that do “principal business activity”” in CA – a challenge to the “internal affairs rule” (req foreign cts will apply the law of the state of incorporation to issues relating to the “internal affairs” of a foreign corporation).
2. If corp is found to have the “specified minimum contacts” it is subject to CA stats dealing, e.g., with cumulative voting, limitations on distributions, broad SH inspection rights, and broad dissenters’ rights.
3. This does not reach corp w/ shares listed on National

orate laws of the states. Most states now have modern statutes that allow flexibility, but there are still some restrictive anomalies to be aware of.
B. Close Corporation- if business mostly in one state, local incorporation is generally preferred; possibility of having to defend suits in distant states should also be considered.
C. Internal Affairs Rule: foreign cts will apply the law of the state of incorporation to issues relating to the “internal affairs” of a foreign corporation
II. Filing / Technical
A. Filings – MBCA §§ 1.20, 1.25
1. limited discretion for Sec. of State – MBCA §§ 1.21, 1.30
2. the grant to Sec of State under § 1.30 is not to make “policy”
B. Name
1. MBCA § 4.01 – distinguishable and non-confusing
2. Reservation – MBCA § 4.02
3. Must contain the word “corporation”, “incorporated”, “company” or “limited” or their abbreviation
C. Liability- corp is a separate legal personality, meaning it can do business in its own name; ordinarily w/o more, the liability of the business is limited to the resources owned by the enterprise (thus, those who have interest in these vehicles are not personally liable beyond the investment they have voluntarily engaged in)
D. Duration- Perpetual unless shorter specified – MBCA § 3.02
E. Registered Offices and Agents – §§ 2.02(a)(3), 5.01, 5.02, 5.03
Name of Incorporators, and if selected, the initial Directors. § 2.02