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Business Associations/Corporations
Southern Illinois University School of Law
Koehler, Michael

CORPORATIONS – Professor Mike Koehler – SPRING 2013
 
        I.            Introduction
a.       Actors within a Corporation
                                                               i.      Board of Directors
                                                             ii.      Officers – CEO, CFO, etc.
                                                           iii.      Shareholders
b.       Basics of Business Structure
                                                               i.      Sole Proprietorship
1.       Generally:
a.       Not a separate legal entity
b.       Owner operated
c.       Numerous in #
2.       Advantages:
a.       Ease of creation – can wake up & declare self SP
b.       Flexible, lack of formality
c.       Complete ownership & control – all profits yours
d.       Not a separate legal entity for tax purposes (taxed on your own personal rate)
3.       Disadvantages:
a.       All the risk belongs to owner
                                                                                                                                       i.      Unlimited personal liability
                                                                                                                                     ii.      No distinction b/t personal & business assets
b.       Limited in ability to raise capital
c.       Limited existence or lack of continuity
                                                                                                                                       i.      Legally speaking, entity ceases to exist if SP dies
                                                             ii.      Partnership
1.       No distinction b/t personal & business assets
2.       All owners subject to personal liability for all debts, losses, liabilities
3.       Generally:
a.       Agreement (express or implied) by 2 or more persons to carry on a business for profit
b.       Partners are co-owners, joint control over its operation, right to share in profits, equal responsibility for losses
4.       Advantages:
a.       Ease of creation – can be set up via handshake (don’t need formal agreement)
                                                                                                                                       i.      But, failing to get it in writing will trigger default rules
b.       Flexible, lack of formality
c.       Not a separate legal entity for tax purpose
5.       Disadvantages:
a.       All the risk belongs to owners/partners
                                                                                                                                       i.      Unlimited personal liability
                                                                                                                                     ii.      No distinction b/t personal & business assets
                                                                                                                                   iii.      Everything a partner does in connection w/partnership business binds partnership as ell as other partners
                                                           iii.      Limited Liability Company (LLC)
1.       Generally:
a.       Hybrid entity formed under state law that combined the limited liability feature of corps w/ease & flexibility of non-corporate form along w/tax advantage
2.       Advantages:
a.       Liability protection – limited liability
                                                                                                                                       i.      Owners protected from personal liability for company debts & liabilities
b.       Partnership-style, pass-through taxation
                                                                                                                                       i.      Favorable to small-business owners
3.       Disadvantages:
a.       Not always an option
b.       In certain cases, unsettled legal principles
c.       Compared to sole proprietorships & partnerships
                                                                                                                                       i.      More formalities
d.       Compared to corps
                                                                                                                                       i.      Limited ability to raise capital
                                                                                                                                     ii.      Limited existence/lack of continuity
                                                           iv.      Corporation
1.       Generally:
a.       Legal entity formed under state law that is separate from the natural persons who own, manage, & operate entity
b.       Shareholders “own” entity & elect a board of directors who are responsible for overall management of entity
c.       Board elects corporate officers who are responsible for day-to-day operation of entity
2.       Advantages:
a.       Perpetual existence
b.       Limited liability of owners (shareholders)
                                                                                                                                       i.      Owners protected from personal liability for company debts & liabilities
c.       Ability to raise capital — Best vehicle for eventual public companies
3.       Disadvantages:
a.       Many formalities in forming & operating entity
b.       Double taxation
                                                             v.      Factors to Consider in Deciding which Structure to Use
1.       Ease of creation/flexibility
2.       Management & control issues
3.       Principal Place of Business preference – where do you want to be incorporated?
a.       State law issues
4.       Liability
5.       Capital/Funding
6.       Taxes
c.       Corporate Basics
                                                               i.      Originally chartered by states for a limited, narrow purpose
1.       Originally put together to allow people to come together for a common public interest
2.       Expanded to encourage business b/c it generates more tax revenues
a.       States began competing with each other to have the most favorable corporate laws in order to lure corps to their state
                                                             ii.      Corporations are “persons” under the law
1.       Legally required to be accountable to shareholders—owners (not stakeholders—employees, suppliers, customers, community at large)
2.       Goal: maximize corporate profits
3.       Santa Clara v. Southern Pacific RR (1886)
a.       Core of decision is about taxing issues
b.       14th Amendment refers to persons—nothing in Constitution says corps are persons
                                                                                                                                       i.      Big Picture Issue: whether corp is entitled to DP of Law/EP of Laws
c.       “One of the points made & discussed at length…was that corps are persons w/in the meaning of the EPC…”
                                                                                                                                       i.      No arguments on this question b/c we’re all of the opinion that it does.
                                                                                                                                     ii.      NEVER argued or discussed before S.Ct.!
                                                           iii.      Corporate Rights
1.       Access to courts, ability to sue & be sued
2.       DP & EP
3.       Free from unreasonable searches & seizures
4.       Freedom of speech (in many instances)
a.       Commercial speech is regulated (no false ads)
b.       Freedom of Speech includes participating in the political process, which, in turn, includes money
5.       Citizens United
a.       Sotomayor questioned if it was a mistake to give corps same rights as humans
b.       HELD: rejects argument that political speech of corps should be treated differently under 1st Amendment simply b/c they’re not “natural persons”
                                                           iv.      Corporations are creatures of State Law
1.       Many choose to incorporate in Delaware
d.       DELAWARE
                                                               i.      The “legal home” – not the PPB
                                                             ii.      WHY Delaware?
1.       Court of Chancery
a.       Specializes in corp law topics
                                                                                                                                       i.      Reputation for expertise in corp matters
                                                                                                                                     ii.      Limited J – much more efficient & faster than traditional courts
b.       Judges are know their stuff
                                                                                                                                       i.      Assures level playing field—judge will be knowledgeable & prepared
                                                                                                                                     ii.      No juries—all bench trials so its much more fair & predictable
c.       Predictable & expansive case law
2.       Legislature & the Secretary of State Office
a.       Legislature & bureaucrats put high priority on making laws & regulations pro-business
                                                                                                                                       i.      25% of budget is attributable to corporate taxes & fees (that’s a huge percentage)
b.       Government agencies committed to quality service
                                                                                                                                       i.      Timely/efficient, satisfactory, positive attitudes
                                                                                                                                     ii.      State-of-the-art technology & user friendly
3.       The Delaware General Corporation Law (statute)
a.       Dynamic—constantly revised & fine-tuned
b.       Maximum flexibility—against regulation
                                                                                                                                       i.      Promotes simplicity & avoids complexity
c.       Body of developed & predictable case law

unadvised” judgments
b.       There was a rational basis for the decision when made
                                                                                                                                       i.      No Monday morning quarterbacking
c.       Absence of a conflict of interest
3.       Not about corp making the “BEST” decision;
a.       It’s just about corp making decisions consistent w/role & purpose of corp and fiduciary duties of corp
4.       è “a presumption that in making a business decision, the directors of a corp acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company”
                                                             v.      Dodge v. Ford Motor Co.
1.       Ford stops paying special divs—Dodge brothers object
a.       Ford wanted to reinvest money into company so that they could expand their plants & reduce price of cars
2.       Corps operate to profit the shareholders; directors are to use powers to that end but still have discretion
a.       Its part of long range business plan to expand & cut prices, so enjoining building new plant was wrong
3.       Directors declare divs & amounts—defer to them unless there’s fraud, misappropriation, or bad faith
4.       It’s NOT within the lawful powers of the BOD to shape & conduct the affairs of a corp for the merely incidental benefit of shareholders & for the primary purpose of benefiting others
                                                           vi.      Shlensky v. Wrigley
1.       Minority shareholder brings shareholder derivative suit against Wrigley for negligence & mismanagement due to refusal to install lights & play night games at home
2.       HELD: No COA asserted
a.       Ct will not disturb business judgment of a majority of directors unless there’s fraud, illegality, or conflict of int
                                                                                                                                       i.      No conclusive evidence that installation & scheduling of night games will accrue a net benefit in revenues to D & there appear to be other valid reasons for refusing to do so
b.       Corps not obligated to follow discretion taken by other, similar corps; BOD elected for their business capabilities, NOT their ability to follow others
3.       TAKEAWAY: BOD can take into account stakeholder (non-shareholders) ints—so long as ints are rationally related to corp purpose of maximizing shareholder wealth
b.       Limited Liability
                                                               i.      “Piercing the Corporate Veil”, “Piercing the Corporate Bubble”
1.       Corporate Privilege= limited liability of shareholders
a.       Can be taken away—there are legal avenues to “pierce the bubble”
2.       Usually deals w/small companies that have corp form
3.       Exceptions—how to make shareholders liable:
a.       Pierce the bubble
b.       Alter ego
                                                                                                                                       i.      Separate & distinct corps on paper, but they’re all controlled by the same person/shareholders
                                                             ii.      Walkovszky v. Carlton
1.       P injured in taxi by D—D had 4 separate corps, each corp w/only 2 cabs & minimum $10K liability insurance
2.       ISSUE: What factors will result in a shareholder of a corp entity being personal liable for the entity’s legal exposure?
a.       Only will look at other corps if they are “dummy corps”—if they don't exhibit normal corp factors
3.       2 Part Test to Pierce Bubble
a.       (1) Factors below; AND
                                                                                                                                       i.      FACTORS to consider in piercing bubble & getting to shareholder (P has the burden of piercing the bubble/establishing alter ego):
1.       Is the corp a sham? – i.e., not set up to make a profit, undercapitalized, failure to abide by corp formalities, other instances of fraud or misrep in establishing or operating corp
2.       Co-mingling of assets, self-interest, self-dealing – i.e., a SH treating the corp like a personal piggy bank