Business Associations/Corporations Outline

Corporations Outline (Furlow)(Fall 2010)
PART I: Introduction to the Corporate Form
1.      Incorporation:
Corporation: A fictional entity with perpetual existence, created by state law where there is investment of capital to make a profit which serves as a shield from liability.
1.      Fictional entity-technically a corporation is a person in the eyes of the law. (§302)
2.     
607.0302  General powers
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power:
(1)  To sue and be sued, complain, and defend in its corporate name;
(2)  To have a corporate seal, which may be altered at will and to use it or a facsimile of it, by impressing or affixing it or in any other manner reproducing it;
(3)  To purchase, receive, lease, or otherwise acquire, own, hold, improve, use, and otherwise deal with real or personal property or any legal or equitable interest in property wherever located;
(4)  To sell, convey, mortgage, pledge, create a security interest in, lease, exchange, and otherwise dispose of all or any part of its property;
(5)  To lend money to, and use its credit to assist, its officers and employees in accordance with s. 607.0833;
(6)  To purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity;
 
Perpetual existence-A corporation has a purpose independent of humans and the people working for it. It can only act through humans, so when a person acts on behalf of the corporation the corporation is liable.
 
 
How a Corporation Looks:
The Stockholders: “Is one who is a holder of record of shares in a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.”
1.      Stockholders put money into the company through the purchase of shares; in return they receive a stock certificate and a fractional ownership interest.
2.      Stockholders vote to 1) elect the directors who manage, 2) approve fundamental corporate changes, and 3) sue (they can sue (i) the Board for abuse of power, and (ii) a stockholder who has so many shares that they can exercise control over the company).
3.      No formal power to manage the company.
                             i.      Exceptions: 1) A small corporation may not have a Board and 2) if a shareholder own 80% of the company he will certainly have control (meaning the directors will answer his calls.)
4.      Stockholder risk is limited to the amount of their investment.
                             i.      In the event a corporation’s liabilities exceed its assets, a person suing would receive nothing, thus stockholders are liable only up to the amount they invest.
5.      What do stockholders get for their investment?
                             i.      If there is enough unencumbered capital the Board of Directors could (if they choose to) issue all stockholder’s a dividend. 
1.      NOTE: No right to a dividend; dividends can only be paid if it will not harm the creditors.
6.      How to get your money back if there is no dividend?
                             i.      If you can’t sell your shares to someone else, and no dividend is issued—you will never get your investment back. All investments are locked.
The Board of Directors: “All corporate power shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the Articles of Incorporation or in a Shareholder Agreement (607.0732).
1.      The board of directors becomes the defendants in a lawsuit.
2.      Basically, the board makes the decisions and supervises.
3.      The board is a deliberative body (meaning that the board makes decisions, not just one of the directors acting alone.)
4.      The board exercises no formal power in the corporation. Although the board has a lot of practical power, they have no role as an individual.
5.      Decisions are made at a meeting. Collectively, the board will come to a decision.
6.      The board makes the big decisions. They decide to sell plants, to merge or acquire, to fire the president, etc. In making these decisions they are acting on behalf of the shareholders. Thus, they are agents of the shareholders and have fiduciary duties.
                           ii.      Fiduciary Duties Flow As Follows:
FURLOW: Directors owe fiduciary duties to all stockholders, including preferred stockholders. 
(1)   The corporation owes contractual obligations to preferred stockholders that require it to honor the preferences defined in the Articles of Incorporation. 
(2)   Directors owe fiduciary duties to stockholders and to the company.  When the transaction under consideration would have a direct affect on the stockholders (for example a merger in which their shares would be cancelled) the duty flows primarily to the stockholders.  When the transaction would only have an indirect affect on the stockholders (for example, a decision to enter a new product market) the duty flows primarily to the corporation.  The reasoning is this:  If the decision serves the best interests of the corporation, the corporation will make more money and as a result the stockholders’ shares will become more valuable. 
(3)   When directors vote to recommend a change to the articles, they owe a fiduciary duty to the corporation to do what’s best for the corporation which, of course, includes making sure the corporation does not violate its contractual obligations to the preferred stockholders.
 
7.      Inside Directors: This is a director who is also an employee of the corporation.
                         iii.      Ex. The president of the corporation, who was also a director, would be an inside director.
8.      Outside Directors: This is a director who is brought in from outside of the corporation because of their objective view. These directors, who are also stockholders, will balance the point of view.
 
The Officers: (607.0841-Duties of Officers) Each officer has the authority and shall perform the duties set forth in the bylaws OR, to the extent consistent with the bylaws, the duties prescribed by the board of directors OR by direction of any officer authorized by the bylaws or the board of directors to prescribe the duties of other officers.
1.      Officers are the owners the board delegates responsibility to do the things that need to be done. They implement the board’s decisions.
2.      Officers are the agents of the corporation.
 
Sources of Governing Law:
Statutory Law: There are two kinds of state law: 1) Delaware (DGCL), and 2) Simple, all other states.
1.      Internal Affairs Doctrine: is a choice of law rule in corporation’s law. Simply stated, it provides that the “internal affairs” of a corporation (e.g. conflicts between shareholders and management figures such as the board of directors and corporate officers) will be governed by the corporate statutes and case law of the state in which the corporation is incorporated
2.      Two Types of Laws:
                       i.      The Model Business Corporations Act: The MBCA assumes that the local judge is more accustomed to dealing with criminal and tort law, therefore it is written out in detail, leaving very little open for judicial interpretation.
1.      Very specific law.
                     ii.      Delaware General Corporations Law: The DGCL is drafted broadly, leaving a lot open for judicial interpretation (this is okay because Delaware judges are really knowledgeable about corporate law, unlike most state court judges.)
1.      Very flexible law.
2.      70% of all corporations in the world are incorporated here, including most of the Fortune 500.
 
Articles of Incorporation: (In Delaware the Articles are referred to as the Certificate of Incorporation.)
1.      These govern the rights of the stockholders (owners/principles)
2.      Governs the rights of directors (managers/agents)
3.      These are subordinate to state corporate statutes.
                   iii.      The statute provides rules that must be followed and provides default provisions in the absence of a provision in the bylaws.
4.      The Articles of Incorporation are public and on file (unlike the internal document: the bylaws.)
 
Bylaws: A private document that is subordinate to the Articles of Incorporation.
1.      Provides the titles and responsibilities of the officers.
2.      Cannot be inconsistent with the Articles of Incorporation.
 
Judge Made Law: (where most of the activity is located)
1.      Judges construe the statute and the Articles of Incorporation and then apply common law.
                   iv.      The judges will ask: “Did the board act consistently with their fiduciary duties of care and loyalty?”
                     v.      NOTE: The co