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Business Associations/Corporations
SUNY Buffalo Law School
Halberstam, Michael

Halberstram

Corporations

Spring 2011

I. Corporations

a. For profit

i. Established primarily to generate wealth

b. Non profit

i. May be established for a range of purposes

1. Charities, hospitals, private universities

c. Public Corporation

i. Publicly traded on major stock exchanges – only be C corp

ii. Widely dispersed shareholders, for-profit

iii. Comply with securities regulations – primarily disclosure requirements (10k’s, 8k’s)

1. Disclosure – # of shares, what you are going to do, how do it)

a. Periodic – may quarterly, must annually (10K, 8K for special events – merger, material changes) – if no disclosure then securities fraud

2. Quality of securities is not controlled

iv. Registration

1. Financial statements based on GAAP – pro forma – going to look like – Management discussion and analysis section (plan, future projection, forward looking statements)

2. Registration becomes prospectus then shown to investors then list on market

a. First market – IPO

b. Secondary market – stock exchange

d. Close/private corporation

i. Not publicly traded on stock exchange – no SEC regulation

ii. Minority shareholders

1. Fiduciary duties

iii. No more than 500 shares, no more than certain dollar amount

iv. S or C corp

v. Wholly owned

e. Perpetual existence

i. Unlimited life

f. Limited liability

i. Only liable for up to amount you invested in the corporation

g. Centralized management

i. Shareholders elect corporate directors

ii. Directors have power to manage and oversee corporations business

1. Directors have duty to act in best interest of corporation

h. Articles

i. Like constitution, filed with secretary of state

i. Bylaws

i. Not filed with state, set out governing details of corporation

1. Powers of directors and officers; procedures for electing directors and filling vacancies, required notice periods and details for calling/holding shareholder/director meetings

j. Stock Shares

i. Authorized

1. Articles specify how many shares of common and preferred stock the corp is authorized to issue (amend articles to add)

ii. Issued

1. Actually sold to shareholders – all or a portion

iii. Outstanding

1. Portion of authorized stock that has been sold and remains with stockholders

2. Corp repurchase some they are called treasury shares

k. Rules

i. Incorporation state statute (N.Y.G.Bus.L.)

ii. Internal affairs doctrine

1. The law of the state of incorporation governs the internal affairs of the corporation

2. Relationship between owners and managers are governed by statutes/law of the state of incorporation

3. Del Corp C. – del. Law will apply to the affairs – sue in NY but apply DE law because incorporated there

4. US S. Ct. has accepted this doctrine to address issues of federalism

5. Why so may in De? – law is good for directors

iii. Judge-made fiduciary duty – applied by the courts various doctrines

iv. Tax

1. C-corp – public or private or closely held

a. Income is taxed – imposed on the profits – if pay out dividends then they are taxed again (taxed twice)(indep entity but it gets taxed)

2. S-corp – no public corp – only gets taxed once

3. Because of tax code – started to pay in stock options rather than dividends to the executives

v. Agreements – voting, shareholders to share power, allocate responsibilities)

vi. Securities laws

1. State – blue sky law – prevent fraudsters from selling the blue sky to investors

2. Federal

II. Forming the Corporation

a. Formal corporate existence commences with the filing of the articles

i. Articles must include

1. Name of corporation

2. Number of shares it is authorized to issue

3. Name and address of each incorporator

4. Name and address of the corporations registered office and agent

a. MAY provide things such as the purpose (NY requires), names of initial directors, par value of shares

ii. Organizational meeting must be held and what must happen:

1. Election of directors

2. Adoption of bylaws

3. Appointment of officers

4. Designation of a bank as depository for corporate funds

5. Approval of the sale of stock to the initial shareholders

b. Ultra vires – corporation could not engage in activities outside the scope of defined purposes – NO longer followed

c. Model business corporation act

i. How do you know name is available and proper form?

1. MBCA § 4.01

ii. What are corporation’s purposes? § 3.01

1. May state limitation (not protected from third parties just because its written in your purpose – shareholders can sue because articles say you can only produce certain thing)(creditors would be third parties)(shareholders can sue board)

iii. What are corporation’s powers? § 3.02

iv. Shares authorized § 6.01

1. Why so important? What about rights of shares? (class A, B – class A in 1960 = $300, now class A is $130,000 – class A has voting rights not class B – shareholder approval because of changing articles) What about share price? Par value?

v. Registered office/agent

1. Who can be registered agent? § 5.01

2. Why is registered office/agent required?

3. Is the registered agent liable for corporate obligations?

vi. Incorporator (what kind of liability do incorporators have for actions they took before company came into existence)

1. Who are directors, officers, and shareholders?

2. Can liability of directors, officers, Shs be specified? §2.02

III. Corporate social responsibility

a. Dodge v. ford (101)

i. Wanted to lower price of cars and increase wages; Dodge Bros. got 20% of shares, beginning Ford paid enormous dividends, product pricing, vertical integration, stop paying special dividends; expected 60 million profit, wanted to invest it back in and produce steel (vertical), Dodge sued – claim of not fulfilling fiduciary duty

ii. Corporation

m and short term goals – if he says in the meeting that he wants to reinvest but he said he wants money to you then he is misrepresenting

b. Rules of professional responsibility

i. Communication

1. Might include in waiver to brad – info relevant to corporation then attorney is required to disclose and all attorney’s understand – Brad can say everyone should get their own attorney

ii. Confidentiality of information

iii. Conflict of interest

iv. Organization as client

c. Hypo

i. Charles – investing in corporation for son – would like to draft papers giving hiim voting control and brad and Angelina don’t have to know – says he is paying attorney fees

1. Inform him that this is a critical fact and cannot be held in confidence but maybe something can be negotiated to get your son involved – stand up to your client

ii. Angelina told other she has MBA but she doesn’t – she embezzled at previous job

d. Professional organization as client

i. Lawyer employed/retained by organization represents the organization acting through its duly authorized constituents

ii. If a lawyer for an organization knows of someone intending to violate legal obligation or law, the lawyer shall refer the matter to higher authority in the organization including the board of directors

1. If despite lawyer’s efforts in (b) the highest authority fails to act and the lawyer believes substantial injury is reasonably certain , the lawyer may reveal information relating to the representation

e. Multiple representation

i. Conflicts within the firm

1. Firm asked to represent client, Patty, who claims that she lost everything in a hurricane – no insurance because Charles committed insurance fraud

a. Can you represent Patty if you already represent Charles?

i. Representing charles in insurance claim against him – conflict

ii. Representing charles in underwriting who he is suing for not paying premiums – not conflict

1. Suing your own client for fraud sounds wrong

2. Need conflicts waivers signed

2. If direct conflict seems inevitable then need waiver or cant do

f. Role as lawyer, serving as director for client

i. Can lawyer for corporation sit on the board as a director?

1. Duty of loyalty, cannot engage in conflicts unless approved by majority of independent directors, does fiduciary duty/duty of loyalty require you to violate any laws? No

2. Nothing wrong to serve as director