Professor Tom Lin
Types of Corporations
· Public- public secondary markets, shares of corporation listed for trading, initiated by an IPO (initial public offering) and subject to federal securities law
· Private- closed corporations, characterized by absence of secondary market for corporation shares, often small, small number of shareholders.
· Corporation is its own legal person – Separate legal existence than shareholders
· Legal fiction, useful for the purposes of law
· Possesses some, not all constitutional rights
o First and fifth amendment protections
· Must meet formal requirements in the state in which it was formed
· Limited liability
o Corporate veil: limits shareholder liability
§ Shareholders are only liable for the worth of their shares
§ No personal liability
§ Flexible liquidity: readily converted into cash
· Separation of ownership and management
o Shareholders own the corporation, board of directors control/manage it
o BOD is elected by the shareholders
o Only the BOD can act on behalf of the corporation
· Rule of Thumb: Boards act, Shareholders react.
· Board of Directors:
o Selects, evaluate senior management
o Oversees strategies
o Reviews and performs major plans and actions
§ Financial projections and structure
§ Long term goals
§ Approves major financing and acquisitions
§ Monitors business competition
o Very limited rights
o Entitled to vote on a limited range of issues
§ Election of board members
§ Fundamental transactions (e.g. corporation decides to sell itself)
§ Approving auditors
§ Election procedures
o Inspect corporate records
o Receive distribution
o File lawsuits on behalf of the corporation (derivative suits)
o Can act on behalf of the corporation
o Appointed by the board
§ Board is final authority in all major decision making
o Owe fiduciary duties
o Can usually be both an officer and a board member
o Top Management Offices:
§ CEO, CFO, COO, CIO/CTO, General Counselors/Chief Legal Officers
· (1) Promotion
· (2) Subscription
· (3) Choose a state in which to incorporate
· (4) File documents (articles of incorporation)
o DE dominates corporate charters: 60% of fortune 500, no minimum capital requirement, can incorporate with only one person, very lowly taxed, can keep books and offices outside the state, highly competent judiciary in corporate law.
· (1) Draft bylaws
· (2) Name directors and officers as necessary
· (3) Adopt bylaws and official actions
· (4) Authorize sale of stocks as needed
– Agency – fiduciary relationship that arises when one person (principal) manifests consent to another person (agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.”
o (1) mutual consent
o (2) agent acts on behalf of and subject to control of principal.
o à where agent causes harm, principal is liable.
– Groton v. Doty (p.1)
R: An agency relationship is created once a party agrees to act on behalf of a second party subject to the second party’s control.
LIMITED LIABILITY AND THE CORPORATE VEIL
A. Corporate Veil:
a. Purpose: insulates shareholders from liabilities. If corp causes harm, corp pays damages, not the shareholders.
b. Not absolute: can be pierced when sanctions fraud or promotes injustice.
B. 2 theories for PCV:
a. Alter- ego: No distinguishable difference between the shareholder and the corporation.
b. Enterprise Theory: Corp is a fragment of a larger corporate combination. Unrelated corps or people can be held jointly liable for some action on the basis of being part of a shared enterprise.
c. [Agency Theory: Not actually piercing; get to parent corp’s assets by arguing that sub is acting on behalf of and subject to the control of parent corp.] C. Requirements for piercing (apply under either theory, called Van Dorn Test in 7th Cir):
a. (1) Unity of interest
i. Failure to maintain separate corporate records, comply with formalities
1. Keep minutes, have meetings, elect officers, separate books and records, adopt bylaws, issue stock, elect BoD.
rporations are allowed; they make up a huge number of corps in America.
a. Law says you have to have separate accounts, records, email, phone # à Bank account, email, phone # are easy; Records are harder- how?
i. Meet with your lawyer, banker
ii. Write memo to yourself — saying everything you did, meetings you had, what you talked about
iii. “see attached” — emails btw you and your banker talking about getting a business loan, etc. Show that you were acting in your capacity as a representative of the business
– Delaware General Corporate Law (“DGCL”) DGCL: §101-102, 107-109, § 121, 122, 124, 141, 142, 161;
– Model Business Corporation Act (“MBCA”) MBCA: § 2.01-2.06, 3.01-3.02, 3.04, 8.01, 8.03, 8.20-8.25, 8.40, 8.43.
SHAREHOLDER DERIVATIVE ACTIONS
I. Derivative suit = suit in equity against corporation to force the corporation to sue a 3d party (manager, director, officer, or outsider).
a. Cause of action belongs to corporation
J. Allow shareholders to hold managers and directors responsible for the actions they have committed at the cost of the corporation.
K. Qualifications for Plaintiff:
b. Contemporaneous ownership (DCGL § 327)
i. Must be shareholder at the time of act or omission complained of and at the time the lawsuit is occurring
ii. Many states also require shareholders to remain so until final judgment
c. Fair and adequate representation of the corporation’s interest
d. In some states à bond requirement (like NJ, Cohen).
L. Alternative: Direct Suit