o Key Corporate Characteristics – separate entity; perpetual existence; limited liability; centralized mgmt; transferability of ownership interests.
o Types of Corporations – non-profit v. private; public v. closely held (private); most public are “C” corps; most close / private corps are “S” corps or LLCs
o The Corporate Actors – shareholders, officers (mgmt), directors, stakeholders (employees, debtors, creditors, community at large)
ü FIDUCIARY DUTIES
o Director Duties
§ duty of care – 3 things: 1) act in best interest, 2) same care and attention you’d give to your own & 3) act prudently, carefully, good faith
§ duty of loyalty – subordinate personal duties to corporate duties when they conflict; more narrow than duty of care
§ BJR – presumption that absent evidence of self-dealing or directors not being reasonably informed, all b/d decisions are intended to advance the interests of the corp and its s/h. boards given presumption that decisions are 1) informed, 2) serve rational business purpose, 3) disinterested & 4) made independently. To shift burden to D (corp), must show that any one of the 4 things is not true.
§ Derivative suit = action in equity brought by s/h on behalf of corp b/c b/d isn’t going to try to take down its own mgmt.
§ Bayer – introduces duty of care (must act in best interest of company, cannot be neglectful), duty of loyalty (must subordinate personal duties to business duties when they conflict), BJR (presumes that every action of b/d adheres to duty of care)
§ 3 question to ask
· 1) Is the transaction disinterested? 2) was disclosure complete, accurate & timely? 3) was the vote uncoerced, independent & timely?
ü CORP & THE SOCIETY
o Ford – corp business plan must be organized to maximize profit of s/h. not necessarily in the short term; captured in ALI §2.01
o Corp Political Expenditure
§ Bellotti – corps have free speech; restrictions on such subject to SS (this statute was over & under-inclusive); Dissent – corps vast wealth leads to disproportionate effect on political issues, thus restriction is OK.
§ Austin – the special corp structure that facilitates the amassing of large amounts of wealth warrants the limits on independent expenditures (there is compelling gov’t interest in preventing corruption that comes from this);
· Scalia dissent: “yes, special advantage, but this shouldn’t = forfeiture of 1st rights”
ü FORMING THE CORPORATION
o The Process of Incorporation – file AOI w/ state of choice. AOI “musts” & “mays” are in §2.02. Not really a corp until filed (§2.03). After incorporation, must have mtg under §2.05. Corp must write bylaws (§2.06) & may write emergency bylaws (§2.07). Bylaws can be anything that is not against the law or against the AOI.
o Lawyers’ Professional Responsibilities
§ MR 1.4 – communication = promptly inform & reply; reasonably consult
§ MR 1.6 – confidentiality of information = can’t reveal w/o informed consent; but can’t assist in criminal / fraudulent info (can reveal to extent necessary if crime; harm/death; fraud; substantial financial / property harm)
§ MR 1.7 – current clt COI = resolution requires atty to 1) ID clt 2) determine if COI exists 3) can representation be undertaken? 4) consult & get informed consent in writing
§ MR 1.13 – organization as client – climb corp ladder. Go outside if b/d doesn’t listen regardless of 1.6
o Entity Theory of Representation
§ Danforth – where person 1) retains lawyer for purpose of incorp & 2) involvement w/ that person is directly related to incorp & 3) entity is eventually incorporated the entity rule applies retroactively such that atty’s pre-incorp involvement w/ person is deemed to be representation of the entity, NOT the person.
§ AZ Opinion – can represent during formation process, as long as everyone agrees that clt will be entity upon formation
· Aggregate theory – when atty represents everybody as joint clients
§ Reasonable Expectations Test – used to determine who clt is / if clt exists – to determine who clt is / if person is clt, look to ppl’s reasonable expectations.
o Problems During Incorporation
§ Ultra Vires – “beyond pwr of corp” not problem anymore b/c AOI drafted broadly
§ Defective Incorporation
· §2.04 – all persons purporting to act as, or on behalf of, a corporation, knowing there was no incorp, are jointly and severably liable for liabilities while acting.
o §2.04 does away w/ de facto & estoppel – just asks: did parties know they weren’t incorporated? Yes? – not protected. No? – protected. CMT: appropriate to impose liability only on persons who act “Knowing” that no corp exists.
· De facto incorporation – if good faith attempt & actions to incorp fails w/o knowledge or responsibility of the parties, a ct may deem the corp “de facto incorporated”.
· Incorporation by estoppel – 1) acting in good faith w/ 2) no knowledge re: lack of incorporation & 3) 3rd party treated them as if a corporation & didn’t know that they were not, THEN, 3rd party is estopped from denying that they were a corporation
· Pre–Incorporation Activities of Promoters –
o Remember: 1) need 2 existing parties to a K. did the parties intend to create a K prior to incorporation? 2) can Not bind a corporation that does not exist to a K 3) a corp can NOT be bound to a pre-incorporation agreement unless it freely chooses to do so after incorporation (“novation” – where corp ratifies the K & substitutes its name for the promoter’s name). (promoter generally on the hook; whether he is off the hook afterwards depends on the intentions of the parties; Factors – P sign as corp agent? Seller intend only for corp to pay? P do partial performance of K that indicates intent to be held personally liable? Absence of action indicate discharge of promoter liability?
FINANCIAL STRUCTURE OF THE CORPORATION
o §6.30 Shareholders’ preemptive rights à Preemptive right to avoid dilution of ownership in the company. Current s/h right to purchase shares preemptively when new shares issues to avoid dilution of their ownership in the company.
§ Most states now “opt-in” to preemptive rights
o §6.21 Issuance of shares à Can pay for shares w/ pretty much anything. (ex. can pay w/ Ks for services to be performed)
o §6.22 Liability of shareholders à Liable for payment of shares.
o §152 Issuance
issuing equity; risk seekers prefer debt (can use leverage)
o Options and Capital Structure
§ Adams – b/d takes on lots of new debt, right when PS want to cut losses. If liquidate, debt would be paid 1st , and PS might not get anything. BJR oks this, no breach of duty. Fiduciary duty of b/d to corporation trumps all (interest of “common stock”).
ü LEGAL CAPITAL
o REGULATION OF LEGAL CAPITAL
§ Creditors having 1st dibs only makes sense if corp has rec’d all amounts it claims to have been paid for equity securities & it is prohibited from distributing dividends to equity security-holders the amount it’d need to satisfy creditors’ claims.
§ General ideal of legal capital scheme = no distribution may be made to s/h unless, after the distribution, the corp has not only enough assets to pay its creditors, but also an additional specified amount (stated capital). Anything over the sum of stated capital & liabilities is known as “surplus” (protects creditors & s/h)
· In reality, a creditor will want to know 1) what’s your collateral? Assets? Are you too highly leveraged?
§ Legal capital is # on the R (claimant’s) side of balance sheet
§ §6.21 abolishes “par value” concept, but corp elect to keep under AOI. b/c no min price at which specific shares of stock must be issued, there is no liability for “watered stock”. CMT – whether shares are validly issued depends on whether proper corp procedures have been followed.
§ DE law – when create class of stock, req’d to assign it a par value (& can’t sell below this price). Matters for 3 reasons
· If not FP & NA, corp can demand stock back / creditor can go after s/h / can’t issue dividend or stock distribution that exceeds amount in surplus. To change par value, have to change AOI
§ Determine stated capital by adding up the “par value x # of shares issued” for each class of stock. If issued stock w/ “no par value”, then §154 gives corp 60 days to determine what the par value is to be. If it doesn’t, then the entire amount of consideration rec’d becomes the par value (meaning it goes into the stated capital pot & can’t be used as surplus)
ü Dividends & Other Distributions
o Dividends & payments made to repurchase stock are both classified as “distributions”
o Distributions from
§ Earned surplus
§ Nimble dividends (whenever corp has current earnings; theory: should be able to pay dividends whenever profitable, even if impairs stated capital)
o In DE, 2 ways to declare dividends
§ §170(a)(1) – can pay dividend out of surplus