CORPORATIONS OUTLINE Padfield Spring 2017
**Business law is fundamentally state law**
Chapter 1: Basic Business Propositions for Law Students
Friedman: social responsibility creates conflict- one and only social responsibility of a business; to increase profits so long as it stays within the rules of the game.
Business is about making money:
A.P. Smith Mfg. co. v. Barlow:
Facts: company gave $1,500 to Princeton university, stockholders questioned this giving.
Issue: The issue is whether Plaintiff can donate money to a charity without authorization from stockholders or through the certificate of incorporation? (Holding: YES)
Reasoning:
Corporate gift-giving increases the goodwill of the corporation, and public policy should be to encourage corporations to provide to charities in the same manner as individuals are encouraged to give.
Rule of Law: Corporate gift-giving is an allowable method of increasing goodwill.
can be made not allowable under state law or AOI.
Limitations:
Statute might limit to a corporate benefit
Some cases say that a charitable donation is a legitimate end in itself
Modern cases say that the donation must be reasonable
There may be an issue if corporation is giving to a “pet” charity or if it were donating indiscriminately
Common-law rule: those who managed the corp could not disburse any corporate funds for philanthropic or other worthy public cause unless the expenditure would benefit the corp. (personal rather than corporate ends- not allowed)
b. Hobby Lobby Case:
Majority opinion renounced the widely held view that maximization of profits is legally mandated as the sole corporate purpose.
Business corporations are not required to maximize profits and they violate no state law mandate when, as is frequently the case, they engage in activities that sacrifice profits for other values.
B. Financial Statements Help Business Owner Understand Performance and Value:
a. Intro:
Key to understanding the health of a business as well as how much money it is making and what it might be worth.
Statutes require business entitled are required to keep appropriate accounting records and to make the available to owners of business. (MBCA §§ 16.01(b) and 16.02(b))
Financial statements are usually prepared according to GAAP (generally accepted accounting principles)
Fiscal Year: may not always be Jan. 1st (retail businesses- end of march)
2 ways to make money from business:
owner can receive distributions of all or part of the money the business has earned
she can sell her ownership in the business for more than she paid for it
b. Three Main Financial Statements:
Income Statement:
profit and loss statement (P & L)
computes the profit of a business for the period in questions (usually 1 year)
PBT: price before taxes
PAT: profit after tax
Can tell a great deal about a business from this statement and how performance changes overtime
Cash Flow Statement:
Measure of how much more or less cash a business has at the end of the year than it had at the beginning of that year.
Profit after tax + depreciation – investment= cash flow.
Investment: something that will be used for more than one year.
Expense: if a company buys something that it will use up within the year. (salaries, cost of goods sold)
Balance Sheet:
Balance sheet is snapshot at a particular moment in time.
When you put the assets on the left-hand side of the balance sheet, and the liabilities and owners’ equity on the right hand side, then the balance sheet will balance.
assets – liabilities = owners’ equity
Three main sections:
Assets
Liabilities
Owners’ equity (left over after u subtract liabilities from assets)
c. Determining Value of Company:
Public company: take number of shares and multiply by stock price
Private companies:
Discounted cash flow: converts the opportunity to receive estimated future payments that are risky into an equivalent number of dollars received, for certain, today.
Cash on hand: matters because more flexibility (6 months’ salary in bank before investing)
Book value: difference between all the company’s things that have value and the liabilities that are all claims on that value.
C. Basic legal forms of business organization include:
All business with more than one owner, has a legal structure:
Sole Proprietorships:
Most common business structure
Business and owner is same actual and legal person
Person does not need to do anything legally to set up a sole proprietorship (unless tries to set up other structure like a corp.)
Person responsible for all decisio
. Law:
State statutes
Most states statutes are modeled some measure on Model Business Corporation Act (MBCA)
Articles of incorporation, bylaws and other agreements
important source of corp. law
Case law
Cases interpret and apply the provisions in corporate statutes and in corps. Articles and bylaws
Cases fill gaps in then law (resolve problems)
Federal statutes
No general corporation federal statute, but there are important statutes that govern certain corporate activities.
B. Legal Problems in Starting Business as a Corp:
Preparing the Necessary Papers
Necessary papers are articles of incorporation.
Corp. doesn’t exist until these are properly executed and filed with appropriate state agency.
MBCA §2.02(a): sets out where they are to be filed and what should be included in them
Permits corp. to make bylaws, all corps. Have them (not required)
MBCA says bylaws may contain any provision for managing the business and regulating its affairs that is not inconsistent with laws or the articles of incorporation.
Bylaws are an internal document (not required to be turned into state agency)
Contracting Before Incorporating
Promoter: someone acting on behalf of a corp. that hasn’t been formed yet.
De Facto Corporations and Corp. by Estoppel
Corp. De facto: they thought corp. was formed but it wasn’t
If proprietors were acting in good faith and came very close to forming a de jure corp., there was a de facto corporation.
Proprietors would not be held personally liable.
Equitable doctrine- must be good-faith (unaware of failure to form corp.)
Many states have abolished this rule (would be personally liable then)
Corp. By Estoppel:
Limited to contract cases, not tort.
Person dealt with business as a corp. and treated it a such and thus should be estopped from denying that it is.