Corporations v Partnerships
BUT, neither is black and white on any of these – most can be accomplished in either
Differences are SUBTLE
Forms are not completely flexible however
What do investors want in a business form:
Form that doesn’t get in the way of doing business
Management of control and risk (generally tied)
Context is very important for determining form
Throughout history, underlying effort is to shield owners from liability of company AND shield company from bets of owners
Dodge v Ford (1919)
What is purpose of corporation?
How much flexibility does it have?
Strong assumption that corporation is for maximizing profits to shareholders
But still won’t constrain management
Profit-making should be guiding principle of corporation
Business judgment rule used by courts to defer to managers
Courts very reluctant to get involved
Constituency (stakeholder) statutes:
Seem to challenge idea that profits for shareholders is key
preemptive right to subscribe to add’l issues of stock?
– small co often has this kind of provision to accommodate employees
Started talking abt corporations.
– defined a series of features that corporations have
– what is the norm? how do you define a corporation?
o provides limited liability
o provides free transfer of shares
o has perpetual existence
o allows centralized management
– in discussion, though, we saw that things are complex.
– for each one of those features, there is a counterpoint. though those four features are the default, there can be changes.
Social responsibilities of corporations
– Dodge v Ford
o case abt declaring dividends
o so, ct is telling us abt responsibilities of directors in terms of declaring dividends
o but also explores who it is corp must pay attention to when deciding policy. to court, it should be the shareholder (traditional understanding of corporate law)
o corp is for benefit of shareholders, to maximize profit
o BUT, in this same case, ct said it’s legit for corp to invest in public interest causes
o so, corp may advance public interest as long as it doesn’t go too far.
Many states have adopted constituency statutes
– allows directors to look to interests of other “constituencies” besides shareholders
– originally were intended to let directors oppose hostile takeovers by allowing them to take interests of other “stakeholders” into account. some statutes explicitly say this, some don’t.
– CT statute, p. 21.
o note “shall consider”
o not optional. directors have the responsibility to consider all of those interests.
o but note—is it strong when you say “consider?” well, strong, but not maybe as strong.
– What does ABA say?
o this is crap
o directors might use these statutes to advance their own interests (i.e. protect their own jobs in the event of a takeover)
Economic Analysis of Corporations
– very influential in corporate law
– two competing theories
o firms have a hierarchical structure, top officials make decisions based on efficiency—try to minimize cost. if cheaper to produce in-house, do so.
o firms are a nexus of contracts, not necessarily hierarchical. have a series of actors who interact to produce a result constituting the firm.
§ traditionally, it was thought that corporate law was about overcoming the gap between ownership and control—the corporation is an entity in which the owners are far removed from decision making.
· so this theory tells us that traditional corporate law is all wrong—the “owner” is not an owner in a traditional way, only an actor who makes choices—the choi
rporate (or another corporation). What then? under what circumstances will the new corp be liable for debts of preceding corporation?
– Cases set out factors (Tift & Tift v Forage King)
o is it a merger?
o is there an express or implied agreement to assume liabilities
o is it a continuation of the seller corporations business?
o is it a fraudulent attempt to escape liability?
– Usual approach—not to apply this test to single proprietorships or partnerships
o might transfer assets of company w/o transferring liabilities
– but in a corp, more complicated—often, corp disappears.
Kulka v Nemirovsky
– Kulka was injured by machinery. Couldn’t figure out who was liable b/c partnership had changed to corporation, and they didn’t know whether they’d assumed debt.
Next class: talk abt Kulka, see how fits in. Then Tift (Michael). Then Lani (Anderson).
Forming the Corporation
Statutes define requirements for incorporation, how you operate as a foreign corp. in DE
Liability held over from prior owners?
Corp to Corp Only
Corp B Buys (assets of) Corp A
Liabilities DO NOT TRAVEL (the norm)
If a corp buys the assets of another corp, it DOES NOT assume the liabilities of that corp
Does not matter who the principals or directors are
Generally, first corp disappears, along with liabilities
BUT, exceptions where liability continues to B:
Assumption (express or implied)