Corporations Outline Cohn Fall 2012
Business Forms
· Sole proprietorship, partnerships, LP, LLC
· Reasons to be a corporation:
o Clear delegation of authority (agency avoided, agents are officers period)
o Well understood by 3rd parties
§ Investors
§ Lenders, banks, creditors, etc.
o Very flexible capital structure
o All corporate characteristics
§ Limited liability
§ Centralized management
§ Continuity of life
§ Transferability of interest
o File Articles of incorporation with state
o Create bylaws.
· Taxes are a big factor when deciding what business to enter into
o S corporation is a corporation that is taxed like a partnership
§ Can only have one class of stock
§ Must have under 75 shareholders
§ Can’t have non-resident aliens as shareholders
o C corporation is name for normal corporations (based on tax form)
o Any public traded company is taxed as a C corporation.
o Pass through or non-pass through entity?
§ Pass through: income of company is not taxed, only the individual is taxed once money is distributed. (Partnership, S corp, LLC)
§ Non-pass through: double taxation (corporation)
· Valuation of corp
o Par value: stated capital determined by this (have in DE, don’t in FL)
o Book value: from balance sheet
§ Net worth divided by shares outstanding
o Market value:
§ Value per share that ppl would be willing to pay of the market
o Fair market value
§ Inherent value of company, could be higher or lower than market value
§ Exception: In closed corps in Florida they use fair value, not fair market value to determine appraisal rights.
· Handout 2:
o Enterprise losses: no taxes on losses.
o Individual tax returns: in a partnership, S corp, or LLC, the losses of the company become income lost and reduces person’s taxable income (because of pass through). This is a tax shelter. It protects actual income from taxation. So even though guy earned 50,000, the 60,000 in losses for the company made it so he pays nothing (Baker).
§ Tax shelter can eventually result in recapture, where ownership in company can be diluted due to operating at a loss earlier
§ For a corp, the individual income is taxed as well, dbl taxation.
o If anticipating losses then pass through entity is the way to go
o Profits retained:
§ IN pass through entity one is deemed to have earned the income of the company whether received or not.
· Able has 75,000 in real money but 86,000 in taxes, so this would be a very bad situation…
· If making money better to be a non-pass through entity, unless corp distributes all the profits…
o Can elect to be taxed like a corporation if you are a partnership by checking a box.
o An entity can change from a pass-through to a non-pass through without any dissolving and reforming of company.
o If you want to switch from C corp to a pass-through then you do have to file papers with IRS to elect this status.
Incorporation
· Process (607.0201-.0203):
o Must File articles with the state
§ .0202: Few requirements: name, address, number of shares, preemptive shareholder rights, name and address of incorporator.
o Must have a registered agent in state of incorporation (so they can be served, contacted)
o Must also register in states where corp is doing business, in principal place of business if doing interstate trade (607.1501)
o Must state business purpose, but can be very broad
o This does not affect validity of any transaction or contract entered into though…
o .0203: corp begins when articles are filed, can also backdate up to 5 days
o .0205: req. initial meeting of incorporators where they elect directors (if they did not in the articles)
o .0206: bylaws (unless power given to shareholders in articles, directors can adopt or amend unless power reserved for shareholders)
§ Much easier to amend bylaws too, but that is another statute.
o .0301: corps can be formed for any lawful purpose
§ Usually say they will operate business for any lawful purpose, eliminating ultra vires litigation pretty much.
o .0302: general powers of corp, lists a bunch of stuff showing they have same powers an individual would have unless limited by articles.
o Shareholder agreements/defining shareholder rights are biggest thing in articles. Should be written into articles to decide operational issues like what to do when ppl dies or want to leave etc. 2 types:
§ Shareholder voting agreement: agree amongst themselves how they will vote in the future
§ Unanimous agreement: takes away power of board and gives it to shareholders. (unclear what this has to do with)
o Certificate serves as constitution, bylaws more like statutes.
· Internal Affairs Doctrine: Only one state’s laws can govern and the laws of the state of incorporation control no matter what state they are sued in or where damage happened.
o Vantagepoint Venture v Examen (DE 2005)
§ Corp does all their business in CA, but was incorporated in DE. Shareholders want laws of CA to prevail because it gives more shareholder voting rights.
§ A CA case said that if you have most of shareholders and assets in CA then CA will treat them as CA resident even if incorporated in another state; for policy reasons.
§ This court says Internal Affairs Doctrine rules and since they were incorporated in DE, they follow DE law.
· Race to the bottom: states all try to have the most pro-business laws to bring in more corps and more business. Usually more pro-manager, not shareholder.
o Prof Winter view: since market forces require managers to maximize value of firm it is not good to create an environment where shareholders are fearful to invest, so there is a market control there
o But, market is an imperfect policeman since things change for no reason all the time.
o System is good since it acts as a lab for corp laws for other states
· Pre-formation contracts
o Promoters contracts: promoters raise money for the corp before it forms
§ Corporation is only bound once they adopt the contract (if they act as if contract exists it can be implicitly adopted)
§ McArthur v Times Printing Co. (1892)
· D says contract voided by statute of frauds since not in writing and over a year old.
· Contract deemed to start at time contract is adopted by corporation beats SOL charge
· Adoption is when principal is not in existence at the time contract was written and then after formation either by expressly adopts, or implicitly adopts by performing obligation under the contract with knowledge of the contracts terms.
o Contract starts at time of adoption
· Ratification is when the corp is in existence when contract formed, contract was beyond authority of agent or something, but principal later adopts either expressly or implicitly.
o Contract starts when agent enters into contract
§ Promoter is bound to contract until corp adopts it, since there can be no valid contract without mutuality
§ Novation clause often in these: an express provision that says the promoter will be relieved of any liability under the contract once the corporation is formed, or if they do not adopt…
o 607.0204 effect: People acting as or on behalf of a corp, having actual knowledge there is no corp, are jointly and severally liable for all liabilities while so acting except to any person who had actual knowledge there was no corporation
§ Cohn thinks this should be interpreted according to parties’ intent
Capitalization
· Liquid assets: cash company has available to run its business
· Comes from 2 types of investments
o Equity
§ Common stock (required, voting stock)
§ Preferred stock (not required)
o Debt (use of debt creates leverage for the equity)
§ Loan (bank or 3rd party)
o Earnings are another form of capital
· Assets = liabilities + equity, E = A – L
o Current assets vs. current liability good way to see health of corp.
· Assets include: cash, accounts receivable, inventory
o Fixed assets, like land shown at purchase price (then they factor in depreciation, but do not ad
abuse even if there is no preemptive right
§ Two partners knew the 3rd partner did not wan to be part of any new stock issuance. Even though offered chance, it was an unfair deal.
§ Then, the offering price for these securities was 1/18 the book value of the stock, only the two other partners were at the meeting and approved this issuance of shares
§ K originally had 5/15 of shares, worth $1800/share. After this deal he had 5/65 of the company at $492.8/share. (Book value of corp went from 27,000 to 32,000 after stock sale)
§ If they had sold additional shares for book value it would have been a fine offer.
· Share transfer restraints (607.0627)
o General standard is to determine whether the restraint is sufficiently needed by the enterprise to justify overriding the general policy against restraints on alienability.
· Buyout agreements
o Must be in shareholder agreement
o Provides circumstances when shares of one will be bought out by others.
o Key elements: triggering event and buyout amount
· Accounting
o Financial statements are balance sheets and income statements
§ They can either be audited (usually just big corps due to cost) or unaudited (investors do not like this as much)
o Use Generally accepted accounting principles (GAAP)
o Fiscal year can be any 12 month period (pick ones that work with business, want it to be a time of closure for that business)
Securities Laws
· State Laws (Blue Sky Laws)
o Kansas first one to make laws, main elements:
§ Registration with disclosure documents,
· (Merit review) standards: 50% including FL can sell if fair, just or equitable. Other 50% can sell unless fraudulent.
§ Licensing of sales agents, and
§ Civil and criminal antifraud provision against corp and promoters if there is any fraud in the offering of the security.
· Securities act of 1933
o Fundamental requirement: registration with SEC with a disclosure document
o Involves primary market, when a corp sells shares to the public.
o Must be a security that is being offered or sold and not fall into one of the exceptions
· Securities act of 1934
o Involves secondary market, where individuals trade the shares amongst themselves
· Concurrent jurisdiction: must follow SEC and state laws.
o Main difference is merit review, cannot sell in a state if not registered there.
· SEC registration process is often too expensive for small corps
· Federal exemptions:
o Statutory
§ Intrastate (3(a)(11) and rule 147): if all offerees and purchasers are within same state, all business done in that state, corp registered in state, principal place of business in state at time of sale, even one sale will eliminate exemption and it applies retroactively.
§ Private offering (4(2) and rule 506):
· Ralston Purina defined this: an offering in which you don’t use any public means of advertising, selling to small group of ppl, and these ppl are sophisticated investors.
· Sophistication, disclosure, no advertising
· 506 created more objective standards
o Can’t sell to more than 35 non-accredited investors, and unlimited number of accredited investors
o No general advertising
o No monetary limits
