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Business Associations
University of Illinois School of Law
Kordik, Ellen R.

    I.     Introduction
   II.    Steps of creation
A. Choose state to incorp. in.
1.   Internal affairs doctrine
B.   Prepare Aricles of Incorp., MCA §202(a)(2), DGCL §601
1.   Name: Name of corp + “inc.” “corp.” “co”
2.   Number of shares of common stock authorized to issue.
3.   Address and registered agent of corp.
4.   Name of incorporator and their address.
C.   File the Articles of Incorporation to bring the corp. into legal existence.
D.   Organizational meeting – called by incorporators
1.   First elect the directors. At this point the incorporators are done unless they are elected directors.
a)   Articles of Incorp. might name initial directors.
2.   Next, approve bylaws that govern the internal structure and operation for the corp.,pg. 403.
a)   Articles of Incorporation are like the constitution and by-laws are the statutes.
(1) Amendments only w/ Director approval, SH must be told and must obtain from them a certain % to pass amend.
b)   By-laws easier to amend than the Articles.
3.   Directors select officers for the company – day to day mgmt affairs delegated to the Officers. ex. CEO, VP, CFO, general council, head execs.
a)   MBCA 801, DGCL §141(a) – ultimate mgmt authority resides in the BOD.
4.   Adopt preincorporation contracts: lease to building from b4 incorp.,
5.   Other director activities: designate a bank, authorize issuance of shares.
 III.   Separation of ownership and control – people who own the corp. are not the ones who control the operations. 
A. Ownership resides in the SH – holders of the corporation’s equity securities
1.   Securities: formal contractual instruments issue by a corp. which represents permanent and l/t contingent claims on the corps’ assets and future earnings.
a)   Debt: bonds. Holders of a debt security are creditors of the corp. not owners.
b)   Equity: Issue as shares, owners are SH. Entitled to whatever is left over after the prior claims of creditors are satisfied, proportionally.
c)   Authorized shares: # of shares the corp. has the power to issue, limited by the art. of incorp. Can amend the art. of incorp. to increase # of auth. shares and sell more.
d)   Outstanding shares: # of shares sold and not repurchased; # of shares held by SH. Max. # of outstanding shares = # Auth. shares. 
B.   Control resides in the BOD (default rule)
1.   Default rule can be changed, pg. 179, §141 – Can limit mgmt authority of the BOD and grant mgmt. auth. to SH.
2.   BOD can delegate authority over day to day decisions, but still retain ultimate control.
3.   BOD, especially outside directors, serve part-time.
a)   Inside directors – are execs of the company and also on the BOD. CEO or Pres. of the company may also sit on the BOD.
b)   Outside directors – not insiders. Only sit on the BOD, may have shares, but don’t hold any other position in the corp. Might be CEOs of other companies, other skilled professionals.
(1) Reasons for having: independence of thought, impartial, no conflicts of interest, strategic business reasons to have ties outside the corp., professional expertise.
 IV.    Shareholder governance rights – shareholders don’t play a big role but have a limited governance role.
A. Have the power to elect and remove directors.
1.   Elect, MBCA 8.03(c)
2.   Remove, MBCA 8.08
B.   Director Initiated Actions
1.   Mandatory SH approval: Actions that consist of extraordinary situations, very rare, but must have SH approval.
a)   Amendments to articles of incorp. MBCA 10.03
b)   Mergers, MBCA 11.03
c)   Disposal of substantially all assets. MBCA 12.02
d)   Voluntary dissolution, MBCA 14.02.
2.   Optional SH approval
a)   Conflicting interest transactions, MBCA 8.63.
(1) Ex. granting stock options, corp. is buying/selling property w/ a director. 
3.   SH power to initiate changes – limited.
a)   Default right to amend bylaws. MBCA 10.20.
(1) SH “shall” have the right to amend bylaws
(2) Ds “may” have the right – can grant right to the Ds.
(3) Precatory recommendations to the board regarding structure a

   Continuity of policy, stability.
b)   Always have a majority of experienced directors on the Board – entrenches current mgmt. Takes at least 2 yrs. to replace a majority of the board. Makes it harder for the SH to easily change corporation policy by voting in new directors. 
c)   Discourages corporate takeovers – it will take at least 2 yrs. to take over the board.
d)   Minimizes the effect of cumulative voting. Cumulative voting gives a lot of power to minority SH.
3.   DGCL 141(d), pg. 181 classifed boards = staggered boards are provided for in the Art. of Incorp. or in the bylaws. SH can initiate a change so long as it isn’t a way to circumvent the authority of mgmt.
4.   MBCA is pro-mgmt – any change has to be initiated by the BODs.
C.   Cumulative voting, MBCA 7.28(b), DGCL 2.14. SH can cast their total number of votes (# of shares X # of positions filled) in whatever allocation for whatever director they want. Can use all votes for one D. Gives minority SHs more power to elect Ds. Someone with 51% can’t just elect all the Ds. Only used for the election of Ds.
1.   Worksheet. Organic Garden is incorporated in an MBCA juris. 100 shares outstanding. Adam owns 22 shares, Eve owns 78.
a)   Under a straght voting scheme, how many Ds can Adam elect?
(1) He can vote 22 for each of his candidates, Eve can vote 78. She can vote in all her Ds, Adam can’t vote in any.
Under a cumulative voting scheme, how many
[1] 123