BRADFORD – FALL 2007
Chapter 1: What Do Businesses Do And What Do Lawyers For Businesses Do?
1. Reasons People Own a Business or Own an Interest Therein:
a. Epstein view à to make money
b. Roberts view à to create value (some purpose beyond making money)
i. Growth – increase the value of the business w/ the hope of anticipated future return on the investment
1. in order to determine if a business has a good earning potential (i.e. the ability to make profit in the future), need to look at several things:
a. present value (PV) – need to determine what the business investment is worth now compared to other alternatives
b. expected value (EV) – investing in the business may be more risky than a bank account – need to take this into account when deciding which way to invest
i. if a no-risk option is going to return the same, then do that
c. Freidman view à focuses on what the people running the business ought to be doing – says that job of corporate managers / BoD is profit maximization
i. Principal v. Agent distinction:
1. principal = the one for whom the action is to be taken (in the corp setting, the SH’s are whose interests are at stake, and thus they are the “principals”)
2. agent = the one who is to act (directors and managers are the SH’s agents and thus they have to act in their best interests and subject to their control)
d. Ben & Jerry’s view à takes into account other possible interests of the principals, such as charity – may not make most possible profit, but other goals are met
e. View of Cts and Legislatures à
i. A.P. Smith Mfg. Co. v. Barlow – ct allowed a donation from the co to PU despite a challenge by the SH’ers of the co that such power was not provided to the BoD
1. Issue was whether the donation was ultra vires, or beyond the power of the corp, given that the co’s incorporation certificates didn’t expressly authorize the donation and that there were no implied powers to make it. Ct held it was intra vires, or within the power of the corp, and thus valid
2. Directors DID NOT have to show the donation provided a direct benefit to the company:
a. Ct said in general there will indirect benefits to the corp, such as increased goodwill in the community, aid of public welfare, production of future employees, etc.
3. Other justifications for allowing the donation:
a. State legislature expressly encouraged these kinds of donations.
b. Greater need for corporate donations due to change in wealth from private individuals to corporations; however, the problem with this argument is that the money only has to be distributed to the shareholders for the money to get back to private hands.
4. Conclusion: both statutory and case law support the action of corporations making donations, even if opposed by at least some of the owners.
ii. MBCA §3.02(13) – does not require that BoD show any benefit to the business and thus charitable purpose is allowed
1. not necessarily inconsistent w/ Friedman’s view – just not able to show the type of connections b/t this stuff and profit maximization so it is left up to the discretion of the BoD
iii. Shareholder’s options when corp donates part of its profits to charity, against SH’s wishes:
1. Sell his stock and get out of the corporation.
2. Get rid of board of directors, although this is extremely difficult
3. Sh won’t succeed on bringing a cause of action against corp. (Barlow and MBCA)
2. How Business Owners Make Money From the Business: 2 ways
a. Receive distributions from the business of all or part of the money the business has earned.
b. Sell all or part of ownership interest in the business for more than he paid for it.
3. Determining how much money the business has made and how much money it is worth
a. Justification for keeping accounting records:
i. Businesses are required to do so and to make the records available to the business owners (see MBCA 16.01(b) and 16.02(b)(2)).
ii. Necessary to make business decisions
iii. Regulatory requirements: income statements necessary for computing one’s taxes
iv. Internal controls: used to determine w
tters à equity is representative of the owner’s residual interest in the business – i.e. if owners take all the assets and pay off the liabilities, what is left is the interest of the owners (remember – the dollar amounts won’t be exact b/c they are not listed as FMV)
4. Total of assets must equal the total of liabilities and equity: by definition, it MUST balance.
5. Depreciation expenses: deducted from the value of the asset on the balance sheet.
6. Balance sheet v. cash flow statement:
a. An increase in a balance sheet asset acct other than cash results in a decrease in cash flow.
b. An increase in a balance sheet liability acct can result in an increase in the cash acct on a balance sheet and an increase in cash flow.
i. Ex. X borrows $20,000: this increases his liability on the balance sheet but also increases his asset cash on the balance sheet and cash flow by the same amt.
iv. Interpreting these statements: one statement won’t reveal what’s going on with a business. One must look at many different statements for multiple years to get a true picture of the business.
4. What Does a Lawyer for a Business Do?
a. Litigation: this is a “zero-sum game” b/c whatever one side wins, the other loses
b. Planning & Deal-Making: adding value for the client – the lawyer, via his participation in the process can add value to the transaction for the client
i. also think of ways to avoid litigation (think of every problem this way) – see week 1 notes, p.5 for a more in-depth discussion re: the difficulties in doing this
5. What are the Legal Structures for Businesses?
a. Basic concepts of different business organizations: