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Business Associations
University of North Carolina School of Law
Krawiec, Kimberly D.

BACKGOUND INFORMATION/BIG PICTURE COMMENTS
I. Role of the Corporation in Society
A. Contractual/Property Model
1)Maximize shareholder wealth
2)More interested in protecting shareholders than other stakeholders
3)Profit-making is 1st role of the corp.; public service is secondary
B. Communitarian Model
1)Stakeholders (other than SH) should be represented in corporate decision making
C. Growing Corporate Social Responsibility (CSR) movement
1)Corps need to become more aware of its social responsibility to its employees, the environment, and to the society at large
2)Corporate scandals contributed
II. Who Runs the Corporation
A. Board of Directors
B. Corporate Management/Officers
C. Shareholders (owners)

CORPORATION BASICS
I. Economics of the Firm
A. Risk
1) 2 Categories of Business Risk
a) Non-Controllable – not within the business’ control
i. i e: weather, supply and demand, etc…
b) Controllable – within the business’ control
i. i e: approach to R&D, marketing, types of goods sold/produced
2) Risk v. Uncertainty
a) Risk can be quantified
i. The business can estimate the probability that an uncertain event will occur
b) Uncertainty cannot be quantified
i. The business cannot predict uncertainty
3) Reactions to Risk
a) Risk Averse – avoid as much risk as possible
b) Risk Seekers – take as much risk as possible
c) Risk Neutrality – avoid/take risk when the expected returns will generate a benefit
i. Expected Returns – weighted avg. return based on the probabilities of events
4) Risk Management
a) The success of a business depends on how well it manages risk
b) Ways to manage risk
i. Insurance; Diversification; Allocation;
B. Allocating Risk
1) Allocating Risk to the Principle
a) Non-controllable risk
i. If the principal is less risk adverse than the agent the principal should bear the non-controllable risks of the venture b/c he/she is more willing to bear the risk
b) Controlling Risk of Agent Shirking
i. Principal must determine what constitutes optimal performance
ii. Principal must determine whether the agent is meeting optimal performance
iii. Solutions to Shirking:
1.Direct supervision: either by principal or hiring a supervisor
2.Employment contract that specifies duties and sanctions
3.Give agent incentive compensation
4.Reputation
c) Agency Cost – cost associated with principal-agent agreement; monitoring and disciplining costs and residual left over shirking
2) Allocating risks to the Agent
a) Tie salary to profits; incentive not to shirk
b) Hire to long-term contract; aligns both parties interest)
c) Reputation; self-monitoring device
C. The Role of Law in Allocating Risk
1) Fiduciary obligation – employees owe duty of loyalty to their employers
2)Types of relationships
a) Employer-Employee
i. Principal/employer has significant control over agent/employee’s activities
ii. Principal/employer has a right to business’ net profits
b) Partnership
i. Each has equal decision-making ability
ii. Each has an equal share of profits or losses
c) Corporation
i. Specialize functions and each would assume different roles as shareholders, directors and officers
II. Intro to Corporate Law
A. Key Corporate Characteristics
1) Separate Entity – corps are legal entities that separate from investors and officers
2) Perpetual Existence – corp. have unlimited life
3) Centralized Management – corp. officers manage day to day operations; not the owners
4) Transferability of Ownership – shareholders can transfer ownership interests to others
B. Terms and Concepts
1)Corporate Statutes:
a) Revised Model Business Corporation Act (RMBCA or MBCA)
b) Delaware General Corporation Law (DGCL)
i. Delaware is the leader in corporate laws modernization
ii. Most publicly traded corps are incorporated in Delaware
2)Corporate Actors
a) Shareholders (stockholders)
i. Owners of the corp.
ii. Have residual financial rights and basic voting rights
iii. Do not directly control the corporation
b) Board of Directors
i. Act for the corp.
ii. Have legal responsibility for managing or supervising the business
c) Officers
i. Chosen by board
ii. Manage the day to day activities
d) Stakeholders
i. Have an interest in the actions of the corp.
ii. Creditors, employees, customers, and the community
3)Corporate Securities
a) Debt
i. Least amt of risk; low expected return
ii. Receive only fixed payments
iii. Have priority if corp. becomes insolvent and assets are liquidated
b) Common Stock
i. Greatest amt of risk; high expected return
ii. Receive payment through dividends or other cash payments
iii. Entitled to vote
iv. Typically paid off after creditors and preferred stockholders if assets are liquidated
c) Preferred Stock
i. Less risky than common stock; more risky than debt
ii. Lower expected return than common stock; higher expected return than debt
iii. Have certain priorities over common stockholders
4)Corporate Choice of Law – the law of the state of incorporation g

e incentive to keep stockholders satisfied (takeovers)
c) Role of Corporate Law
i. Set default or enabling laws
ii. Regulate when efficient breaches occur
1.Efficient breach – when management causes a conflict of interest and breaches its fiduciary duty to shareholders (mgt takes the money and runs)
d) Role of the State
i. Relatively small: set some procedures that the corp. must follow
e) Less shareholder involvement is better
i. Management can be specialized
ii. Increase shareholder diversity
iii. If shareholders are unhappy they can exit
3)“Team Production” Model
a) Emphasizes the interest of all stakeholders of the corp.
b) All stakeholders give input to Board of Directors
4)Criticisms of the market for corporate control
a) Threat of takeover is not great
i. Difficult to takeover a company; States have enacted anti-takeover legislation (poison pill, shark repellant)
III. Corporate Federalism
A. Internal Affairs Doctrine
1)The law of the State of incorporation governs the rights of the corp.’s shareholders
a) Even if that law conflicts with the laws of the state where the corp. is headquartered or does substantial business
2)Some states make certain provisions of its State Laws applicable to foreign corp.
B. State of Charter Competition Debate
1)Delaware is the leading state of incorporation
2)Often depends on if the corp. is going to do business in other states
3)Should incorporate in state that would provide the most benefits:
a) Tax rates; Ease of Operation; Regulation of sale of stock and payment of dividends
b) Existence of specific provisions for close corporations
IV. Corporation and Society
A. Economic and Legal Framework
1)One view – corp.’s responsibility to society is to increase profits within the boundaries of law; corp. should seek to serve the interest of the shareholders
2)Another view – corp. should take into account broader societal interest in its decision-making; corp. should seek to serve the interest of all stakeholders
B. Framing the Issues