Shaner – Spring 2016
I. The General Corporate Form
A) Basic Overview
(1) A corporation is separated into three main specialized roles
make major policy decisions
execute the policy decisions and provide day-to-day management
provide capital and elect the directors
(2) separation of these roles is normal, but not mandated
(3) corporations follow the law of the state in which they are incorporated
Important provisions – § 141 of the DGCL and §8.01 of the MBCA
Locus of all power and authority exercised by the corporation
Determine basic corporate policies
Appoint and monitor the corporate officers, and determine when and if dividends are to be paid to shareholders.
Entitled to compensation for their services, but they do not share in any of the corporation’s residual profits unless they also are shareholders
Authority exercised collectively and by majority rule.
Individual directors do not have general agency power to deal with outsiders
Their decisions get the judicial application of the “business judgment rule”
Who can be a director?
Someone elected by the shareholders
In a closely-held corporation, major shareholders tend to occupy the roles, but in larger public corporations, they tend to be outside, independents
Important provisions – § 142 of the DGCL and § 8.50 of the MBCA.
Not really addressed in statutory provisions other than to say that corporations can have them, and they are necessary for day-to-day operations
Most codes also contain a provision that there must be someone nomintated to be responsible for keeping and verifying corporate records, and this usually is a person termed the “corporate secretary”
They do three things: vote, sell, and sue
The corporation’s risk bearers and residual claimants.
They have the power to elect annually the corporation’s directors and approve fundamental changes in the corporation’s governing rules or structure.
Individually, not powerful. Collectively, powerful.
They are owners of shares, or fungible ownership units which confer on the owner the right to a pro rata share of the firm’s profits and assets when the corporation dissolves and winds up business
They are freely transferrable. Owners have all the voting powers given by the share, and they can transfer the shares for value to a third party without the corporation have to liquidate the shares and pay cash.
They have no obligation or liability to the corporation or its creditors beyond the amount he or she paid for the shares, so shareholders risk only predetermined amounts of capital in each corporate investment.
They are not liable for a corporation’s debts, which lowers transaction costs because it doesn’t require individual shareholders to make incredible investigations before the corporation invests in something.
They, although large in number, don’t have substantial managerial roles. Corporate law generally leaves managerial decisions to the board of directors.
B) Formation of the Corporation
Important statutes – DGCL §§ 101, 102, 361-368, MBCA – §§ 2.01-2.06, 3.01
Statutory norms dictate what the certificate of incorporation MUST contain, and what the articles of corporation MAY contain.
Delaware Must have’s
(1) name of the corporation + specific words listed in § 101
(2) address of the corporation’s registered office + name of registered agent
(3) nature of business purpose
(4) # of shares of stock OR @# of classes of shares of stock plus
(5) name and address of incorporator
(6) If powers of incorporator terminate upon filing, the names of board of directors initially
Delaware May haves
(1) provisions for the management of the business and for the conduct of the affairs of the corporation
(4) Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power, or a larger number of the directors (majority vote)
(5) Provision limiting the corporation’s existence to a certain date. If this provision is not listed, the corporation exists indefinitely
(6) Provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and under specified conditions. If this provision is not listed, stockholders of a corporation are not personally liable for payment of the corporation’s debts except as they are liable by reason of their own conduct or acts (piercing of the corporate veil)
(7) WILL ADDRESS LATER – Provision eliminating or limiting liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that this provisions CANNOT: eliminate liability for a breach of the fiduciary duty of loyalty, a breach of the duty of good faith or a breach of the duty against self-dealing. Which you can pretty much sum all of that up in don’t breach the duty of loyalty.
See MBCA for similar provisions
C) Issuing different types of shares
Code provisions – DGCL § 151, MBCA § 6.01
A corporation can issue different types of shares with varying characterstics
What do some shares have to have?
(1) authority to elect directors and exercise all other shareholder voting rights
(2) right to receive the corporation’s net assets upon dissolution
Shares that have both above factors are called common shares
Shares that are altered to provide a greater dividend payout or have some difference in voting rights are called preferred shares
stay in office every year
Think about, as a corporate planner, if you want to put a provision creating a staggered board in the bylaws or in the articles of incorporation? Think about whether it would be better to have something that is really difficult to change (articles of incorporation) or something that a majority of shareholders can easily adjust (bylaws)
G) Shareholder Powers
Important provisions – DGCL § 211-213, 216, 22, 228 / MBCA § 7.01-7.07, 7.21
Shareholder voting and meeting rights, as well as a plethora of other rights are defined in great detail in corporate statutes because often times, directors run head-long into a serious conflict if they feel as though shareholders are going to make moves to get them out of their positions
1) Annual shareholder meeting
DGCL § 211(a)
MBCA § 7.03
Paramount shareholder function is to elect directors, and this is generally completely protected by corporate code
Directors can adjust timing/location (see Schnell, far down in outline), but they cannot totally avoid this meeting
2) Special shareholder meeting
Meetings called to expressly address certain issues
DIFFERENCE BETWEEN DELAWARE AND MBCA
Delaware has a short list of who can call special shareholder meetings: directors or others listed in the charter. This basically blocks shareholder-initiated meetings
MBCA – holders of 10% or more of stock can call special meeting
3) Action by written consent
corporation statutes provide that shareholders can act in lieu of having a meeting, with an action by written consent
DIFFERENCE BETWEEEN DELAWARE AND THE MBCA
Delaware default statute permits written consent by a majority of shareholders (normally changed by articles of incorporation)
MBCA more restrictive – written consent must be unanimous among shareholders, which has the effect of limiting actions by written consent to really small companies
4) The record date
DGCL § 228
Shareholders who are entitled to participate and vote at a meeting are not necessarily the shareholders who own the shares on the day of the meeting.
Corporation codes provide that the shareholders entitled to vote are those who own shares on the record date specified by directors. This record date can be set anywhere from 60 to 10 days before the meeting.