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Business Associations/Corporations
University of Oklahoma College of Law
Cleveland, Steven J.

Corporations Outline Spring 2012, Professor

INTRODUCTION

A. GENERAL

è Conflicts in Corporate Law

· Shareholders (investors) vs. Directors and Officers (control the money).

· Shareholders vs. Debtholders.

· Majority Shareholders vs. Minority Shareholders (non-controlling).

è Corporate law = State law. Exceptions: Federal Securities Law and NYSE Regulations.

è Delaware Code is the dominant law focused on in Corporations.

· 50% of companies on NYSE and Fortune 500 are incorporated in Delaware.

· Reasons for DE’s dominance:

o Large body of case law which gives more certainty to the law (Corps. Love certainty);

o Mature statute (longest in existence);

o Highly specialized courts with specialized judges trained in corporate law and disputes;

o Highly responsive legislature – State gets a lot of revenue through taxes it can impose directly on those corporations since there is no state tax directly imposed. Thus, legislature has to be responsive to keep the corporations around.

è Players in Corporate Law

· Shareholders (owners of the corporation)

o Can be anyone, from savvy investors to the average person;

o Provide capital for the corporation;

o Enjoy capital appreciation;

o Voting rights: DGCL §§ 216 (elect directors), 141(k) (remove directors), 242 (amend corporate charter), 251 (merger), 271 (sale of corporate assets), 245 (dissolve).

o Note: Once they entrust their money to the directors, they lack the power to manage the affairs of the corporations. There might be monitors, but the corporations hire those monitors, even if they are third-party monitors. Directors might bond their interests to the shareholders, but this might be abused as well.

· Directors (§141)

o Managers of the business and affairs of the corporation (§141(a)).

§ Map out the blueprint (big picture) for the company .

o Advisory role – monitoring people running the company.

§ Not full-time employees (unless they are an officer of the corporation).

§ Generally only work about 16 hours per month.

o Do not reflect composition of society – usually made up of white males.

o Duty to appoint officers to manage day to day affairs of the corporation.

· Officers

o Full-time employees of the corporation.

o Demographic composition usually mirrors that of the Board.

o Arguably have the most control – They are there for the day to day operations and the information that directors receive is given to them by the officers.

**There may be some significant overlap in people serving in each of these roles, but that phenomenon diminishes as the size of the corporation gets bigger.

II. CHARACTERISTICS OF VARIOUS BUSINESS ORGANIZATIONS

Characteristic

Corporation (Publicly Held)

Close Corporation

LLC

General Partnership

Limited Partnership

LLP

Recognized as Legal Entity?

Yes

Yes

Yes

Yes

Yes

Yes

Limited Liability to Investors?

Yes (*Pierce)

Yes

Yes

No

Gen. Partner: No

Lim. Partner: Yes

Yes

Perpetual Existence?

Yes

Yes

Trending to yes

No

No

No

Transferability of Investment Interest?

Yes

No

Look to articles of formation

No

Gen. Partner: No

Lim. Partner: Yes

Look to partnership agreement

Centralized Mgmt?

Yes (shareholders don’t manage)

* “One share, one vote”

Look to articles of incorporation or shareholder agreement

Member-managed: No

Manager-managed: Yes

No (one partner, one vote)

Yes, General Partner

Look to partnership agreement

Tax?

Entity-level tax and investor-level tax on distributions

May qualify for pass-through treatment such that there is only an investor-level tax

Taxed at investor-level; no entity-level tax

Taxed at investor-level; no entity-level tax

Taxed at investor-level; no entity-level tax

Taxed at investor-level; no entity-level tax

Formalities to Form Entity?

Yes

Yes

Yes

No; only needs agreement; no “magic” words needed. Important: Substance of the agrmnt.

Yes

Yes

A. CHARACTERISTICS OF THE CORPORATION

è General

· Corporations are legal entities, separate from its shareholders, created by statute.

è Limited Liability

· Default Rule: Shareholders cannot be personally liable for the debts of the corporation (i.e. Shareholder liability is limited to the amount of their investment.

o Exceptions: (1) Can be modified in the charter – §102(b)(6) allows a provision to be included in the charter that makes shareholders personally liable for debts to the corporation; (2) Piercing the corporate veil.

o Benefit: Helps corporations take actions that might be risky but might be ultimately socially advantageous.

o Note: Facilitates centralized management because liability of investors is capped. When it isn’t capped, then investors want more control since they are on the hook for liability of the business’ actions. Also facilitates free transferability of shares because when there is unlimited liability, then it matters who the shareholders are (e.g. you want rich shareholders other than yourself so people sue them instead – people most likely to sue the deepest pockets).

è Perpetual Existence

· Default Rule: Corporations have perpetual existence (they go on forever, unless formally dissolved)

o Regardless of death or incapacity of shareholders or upon transfer of shares, the corporation’s existence continues.

o Exception: § 102(b)(5) – charter may contain provision limiting the duration of the corporation.

è Transferability of Investment Interest

· Default Rule: Ownership interests in corporations are represented by shares which are freely transferable.

o Exception: §202 – Management can restrict transferability.

è Centralized Management

· Management and control of the corporate affairs is centralized in a board of directors and officers acting under the Boar’s aut

naged: Manager is appointed by members to run the LLC (centralized).

· Tax

o Investor-level tax – Taxed on at investor-level, not at entity-level.

III. MANAGEMENT AND CONTROL OF CORPORATIONS

A. BOARD OF DIRECTORS AND FORMALITIES

è DGCL

· § 141 – Board of Directors

o (b) Defines quorum

o (c)(2) board may make committees and give them powers, but their limitations are that they don’t have the authority to (i) approve, adopt, or recommend to SHH any matter that must be approved by SHH, or (ii) adopt, amend, or repeal any bylaw.

o (f) Board may be able to act without convening a meeting but all members must consent in writing.

o (i) board members don’t have to show up at the meeting; they can attend from afar, but all participants must be able to hear each other.

è MBCA § 8 – Directors and Officers (Most states follow the MBCA – more detailed than DGCL sometimes)

· § 8.01 – Requirements for and duties of Board

· § 8.02 – Qualifications of Directors

o Prescribed by Articles of Incorporation

· § 8.03 – Number and election of directors

o (a) Must consist of one or more individuals

o (b) Number may be increased or decreased

o (c) Elected at the annual SHH meeting

· § 8.04 – Election of directors by certain classes of SHH

· § 8.05 – Terms of directors generally

· § 8.06 – Staggered terms for directors

· § 8.07 – Resignation of directors

· § 8.08 – Removal of directors by SHH

o SHH may remove one or more with or without cause

o Can only be done in a meeting for that purpose

· § 8.09 – Removal of directors by judicial proceeding

· § 8.10 – Vacancy on Board

· § 8.11 – Compensation of directors

o Fixed/set by Board of Directors

· § 8.20 – Meetings

o All participating directors must be able to simultaneously hear each other

§ Teleconference and video conferences are ok; E-mail real time is not ok.

· § 8.21 – Action without a meeting

o (a) Each director must sign consent

o (b) Consent can be revoked by a signed revocation sent prior to all consents being received

· § 8.22 – Notice of meeting

o (a) Regular meeting: Okay without notice

§ Boards oversee these all the time so its regular and not everyone needs to be there

o (b) Special meeting: 2 days notice (purpose not required in the notice)

§ Doing something outside the norm so we need all directors there to have an opportunity to participate.

· § 8.23 – Waiver of notice

o (a) Waiver must be in writing and signed by director (filed with the minutes)

· § 8.24 – Quorum and voting

o Quorum = simple majority

o Articles of Incorporation can make a quorum require 1/3.

· § 8.25 – Committees

o (e)(2) – Committees cannot approve or make proposals to SHH that have to be approved by SHH.