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

Corporations – Fall 14’ 8/17/14 9:34 PM

Week 1

5 Factors that motivate to make it a corporation:

· 1) Limited liability of shareholders

· Means: investors only risk their purchase price. They are not personally liable.

· 2) Perpetual existence of the corporation

· Means: The legal status of the corporation is unaffected by death, withdrawal, or insolvency of a shareholder, enjoys perpetual existence.

· 3) Easy transferability of ownership interests.

· Stock exchanges. They are freely transferable.

· 4) Centralized management

· Board of directors

· 5) tax considerations

Individual participants

· Managers


· Directors

· Large public corps: CEO’s of other corporations, University Presidents, former public officials, etc.

· 1) Lead director

· 2) Enhanced role of audit committee

· 3)New independence requirements

· Shareholders

· Investors in corporation.

Managerial Discretions: Berle-Means Thesis

· Berle-Means thesis: the diffusion in shareholder ownership has resulted in a separation of ownership and control under which corporate managers can pursue their own interests largely unconstrained by shareholder opposition.

· Plain language: shareholders lack the capacity to control management

· Agency cost model

· Corporations may raise money by selling securities:

· Common stock

· Borrow money (debt holders)

o conflict between debt holders and shareholders.

· Corporations is just a means of organizing a business.

· Corporate law is state law.

· Focus on Delaware law because it is King and most favorable to corporations.

· Over half of corporations are organized there. NY is #2 with less than 10%.

· Oklahoma copied Delaware’s corporate code.

· Federal law may be important but is not a focus of this class. Federal law governs securities.

· There might also be private law. NASDAQ and NYSE have their own rules.


· §216 of Del Corp code.

· Each share = 1 vote.

· They elect the board of directors. Seems like they are the top of the food chain.

· 141k of Del. Code – shareholders have the power to remove directors.

· §242 – amendments to certificate of corporation. Corporate constitution.

· Fundamental changes to corporation

o Board must start the process and get shareholders approval.

o In a merger, shareholders must approve.

· §271- sale of corporations assets

· Fundamental change because Butter company sells assets and gets money and gives money to gun company in exchange for assets that make guns.

· §275 – dissolution.

· Shareholders have a vote even if in minority.


Board of Directors

· Board runs the show.

· Spend about 16 hours/month on board matters.

· Typically, some may be officers of corporation. If small, may only have 1 person.

· Officers of other corporations, university presidents, former politicians, other people of influence.

· Most old white influential businessmen.




· Hired and fired by Board of Directors.

· Bonding costs: make the mangers tie his interest to the performance.

· Incentivize someone to act with the owners best interest.

· Link compensation to performance.

o Homework done, kids asleep, eat healthy.

· Bond his interest(money) to mom’s interest(eat healthy, homework done)

Barbarians at the Gate- Handout

· RJR Nabisco – spent a lot of money.

· This can be kept to a minimum by monitoring.

· We can incur certain monitoring defenses and it still may occur.

· We can have third party verifiers-certified accountants to look over the books.

· Even if mom incurs monitoring costs, there could be residual loss.

· Monitoring might not always get it done. May make it look like everything is ok.

· Stock options may align the officers with shareholders.

· Officers may have a short tiem horizon v. shareholders (long term horizons)

Purpose of the corporation

· Starting lemonade stand. Parents are investors. Use $ for supplies. Re-supply. Pay down parents debt. Advertise. Expand products. Improve product line. Expand into new markets.

· 100 years later, CEO of Countrytime Lemonade. Donate to charities/disaster relief. Shareholders don’t like you spending their money. It’s good for them in the long term.

· Might lead to future earnings.

· No one remembers charity contributions.

· Goodwill may not be a motivating factor.

· Companies that aren’t trying to maximize profits are going to have a hard time to get investors.

· Chesapeake arena are marketing to other corporate executives.

· Aubrey McClendon is CEO of Chesapeake.. Owns the Thunder.

· Corporations get tax breaks from charitable donations.

· Instead of giving to charity, we could had paid down debt, etc.

· We expect the board to maximize shareholder value.

o Not exactly correct.

o Every corporation makes charitable contributions and

. Your personal assets are at risk. Creditor can go after them.

· Centralized management

· No. De-centralized management.

· Partners fill all three roles (shareholders, board of directors, officers).

o May contribute capital. labor, etc.

· Partners are agents of the partnership. They can go out and bind the partnership.

· UPA ª(1): Every partner is an agent of the partnership for the purpose of the business, and the act of every partner … in the usual course of business … binds the partnership.”

o Called “Real Estate Partnership”

§ Can bind the partnership to any sale of land without authority.

ú Unless the person selling the land knows you don’t have authority.

o General rule: act of partner in ordinary course of business can bind the partnership without any authority.

§ Exception:

ú 1) You don’t have authority(agreed not to); and

ú 2) The person selling it knew you didn’t have authority.

· 1 Partner = 1 vote unless agreed otherwise.

o Presumed to be equal partners.

o Corporations have 1 share = 1 vote.

· Free transferability of investment interest

· No. You can’t sell your interest to whoever.

· General rule: no transfer without consent.

· Taxes

o Single level taxation.

o Only at the individual level.

§ Even though no distribution to partners, gov’t may impute income and tax that.

§ Gov’t can impute income even if no money is given to partners.

§ Might not look as good as it seems.

Limited Partnerships

· Formalities to organize

o Yes. Everything but a partnership has formalities that they have to abide by. If you don’t do it right, you could be classified as a partnership and your investors are subject to their personal assets.

o General partnership is usually implied.

o These are younger. New entity.

o Must file a certificate of limited partnership.

· Perpetual existence

· Limited (investor) liability

· GP: No. LP: Yes.

· 2 categories of partners

o 1 general and at least 1 limited partner.