Corporations – Fall 14’ 8/17/14 9:34 PM
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
· CEO, CFO, COO
· 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
· 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.
· CEO, CFO, COO
· 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.
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.
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.
· 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.