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

Corporations; Cleveland; Spring 2015        4/23/15 9:48 AM
(1) Corp law = state law—so look to state of incorporation for applicable law.
·         Del. = King (50% of major corporations incorporated there)
(2) Corps are DISTINCT LEGAL ENTITIES from owners. Comprised of:
·         (a) § 101(a) COI
·         (b) § 109 Bylaws—easy to amend—default is SHH power to do so, but BOD’s can reserve right to amend, W/O divesting SHH’s power to do so also.
A. Key Players:
(1) Shareholders: investors in a corp who get privileges/rights in return
·         (a) Compensation dividends; capital appreciation (buy low/sell high; potentially through dissolution of corp as residual claimants (pay of CR’s; rest goes to SHH’s);
·         (b) Role: generally, do not run corp—certain rights/powers:
o   § 141(k): have power to remove directors.
o   § 216: SHHs elect board of directors.
o   § 242: vote on amendments to COI/AOI/charter.
o   § 251: vote on mergers.
o   § 271: vote on sale or major sale of corp’s assets.
o   § 275: must have SHH approval to dissolve corp.
(2) Directors: (§141); elected by SHH’s (§216); removed by SHH’s (DGCL 142(b)); they have power to manage the corp affairs
·         (a) Compensation salaries; stock options
o   Unless COI/bylaws specify otherwise—BOD’s set own salaries
·         (b) Role: TWO MAJOR ROLES
o   (1) Appointing Officers: §142
o   (2) Managing Corp Affairs: and also delegating to officers
·         (c) Types: two types
o   (1) Inside Director: also an employee of corp; so wears “2 hats”
o   (2) Outside Director: no inside position; “independent”; no material relationship w/ company (not stock though); only wears “1 hat”
(3) Officers: full-time appointed managers by BOD’s; can be removed anytime; CEO’s; CFO’s; COO’s
·         (a) Compensation: salaries; stock options
·         (b) Role: execute the BOD’s plans via authority delegated to them
(4) CR’S (debt holders): contractually apart of corp
·         may receive fiduciary duties from BOD
B. Default Characteristics (opts in w/ COI; may amend charter/bylaws)
(1) Limited Liability: SHH’s, BOD’s, Officers enjoy such—only “investments” are subject to being lost.
·         EXCEPTION: (1) Piercing the Corp Veil; (2) § 102(b)(6)—SHH may be liable up to X amount (optional)
(2) Perpetual Existence: once formed, perpetually exists UNLES otherwise in COI under § 102(b)(6). Thus unaffected by: death, withdrawal, insolvency of SHH, BOD, officer
·         Fosters long-term K’s; certainty for investors
(3) Free-transferability of Shares: default rule—shares are FREELY transferable on market
·         EXCEPTION: under § 202, transfer restrictions can be imposed if (1) restriction conspicuously noted on stock certificate AND; (2) restriction is issued through (a) COI; (b) By-laws; (c) Agreement by SHH’s.
o   NOTE: CC’s CAN have freely transferable shares—but usually NOT so
(4) Centralized Management: large corps appoint BOD’sà whom hire officers to manage
·         pros: SHH’s don’t have to have expertise, can just invest and make $
·         cons: agency & authority concerns; SHH’s may have insufficient checks on MGMT
(5) Taxation: DOUBLE level of taxation for corps: corp level & individual level
·         corp revenues being taxedàthen income being taxed by issuing dividends.
o   Thus can avoid by NOT paying out dividends.
(6)  SEE CHART for legal characteristics of CORP/CC’s/P’SHIPs, etc. on back
C. BOD Formalities (MBCA rules here, not DGCL 141)
General Powers, Qualifications, Number, Election, Officers
·         MBCA 8.01 – Each corporation has a BOD to manage business and affairs
·         MBCA 8.02 – the articles of incorporation or bylaws MAY prescribe qualifications for directors
·         MBCA 8.03 – BOD must consist of one or more individuals; articles or bylaws may provide a variable range with a specified maximum and minimum; directors are elected at each annual SHH meeting unless their terms are staggered
·         MBCA 8.40 – A corporation has the officers described in its bylaws or appointed by the BOD in accordance with its bylaws; Officers may appoint other officers if authorized to do so by the bylaws; one officer shall be assigned to prepare minutes for the Directors’ meetings and SHH meetings, and for maintaining and authenticating required corporate records
·         MBCA 8.41 – Officer duties are set forth in the bylaws and/or may be prescribed by the BOD
Director Formalities
·         MBC

for management of business/conduct of the affairs; preemptive rights to SHH; supermajority voting (if applicable); changing limited liability or perpetual existence (they are presumed); limiting DIR personal liability except for violations of the duty of loyalty, good faith, negligence, or improper benefits
·         (3) DGCL § 109 BYLAWS: can contain anything not inconsistent w/ statute or COI related to business/affairs or rights/powers of key players.
·         (4) Were the AOI filed w/ the Sec. of State under § 101(a)?
o   (a) IF Y: and all requirements followed then inc. and get benefits of it (LL)
o   (b) If NOT complied w/: Then corp will be DEFECTIVELY INCORPORATED: i.e. purported to be incorporated, but have not fulfilled §101(a)’s statutory requirements; and NO agency & authority law applicable—must see “promoter-preformation” rules.
§  (i) What type of “defectively incorporated” corporation is it?
ú  (a) De jure corp: there is substantial compliance w/ the statutory requirements
ú  (b) De facto corp: a worthy attempt made in “good faith” to inc, and SOME exercise of corp powers have already occurred.
§  (ii) Methods to deal w/ Defective Corp:
ú  (a) Individuals who act for the corp W/O authorized (not validly organized) can be liable for the resulting debts/obligations
ú  (b) BUT, one that deals w/ the corp AS IF IT WAS validly organized is estopped from using the defective organization as a defense.
·         Only way to recover is/would be through a personal guarantee
·         (5) was it validly organized, but inadequate capital raised?
o   YES: officer/BOD that participates in operating b4 specified capital raised can be personally liable for and debts/obligations arising out of such activity
§  But: liable for amount not raised in requirement (ohio general corp).