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

Corporations Cleveland Fall 2016

Corporate law is a matter of state law

Class focuses on Delaware because around half of the corporations in America are incorporated there

means that Delaware citizens have to pay less tax

Delaware amends/updates the corporate code every year, and has a rich body of common law that is lacking in other jurisdictions

Means that judges have expertise in the area
Corporate disputes get resolved more quickly and accurately
Attracts managers

Delaware corporate law governs disputes, no matter where they occur
Smaller corporates are more likely to organize in the jurisdiction where they will practice because they would otherwise have to pay fees to more than one state

double taxation

Many states (e.g. Oklahoma) have adopted Delaware corporate code as their own
Model Business Corporation Act

drafted by a subcommittee of the ABA
widely adopted, but not as influential as the Delaware code
Texas adopted, but gradually amended it to look more and more like Delaware

Organizational Documents

U.S. Constitution : U.S.C. :: Charter/Articles(ABA)/Certificate(Del) : Bylaws
Charter must address:

the name
the address
nature of business
number of shares of stock
name/address of incorporators
name/address of directors

Only the Board of Directors can amend the charter, but they have to get approval from the shareholders
Shareholders always have the power to amend the bylaws, but directors can have that power if included in the charter (DGCL § 109)

In OK, shareholders cannot amend the bylaws unless empowered to do so under the charter

Optional Provisions

The articles may set forth any other provision not inconsistent with law regarding managing the business and regulating the affairs of the corporation. [RMBCA §2.02(b)] However, it should be noted that the RMBCA includes a number of features that a corporation need not adopt, but if they are adopted they must be provided for in the articles. For example, a corporation may choose to limit directors’ liability for damages in certain circumstances, but if a corporation wants to so limit liability, it may do so only by including the limitation in the articles. A number of these conditionally mandatory provisions will be discussed later in this outline.

Business Purposes

Traditionally, the articles had to include a statement of the business purposes of the corporation, and the corporation was limited to activities pursuing the stated purposes. Over time, statutes became more lenient and allowed a broad purpose statement, such as “to conduct any lawful business.” The RMBCA has gone even further and presumes that a corporation is formed for any lawful business unless the articles provide a more restricted business purpose. [RMBCA §3.01(a)]

Ultra Vires Acts

Generally, a corporation is allowed to undertake any action necessary or convenient to carry out its business or affairs. If a corporation includes a narrow purpose statement in its articles of incorporation, it may not undertake activities unrelated to achieving the stated business purpose (e.g., if the articlesstate that the corporation’s purpose is to operate restaurants, the corporation may not undertake to run a mink farm). If a corporation undertakes activities beyond the scope of its stated purpose, it is said to be acting “ultra vires.”

responsible for the big decisions
statute puts the Board of Directors at the head of the corporation
Chosen by election of shareholders
Usually outsiders (non-employees) in the case of large publically-traded corporations so that they are not having to operate the business itself–just overseeing the management of the business
Mom –> Babysitter –> Baby

nanny cam = auditors

can go through the finances and see whether money was well spent
monitoring costs (residual losses) will be born by the shareholders
bonding costs – agent bonds his interest with the interest of the shareholders, bears the cost of performance, compensated only if successful
Auditors only do spot checks

whistleblower incentives

look for violation of statutes

compensation or penalties based on corporate performance

DUTIES

Officers’ duties are determined by the bylaws or, to the extent consistent with the bylaws, by the board or an officer so authorized by the board.

POWERS

The officers are agents of the corporation and receive their power to manage from the directors.
The ordinary rules of agency determine the authority and powers of the officers and agents.
Authority may be actual or apparent. If authority exists, actions taken by an officer or agent (such as entering into contracts) bind the corporation.

Actual Authority

An officer’s actual authority includes not only the authority expressly granted to the officer by the directors, the bylaws, the articles, and statutes, but also any authority that may be implied by the express grant. Appointment to the following offices implies the following powers absent an express provision otherwise:
President

There is a presumption that the president has implied authority to enter into contracts and otherwise act on behalf of the corporation in the ordinary course of corporate affairs. The president also is deemed to have any actual authority that the corporation’s secretary certifies that the board has given to the president.

Vice President

The vice president has implied authority to act when the president is unavailable because of death, illness, or other incapacity.

Secretary

The secretary has implied authority to keep and certi

items, or may lose limited liability status

Limited Liability status can be negated by piercing the corporate veil due to a personal guaranty

Transfer of Ownership

Default rule: Free Transferability of Shares
In large, publicly-traded corporations, shares are traded at the NY stock exchange
For small corporations, while there are no technical restrictions on transferability of shares, there may be practical restrictions–concerns about how to find buyers, value of shares, etc.
transfer restrictions can be voluntarily imposed for certain classes of stock (e.g. pref. right, rights of first refusal)

not on common stock, but maybe in small, closely held corporations
Don’t want shares to fall into hands of competitors
Want co-owner to be someone you trust (not Hannibal Lecter)

Centralized Management

Shareholders do not need to know the nature of business operations in order to make money off of an interest in the corporation
Facilitates diversification

One person cannot run multiple businesses, but they can invest in multiple businesses

Officers are essentially employees, managing operations, and package information for the Directors to actually make the decisions
Board of Directors

White old men
SHHs are entitled to elect representatives under state law
Federal law requires Publically traded corps. to have proxies
BoD requires a “quorum” or a majority of shareholders in order to make certain decisions

Internal Affairs Doctrine

Matters internal to the corporations between/among the D/O and SHH are governed by the jurisdiction where the corporation is organized (incorporated)
Suits in non-shareholder capacity are external, and therefore are governed by ordinary personal jurisdiction rules

Corporations are subject to double taxation: one at the corporate level and one at the individual level

If profits are reinvested in the corporation, there is no gross income, so there is no tax

Partnerships are only taxed at the individual partner level

If profits are reinvested in the partnership, government will impute income, and charge a tax on that (some kind of penalty tax)

Closely-held vs. Publically-held

Some courts treat closely-held corps. more like partnerships than like big corps.