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

Corporations Outline
Professor Cleveland
Summer 2017- Oxford
Intro—CH 1
Business orgs can k around statutory defaults (eg “unless otherwise provided in the cert. of incorp. Or bylaws.”)
States provide the law of business orgs
Delaware corporate law is the focus of the course—WHY? (in contrast, almost ½ of the states have enacted the model business corporation act)
Roughly half of all publically-traded companies are incorporated in Delaware
Delaware revises its corporate code every year (OK does not) and has a rich body of common law
Oklahoma has enacted the Delaware code with select variations
Delaware has a special court for corporate issues, and its judges have corporate expertise
This results in quicker and more accurate resolution of cases
Internal affairs doctrine:
The law of the state of incorporation governs the “internal” affairs of the corporation, but the law of the state of operation governs the “external” affairs
Internal = btwn shh’s, directors, and officers
External = tort law etc.
The size of the corporation will generally determine where it incorporates and operates
You must pay a fee to the state where you organize and where you operate
Therefore, smaller companies are likely to incorporate and operate in the same state
Hierarchy of rules governing corporations
At the top of this hierarchy is state statutory law. Recall from the last clip that corporations are created and governed by the laws of the state in which they are incorporated. See generally, DCGL § 101(a)-(b). Next in the hierarchy comes the certificate or articles of incorporation. The articles also serve as the corporation’s contract with the state and as a governing document for the company. Lastly, below the articles in our hierarchy, we have the bylaws. Bylaws are rules or guidelines for the internal governance of the corporation.
DGCL 102
Must include certain items; permitted to includeothers
Must include name (must be unique), nature + purpose, # of shares and par value + rights/privileges/pref if multiple classes
More difficult to amend than thebylaws
242(b)(1) – need BOD + shh approval to amend charter
DGCL 109
Must not contradict thecharter
Easier to amend than thecharter
In Oklahoma, the rule is the opposite—the default rule is that the board may amend the bylaws, andthe shareholders may only amend them if empowered to do so by thecharter
1. Board ofdirectors
DGCL 141
Manage and direct the corporation’s “big picture”affairs
Must approve fundamental changes, but not every operationaldecision (DCGL 242)
Hire/fire officers (DCGL 142)
For large companies, directors tend to be outside officers, large investors,etc.
Board can delegate power to a board committee (w/ limitations)
The authority of the board may be limited by the certificate of incorporation.
Inside director- serves both as an officer or employee and on the board
Outside director- not officer or employer
Independent director- uninfluenced by familial considerations or financial considerations that are not shared by stockholders—not an inside director (in line w/ shh’s)
Interested director- influenced by factors other than the merits of decision to be made—not independent
DGCL 142
Implement strategies approved by theboard
Responsible for electing and removing the board ofdirectors (DCGL 241, 141(k))
Must approve certain fundamentalchanges (DCGL 242- amend, 251- merger, 271- sale of assets, 275- dissolution)(MBCA 11.04, 14.02)
See DGCL 122—Specific powers of corporations
Greater separation of ownership and control characterizes largecorporations
Shareholders own the corporation, but directors and officers controlit
This presents an agency problem (and the associatedcosts) à Principal (Shh) v. Agent (directors)
Monitoring costs: principal policing the agent; borne byshareholders
Bonding costs: agent proving its behavior to principal; borne by thedirectors
Want to align interests of management and shh
1 solution: concentrated ownership: institutions own a significant stake if not a majority of shares. Institutions may simply sell stock of under performing corp instead of closely monitoring
The Purpose of a business entity:
1) Maximize shh value
dodge v ford motor co. – A corp is carried on PRIMARILY for the profit of the shh’s
A co. cannot take actions that harm its shh and are motivated solely by humanitarian concerns, not by business concerns
Should the corp pay divs to shh’s instead for them to donate to charity?
Choice of Organizational Form- CH 2
Formalities to organize?
In exchange, the directors/officers/shh enjoy limited liability (meaning creditors cannot go after them personally)
Must have a unique identifying name. DGCL 102 requires “magic words”—why? Because it puts ppl on notice that Creditors cannot go after them
Must have a registered office (mailbox) for service of process
Must state the corporation’s nature and purpose; most say that the corp will engage in “any lawful activity”
Must include info regarding stock (number of classes and shares)
Yes; may deviate from this rule, but there is no reasonto
Limited liability forinvestors?
Limited liab – shh’s losses are limited to the purchase price of their shares and cannot be held personally liable
Yes; losses are capped at the amount of yourinvestment
Limited liability is less valuable against contract creditors who indemnify themselves by personal guaranty;they can sue shareholders in anothercapacity
Free transferability ofshares? – DGCL 202
Yes; very little overlap between shareholders andmanagement
Management tends to decentralize as the size of the corporationdecreases
several businesses
Corporations are subject to double taxation (unique from otherentities)
The company is taxed off the top, and then the investor is taxed after dividends are delivered (if theyare delivered)
Exception: An S corporation can qualify for federal taxexemptions
Default rule is one share, onevote
General Partnership (GP)
No formalities toorganize
Focus on what it looks like rather than what the partiesintended
Historically, they do not enjoy perpetualexistence
Uniform Partnership Act and others are trending away from thisrule
Do not enjoy limitedliability
Partners themselves may be personally liable in the event of ajudgment
Do not enjoy free transferability ofshares
Because liability is unlimited, we care more about who our partnersare
Any partner can bind a partner through a k (through consent)
Characterized by decentralizedmanagement
Every partner is both a manager and agent of thepartnership
Partners generally owe a fiduciary duty to oneanother
Meinhard v. Salmon- court held that partners in a business owe fiduciary duties to one another where a business opportunity arises during the course of the partnership
In re USACafes, LP- Where a corp acts as a GP, the individual directors of the corporation (in addition to the entity itself) owe duties to the other partners and to the partnership
Default rule for voting is one partner, onevote
May deviate away from this rule where one partner contributes more thananother
Single taxation; taxed at the individual levelonly
Limited Partnership (LP)
Only limited partners enjoy limited liability; general partners donot & are subject to unlimited liability
Exception: Limited partners that control the business are subject to unlimited liability
You do not control if:
You consult w the general partner; etc. there is more
Default rule: No free transferability ofshares
May opt out of the default rule by k (see KKK partnership agrmt for ex)
Centralized management in the generalpartners
Single taxation; taxed at the individual levelonly
Limited Liability Company(LLC)
Members of LLC enjoy limited liability
Unless they act before the LLC was formed (see Pepsi-Cola) so they were not being sued as members of the LLC so they are personally liable
No free transferability
Can deviate by k
Centralized Management
Oklahoma LLCs are “managermanaged” – centralized management
Can opt out by k
Delaware LLCs are “membermanaged” – decentralized management (bc every investor participates in management of the business)
Can opt out by k
Single level taxation; taxed at the individual levelonly
Pre-Formation Liabilities- CH 3
A. Successor Liability – the purchaser (successor) may be liable for the obligations of the seller (predecessor)
There are three ways to acquire a business:
(1) Statutory merger
DGCL 259
One entity survives, the other disappears
Requires approval from both the board and shh
The surviving company assumes all assets and liabilities of the acquired company.
(2) Stock acquisition
Stock sales transfer everything (all assets and liabilities)
Target (B) is still on the hook for all its liabilities unless we (A) pierce the corporate veil because the purchaser is the shareholder of the target (seller) & shh enjoy limited liability
 (3) Asset acquisition
Value of a corporation is in the eyes of the beholder—in other words, the target company will typically think it is worth more than the buying company does
They might see eye-t

promoter unless look elsewhere
Rule: if the corp accepts the k’s benefits then the corp will be req to perform its obligations. So, because R&S Fuel accepted the benefits of the k with knowledge of its terms they implicitly accepted the preincorporation agreement and is bound by it.
Piercing the Corporate Veil
Note that the veil of a publicly-traded corp has never been pierced
Two overarchingconsiderations:
1. Reasons for the corporation’s inability to pay itsdebts
Undercapitalization, siphoning,etc.
2. Whether the corporation is being operated as a separateentity
If not, why recognize the veil separating the corporation from itsshareholder?
Domination, commingling (shh treat corporate assets as shh’s assets), compliance with formalities,etc.
Compare the taxicab case with our $1m loan/casinoexample:
Courts are more likely to pierce the corporate veil in a tort action where the inured plaintiff had noopportunity to negotiate in advance of theincident
Walkovsky v. Carlton (NY 1966)
Note: Courts are more likely to pierce the veil to hold another corporation liable in its capacity as shareholder than they are to pierce and hold individual shareholdersliable
In this case, court deferred to congress to set limit
Factors to consider in deciding whether to pierce theveil:
Not outcomedeterminative
Suspicious with closely-held corporations, but not likely to have an issue with large, publicly-traded corporations
2. Interminglingassets
Policy: Why recognize the veil if theydon’t?
Leaving the company incapable of paying its debts that we are sure willarise
Here, Carlton took dividends even though he knew there would bewrecks
4. Externalization ofrisk
Plaintiff bears the burden of not being madewhole
Corporation (on purpose) doesn’t hold enough assets to make the plaintiffwhole
5. Adequatecapitalization
Capitalization = all assets used to make good on an obligation
In this case, the statutory floor on insurance was $10k and Carlton satisfied that amount; themajority says this is a legislative rather than a judicialdetermination
“externalization of risk” – strategically avoiding the risk
Suppose capitalization is inadequate at the time of formation and the plaintiff’s judgment is greater than what would be considered adequate capitalization; we might pierce to the amount of the judgment to avoid the perverse incentive of intentionallyundercapitalizing
If you knew that you could not be liable for more than adequate capitalization, then youwould always undercapitalize, but it varies byjurisdiction
Ohio statute (loc. 3379) disadvantage to P
Note: 1 large corp is easier for P to recover from (see diagram)
6. Failure to maintainformalities
Board meetings, minute-keeping, issuing stock and dividends,etc.
Does the entity look like acorporation?
If not, why recognize them assuch?
7. Subject of the pierce
If pierce, who would be reached? Individual shh or another corporation? Some courts are more likely to pierce if corporation would be reached.
8. Ultra vires
An ultra vires action is an act beyond the nature and purposes or power of a Corporation.
Ex: bookstore purpose of company is to sell books à add coffee and scones to induce sales à just sell coffee and scones à acting outside the scope of corporation
Incorp. Forms in Delaware are no longer left blank – purpose is to engage any lawful act or activity for which corporations may be organized under law
DGCL 204, 205 – ratify conduct that was not correct at the time
the court is more likely to pierce the corporate veil if the underlying claim is a tort claim rather than a k claim bc there was no time to negotiate a guarantor