Corporations Cleveland Fall 2017
Corporate law is state law: Any Corporation can incorporate in any state it likes, but it is bound by the law of the state of incorporation.
Most major Corporations are incorporated in Delaware and other states look to Delaware when their own precedents do not cover a particular case. This is because Delaware has a court of chancery.
Delaware is the leading provider of corporate law because (1) its statute is over 100 years old and (2) it is well-developed and it keeps updating its corporate code
You can be an Oklahoma citizen and can organize a Delaware corporate law
A corporation can organize in one jurisdiction and operate in another jurisdiction
Because each state can create corporation, you have 51 bodies of corporate law (including Washington DC)
The goal of any corporation is to ‘maximize shareholder’s value’
DGCL 242: Cs must have a certificate of incorporation (also known as a constitution, as charter, or the articles of incorporation)
In their certification of incorporation., the Corporation states the rules it will operate under, including any rules it will use in lieu of the default (DGCL 102(b))
Cs can engage in charitable giving (DGCL 122)
But: The statute has no limits and is unclear as to who should benefit.
The SHHs are the owners of the Corporation; owning shares confers bundles of economic rights and bundles of voting rights
Shareholder (as owners) enjoy limited liability.
Meaning if the corporation does poorly, the shareholder may lose his investment but he is not liable for what the business does (a narrow exception to this is called “piercing the veil”
Relative DGCL sections: 141(k), 142, 216, 242, 251, 271, 275
DGCL 216 + 141(k): SHHs have the power to elect and remove the BoD.
Any ‘fundamental change’ in the C must go to the SHHs for a vote (e.g., mergers, sale of assets, dissolution)
DGCL 271 says sale of all or substantially all of corporation’s assets must comply with the following:
(1) Bod deems in corporation’s best interest and (2) SHH adopts resolution by majority (these are shareholders who are entitled to vote)
Board of Directors:
Governed by DGCL 141 & 142
They are in charge of running the corporation
The job of the BoD is to create a map/blueprint of the C’s goals and then make decisions toward meeting those goals.
Often, the BoD will be comprised of executives from other Corporations and presidents of universities
Only 1 director is needed
Quorum requirement for directors: DGCL 141(b)
Quorum . Even if a meeting is properly noticed, the board members who are present for the meeting may not be able to take formal action. State law requires that enough board members be present at the meeting before those board members can take action; that is, state law establishes quorum requirements for board meetings. State law commonly establishes that a majority of the board constitutes a quorum, but the quorum requirement may be altered by the corporation’s organizational documents. See DGCL § 141(b):
Types of directors:
‘Inside’: A member of the BoD who is an employee/officer of the Corporation
There is a concern that inside directors may be biased toward their own interests, at the expense of the SHHs.
‘Outside’ (aka ‘independent directors’): A member of the BoD who is not connected to the C in any other way. Outside directors are neither employee or stakeholders in the company.
Officers (aka ‘Executives’)
These are the people who are hired to make the day-to-day decision of running the C.
Analogy: The SHHs are the mom, the C is the baby, the officers are the babysitter.
The concern is that, like inside directors, executives’ interests will not align with the SHHs’ interests.
‘Bonding’: An attempt to make the executives interest align with SHHs by offering them incentives (e.g. stock options) that increase as their performance and the C’s performance increases.
‘Monitoring’: SHHs will hire third-parties to verify statements made by the executives.
DGCL 141 (Board of directors; powers, number, qualifications, terms and quorum; committees; class of directors; nonstock corporations; reliance upon books; action without meeting; removal)
(A) The business and affair of every corporation. . .shall be managed by or under the directors of a board of directors except as may be otherwise provided in this chapter or in its certificate of incorporation.
If the certificate of incorporation specifies a different person, the power and duties of the BoD shall be exercised or performed by that person
(B) . . . A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors except that when a board of 1 director is authorized under this section, then 1 director shall constitute a quorum
Notice to the Board:
Notice . Board members tend to be busy individuals, so state law commonly requires that board members be provided with notice, in advance of any meeting, of the date, time, and place of the meeting. Notice, however, may be required for only “special” meetings of the board, not “regular” meetings of the board. MBCA 8.22 (“[R]egular meetingsf of the board of directors may be held without notice of the date, time, place, or purpose of the meeting. . . . [S]pecial meetings of the board of directors must be preceded by at least two days’ notice of the date, time, and place of the meeting.”); CAL. CORP. CODE § 307 (“Special meetings of the board shall be held upon four days’ notice by mail or 48 hours’ notice delivered personally or by telephone, including a voice messaging system or by or by electronic transmission by the corporation . . . . The articles or bylaws may not dispense with notice of a special meeting.
Purpose: States typically do not require that the notice specify the purpose of the board meeting. MBCA 8.22
Board of directors approval:
Approval . Assuming proper notice of, and the presence of a quorum at a board meeting, states generally provide that approval by a majority of those board members present constitutes approval by the board. DGCL § 141(b) (“The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number.”);
For example: Assume that a board is comprised of 9 individuals. Under the typical default rule, given a board comprised of nine individuals, 5 board members would constitute a quorum. Assume that only 5 board members showed up at a duly convened meeting, then the majority needed for approval by those present would be (3 of 5)–>this is the default rule. However, to avoid the possibility of 3 speaking for 9, a corporation may deviate from the default rules of its state of organization. For example, a corporation may require supermajority approval of the board (say, approval by six of nine directors) for specified actions. Expanding upon the earlier example, if only five of nine directors attended a meeting to contemplate an action that required supermajority approval by the board, unanimous approval of those five would not constitute approval by the board. With regard to many issues, the parties may utilize the certificate of incorporation or the bylaws to tailor the governing rules to serve their needs)
Note: A vacancy on the board does not change the number of directors needed to make a quorum–the board needs a majority of the number authorized in the bylaws, not a majority of actual directors. Let’s say if the bylaws requires 5 board of directors (so quorum of 3), if 3 out of 5 resign, the quorum required is still 3 and the two remaining directors cannot conduct business because no quorum.
Committees of the Board :
Recall that committees of the full board of directors commonly address recurring issues or discrete tasks. See DGCL §141(c) (“Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation. . .)
Unless restricted by the charter or bylaws, members of the BoD or any committee designated by the Bod, may participate in meting via conference telephone or other communication equipment by which all people can hear each other.
Unless restricted by the Certificate of incorporating or by laws, an action required or permitted to be taken at any meeting of the board of directors or any committee may be taken without a meeting if all members of the board or committee consent in writing, or by electronic transmission. . . .
DGCL 141 (e):
A member of the BoD or a member of any committee. . .be fully protected in relying in good faith upon the records of the corporation or by any information, report, etc presented to the C by an of the C officers or employees. . . ..
Types of Businesses Formed
Differences between publicly-held C and a P’ship
Formalities Required for organization
y also impose taxes on the incomes of corporations and individuals
State may impose a fee on a corporation at the time of its formation and every year after that.
General Partnerships (aka Partnerships)
Requires no formalities to organize (i.e. No requisite filings)
Partners owe fiduciary duties to other partners in a partnership whereas shareholders do not
No Perpetual existence
If a partner dies, sells, or retires, the original partnership cases to exist and a new partnership could then come into being if a new person becomes a partner.
Basically, A p’ship is an aggregation of individuals, and if that aggregation ever changes (death, sale, move, etc.) then the original p’ship ceases.
Unlimited liability for investors
Partners (as investors) in general partnerships are subject to unlimited personal liability
Restricted Transferability of ownership interests
A partner may not freely transfer his ownership interests in the general partnership
Delaware Code Ann.Tit. 6, section 15-502 says that a partnership interest is personal property. Only a partner’s economic interest may be transferred
Every partner has equal rights in the management of the business of the general partnership.
Each partner is an agent and also a fiduciary of the general partnership
Any act of a partner carrying on the business of the p’ship in the usual way binds the p’ship.
Exceptions: The partner was not carrying on the business in the ‘usual way’; the partner does not have the authority to act and the vendor knows that fact.
A general partnership is not subject to taxation (only partners are subject to taxation)
As opposed to corporations, general partnerships have single-level taxation
General partners are not employees and must pay self-employment tax on their net earning from self-employment assigned to them from the partnership.
If the profits (not the gross revenue, the profits) of the enterprise are shared, that is prima facie evidence of a partnership.
But: This rule does not apply if the money is paid as wages to the employees of the enterprise.
Limited Partnerships (LP)
Formalities to organize
In order to form a limited partnership, 1 or more person + all the general partners must execute a certificate of limited partnership.
The default rule is that LP is not freely transferable
A limited partnership enjoys perpetual existence
Limited liability for certain investors
Limited partnership has at least one general partner and at least one limited partner
subject to unlimited liability
A general partner of an LP has the liabilities of a partner in a partnership
General partners run the show because and owe fiduciary duties to limited partners
enjoy limited liability
A limited partner is not liable for the obligations of a LP UNLESS he is also a general partner or he participates in the control of the business
If the limited partner does not participate in the control of the business, he is liable only to persons who transact business with the limited partner reasonably believing (based upon the limited partner’s conduct) that the limited partner is a general partner.
Management of an LP is centralized in the hands of the general partners who have equal rights in the management of the business of the LP
Limited partners of an LP are analogous to shareholders of a corporation
Just as SHH give the management of the business to the board of directors, limited partners give the management of the business to general partners. (However, general partners may be required to seek approval of limited partners to undertake certain fundamental changes to the LP).