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

Corporations
Professor Cleveland (Spring 2008)
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I. Intro

General

3 General Conflicts in Corporate Law

i. SHH and Directors/Managers
ii. SHH and Debtholders
iii. Majority (controlling) SHH and Minority (noncontrolling) SHH

Delaware Law (King of Corporate Law)

i. 50% of companies on NYSE and Fortune 500 are DE corporations
ii. Reasons for dominance:
1. Large body of case law (certainty – businesses love certainty)
2. Mature statute (longest in existence)
3. Specialized Courts
a. Courts focused on corporate law with specialized judges
4. Highly Responsive Legislature
a. To keep corporations around (and keep the taxes and incorporation fees) the legislature is very responsive to changes in corporate circumstances

Actors in Corporate Law

i. SHH (Owners of Corporation)
1. Provides capital for the corporation
2. Enjoys capital appreciation
3. Voting Rights (DGCL)
a. § 216 – Elect directors
b. § 242 – Amend corporate charter/consitution
c. § 141(k) – Remove directors
d. § 251 – Merger
e. § 271 – Sale of all or virtually all of its assets
f. § 245 – Dissolution
ii. Directors (§ 141)
1. Managers of the business and affairs of the corporation (§ 141(a))
a. Map out blueprint for company and what to do
b. Advisory role – monitor people running the company
i. Not full-time employees (unless officer of corporation)
ii. Generally work 180 hours a year for corporation
2. Duty to appoint officers to manage day to day affairs of corporations
iii. Officers
1. Full-time employees of the corporation

There could be significant overlap in people serving as directors, officers and SHH

i. More prevalent in closely held corporations

Corporate Social Responsibility (Charity)

i. DGCL § 122(9) – Allows corporations to make donations for:
1. Public Welfare
2. Charitable, Scientific and Educational Purposes
3. War or Other National Emergency
4. Caveat: Corporations can make donations as long as they benefit SHH
ii. CEO’s usually have heavy influence on charity’s chosen (usually biased)
iii. Problems with Corporate Donations:
1. Picking the Charity
a. Could be a waste of time and SHH money
2. Inability to Track Funds
a. Don’t want to donate 5M and have 4M go to administrative costs
3. SHH Disagreement
a. SHH may have donated individually or have different views on proper charity
iv. Advantages of Corporate Donations:
1. Tax – 2 tax advantages
a. Deduction for charitable donations
b. Corporate tax is the only tax on the money if the corporation donates but if SHH donates, it is after corporate tax and individual tax.
2. Corporate benefit – makes the corporation look better to donate; naming rights; advertisement

II. Characteristics of Various Business Organizations

Characteristic

Corporation

Close Corporation

LLC

General Partnership

Limited Partnership

LLP

Recognized as legal entity?

Yes

Yes

Yes

Yes

Yes

Yes

Limited Liability to Investors?

Yes (*Pierce)

Yes

Yes

No

GP: No
LP: Yes

Yes

Perpetual Existence?

Yes

Yes

Trending to Yes

No

No

No

Transferability of Investment Interest?

Yes

No

Look to articles of formation

No

GP: No
LP: Yes

Look to partnership agreement

Centralized Mgmt?

Yes

Look to articles of inc. or SHH agreement

Member-Managed: No
Manager-Managed: Yes

No

Yes, GP

Look to partnership agreement

Tax?

Entity-level tax and investor-level tax on distributions

May qualify for pass-through treatment such that there is only an investor-level tax

Taxed at investor-level; No entity level tax

Taxed at investor-level; No entity level tax

Taxed at investor-level; No entity level tax

Taxed at investor-level; No entity level tax

Characteristics of the Corporation

General:

i. Corporations are legal ent

ax – taxed only at investor-level and not entity level

Limited Partnerships

i. General:
1. LP’s use two tiers of partnerships to achieve the benefits of corporations (limited liability for investors and avoidance of taxation)
2. Formalities for formation – yes, must file certain documents
ii. Limited Liability:
1. 2 Tiers of Partners:
a. 1. General Partners – Rights are the same as those of GP
i. Subject to unlimited liability
b. 2. Limited Partner – Investor who holds an ownership stake in the enterprise and participates in profits, but with limited liability
i. Limited liability, but as a trade they have far less say in how the business is run
iii. Perpetual Existence:
1. No perpetual existence
iv. Transferability of Investment Interest:
1. General Partner – No transferability
2. Limited Partner – Transferable
v. Centralized Mgmt:
1. General Partner is the centralized manager
a. Limited partner may be deemed general if they participate in management (they may advise or consult GP, but GP doesn’t have to follow)
vi. Tax:
1. Investor-level tax – taxed only at investor-level and not entity-level

Limited Liability Company

i. General:
1. Non-corporate entity whose members (owners) have limited liability and can participate actively in management.
2. Formalities for formation – yes, must file documents with secretary of state
ii. Limited Liability:
1. Default Rule – The members of the LLC enjoy limited liability
a. Exception:
i. Piercing the entity veil to go after member assets
iii. Perpetual Existence:
1. Trending towards a perpetual existence
iv. Transferability of Investment Interest:
1. Default Rule – Transferable only upon consent of other members
a. Can be varied in documents
v. Centralized Mgmt:
1. Member-managed – All members participate in the management of the LLC (no centralized management)
a. DGCL §18-402 – Default Rule – How members vote is in proportion to their percentage of profits (can be changed if they “provide otherwise”)
b. Note: One common way to provide otherwise is to have manager-managed LLC
2. Manager-managed – Manager is appointed by members to run the LLC (centralized management)
vi. Tax:
1. Investor-level tax – taxed only at investor-level and not entity-level

Limited Liability Partnership
Close Corporation