I. Characteristics of a corporation
i. Limited Liability: DGCL 102(b)(6)
1. Default rule: the extent of your loss is the price paid for your shares
a. Shield: as a general matter, creditors cannot pierce the corporate veil; the debts of a corp’s must be satisfied w/corp’s assets .
2. §102(b)(6) a provision imposing personal liability for the debts of the corporation on its stockholders or members to a specified extent and upon specified conditions; otherwise, the stockholders or members of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts;
ii. Centralized Mgt. §141, 142
1. SHHs don’t manage the business; centralize mgt in the hands of a few
a. BOD—elected by SHs
b. Officers—hired by BOD
iii. Free Transferability of shares §202
1. Default rule: no limits on transfers
2. Limits which may be imposed: §202
iv. Perpetual Life §102(b)(5)
1. If SH dies, corp isn’t affected
2. Partnership—if a partner dies, the partnership is dissolved.
b. How the characteristics facilitate each other:
i. Free transferability of shares: facilitated by (1) limited liability and (2) centralized management
1. Limited Liability: if your assets aren’t at risk, you don’t care who else owns the shares – making them freely transferable, if there was unlimited liability, then a SHH could transfer all of his shares and avoid liability, leaving you liable for the SHH – therefore you would care who else owns shares and this would not promote free transferability
a. if it wasn’t limited liability, you would definitely care who owns stock
b. SHHs don’t care who else owns stock because they are only liable to lose what they put in, no one else’s liability could be placed on them
2. Centralized Management: if there was no central management, there would be no FREE transferability of shares because the other SHH, who would also be running the company, would have to approve the transaction every time someone purchased stock, all transfers would have to be approved – thus not free
ii. Diversification: facilitated by centralized management
1. London: HYPO
a. It rains and he opens a fake bake salon.
b. When it rains–$$$; when it is sunny—no money. Profits are tied to the weather. (high risk)
c. Only have time to run one business.
2. Centralized management:
a. Can invest in shop next door which sells suntan lotion. So now, if it rains, the salon makes money, and if it is sunny, you make money from the sale of suntan lotion.
b. Minimize risk. Make $ regardless of weather.
c. Centralized mgt. Can run your business and you can invest in another business which is run by others.
3. Diversification for shareholders.
a. PREVIEW: much more difficult for officers to diversify
b. HYPO: manager makes springs—his sole area of expertise.
i. If he were fired from CEO of Springs Inc. he is unable to diversify his “spring expertise” as it isn’t useful for running Wal-Mart. Some of his skills aren’t able to diversify successfully.
ii. Should a corp sell itself to other people who can better manage the business.
iii. Bad managers leave and good managers replace them. (But who wants to leave when you can’t get hired elsewhere?) Conflict.
II. Forming the Corporation
a. Selection of State of Incorporation
i. Delaware §101 –
1. (a) anyone can incorporate in Delaware – don’t have to be resident
2. (b) can conduct any lawful business or purpose
ii. Deleware and NJ are popular states to incorporate (see pg 238)
1. Permissive: DE law is management friendly, i.e. it gives managers more autonomy than other laws.
2. Certainty: DE law is older, and therefore adjudicated more often. There is a significant body of case law surrounding the statutes, therefore questions have been resolved and outcomes are more certain.
3. Talented Judiciary: because of the age of the statutes, the DE judiciary has developed expertise in adjudicating the legislation.
4. Responsive Legislature: In DE, the legislature understands that the fees from the incorporation requirements allow them to keep personal taxes low, therefore judicial actions which hinder corporations are generally dealt w/swiftly and favorably (to Corp.) by the legislature.
iii. Choice of law rule: The law of the state of incorporation will govern corporation’s internal affairs
iv. Considerations in choosing where to incorporate
1. The smaller the entity – should organize where you operate – this limits the “tax” (if in OK and organize in Delaware – you have to pay Delaware and OK).
2. If doing business in multiple states, then you want the law that is most protective of corporations that have many shareholders to protect the corp in shareholder disputes (Delaware – vast amount of case law to limit legal uncertainty, legislation is constantly updating – very responsive to corporate needs)
b. Compliance with State Requirements
i. Preparation of Documents
1. Delaware § 102 – What you have to include in the Certificate of Incorporation
a. Must have some magic words – such as Inc., foundation, union, society
i. This puts actors on notice
as a corp – often may sound like misrepresentation
v. Delaware § 329 – cannot use lack of legal organization as a defense to a claim by a corp or by a person, but can be used to challenge corporate status/power.
vi. Sulphur Export Case – Required minimum initial capital
1. Corp did not pay initial capitalization prior to conducting business which would be considered defective corporation by statute and thus actors are joint and severally liable for debts as in most defective corportations
a. However, those who dissent to the transaction are usually protected from liability
2. Most states allow just a minimum initial capital to begin conducting business – whatever amount is stated in their COI
3. The law was meant to protect creditors and judgments but typically the amount is so low that it really won’t provide much relief in the case that it is needed. Kind of a hollow requirement.
vii. Trends in modern law with respect to defective corporation (note 2 pg 255)
1. Courts are more likely to hold individual D’s personally liable –
a. even if dealings were on a corp basis
b. especially if there are statutes dealing with defective incoporation
2. Finding of personal liability was extremely common when there was no attempt to incorporate
3. No party has ever succeeded in avoiding a K by asserting its own defective incorp status – see Del § 329 above
d. Disregarding the Corporate Entity – Piercing the Corporate Veil
i. General rule – the corp will be treated as an entity until the entity is used to defeat public convenience, justify wrong, protect fraud or defend crime
ii. Factors to consider to determine whether the corp veil should be pierced
1. Nature of claim
a. Tort – more likely to pierce b/c it spreads the costs to those who are responsible and P can’t really protect themselves
b. Contracts – less likely because P was free to protect his interests – asking for a personal gurantee
2. Co-mingling of funds – was there a transfer of funds to a parent or subsidiary in the wake of potential liability – were dividends prematurely paid