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Business Associations/Corporations
University of Pennsylvania School of Law
Fisch, Jill E.



Fall 2011

Introduction to the Corporate Form

Formation and Structure

The basic characteristics of the corporate form

Limited Liability

Free transferability of interests

Investor ownership

Continuity of existence

Centralized management

Others: cost and formality of formation and operation; tax treatment

Variations among Corporations

Close corporations v. Public Corporations

Controlled Corporations v. Market Controlled Corporations

Formation of the Corporation

DGCL statute

The charter/ Certificate of incorporation

i. The charter must provide for the name of the corporation (102(a)(1)), the registered office address (102(a)(2)), purpose of the corporation (102(a)(3)), and shareholder voting for certain transactions, capital structure: the various classes of authorized shares, the number of shares of each class, and the privileges, rights, limitations, and preferences of each class. No share price need be stated. (102(a)(4)). The incorporator’s name and mailing address. (102(a)(5)), dummy directors (102(a)(6)): If the powers of the incorporator(s) are to terminate upon the filinf of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.

ii. Contractual freedom is the overriding concept buy provisions could not in contravention of DGCL statute.

iii. The charter may establish the size of the board, terms of the board, removal of directors, indemnification provisions. (102(b)(1)) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstick corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation.

iv. How to amend? DGCL 242(b)(1) …board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting or proposing at the next annual meeting of the stockholders entitled to vote in re for the consideration of … amendment…If a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock … in favor of the amendment…(p.s. the same process as Company dissolution, DGCL 275)

File your charter to the secretary of the state in Delaware. The corp. is a Delaware rule even it does business in Pennsylvania. And Delaware law, the law of the state of incorporation, applies, which is called internal affairs doctrine.

i. Parties that incorporate in Delaware are bound exclusively by Delaware law and cannot choose to substitute other state or private provisions for their off-the-rack Delaware provisions. But other jurisdictions may be more flexible. Rosenmiller v. Bordes, 607 A.2d 465 (Del. 1991)

The Corporate Bylaws

i. Could not contradict the DGCL and the charter. (DGCL 109(b))

ii. Supplement the charter: 3.b.iii; annual meeting date, the board’s committee structure; quorum requirements.

iii. How to amend? In DGCL 109(a) shareholder have the inalienable right to amend the bylaws. The power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote. But any corporation can, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. But the power shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws.

1. Under MBCA 10.20(a)(2), a shareholder-initiated bylaw amendment cannot be altered by the board, if the amendment expressly so provides.

2. The scope of the shareholders’ power to amend the bylaws? CA, Inv. V. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008) The power of shareholders to amend the bylaws under DGCL 109(a) must be consistent with the power of the board to manage the corporation under DGCL 141(a). Although bylaws may not “mandate how the board should decide specific substantive business decisions,: they may “define the process and procedures by which those decisions are made.”

a. Ex: a shareholder-proposed Bylaws amendment that reimbursement of reasonable expenses of shareholder nominating a “short slate” of directors is valid, so long as directors are not prevented from exercising their fiduciary duties.

b. Ex: advance-notice of nominations to the board is valid

Control of Corporate Decisions

The Role of the Shareholder considering the centralized management structure

The shareholder can do 3 things:

Voting: designation of the board + fundamental corporate transactions

i. Voting right protects their residual claims.

ii. Shareholder collective action problems – shareholder passivity

1. Disperse ownership: no incentive to bear costs of information and activism to make no influence on a big company.

2. Solutions: 1934 SEC Act 14: disclosure requirement, proxy rules/ inst

e the meeting. DGCL 228 any action that may be taken at a meeting of shareholders may also be taken by the written concurrence of the holders of the number of voting shares required to approve that action at a meeting attended by all shareholders

Mechanics of the voting process

i. Notice: DGCL 222(a) written notice; DGCL222(b) 10~60 days before the date of the meeting

ii. Quorum: DGCL216 …the certificate of incorporation or bylaws of any corporation authorized to issue stock may specify the number and/or the amount of other securities having voting power the holders … in order to constitute a quorum for … but in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting…

iii. Record Date: for determining the stockholders entitled to vote at the meeting

iv. Voting Method

1. Default rule, DGCL 216 (2) In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders.

2. Default rule, DGCL 216(3) Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting…

a. Ex: seven places on the board to be filled each year, an owner of one share casts one vote for a candidate for each office. The top vote-getters for the open seats are elected. This allows the holder of a 51% voting block to designate the complete membership of the board of directors, while 49% holder can be entirely excluded from representation on the board.

3. Alternatives:

a. limited voting rights for preferred shareholder (or even, on some states, creditors could vote)

b. Class voting: ex: preferred stockholders usu. don’t elect even though they could vote.

i. NYBCL 804(a)(3) the holders of shares of a class (preferred) is entitled to vote, … the amendment shall be authorized by a majority of the votes of all outstanding shares of the class when a proposed amendment would (3). Subordinate their rights, by authorizing shares having preferences which would be in any respect superior to their rights.