Select Page

Business Associations/Corporations
University of San Diego School of Law
Dallas, Lynne

 
Corporations Outline
Dallas: Spring 2014
 
 
 
A. Introduction
a. Characteristics of Corporations
                       i.   Liability: Corporations generally have limited liability and are not responsible for what officers and shareholders do.
                     ii.   Continuity of Life: Corp existence is perpetual, regardless of what happens to shareholders, directors, or officers.
                iii.  Tax: Double Taxation
1.  Default: the corp. is taxed as a distinct entity
2.  Subchapter S: taxed like a partnership.
                 iv.  Incorporating
1.  Incorporators must choose between incorporating in their headquarter state or somewhere else (Delaware)
a.  For a closely held corporation, incorporation should take place in the corporations principle place of business
b.  For a publicly held corporation, incorporation in Delaware is usually very attractive
                                                    i.   because of Delaware’s well-defined, predictable, body of law and its slight pro management bias
2. Articles of Incorporation
a.   To form a corporation, the incorporators file a document with the secretary of state.
                                                    i.   Called Articles of Incorporation or Charter
3. Bylaws
a.  After the corporation has been formed, it adopts bylaws.
b.  Bylaws are rules governing the corporations internal affairs.
c.  They are usually not filed with the secretary of state, and may usually be amended by either the board or the shareholders.
b. Structure of a Corporation
                   i.  Shareholders elect the board of directors, who choose officers
                 ii.  Corporate Actors: Shareholders, Directors, Officers, and Stakeholders
                iii.  Shareholders:
1.  Have a right to vote directors on the Board of Directors.
2.  Also entitled to remove the directors and fill the vacancies with those they believe are most suitable.
3.  Delegate control over their investment to managers.
4. If unhappy the shareholder could sue, or can choose to exercise other options that may send more of a message or have a financial impact.
a. Exit By Selling shares
                                           i.  Some impact “market for corporate control”
                                         ii.  Limitations
1.  Message may not be conveyed
2.  May not have Impact on stock price
a.  Too few shares sold
b.  Stock market inefficiencies
c.  Other events may influence stock price
d.  Managers may manipulate information to markets
3.  Price would have to decline substantially to influence “market for corporate control” because of takeover costs.
b. Voice
                                                    i.   Can also exercise their voice through voting
1.  Some impact because of shareholder voting rights
                                                  ii.   Litigation also can be viewed as a form of voice
c. Loyalty: Hold and do nothing
                 iv.  Board of Directors:
1.  Appoints officers
a.  (Shareholders do not appoint officers)
2.  No one director has the power: the board has to vote for officers.
3.  The Board of Directors makes major decisions/policies of the corp – the implementation of those policies are done by the officers.
4.  They monitor the corp, not really manage.
5.  They make major decisions, but the officers in reality are in control and are monitored by the BOD
a.  BOD can fire officers whenever they want.
                   v.  Officers:
1.   Implement decisions made by the BoD.
                     vi.   Stakeholders:
1.  Those who do not fit the legal categories above, but who nevertheless have an interest in the actions of a corporation
2.  i.e., creditors, employees, customers, and the community
c. Conceptions of the Corporation
                       i.   No one definition of a corporation
                 ii.  Is the corporation a private institution or a social institution?
                    iii.   Hypothetical: If a corp not only injured its shareholders, but also its employees (maybe an investment caused it to lay off workers) – do employees have a say? Should the Corporation consider the interests of its employees?
1.  The answer to this depends on the conception of the corporation
                 iv.  Corporation as Private Institution
1.  Corporation as Private Constitution (with Fundamental Rights)
a.  Like public constitution, the governing documents for corporations allocate rights and responsibilities among he various “citizens” and “officials” who participate in the corporation.
2.  Elected officials, not citizens, make most political decisions. 
3. Role of Law: Enabling
a.  Private contracting
b.  Market discipline
                   v.  Corporation as Social Institutions
1. Role of Law: “Mandatory” Rules
2.  Market failure in contracting
a.  Collective action problems
b.  Inadequate information
c.  Disparity in expertise
d.  Inefficiencies in market pricing
                 vi.  Which Law Applies?
1.  Who should determine applicable corporate law?
a.  State government? Which state? Federal government?
2. A corps “Internal Affairs”: relate to the legal relationships between the corp participants, rights of shhs, fiduciary duties of directors, and the procedures for corp action.
3. Internal/International Affairs Doctrine
a. The law of the state of incorporation governs all shh/manager matters in multistate corps.
b. State Courts are bound to accept the corp law rules of the incorporating state.
                                                    i.   Unless Psuedo Foreign Corporation exception applies
c. A corporation is in the state where they file.
                                                    i.   They can file in any state.
                                                  ii.   Its not necessary to file or incorporate where you do most business or where your head quarters is.
4. Psuedo Foreign Corps: state law may apply if significant contacts with the state.
a.  This is an exception to the State Ct being Bound
b. Some states have modified the choice of law rule and regulate the internal affairs of corps that have substantial operations in the state but are incorporated in another jurisdiction.
c. California
               

: consent of others for a transfer of control rights
3.  economic interests
4. centralized management: free transferability of ownership interests
a. free transferability – continuity of life
b. consent to transfer – right to dissolve
                vii.  Mergers and Consolidations
1.  Corporations may combine in a merger
a.  Assets and liabilities are automatically combined in a surviving corporation
b.  Merger plan must be approved by both corps’ boards AND shareholders
2.  After merger, articles of merger must be filed
3.  Partnerships may combine by agreement
4.  LLCs may merge in most statutes
c.  Planning Considerations
                       i.   Balancing ownership interests
                     ii.   Economics of the Choice
d. Tax Consequences
                       i.   Default: the corp. is taxed as a distinct entity
                 ii.  Corporation vs. Partnership
1.  Characteristics of limited liability partnerships and limited liability limited partnerships:
2.  Differing Tax Treatments:
a.  reason corporation has to file with government and partnership doesn’t
                                                    i.   liability: partnership can be sued as individuals but corporations are sued as the corporation
b. consistent with concession theory of corporation: theory that corporation has certain characteristics of limited liability and as a result of getting this benefit the corporation should be viewed as more public or social entity.
c.  taxation reasons: separate taxable entity.     
                iii.  What does “check the box” refer to:
1.  Every unincorporated entity (GP, LLP, LLLP, LLC)  is taxed as a partnership, unless its owners elect for the entity to be taxed as a corp by checking a box or filing for subchapter S.
2.  If you are an unincorporated business association you can check the box – then you wont be treated as a partnership for tax purposes, you will be treated as a corp.
3.   Just bc you see the name partnership, its just a status under state law, but for tax purposes, corporate tax treatment can be applied to the partnership, or any other unincorporated business associations if you check the box.
4.  Issue: What does it mean to be treated as a corp or partnership for tax purposes?
a.  You can be an LLC (unincorporated association) even though you are a company, you can be treated as a partnership for tax purposes.
b.  A LLLP or a GP, although under state law are partnerships, if they check the box, they can be treated as a corp for tax purposes.