a. Basic characteristics of a corp.
i. Separate legal entity which has special rules associated with it
1. Owners have limited liability (creditors would like to know this)
2. “nexus of K’s” or “fictional entity” a “social entity” all terms used to define what a corp is.
ii. Certificate of incorporation (aka articles of incorp. or charter)
iii. It can hold property
iv. It can sue
b. Corps have indefinite life (perpetual, unless indicated otherwise). It means that if the CEO or shareholders die, leave, retire the corp does not die.
c. Who runs a corp?
i. Separation of management, shareholders, officers, etc. all different and different rights and responsibilities involved with each function.
1. Set management structure
2. Does not always have to exist that way, but often does.
ii. Who has what rights? Centralized management structure.
1. Shareholderàright to vote, certain financial rights
a. In terms of voting, the shareholders most important vote is to elect the board of directors.
i. The BD then elects to managers of the corp.
2. Boardàthey decide when and what contracts to enter into and then delegates to the managers of the corp. the duty to enter into said K.
3. Managersàthey act on behalf of the corp.
iii. Often the board delegates a great deal of authority to the managers of the company.
d. Publicly held corporationsàlisted on stock exchanges (sometimes) and are larger and have many shareholders.
e. Closely held corporationsàfew shareholders and you do not have an active trading market. Most family corporations.
f. In order to make directors and by proxy officers accountable, the shareholders have numerous tools at their disposal.
i. Voiceàby voting
ii. Exitàsell shares
1. If the corp stock price drops due to liquidation of shares this makes management question why and subsequently may lead to change. Which can also lead to take-overs
iii. Loyaltyàif officers are not doing the right thing then they can bring an action for breach of fiduciary duty. (derivative suit)
g. The purpose of the corporationàto make money and then there is a social responsibility aspect as well.
h. Corp law is basically state law, which is composed of default rules and a handful of mandatory ones
i. Federal lawàtrading of securities, and disclosure law, Sarbanes-Oxley
j. What is a corporate securityàfinancial instrument.
i. Common sharesàhighest risk
ii. Preferred shares
Which requires a shareholder vote of the effected shareholder vote.
i. Instead they choose to merge the company and roll it over into another “dummy” company with new articles of incorp.
ii. Only requires a 2/3 vote
ii. Appraisal rightsàyou can argue that you did not get a fair value of the shares taken as a result of a merger.
II. Corporate federalism
a. The extent to which states may regulate corp behavior and not interfere with interstate commerce.
i. Commerce clauseàcongress shall regulate intra-state commerce
1. Ergo, states may not regulate intra-state commerce.
b. So how do we know which state law should apply?
i. Due process issuesàofficers of corps have a right to know which laws are going to apply
c. Full faith and credit clauseàyou should give full faith to another state. (Huh?)
III. Internal affairs doctrineàmajority rule, satisfies which states law should apply.
a. Generally where the company incorporatedàwhere their articles of incorp are filed.