Corporations, Frank Partnoy
I. Overarching questions and themes:
a. Who should bear the key risks?
b. How should they divide the profit?
c. How should they allocate authority and responsibilities?
d. How long should their business and their responsibilities last?
e. How should they be able to change or end their relationship?
f. Who does the corporation serve?
i. Focus tends to be SHs but it’s both flexible and controversial (CSR, etc).
g. SEPARATION OF CONTROL AND OWNERSHIP
Corp Types: [2 most common are LLC and S-Corp]
1) General partnership
GP = “an association of 2 or more persons to carry on as co-owners a business for profit.” RUPA §202(a). Each partner can be held personally liable for all debts of the GP as well as for torts committed by other partners within the course of business. RUPA §306.
· No formal filing required. A GP is formed by law if 2+ people associate to carry on as co-owners a business for profit (usually by consent but has happened inadvertently).
· Partners can be held joint and severally liable for contractual and tort obligations.
2) Limited partnership
LP = “partnership formed by 2 or more persons having one or more general partners and one or more limited partners.” RULPA §101(7). General partners are personally liable BUT the limited partners are liable only up to the amount of their capital contribution.
· A limited partner has no voice in management and liability is limited to the capital contributed. A general partner acts as active management and is personally liable for business obligations.
3) Limited liability partnership
LLP = Only the LLP as an entity is liable for business obligations but partners are personally liable for tortious conduct of self and those they supervise.
· Liability rules vary by state.
· general partners can only be held liable for own wrongful or negl acts and those of employee under their supervision.
4) Limited liability company
LLC= Legal entity distinct from owners (who are called members). Members/owners have limited liability but management is specified in an operating agreement that chooses either: Member managed or Manager managed
· Formation requires articles of incorporation AND operating agreement filed with the state.
· More attractive than an LP because allows members to participate fully in management and still get lim. liability.
5) S-Corp = SINGLE taxation
· Articles of incorporation must be filed with the state.
· Partnership income and expenses are said to “PASS through” to the partners in proportion to their ownership interest.
· To qualify must be:
a. A domestic corp or LLC with no more than 100 SHs.
b. The corp can have only one class of stock (though different voting rights are treated as a single class if they are otherwise alike), AND
c. All SHs must have agreed to Subchapter S tax treatment.
6) C-Corp = DOUBLE taxation
· May be taxed as incorp’d or unincorp’d (ie. as a corp or as a partnership). “Check the box” form allows GPs, LPs, LLPs, LLLPs, and LLCs to be taxed as partnerships regardless of liability, management structure, and transferability of shares unless owners elect to be taxed as corps. (State income tax tends to follow the federal lead.)
· C-Corps are subject to DOUBLE taxation (tax on corp income AND personal tax on SH dividends (with no deductions or allowances for the other tax already paid))
I. Corporate structure
A. Key attributes:
1. Separate entity: corp separate from investors/managers
2. Perpetual existence
3. Limited liability: SH cannot lose more money than they’ve invested
4. Centralized management: SH elect board to manage
5. Transferability of ownership interests
B. Corporate building blocks
2. Expected return
3. Risk management
4. Firm organization
a. Meinhard v. Salmon – “Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty…
i. Dissent (Andrews) – there was no general partnership, merely a joint venture for a limited object, to end at a fixed time.
b. SHs generally do not owe each other any duty.
i. Some exceptions generally relating to controlling SHs (these might owe duties, think separation of ownership and control).
c. Vote, sue, sell, yell (Exit v. voice)
i. Exit is the wall street rule — if you don’t like something sell your stock and leave. Voice — allows SHs to affect how the corp is run. Emotional ties can develop though and loyalty can play a role here as well.
C. Sources of corporate law
1. Model business corporation act
2. Delaware general corporation law
3. California corporations code
4. ALI principles
5. Judge-made law (internal affairs doctrine)
6. “Private law” (corporate documents)
7. SOX: requires public corps to undertake the costly process of accessing their internal controls over financial reporting and possible corp wrongdoing.
D. Corporate Vocab
1. Shareholders / directors / offic
ith respect to amount and purpose
a. Model rules say: chartiable, scientific, educational donations OK
b. IRS: no more than 10% of taxable income
2. “Ultra vires”: do the articles of incorp prevent it? Is it beyond the scope of the biz?
3. Shareholders: should they get to vote?
III. Corp as Political Actor
A. Citizens United
1. Gov’t may not, under the First Amendment, suppress political speech on the basis of the speaker’s identity (corp = speaker). Overruling Austin.
2. Fed Statute barring independent corp executives from electioneering communications violated the First Amendment. Overruling McConnell
3. Disclaimer and disclosure provisions of the BCRA did NOT violate the First A as applied to nonprofits film and advertisements for the film.
a. No indication that disclosure chills speech.
b. speech that is within the reach of rules for regulating political speech DOES chill speech however.
4. No cap on corp. spending for these purposes BUT cap on individual spending.
5. SH can figure out whom the corp is donating to and can choose to exit.
6. Anti-distortion Rationale: Permits the gov’t to ban political speech bc the speaker is an association with a corporate form. Under this rationale, C can ban political speech of media corporations.
A. Formal requirements:
1. Filing fee
2. Articles of incorp must be filed
3. Must hold an organizational meeting
4. Rule of thumb when choosing state to incorp in:
B. Legal representation:
1. Entity rule– lawyer represents the company and it applies retroactively (even if the corp wasn’t technically in existence yet).
2. BUT aggregate theory is sometimes applied for equitable purposes (cts assume the existence of dual representation).
3. Cts will also look at the reasonable expectations of the parties (payment is not dispositive but is pertinent).
4. Use engagement letter to make clear that you rep the corp or (if aggregate) that he assumes ethical obligations to each participant