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Business Associations/Corporations
University of San Diego School of Law
Partnoy, Fred

I.) The Corporation Overview-The Grand Capitalist Tool
            A.) The corporation is an investment vehicle for the pooling of money and labor
                        1.) Suppliers of capital join with providers of labor to make possible the advantages of business                                          specialization
                                    a.) As industrial and manufacturing concerns grew with industrialization and specialized                                                    businesses, it became a matter of economic necessity to incorporate to attain resources                                                     sufficiently adequate to finance the enterprises
            B.) Five Basic Attributes
                        1.) Separate entity with perpetual existence
                                    a.) The corporation is entirely a creature of the law-a legal artifice
                                    b.) The corporation is a legal entity that can enter into contracts, own property and be a party to a                                                 lawsuit
                                    c.) Corporate existence and attributes arise completely from state statutes
                                    d.) The corporation is an entity distinct from those who contribute capital and those who manage                                      the business
                                                i.) The corp. owns the assets of the business and is liable for any business debts
                        2.) Limited Liability
                                    a.) The corporation is liable for its own obligations
                                    b.) Corporate insiders (directors, management etc.) are not personally liable to outsiders for                                               corporate obligations
                                    c.) Outsiders bear the risk of corporate insolvency
                                    d.) Investors and managers risk only their own personal investment
                        3.) Centralized Management
                                    a.) Board of Directors (BOD) is the locus of corporate power responsible for managing and                                              supervising the business
                                                i.) Shareholders (SH) elect the board but otherwise have a limited role in managing the                                                      corporation
                                                            a.) SH have no power to bind the corp or act on behalf of it either
                                                            b.) Can vote on fundamental changes only
                                    b.) The BOD most often delegates its powers to management officers who then can act on behalf                                                 of the corporation and bind it as well
                        4.) Transferability of Ownership Rights
                                    a.) SH ownership interests are freely transferable
                                                i.) SH can sell their financial rights and realize the value of their investment
                        5.) Ownership Interests Tied to Residual Earnings and Assets
                                    a.) Corporation establishes a hierarchy for the stream of earnings generated by business
                                    b.) Creditors are at the top and receive a return based on their contracts
                                    c.) SH are last and receive dividends declared at the discretion of the board
                                    d.) Upon dissolution of the corp., creditors have top priority
            C.) Corporate Law Generally
                        1.) Corp. law generally focuses on the often conflicting relationship between shareholders and                                           managers/directors
                                    a.) They comprise the “internal” organization of the company
                                    b.) Agency costs
                                                i.) The fallout associated with the division between ownership and control
                                                ii.) Where ownership delegates power of management and control there are bound to be                                                  conflicts of interest and exploitation of opportunism
                        2.) Separation between the SH and the managers creates opportunity for exploitation and personal gain
                                    a.) Together, the two categories should want to maximize profit but each will likely have its own                                        separate agenda
                                                i.) Managers may shirk duties after SH investment, take exorbitant perquisites, may be                                                      reluctant to undertake risky ventures in effort to maintain job security
                        3.) Corporate law a

urn on her investment, given other investment choices
                                                i.) This means that the principal would like to charge as much as the market will allow                                                       (maximize income) and pay as little as possible (minimum wage/outflow)
                                                ii.) In other words, maximize profits and minimize labor and agency costs
                                    b.) Venture to be a success
                                    c.) To see the bulk of the venture’s profits
                                                i.) Principal will generally bear the risk of loss
                                                ii.) In exchange for shouldering the risk, the principal will get the returns
                                    d.) Management/employees to put the interests of the investor above all else, including sacrificing                         their own interests
                                    e.) The means to impose his will if necessary
            C.) Agent
                        1.) The agent is the manager, employee etc. of the firm and the invested capital
                        2.) The manager/employee (hereinafter the agent) wants:
                                    a.) Munificent compensation, regardless of the firm’s performance
                                    b.) To make the firm successful with as little effort as possible
                                    c.) Very limited and as little interference from the principal as possible
            D.) Business Risks
                        1.) General
                                    a.) Prof. Knight made a distinction between risk and “uncertainty”
                                                i.) Risk is specifiable uncertainty
                                                ii.) Uncertainty is where you cannot specify the certainty with which an event will occur
                        2.) There are generally two types of risks: