a. Four Basic Attributes
1. Separate entity with perpetual existence
2. Limited liability- limited to assets the Corp. owns.
3. Centralized Management- directors to act in the best interests of the shareholders
4. Transferability of ownership interests
b. Corporations are creatures of state law, although there are several federal guidelines and regulations (antitrust, banking, environment, SEC)
c. Corporate governance: the way shareholders exercise control over corporate managers.
d. Corporate law creates structures of power and accountability:
a. More viable in close corporation
a. More viable in large corporation
e. Seek to maximize shared interests while minimizing conflict
II.Economics of the Firm
a. Principle/Agent relationship
i. Agency costs and the threat of shirking and moral hazard.
1. Ex: grapes and winemaking
2. Each party will have very different interests and risks
3. How to allocate various terms
a. Risk of loss
4. There will always be some separation of incentives and the goal of an atty is to align interests so as to minimize shirking.
b. Business risk due to uncertainty.
i. Try to contract around risk, components of an agreement:
1. Term of relationship
2. Allocation of financial rights and obligations
3. Discretion and responsibilities of the agent
4. Supervisory powers of principal
5. Ability to terminate
6. Ability to change
ii. Types of Risk:
1. Non controllable: weather, war
a. Ways to control: insurance, diversify ventures
2. Controllable: specific to the business for which human action can affect the outcome. Usually means that it is somehow quantifiable.
a. Ways to control: improve management, take more efficient actions
iii. Risk vs. Uncertainty: Risk is a quantifiable uncertainty. If you can quantify risk, then bearing it becomes much easier. People can get paid for taking risk (Ex: residual claimants aka stock holders).
1. Systematic v. Diversifiable
2. Market risk v. Interest rate risk
3. Credit risk
4. Expected value vs. volatility
iv. Risk Preference: various human beings have different preferences and risk preference will and can change according to circumstances.
1. Neutral: decisions based solely on expected returns (coin toss offers more)
2. Averse: take into account the magnitude of the risk (140 guaranteed)
v. Managing Risk
a. Same as life, car, health insurance; it’s a risk reducing strategy
a. Not putting all your eggs in one basket; harvest less frequently, invest in different stocks/bonds, or different products,
b. Richest peeps in the world never diversify; but all investment advisers do
c. Risk seekers would put all eggs in one basket
i. Statutes: state
ii. Judge made corporate law: interpretive and theoretical gaps (fiduciary duties)
iii. Corporate choice of law: the law of the state of incorporation governs internal affairs and if a suit raising corporate law issues is brought in a state other than the state of incorporation, the incorporating state’s rules apply and determine the outcome.
iv. Organic Documents: Corporate vocabulary articles of incorporation and bylaws for internal government.
c. Corporate actors
1. Residual Financial rights
2. Basic voting rights: fundamental transactions, bylaws
3. Elect Board of Directors
ii. Board of Directors: legal responsibility to manage the corporation
1. Inside- affiliated with the corporation
2. Outside- no other affiliation with the corporation
3. They are there to represent the interests of the corporation.
1. Handle the day to day operations.