Basic Corporate Law
An Introduction to Corporate Law
Most of the Fortune 500 companies are incorporated in Delaware
There is no one definition of a corporation. It is a legal entity that can own property, enter into contracts, sue and be sued. The basic characteristics of a corporation include:
Separate legal entity
A separate legal entity is an entity that is legally separate from the investors who provide it with money and the people who manage its business.
It is an artificial/fictitious entity
A corporation goes on indefinitely unless it is dissolved
It doesn’t die like a human being.
A shareholder’s liability is limited to the amount of money she paid for her shares. It is the corporation, not the shareholders that own the assets of the business and is liable for its debts.
The people who manage the corporation’s business are known as directors and officers, and are sometimes referred to collectively as managers.
A corporation is owned by shareholders but its usually managed by the executive officers and board of directors
Shareholders → Board of Directors → Executive Officers
The shareholder’s don’t really own the corporation. Stockholders own the corporation’s stock, which carries residual financial rights and basic voting rights. They do not directly control the corporation. Instead the elect a board of directors which is responsible for managing and supervising the corporation’s business. The board of directors hires the mangers.
Voice: They can exercise their voice through shareholder mechanisms
Exit: They can sell their shares if they do not like what is going on with the corporation
The company will be held accountable because they will lose shareholders and the stock price may go down. This can trigger the executive officers and management to see what is going on
This can also lead to takeovers which could in turn lead to a change in management
Loyalty: The shareholders can bring an action for breach of , and are sometimes fiduciary obligation
There are three basic types of securities:
Common stock, preferred stock and debt
Debt is the least risky and has the lowest expected return. A holder of debt can expect to receive fixed payments over time
Debt is also known as bonds, debentures, or notes
Common stock has the greatest risk and the greatest expected return.
Common stock can receive dividends which are cash payments which the corporation may make at the discretion of the board of directors.
The receive money after everyone to whom it owes money has been paid.
Preferred stock is situated between debt and common stock. Preferred stock has priorities over common stock. (receive dividends before common stockholders)