Select Page

Business Associations/Corporations
University of South Carolina School of Law
Burkhard, James R.

BUSINESS CORPORATIONS – BURKHARD
INTRODUCTION……………………………………………………………………………………………………………………………… 6
·      Friedman’s Theory……………………………………………………………………………………………………………………… 6
·      Purposes and Powers of Corporations (S.C. Business Corps Act)………………………………………………… 6
o      §33-3-102: General Powers…………………………………………………………………………………………………….. 6
o      §33-1-400 (26): Shareholder…………………………………………………………………………………………………….. 6
o      §33-2-102 – Articles of Incorporation……………………………………………………………………………………….. 6
o      §33-1-280 – Certificate of Existence………………………………………………………………………………………… 6
·      Income Statement…………………………………………………………………………………………………………………….. 6
·      Cash Flow Statement………………………………………………………………………………………………………………… 6
·      The Balance Sheet……………………………………………………………………………………………………………………. 6
·      Sarbanes-Oxley Act of 2002………………………………………………………………………………………………………. 7
o      Motivation for Fraud………………………………………………………………………………………………………………. 7
o      Types of Fraud………………………………………………………………………………………………………………………. 7
o      Intent of the Act…………………………………………………………………………………………………………………….. 7
·      Different Types of Legal Structures for Businesses (generally—explained in greater detail later)…….. 8
o      Sole Proprietorship…………………………………………………………………………………………………………………. 8
o      The Corporation…………………………………………………………………………………………………………………….. 8
§      Corporate Form is Superior:…………………………………………………………………………………………………. 8
o      The Partnership……………………………………………………………………………………………………………………… 8
§      Partnership Form is Superior:……………………………………………………………………………………………….. 8
o      The Limited Partnership………………………………………………………………………………………………………….. 8
o      The Limited Liability Company (LLC)……………………………………………………………………………………….. 8
o      S Corporation………………………………………………………………………………………………………………………… 8
o      Non-Profit Corporation…………………………………………………………………………………………………………… 9
o      Professional Corporation or Professional Association (allowed in S.C.)………………………………………… 9
o      Two most important differences bw the varieties……………………………………………………………………….. 9
§      You must have a lawyer to create a corporation (In SC)……………………………………………………………… 9
·      But not so to create an LLC…………………………………………………………………………………………………. 9
SOLE PROPRIETORSHIPS………………………………………………………………………………………………………………. 9
·      Generally…………………………………………………………………………………………………………………………………. 9
AGENCY…………………………………………………………………………………………………………………………………………. 10
·      Agency law involves delegation……………………………………………………………………………………………… 10
·      Restatement Third of Agency (RTA)………………………………………………………………………………………. 10
·      Authority (P = principal; A = Agent)……………………………………………………………………………………… 10
·      Employee(s) (RTA §7.06): are generally agents of the principal/employer…………………………………… 10
·      Independent Contractors:……………………………………………………………………………………………………. 11
·      Miller v. McDonald’s Corp (1997)………………………………………………………………………………………….. 11
·      Restatement of Torts § 429……………………………………………………………………………………………………. 11
·      Funding by the Owner………………………………………………………………………………………………………….. 11
·      In re Estate of Fenimore (1999)……………………………………………………………………………………………… 11
PARTNERSHIPS…………………………………………………………………………………………………………………………….. 11
·      In general………………………………………………………………………………………………………………………………… 11
·      Partnership Property……………………………………………………………………………………………………………… 12
·      Meinhard v. Salmon (1928) (Know this case: most cited case in history)…………………………………….. 12
·      Fiduciary Duties……………………………………………………………………………………………………………………… 12
o      § 33-41-530: Duty of partners to give information……………………………………………………………………. 12
·      § 33-41-390: Liability of Incoming Partner………………………………………………………………………………. 12
·      Profits……………………………………………………………………………………………………………………………………. 12
·      Withdrawal of a partner…………………………………………………………………………………………………………. 12
o      § 33-41-910: Dissolution……………………………………………………………………………………………………….. 12
·      Termination of a partner………………………………………………………………………………………………………… 13
o      Bohatch v. Butler & Binion (1998)…………………………………………………………………………………………. 13
o      Freeze Out (Page v. Page (1961))………………………………………………………………………………………….. 13
CORPORATIONS……………………………………………………………………………………………………………………………. 13
·      Piercing the Corporate Veil…………………………………………………………………………………………………….. 13
o      Sturkie Test………………………………………………………………………………………………………………………….. 13
o      Enterprise Liability (to PCV)…………………………………………………………………………………………………. 14
§      Walkovszky v. Carlton (N.Y. 1966)…………………………………………………………………………………….. 14
·      Subsidiary and Parent Companies…………………………………………………………………………………………… 14
§      In re Silicone Gel Breast Implants…………………………………………………………………………………………… 14
·      Board of Directors………………………………………………………………………………………………………………….. 14
o      McQuade v. Stoneham (N.Y. Ct. App. 1934)………………………………………………………………………….. 15
·      Voting……………………………………………………………………………………………………………………………………. 15
o      Straight……………………………………………………………………………………………………………………………….. 15
o      Cumulative………………………………………………………………………………………………………………………….. 15
·      Voting – Fundamental Corporate Changes……………………………………………………………………………… 15
o      Differs from voting on Directors election/removal in 3 aspects…………………………………………………… 15
·      Voting – Where and who………………………………………………………………………………………………………… 16
o      Record Owner:…………………………………………………………………………………………………………………….. 16
o      Proxy:…………………………………………………………………………………………………………………………………. 16
·      Shareholder Proposals (governed by Rule 14a-8 (handout))………………………………………………………… 16
o      2 Types……………………………………………………………………………………………………………………………….. 16
·      Shareholder Inspection Rights………………………………………………………………………………………………… 16
o      Kortum v. Webasto Sunroofs, Inc. (D.E. Ct of Chancery 2000)…………………………………………………. 16
·      Shareholders’ Voting Agreements…………………………………………………………………………………………… 17
o      Ringling Bros.-Barnum & Bailey v. Ringling (D.E. Sup. Ct. 1947)…………………………………………….. 17
·      Duty of Care……………………………………………………………………………………………………………………………… 17
o      Business Judgment Rule…………………………………………………………………………………………………………. 17
o      Dockside, 294 S.C. 86…………………………………………………………………………………………………………… 17
o      Barnes v. Andrews (S.D. N.Y. 1924)……………………………………………………………………………………… 17
o      Caremark Int’l, Inc. Derivative Litigation (DE Chancery Ct. 1996)……………………………………………. 17
o      McCall v. Scott (6th Cir. 2001)……………………………………………………………………………………………….. 17
o      Stone v. Ritter (Del. Sup. 2006) [handout]………………………………………………………………………………. 18
o      Executive Compensation…………………………………………………………………………………………………………. 18
·      Duty of Loyalty………………………………………………………………………………………………………………………….. 18
o      Self-Dealing Transactions……………………………………………………………………………………………………….. 18
o      Jones Co. v. Frank Burke, Jr. (N.Y. Ct. App. 1954)……………………………………………………………………… 18
o      Northeast Harbor Golf Club v. Harris…………………………………………………………………………………………. 18
§      Line of Business Test…………………………………………………………………………………………………………… 18
o      Broz v. Cellular Info Systems, Inc……………………………………………………………………………………………… 19
§      Corporate Opportunity Doctrine…………………………………………………………………………………………. 19
o      HMG/Courtland Properties, Inc. v. Gray (DE 1999)…………………………………………………………………….. 19
§      Entire Fairness Test…………………………………………………………………………………………………………….. 19
o      Cookies Food Products v. Lakes Warehouse Distributing (Iowa 1988)…………………………………………… 19
§      Different burden in Iowa that in Delaware…………………………………………………………………………… 19
·      Derivative and Direct Suits…………………………………………………………………………………………………………. 19
o      Derivative:……………………………………………………………………………………………………………………………… 19
§      Derivative v. Class Action………………………………………………………………………………………………….. 20
o      Direct:……………………………………………………………………………………………………………………………………. 20
§      Eisenberg v. Flyer Tiger Line, Inc. (2nd Cir. 1971)……………………………………………………………….. 20
o      Demand on Directors……………………………………………………………………………………………………………… 20
§      Marx v. Akers………………………………………………………………………………………………………………………. 20
·      Futility of Demand Test…………………………………………………………………………………………………… 20
§      Zapata v. Maldonado……………………………………………………………………………………………………………. 21
§      Delaware Demand Futility Test………………………………………………………………………………………………. 21
§      New Jersey Demand Futility Test……………………………………………………………………………………………. 21
o      South Carolina Cases………………………………………………………………………………………………………….. 22
§      Grant v. Gosnell, 266 S.E.2d 413 (S.C. 1976)………………………………………………………………………. 22
§      Carolina First v. Whittle, 539 S.E.2d 402 (S.C. App. 2002)……………………………………………………. 22
o      Right to Jury Trial – derivative suits……………………………………………………………………………………. 22
§      In Ross v. Bernhard (1970)………………………………………………………………………………………………… 22
·      South Carolina 7.01………………………………………………………………………………………………………………… 22
o      Davis v. Hamm (S.C. App. 1989)…………………………………………………………………………………………… 22
o      Babb v. Rothrock (S.C. 1991)………………………………………………………………………………………………… 23
·      Venture Capitalists…………………………………………………………………………………………………………………. 23
o      Capitalists demand high returns because:…………………………………………………………………………………. 23
o      Venture capitalists are shareholders w/ special rights:………………………………………………………………… 23
o      Private placement:………………………………………………………………………………………………………………… 23
·      Going Public…………………………………………………………………………………………………………………………… 23
o      Why?………………………………………………………………………………………………………………………………….. 23
o      How much $ to raise?……………………………………………………………………………………………………………. 23
o      How many shares to sell?………………………………………………………………………………………………………. 23
o      Public offering – How to make one………………………………………………………………………………………… 23
o      Underwriter: typically an investment bank………………………………………………………………………………. 23
·      Federal Securities Regulation……………………………………………………………………………………………………… 24
o      Must Register w/ S.E.C. unless exempted (prospectus, cost of $100K)…………………………………………… 24
§      Private Placement exemption – §4(2)……………………………………………………………………………………….. 24
§      Intrastate exemptions – §3(a)(11), Rule 147……………………………………………………………………………… 24
§      Short Form registration – Reg. A – cheaper, but not cheap………………………………………………………… 24
·      Regulation D Exemptions – Rule 504……………………………………………………………………………….. 24
o      South Carolina Registration………………………………………………………………………………………………… 24
§      Limited Offering………………………………………………………………………………………………………………. 24
§      Preemptive Rights of Shareholders…………………………………………………………………………………… 25
o      Debt Securities……………………………………………………………………………………………………………………. 25
§      Advantages………………………………………………………………………………………………………………………. 25
§      If undercapitalized may be treated as equity………………………………………………………………………… 25
o      Shareholder’s Obligation to Pay Par Value………………………………………………………………………………. 25
§      Issuance of shares in S.C……………………………………………………………………………………………………. 25
·      SEC and Regulations…………………………………………………………………………………………………………………. 26
o      2 Main Federal Statutes…………………………………………………………………………………………………………….. 2

   Hite v. Thomas & Howard Co. of Florence (S.C. 1991)……………………………………………………… 41
·      Conversions……………………………………………………………………………………………………………………………. 42
o      Corp to LLC: § 33-11-111……………………………………………………………………………………………………. 42
o      Corp to Partnership: § 33-11-113…………………………………………………………………………………………… 42
·      Limited Partnership (LP)……………………………………………………………………………………………………………. 42
o      History…………………………………………………………………………………………………………………………………… 42
§      ULPA & RULPA…………………………………………………………………………………………………………………. 42
o      What it is………………………………………………………………………………………………………………………………… 42
o      Problems w/ LP’s……………………………………………………………………………………………………………………. 43
§      Zeiger v. Wilf (N.J. 2000) (Liability to 3rd parties)…………………………………………………………………… 43
o      Avoiding liability…………………………………………………………………………………………………………………….. 43
o      Liability to the partnership and partners…………………………………………………………………………………. 43
§      Kahn v. Icahn (Del. 1998)……………………………………………………………………………………………………… 43
§      In re USACAFES, LP (Del. 1991)…………………………………………………………………………………………. 44
INTRODUCTION
General purpose of creating a business: To make money
But this doesn’t always mean to generate cash $$$
Often $ is reinvested to help the business grow
Also, you can generate cash, but not make $$$
Look to the opportunity costs, risk/rewards tradeoff
If you can’t make more that the risk free investment, then don’t undertake the business
Further, some businesses are created to help people rather than make $$$
Pro bono firm for example
But they still make some $, but their primary goal isn’t making $ but helping people
Friedman’s Theory
Each business has 1 main goal: TO MAKE MONEY (as much as possible)
Everyone who invests in a company is an “owner”
Purposes and Powers of Corporations (S.C. Business Corps Act)
§33-3-102: General Powers
(13): make donations for the public welfare or for charitable, scientific, or educational purposes
(15): make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corp
Political contributions are one difference bw (13) and (15)
§33-3-103: Emergency Powers
§33-3-104: Ultra Vires
§33-1-400 (26): Shareholder
 – person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent rights granted by a nominee certificate are on file with a corporation. Creditors of a corporation may have the rights of a shareholder as allowed in the corp’s articles of incorporation.
§33-2-102 – Articles of Incorporation
Sets forth a list of rules/guidelines which get a corporation started
§33-1-280 – Certificate of Existence
Document prepared by the Secretary of State which says whether or not a corporation is generally complying with statute requirements
Fees, filing requirements, etc.
Income Statement
Computes the profit of a business for the period in question – usually one year
Sales – Costs = Profits (before taxes)
Costs include materials, salaries, general and admin expenses, depreciation of machinery or other items, etc
·         Cash Flow Statement
o       Measure of how much more cash a business has at the end of the year than it had at the beginning
o       Cash Flow = Profit after Tax + Depreciation – Investment
o       Can be complicated bc cash can be put into investments for the company or other expenses. The $ isn’t all just sitting in a bank to be counted
o       The Cash Flow Chart on p. 21: Depreciation is on the list twice, why?
§         Depreciation is a “paper deduction.” It isn’t actually a payment. You don’t lose or gain any actual cash. The investment in year 2009 is the payment for the machine.
·         The Balance Sheet
o       Is a snapshot of a particular moment in a business’s ongoing operations
o       3 main sections
§         Assets: things the company owns that have value
·         Ex. Cash, land, buildings, accounts receivable, equipment
§         Liabilities: what the company owes
·         Ex. Accounts payable, wages to EE’s, other debts
§         Owner’s Equity: what’s left over after you subtract the liabilities from the assets
·         Liabilities and Equity are on the same side of the balance sheet, why?
o       Bc liabilities is what your debtors have a claim on, while Equity is what your stockholders have a claim on – what you owe them.
·         When deciding to sell a business (things to look at/for)
o       Cash flow
o       Assets
o       Selling price
·         Sarbanes-Oxley Act of 2002
o       Passed in response to breakdowns of financial accounting and corporate accountability in the wake of the financial scandals in the 2000 time frame
§         Most notable are Enron and WorldCom
o       The frauds transpired in public companies
§         Companies whose stocks are publicly traded and held broadly by the investing public
o       Audit committees oversee a co’s financial accounting staff and procedures
§         See that the firms stated accounting policies are applied consistently
§         Assess the reasonableness of the policies
§         “Test” the data the firm’s financial statements are based upon
·         It’s impossible to test every single piece of data—so the audit team samples certain random transactions
o       As well as anything which looks suspicious
o       Or transactions which are prone to mistakes or fraud
o       Motivation for Fraud
§         Put out “good numbers”
·         If ↑, then performance of the co. is good and the stock price will rise—so firm managers have an incentive to create good numbers
·         Some managers get bonuses for delivering good financial results
o       They may also own stock in the company—and sell it when the price of the stock rises (“cashing in”)
o       Types of Fraud
§         Promulgation of false financial statements—balance sheet, income and cash flow statements
§         Off-balance sheet transactions—moving liabilities off the balance sheet
·         Enron
§         Inflation of profits
·         WorldCom
o       Intent of the Act
§         Audit committee must disclose if they have an “audit committee financial expert” – one who is very experienced and has dealt w/ a range of issues
§         Section 404: co. must evaluate its internal controls through procedures that evaluate the design of the controls and test its operating effectiveness
·         And auditors must audit management’s assessment and opine on the internal controls
§         CEO and CFO must attest to accuracy of the financial statements—and face criminal liability if the statements aren’t accurate
§         Specified the degree which firms could do other work for audit clients and the procedures to be followed to do such work
·         Question 2, pg. 33: Who is the client the business atty is to represent zealously?
o       The corporation itself – it is its own legal entity
·         Different Types of Legal Structures for Businesses (generally—explained in greater detail later)
o       Sole Proprietorship
§         the individual and business are one and the same for tax purposes (he reports all profits and pays all taxes – no tax sheltering)
§         individual is personally liable and claimants can pursue assets of the business and the owner