Business Corporations, Fall 2014
· 2 types of corporations
§ Normally have very few owners, owners are the shareholders
§ Stock is almost never bought or sold
§ Closely owned
§ Large publicly owned corporations
· The state statutes that affect corps are drafted mainly concerning the large public corps, but the vast majority of corps that you will encounter will be close corps.
· What is the difference between acting as an agent and acting as a principle?
o Agency is the fiduciary relationship that arises
§ (1) when one person (a “principle”) manifests assent
§ (2) to another person (an “agent”) that the agent shall act on the principle’s behalf and subject to
§ (3) the principle’s control, and
§ (4) the agent manifests assent or otherwise consents so to act. [See Supp. E1] o The board would be mostly viewed as a principle rather than an agent, even though they are not the corporation.
o Agent owes fiduciary duty to principle – acting on behalf of principle.
· § 1.01 Agency Defined (restatement (third) definition)
o Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control and the agent manifests assent or otherwise consents so to act.
· A.P. Smith Mfg. Co. v. Barlow
o A.P Smith made a charitable donation to Princeton. SHs tried to block b/c they claim cert of incorp does not allow corp to make donation.
o Board of Directors is suing the President of the company.
§ They are doing this to prove that the donation was legal. They want the “blessing” of the court.
o The stockholders argue that there is nothing in the articles of incorporation that expressly allows the donation, and the statutes that authorize this type of donation cannot retroactively apply to this corporation that was formed before the statute was enacted.
o HELD: Corp should not have been blocked re: donation. In modern times (where wealth has shifted from individuals to large corps and tax has become a burden) corps have social and private responsibilities to communities in which they are located. (Further, NJ law does not apply because state has authority to amend previously issued corp charters).
o Directors are PRINCIPALS b/c they are calling the shots à officers are agents.
· General Powers – S.C. Code Ann. § 33-3-102 [pg. C12] o Allows the corporation to do essentially anything that a person has the power to legally do, except that the action must be “necessary and convenient” to carry out the business affairs of the corporation.
o (13) Make donations for the public welfare or for charitable, scientific, or educational purposes.
o (15) Make payments or donations, or do any other act, not inconsistent with the law, that furthers the business and affairs of the corp., e.g. political contributions.
§ Ought to be limited to business activities
o NOTE: Political contributions are one difference b/t (13) & (15).
· Emergency Powers – § 33-3-103 [pg. C13] o (d) Emergency exists when a quorum of the directors cannot be assembled b/c of catastrophic event.
· Ultra vires – S.C. Code Ann. § 33-3-104 [pg. C14] o Purpose of ultra vires statute is to prevent challenges to validity of corp actions based on inconsistencies with the corp charter.
o BUT, how can corp sue officer/director under this statute when in previous statute they were given power to do anything an individual can do?
§ ANSWER: lines in phrase “necessary and convenient to carry out business and affairs” in § 102.
· Board of Directors – S.C. Code Ann. § 33-8-101. [pg. C38] o The board of directors must carry out all of the actions by a corporation.
o Board of Directors
§ Three Levels of Ownership:
· Officers – carry out decisions
· Directors – set policy and make decisions
· Shareholders – owners
§ § 33-8-101 [pg. C38] – one of the MOST IMPORTANT code sections à Requirement for and duties of board of directors
· Unless otherwise provided in:
o Ch. 1 through 20 of the Title;
o The articles of incorporation; OR
o An agreement unanimously approved by the SHs and disclosed in Articles and on share certificates:
· All corporate powers must be exercised by or under the authority of, and the business and affairs of a corporation must be managed under the direction of, a board of directors. If the authority of the board is dispensed with or limited by a provision in the Articles under (b) or by a shareholder agreement under (c), Articles or agreement shall describe WHO is to perform some or all of the duties of the board.
· Board can range in # of people.
· Board NOT an agent for SHs à considered the PRINCIPAL
· Articles of Incorporation – § 33-2-102 [pg. C10] o Sets out list of rules/guidelines which get a corp started.
o The Articles of Incorporation MUST set fourth:
§ (1) Name of corporation
§ (2) number of shares, itemized by class
§ (3) Street address and name of registered agent
§ (4) name and address of each incorporator
§ (5) signature of each incorporator
§ (6) attorney signature
· Certificate of Existence – S.C. Code Ann. § 33-1-280 [pg. C5] o Why is this in the statute?
§ It is because to show the public that the corporation exists and is licensed to do business in the particular state.
· In SC something is terribly missing from this statute.
o In section (3), the taxes are paid to the department of revenue, not to the secretary of state.
o Doc prepared by Sec. of State – says whether or not corp i
any is “capital expenditure”
§ Straight-line depreciation
· Take the value of the equipment, divide it by the number of years of useful life, and then deduct this much each year from the income statement as depreciation.
· Useful life determined by accountant or IRS
§ Accelerated depreciation
· Depreciate a larger amount in the first year, declining amount in the subsequent years.
· Reduces PBT, so therefore reduces amount of taxes in the first year, but more taxes in subsequent years.
· Most business owners would choose this method to allow for lower taxes now.
· Cash Flow Statement
o A measure of much more or less money a business has at the end of the year than it had at the beginning of that year.
o Profit after tax + depreciation =cash flow
§ Depreciation is a bookkeeping expense, not an actual expense
· The Balance Sheet
o Shows assets, liabilities, and equity at a given moment à “snapshot”
o Uniformly displayed on left (assets) and right hand (liabilities and equity)
o 3 main sections
· Things that the company owns that has value
· When equipment is depreciated, the dollar amount of that depreciation charge is deducted as an expense on the income statement; the same amount is deducted from the value of the asset on the balance sheet.
· What the company owes
o Accounts payable, wages payable, debts
§ Owners’ Equity
· What is left over after you subtract the liabilities from the assets
· Assets – liabilities = owners’ equity
o Liabilities and Equity are on the same side, b/c it is amount owed to shareholders.
o The balance sheet is important to a lender in determining how much money can safely be borrowed by a company
o The balance sheet also helps prospective buyers determine how much to pay for a business, however, the lender is going to pay much more attention to the balance sheet. To the buyer, the income statement is much more important.
· Sarbanes-Oxley Act
o Applies only to publicly traded companies
o Regulates the management of the company so they cannot claim false financial statements
o Attempts to limit or eliminate fraud in publicly traded companies
o Did not work
§ Impossible to test everything