Business Organizations
Larson
Spring 2015
Introduction to Corporate law
The three groups involved in a corporation are (1) shareholders (2) directors, and (3) officers and employees (agents)
Existence and Governance
2.02 Articles of Incorporation are needed by the secretary of the state for the incorporation process.
They must include
• a corporate name for the corporation that satisfies the requirements of section 4.01;
• the number of shares the corporation is authorized to use;
• the street address of the corporation’s initial registered office and the name of its initial registered agent at the office; and
• the name and address of each incorporator
2.06 By-laws are what govern the corporation. They typically concern matters such as the corporation’s officer positions and the duties and responsibilities of those positions; rules for the conduct of board meetings; rules for the conduct of shareholder meetings; provisions authorizing the corporation to indemnify directors and officers for certain expenses.
(b) The bylaws of a corporation may contain any provision that is not inconsistent with law or the articles of incorporation.
By-laws are similar to the partnership agreements.
6.01 The articles of incorporation of the corporation are authorized to issue stock
6.21(b) board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation
6.01(b) Authorized (eligible for sale) stock means the stock that the corporation may or may not issue.
6.03(a) Issued (sold) stock means a share that the corporation sells for cash or some other type of consideration to one or more persons. Its reacquired.
6.03(a) Outstanding (pending sold) stock means shares that have been issued and that are currently owned by a shareholder until they are reacquired, redeemed, converted, or cancelled.
Classes of Stock
Common stock: Represents an equity interest in the corporation.
May give the holder certain rights, such as:
• right to vote
• right to receive dividends/distributions if corporation liquidated
Preferred stock: Gives the holder some rights preferential to common stockholders. They are the ones to get their shares first.
Any purpose, unless a more limited purpose is set forth in articles (§ 3.01)
Powers including, but not limited to, those set forth in sec. 3.02
By-laws (§ 2.06): administrative provisions on how corporation will be run, are not filed, must be consistent with articles of incorporation
6.01(b) Common stock generally has the following rights: (1) right to vote (2) right to receive dividends
Right to sell the stock
6.01(c) Preferred stock has conversion rights which means the right to convert into shares of common stock, either at the option of the shareholder or upon some predetermined event. It may be redeemable at the corporation’s or the holder’s option at a fixed price or a price determined by some formula, or may be convertible into another class of stock at the corporation’s or the holder’s option.
6.40(c) The board may declare a dividend if the following two requirements are met:
(1) Solvency test: the corporation is still able to pay its debts as they become due in the usual course of business after paying a dividend; and
(2) Balance sheet test: the corporation’s total assets would NOT be less than the sum of (a) its total liabilities and (b) “the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights (upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.)”
Dividends (distributions) are payments that the corporation makes with respect to its stock. The amount of dividends you receive depends on how many stocks you own.
Example: 100,000 assets and 50,000 debts – Preferred 10,000 (treated as a creditor/debt)
= 40,000
A 20,000
B 20,000
The shareholder’s equity is maxed at and cannot exceed 40,000 of
paying dividends, total assets left are greater than liabilities plus preferential liquidation rights.
• Appoints officers (§ 8.40(b))
• Fiduciary duty of care and loyalty
Board Meetings:
• Have regular and special meetings (§ 8.20)
• Regular meetings – no notice; special meetings – notice with a purpose (§ 8.22)
• Notice may be waived (§ 8.23)
• Need quorum for valid meeting (§ 8.24(a))
• Need majority affirmative vote of quorum present (§ 8.24(c))
• Board can act without a meeting (§ 8.21)
Formalities required for board action:
• Person calling meeting must have the power to convene
• Special meetings require notice (date, place, time)
• Quorum of directors must be present
• Majority of directors approve proposal
• If more vote in favor, proposal is approved
Shareholder liability: generally, a shareholder has no liability for corporate obligations.
The most a shareholder might lose is the amount of the investment. (§ 6.22(b))
Exceptions: Piercing the corporate veil through a judicial determination and Enterprise liability
Piercing the corporate veil
• Exception to the rule that a shareholder is not liable for the debts of the corporation
• Need facts to establish that the corporate form should be disregarded and the business treated as SH’s alter ego
• Based on facts and circumstances
• Do not need to establish fraud
Common Enterprise Theory
• Separate corporations
• Treated as single legal entity for liability purposes
• Must establish are commonly-owned and engaged in one enterprise together
