#11700 - Formation Of The Corporation - Business Association (Duke Cox)

Corporations provide limited liability to SH

1. Shareholders are not personally liable for corporate obligations

2. Managers generally not personally liable

Free transferability of ownership interests

1. Ownership or “equity,” represented by shares of stock, can be freely sold

Continuity of existence

1. Legal existence is usually forever

2. Can specify a shorter duration on certificate of incorporation

Centralized management

1. Power is legally vested in a Board of Directors

2. Shareholders have no right to participate in management

Entity status

1. Corporation is a legal person

2. Corporation exercises powers and has rights in its own name

Corporation is preferred form for publicly-held companies, but for privately held companies, the choice of form is more complex

1. Owners may value certain partnership attributes

2. Enterprise could be a:

   1. Corporation

   2. Limited liability company (LLC)

   3. General partnership

   4. Limited partnership

   5. Limited liability partnership

Corporate law consists of four major modules:

1. State statutory law

2. Model Business Corporations Act (MBCA)

   1. Delaware, NY, and Cal don’t use it

3. State judge-made law

4. Federal law (example. Securities Acts and Sarbanes-Oxley)

5. Private ordering (ex. soft-exchange rules for listed companies)

Firms can incorporate wherever they want

1. Close corporations (corporations with a few owners) incorporate locally in the principal place of business

2. Publicly held corporations usually incorporate in DE or a state that has adopted the MBCA

Why Delaware?

1. Broadly enabling statute that protects management

2. Judiciary

   1. Justices all practiced corporate law

3. Stable body of law

   1. Provides certainty

   2. Requires 2/3 vote (super vote) of legislature to amend statute

4. Rich case law

5. Network effects

6. Everyone uses Delaware law

Delaware: “Race to the Bottom” Theory (William Cary)

1. Corporate law is a product that states sell—broadly enabling statutes attract corporations

2. Del wants corps because of their taxes

3. State legislature has an incentive to give managers “side payments” (ways to regulate their conflicts of interest) to induce them to cause their corps to incorporate in the states

4. This leads to suboptimal statutes

5. Cary argues that we should have federal regulations that will create minimum standards for corporate law

Delaware: “Race to the Top” Theory (Ralph Winter)

1. Counter-position to Cary

2. If law is a product and it’s bad, people won’t buy it

3. An optimal statute will attract the most corporations

4. The incentive for states to sell corporate charters must lead states to produce an optimal statutory corporate law regime

Reincorporation in Delaware

1. Create a DE shell by filing articles in DE

2. Take existing operating company and merge with shell

3. Specify in merger agreement that resulting company will be a DE company

4. Requires board approval and shareholder vote

Why do shareholders agree?

1. Benefits outweigh more management friendly laws

2. Efficiency

3. Certainty

4. Smooth

5. Decreased transaction costs

6. Increased stock prices after reincorporation

7. Markets like certainty, which DE law provides

8. Much easier to do deals in DE because of added legal protection

9. Signals that company is big enough to need to go to DE

Internal affairs doctrine (Vantage Point)

1. the law of the state of incorporation will govern the corporation’s internal affairs

To form a corporation, the incorporators file a document with the Secretary of State, this document is usually called “articles of incorporation”

1. Bylaws: after the corporation has been formed, it adopts bylaws. Bylaws are rules governing the corporation’s internal affairs

2. Before filing, the corporation does not exist

3. In this case, the entity is a partnership before filing AoI, then each partner is liable for the actions of partners in the ordinary course of business

§ 2.02 sets out requirements for articles of incorporation: corporate name, number of shares corporation is authorized to issue, street address and name of registered agent, and name and address of each incorporator

§2.03: corporation is not in existence until the Articles of Incorporation are filed.

§2.04: Liabilities for pre-incorporation transactions: that anyone who acts on behalf of the corporation knowing that there was no incorporation under the Act is jointly and...