#10917 - Outline Corporations - Corporations

Corporations

1. Basic Concepts

   1. Types of Corporations

      1. For-profit

      2. Non-profit

      3. Public corporations

         1. Market for corporate securities

      4. Close corporations

         1. Typically no market for corporate securities

   2. Corporate Statutes

      1. No Federal Corporate Statute

      2. Model Business Corporations Act (MBCA)

      3. Delaware General Corporation Law (DGCL)

      4. NOTE: The statutes create the default rules, but there is great flexibility to modify

   3. Corporate Actors

      1. Shareholders (a.k.a. stockholders (Del.))

      2. Board of Directors

         1. "All corporate powers shall be exercised by or under the authority of, and the business affairs of the corporation managed by or under the direction of, the board of directors . . . ." MBCA § 8.01(b).

         2. "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of the board of directors . . . ." DGCL § 141(a).

      3. Officers

      4. NOTE: This structure embodies the separation of ownership and control

   4. Organic Documents

      1. Articles of Incorporation (MBCA)/Certificate of Incorporation (DGCL)

         1. Cannot conflict with statute under which the corporation is organized

      2. Bylaws

         1. Cannot conflict with the statute or the Articles/Certificate

   5. Corporate Securities

      1. Equity Securities

         1. Common Stock

         2. Preferred Stock

         3. Authorized Stock: Articles/Certificate specifies how many shares of the common/preferred the corporation is authorized to issue

         4. Outstanding Stock: The portion of the authorized stock that has been sold and remains in the hands of the shareholders is the outstanding stock

         5. Authorized But Unissued Stock: Authorized stock but not outstanding stock (a.k.a. Treasury Shares)

      2. Debt Securities

         1. Bonds

         2. Debentures

         3. Notes

   6. Choice of Law

      1. A corporation can incorporate under the laws of whatever state suits it best

      2. Internal Affairs Doctrine: The law of the state of incorporation, with rare exceptions, governs the "internal affairs" of the corporation

         1. Disputes between the shareholders and managers (directors and officers) are governed by the laws of the state of incorporation

         2. Applies to the set of rules defining the fiduciary duties that managers of a corporation owe to the corporation and its shareholders

            • "It . . . is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares." CTS Corp. v. Dynamics Corp. of America - pg. 49

         3. The "external affairs" of a corporation are generally governed by the law of the place where the activities occur and by federal and state regulatory statutes rather than by the place of incorporation

            • Ex: State's Labor Laws, State Tax Law, Franchise Taxes

         4. Antitakeover statutes: Constitutional insofar as they do not impose undue burden on interstate commerce

            • "To the limited extent that the Act affects the interstate commerce, this is justified by the state's interests in defining the attributes of shares in its corporations and in protecting shareholders." CTS Corp. v. Dynamics Corp. of America - pg. 50

              • UNCONSTITUTIONAL where statute applies to foreign corporations BUT CONSTITUTIONAL where does not apply to foreign corporations

                • But see Wilson v. Louisiana-Pacific Resources, Inc. - pg. 59-60: In Wilson, the court in California held that antitakeover statute applied to foreign corporation was constitutional where (1) average of defendant's property, payroll, and sales exceeded 50% and (2) more than 50% of its shareholders entitled to vote resided in California

   7. Fiduciary Duties

      1. Duty of Care: Requires the director to act in the corporation's best interests and to exercise reasonable care in overseeing the corporations's affairs and in making business decisions

      2. Duty of Loyalty: Requires a director to place the best interests of the corporation above his own personal interests

         1. "The fiduciary must subordinate his individual and private interests to his duty to the corporation whenever the two conflict." Bayer v. Beran - pg. 25

      3. Business Judgment Rule: Creates a presumption that, "in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."

         1. Under Delaware Law, the business and affairs of a Delaware corporation are by managed by or under its board of directors. DGCL § 141(a).

         2. "[A] breach of either the duty of loyalty or the duty of care rebuts the presumption that the directors have acted in the best interests of the shareholders, and requires the directors to prove that the transaction was entirely fair." Cede II - pg. 703

   8. Equitable Limitations

      1. SPLIT

         1. Inequitable action does not become permissible simply because it is legally possible Schnell v. Chris-Craft Industries, Inc. - pg. 31

         2. Doctrine of Individual Legal Significance: "[T]he validity of corporate action taken pursuant to one section is not necessarily dependent upon its being valid under another section." Bove v. Comm. Hotel Corp. - pg. 33

   9. Accountability

      1. Exit: A person can sever her connection with the organization

      2. Voice: A person can remain within the organization and attempt to remedy the situation

   10. Purpose of Corporation

       1. Ultra Vires

          1. According to common law, "a corporation could not engage in activities outside the scope of its defined purposes." (pg. 159)

          2. BUT, typically the default rule under statutes today provide that every corporation may engage in "any lawful business." See MBCA § 3.01(a); see also DGCL § 122 (setting out the extensive powers of corporations).

             • See also MBCA § 3.04 (addressing and limiting Ultra Vires).

             • See also DGCL § 124 (addressing and limiting Ultra Vires).

       2. Political Expenditures

          1. "[T]he Government may not suppress political speech on the basis of the speaker's corporate identity." Citizens United v. Federal Election Comm. - Supp. pg. 7

       3. SPLIT re Charitable Contributions

          1. Traditional Rule: Maximization of shareholder value

             • "A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself. . . ." Dodge v. Ford Motor Co. - pg. 81

          2. Modern Rule: Allows Charitable Donations

             • MBCA § 3.02(13): A corporation has the power "to make donations for the public welfare or for charitable, scientific, or educational purposes . . . ."

             • DGCL § 122(9): A corporation has the power to "[m]ake donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof . . . ."

               • The TEST is that of reasonableness: "[A] corporate charitable or educational gift to be valid must merely be within reasonable limits both as to amount and purpose." Theodora Holding Corp. v. Henderson - pg. 108

                 • Look to Business Judgment Rule

                 • BUT SEE ALSO FACTORS from Kahn v. Sullivan - pg. 114:

                   • (1) Net Worth of Company

                   • (2) Annual Income Before Taxes

                   • (3) Tax Benefits

                   • (4) Reputational Benefits (ONLY IN NOTES)

2. Choice of Organizational Form

   1. Formation

      1. Corporation: Requires formal action with the state (File Articles/Certificate, etc.)

      2. General Partnership: Generally created by contract BUT may be formed by operation of law as simply defined as "an association of two or more persons to carry on as co-owners a business for profit"

      3. Limited Partnership: Requires the filing with the state of a certificate of partnership setting forth the rights and duties of the partners

         1. Typically, also execute a written partnership agreement

      4. LLC: (1) Requires the filing of articles of organization, (2) ALSO enter into an operating agreement (a.k.a. "regulations" of the LLC), (3) ALSO enter into the "limited liability company agreement" (a.k.a. member control agreement")

   2. Limited Liability

      1. Corporation: A shareholder's liability is limited to original investment EXCEPT (1) where the corporation is not properly formed, (2) for unpaid capital contributions that the shareholder has agreed to make, or (3) where the veil of limited liability is pierced for equitable reasons.

      2. General Partnership: The partners, as individuals, can be held jointly and severally liable for partnership obligations

      3. Limited Partnership: General partners have the same unlimited liability as in the case of a general partnership. Liability of limited partners is limited to the amount of their investment in the partnership UNLESS they "participate" in management

         1. "Participation" does not include such activities as advising the general partner or voting on certain critical transactions

            • NOTE: A limited partnership can be structured such that a corporation is the general partner and the individuals are all limited partners thereby allowing limited liability for all the individuals involved

      4. LLC: Limited liability for all members and managers BUT may be liable (1) where the corporation is not properly formed, (2) for unpaid capital contributions, or (3) where the veil of limited liability is pierced for equitable reasons.

   3. Management

      1. Corporation: Centralized in the board of directors BUT the board delegates day-to-day operations to officers of whom the board appoints

         1. By default, in most statutes, directors are elected by a plurality of shares entitled to vote

      2. General Partnership: Management authority vested in all the partners

      3. Limited Partnership: General partners have responsibility for most management decisions. Limited partners may...