#16461 - The Corporate Structure - Corporation

Office hour: mon, wed 11:30am, by appointment mk1@nyu.edu; 11:15-12:35 Thurs class time; TA office hr: Wed 4-5

Basic Terms

• Corporation: artificial and separate legal entity (give rise to problems which we will focus on)

  • Have assets and liabilities, enter into legal obligation through contract, can violate law, can sue/ to be sued

  • Separate from the stockholders/ shareholders (owners of the corporation/ shares of stocks – equity interest)

• Shares/ shares of stock/ stock

  • We focus on public corporations with a large no. of shareholders

  • C.f. closely held/ privately held corporation

• Creditors: people whom the corporation owe money to

  • Mostly people who lend money to the corporation

• Directors/ managers: people with legal power to run the corporation

  • Note difference between directors and managers

We will focus on the relationship of powers and conflicts that arise between

• Corporation, directors and shareholders;

• Corporation, directors and creditors

Corporations

• Form by: certificate of incorporation file at the state you want (e.g. Delaware) fee

• In the US, 60% public companies are incorporated in Delaware – other states often look to Delaware

• Companies need not have domicile in that state

• Place of corporation affects internal affairs rules – e.g. subject to Delaware law and Court

• Shareholders elect directors directors run the corporation directors owe duties to corporation and shareholders Shareholders approve “major” changes of a corporation

Basic Power Structure: Shareholder Elect Directors

• General rule: one year term

• Board of directors

• Elected during the annual meeting of shareholders

• Removal of directors before term expires

A. The Corporate Form

• Corporation is the standard form of most large US firms, main features:

  1. Limited liability for investors

  2. Free transferability of investor interests

  3. Legal personality (entity-attributable powers, indefinite life span, and purpose) and

  4. Centralized management

• State corporation statutes

  • establish the separate legal identity (from shareholders and directors)

  • provide rules governing relationships among shareholders, directors and mangers

• Small/ closely-held corporation incorporated for tax/ liability purposes

• Corporate law generally better suited to large firms with numerous shareholders (public firms)

• Corporate form is designed to raise funds on capital markets

• Incorporation process in Delaware

  • Filing a certificate of incorporation at the Secretary of State + pay fee

  • Can be done by anyone + for any lawful purpose

Sources of Corporate Law

1. State Corporation Law (most important)

   1. Corporation Statutes

      • Corporations are primarily governed by the state corporation statute where it is incorporated

      • chosen from 50 states, regardless of where they conduct most of their operations

      • large US corps usually choose Delaware)

      • Delaware General Corporation Law (DGCL)

        • Ch 1-3: formation of a corporation

          • Subchapter 1: formation process, certificate of incorporation, by-laws

          • Subchapter 2: corporate powers

          • Subchapter 3: procedure requirements

          • Subchapter 4: directors and officer

          • Subchapter 5: stocks and dividends

          • Subchapter 6: stock transfer restrictions + Delaware anti-takeover provision

          • Subchapter 7: stockholder/ shareholder’s voting

          • Subchapter 8: change in certificate of incorporation/ equity capital structure

          • Subchapter 9: merger

          • Subchapter 10: major asset sales and dissolution

          • Subchapter 11: insolvency

          • Subchapter 12: raising of he dead

          • Subchapter 13: procedure for suing corporations

          • Subchapter 14: special provisions for corporations that elect to be ‘close’ corporations’,

          • Subchapters 15, 26’: non-Delaware corporations that want to do business in/ become domestic in Delaware

          • Subchapter 17: miscellaneous provisions – sections on taxes and fees

      • Shareholders/ stockholders

        • Main source of power: elect directors each year at AGM

        • Remove of director (other than when term ends on AGM) by:

          1. Special meeting (in between annual meetings) or

             • Rule in Delaware: only board of director can call special meeting

          2. Written consent (majority signing a form stating they want to remove them)

      • Directors: legal power to manage the corporation

        • Decide how to run the business operations, how much salary they receive, how much is distributed to shareholders in dividends, borrowing money, selling some additional stocks

        • Dividends – distributions to shareholders by the corporation, when and how much are determined by directors, not compulsory for the company to pay dividend [c.f. creditors must be paid principal and interests]

        • Not bound by shareholders in management

        • Officers of corporation (CEO/ CFO/ COO/President):

          • Individuals who help directors to manage day-to-day business operations

          • Directors can delegate rights to officers, bound by directions given to them by the board

        • Inside directors/ management (directors that are also officers)

          • Mostly have 2: CEO and president

          • Advantages over outside – full time job to run corporation more information + paid a lot more + care more about professional reputation + more influential (since officers are subordinate to directors)

          • Varies in different companies: some board rubber stamps officers; some don’t

        • C.f. outside directors

          • don’t spend much time managing the company

          • picked by inside directors

          • receive a relatively small amount of compensation

        • Law provides that all directors have equal powers, but the real power is often exercised by CEO

      • Shareholder management power – must approve “major” changes

        • Directors have general power to manage corporation, but extraordinary decisions require shareholders’ approval:

          1. Dissolution of corporation, liquidation

          2. Sale by corporation of all its assets

          3. Merger of corporation with another corporation (become one corp that holds all assets + owe all liabilities previously held/ owed by either one)

          4. Amendment to certificate of incorporation

          5. Consolidation

   2. State Case Law – Directors duties

      1. Duty of care: not to be negligent in managing the corporation – to make informed decisions

      2. Duty of loyalty: manage company for benefit of shareholders, not for own personal benefit [fiduciary duty]

      • Delaware – most important domicile + influential – has an unique court system

        1. Chancery Court

           • Expertise: in Delaware (but not in other states), corporate cases are heard by this specialised trial court on corporate law

           • Their precedents governs many corporate disputes, corporations often domicile in Delaware, and hence binding on them

           • 5 judges: 1 Chancellor + 4 Vice-Chancellors

           • Jurisdiction over all dispute arising under Delaware corporate law

             • 90% are corporate cases

           • No juries, judges all have fair degree of subject-matter expertise

        2. Supreme Court

           • Appeals heard by Delaware Supreme Court

           • 5 judges, normally sits in panels of 3 judges

           • Chief Justice often a former Chancellor

      • 5 judges in Chancery + 5 judges in supreme court make most of US’ corporate law precedents

      • Jurisprudence

2. Federal Law and Regulations

   • Supplements State law

   • Securities Exchange Act 1934 (1934 Act/ Exchange Act) – forms complex regulatory scheme (with 1933 Act)

   • Congress established Securities Exchange Commission (SEC) + empower it to enforce the provision of the Exchange Act + promulgate detailed rules/ regulations

   • Most important regulation are those on voting, acquisitions of corporations, insider trading

The Certificate of Incorporation

3. Corporate Contracts drafted by lawyers to lay down rules

1. Certificate of Incorporation (charter)

   • Corporation is formed by filing the charter with the Secretary of State

   • Contains mandatory and optional provisions

   1. Mandatory (listed in DGCL s.102(a))

   1. Name of corporation

      1. Form of corporation: limited liability, domestic/ foreign corporation, partnership (unless waived)

      2. Unless permitted under s.395, cannot contain the word ‘trust’

      3. Cannot contain the word bank

   2. Address of the corporation’s registered office

   3. Nature of business/ purpose to be conducted/ promoted

      1. Engage in any lawful act or activity: will cover anything

   4. Total number of shares authorised (unless nonstock corporation) and par value (if any)

      1. Right after filing Cert of incorporation + paying fees co. owns nth + issued no shares

      2. The max no. of shares which the board of directors are permitted to issue in the future

   5. Name and mailing address of the incorporator(s)

   6. Powers of the incorporator(s), first directors

      • Example: XYZ Certificate of Incorporation

1. Name – mandatory s.102(a)(i)

2. Address/ agent - mandatory s.102(a)(v)

3. Purpose – mandatory s.102(a)(iii)

4. Shares – mandatory s.102(a)(iv)

5. Business managed by the Board of directors, election -

6. Director not personally liable

ix. Vote, Amendments – optional s.102(b)(4)

• Not all mandatory provisions are contained in the charter

  • Missing s.102(a)(v): name and mailing address of incorporator(s) mandatory

    • Incorporators are people who filed the certificate of incorporation

    • To know who are in charge before corporation take its existence, but not relevant in later stages of corporate life

    • S.245(c) can be omitted in later versions

  • Missing s.102(a)(vi): if the powers of the incorporator(s) not a required a provision

1. Optional provision for

   • Management...