8-12 questions on business Law (will attach all notes)

I will attach the notes needed for this and give what I can, then shortly after we match I can give you about 10-20 minutes to look over the notes and then we will begin the questions after that we will have about 20 minutes or so to complete the questions. They should be relatively easy to the notes or anything you can find off the internet.

Chapter 22
Formation and
Financing of
Corporations
Chapter Details
 Characteristics of a Corporation
 Incorporation Process
 Corporate Classifications
 Corporation as a Separate Entity
 Financing
 Equity
 Debt
 The S-Corporation
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Ch. 22 – Formation and Financing of Co
rporations
2
Introduction
 Corporation
 A fictitious legal entity that is created according to
statutory requirements
 Dominant form of business organization in the US
 Legal Entity (aka legal person)
 Corporations are treated as artificial persons
 Can sue and be sued in corporate name
 Can be held liable for civil violations and guilty of
criminal violations
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Ch. 22 – Formation and Financing of Co
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3
Characteristics
 Legal entity distinct from its owners
 Property owned by corporation belongs to the
corporation, not shareholders
 Shareholder Limited Liability
 Limited liability (liable to extent of capital
contributions)
 Free transferability of Stock
 Unless restrictions apply
 Perpetual Existence
 Unless articles of incorporation specify a duration
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Ch. 22 – Formation and Financing of Co
rporations
4
Characteristics (cont.)
 Centralized Management and Control
 Owners = shareholders
 Directors
 Make policy decisions concerning operations of
corporation
 Elected by shareholders
 Officers
 Run corporation’s day-to-day operations
 Appointed by directors
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Ch. 22 – Formation and Financing of Co
rporations
5
Advantages & Disadvantages
 Advantages
 Can raise an almost limitless amount of
capital by selling shares of its stock
 Shareholders may sell their stock or die
without affecting the corporate entity
 Corporation is solely liable for the debts of the
business.
 Shareholders have no personal responsibility,
absent personal guarantees
FBE 458
©
Ch. 22 – Formation and Financing of
Corporations
6
Advantages & Disadvantages (Cont.)
 Disadvantages
 Formation can be more complicated and costly
 Absent a S election, the corporation as a
separate legal entity must pay taxes
 Shareholders also must pay taxes on dividends (i.e.
double taxation of the same income)
 Reduced individual control of the business
 Hostile takeover (if a publicly held company)
 Compliance with securities laws
FBE 458
©
Ch. 22 – Formation and Financing of
Corporations
7
Incorporation Process
 Incorporation
 The process of forming a corporation in a state (can only be
incorporated in 1 state)
 Follow state’s incorporation statute
 Process
1. Select a State for Incorporation

States may vary on corporate taxes, corporate takeover defenses,
indemnification rights and business friendly courts
2. Selecting a corporate name
Name must contain “corporation, incorporated, or limited,” or an
abbreviation thereof.
 Cannot use a word or phrase indicating corporation has a purpose other
than those stated in articles of incorporation
 Can’t use a name already taken, federally trademarked, or similar to
federally trademarked name

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Ch. 22 – Formation and Financing of Co
rporations
8
Incorporation Process (cont.)
 Process (cont.)
3. Incorporators and the Articles of Incorporation

Articles of Incorporation





Incorporators


FBE 458 ©
Basic governing documents of the corporation.
Filed with the state
Once filed, corporate status begins
Can be amended with approval of board of directors and
shareholders
Person who signs and file the articles of incorporation
Can be a person or business entity
Ch. 22 – Formation and Financing of Co
rporations
9
Incorporation Process (cont.)
 Process (cont.)
4. Purpose of the Corporation
Corporations can be formed for any lawful
purpose
 General purpose clause



Limited-purpose clause

FBE 458 ©
Most corporations contain a general purpose clause
allowing it to engage in any lawful activity
May limit a corporation to only engage in certain
activities
Ch. 22 – Formation and Financing of Co
rporations
10
Incorporation Process (cont.)
 Corporate powers originate from
 Express powers
 Those granted in the articles of incorporations, bylaws and by
constitution or statute (federal or state)
 Implied
 Not all powers can be expressly detailed and corporation has
certain implied powers necessary to carry out corporate purpose
 Ultra Vires Acts
 Acts outside of express or implied powers
 Officers and directors responsible for those acts become
liable to the corporation or shareholders for damages
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Ch. 22 – Formation and Financing of Co
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Incorporation Process (cont.)
 Process (cont.)
5. Bylaws (not required)





Govern the internal management and structure of the corporation.
More detailed than articles of incorporation
Not filed with state
Adopted at the first organizational meeting
Can be amended by board of directors
6. Organization Meeting


FBE 458 ©
Organizational meeting held after articles of incorporation are filed
Elect initial board of directors, adopt bylaws, appoint officers and
transact other business as needed.
Ch. 22 – Formation and Financing of Co
rporations
12
Incorporation Process: Defective
Incorporation
 Courts can attribute corporate status to an
improperly formed corporation
1. De Facto corporation
 Some defect in compliance with the incorporation
statute exists
 Requires:
 State statue allows incorporation
 Good faith attempt to comply with the statute
 Corporation exercises some business in corporate name
 Many states have abolished de facto corporations
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Ch. 22 – Formation and Financing of Co
rporations
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Incorporation Process: Defective
Incorporation (cont.)
 Defective Incorporation (cont.)
2. Corporation by Estoppel
 Requirements
 Business makes no attempt to incorporate
 Third party has contracted with the business, and
 The business represented itself as a corporation
 Third parties cannot go after personal assets of
“shareholders” and instead must go after
“corporation’s” assets.
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Ch. 22 – Formation and Financing of Co
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Pre-incorporation Contracts
 Promoter
 A person acting on behalf of a corporation that is
not yet formed
 Often enter into contracts on behalf of
corporation prior to articles being filed
 Liability of pre-incorporation contracts
 Corporation liability
 No liability until the corporation adopts the contract
 Promoter liability
 Unless contract provides otherwise, promoter remains liable
on pre-incorporation contracts until there is a novation
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Ch. 22 – Formation and Financing of Co
rporations
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Corporate Classifications
 Public vs. Private Corporations
 Public
 Corporations formed by government entities
 Private
 Formed by privately owned businesses
 Profit vs. Non-profit Corporations
 Private corporation are classified either by profit or non-
profit
 Profit if you are seeking to conduct business for a profit
 Non-profit corporations are formed for charitable,
educational, or scientific purposes.
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 Prohibited from distributing profits
Ch. 22 – Formation and Financing of Co
rporations
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Corporate Classifications (cont.)
 Domestic vs. Foreign vs. Alien Corporation
 Domestic
 Corporation incorporated in the state
 Foreign
 Corporation incorporated in another state
 States can require foreign corporations who want to conduct
business in the state to obtain a certificate of authority from
the state
 Cannot file a lawsuit unless certificate obtained
 Can defend a lawsuit even without certificate
 Alien
 Corporation incorporated in a foreign country
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Ch. 22 – Formation and Financing of Co
rporations
17
Corporate Classifications (cont.)
 Publicly vs. Closely Held Corporations
 Publicly held corporation
 A corporation with many shareholders, or
 Shares are publicly traded on national stock
exchanges
 Closely held corporation
 A corporation that is privately held with a small
number of shareholders
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
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Problems
 In class problems
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
19
FBE 458 ©
Ch. 22 – Formation and Financing o
f Corporations
See you next class
20
Corporation as a Separate Entity
 Piercing the Corporate Veil
 Where a court disregards the corporate entity and
holds the responsible shareholders personally liable
for corporation’s debts and obligations
 May arise where:
 Corporation was undercapitalized when formed, or
 Shareholders used entity to carry out fraud or injustice
(attempting to avoid creditor debts)
 Separateness not maintained between corporation and the
shareholders
 Failing to follow corporate formalities
 Decided on a case-by-case basis
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Ch. 22 – Formation and Financing of Co
rporations
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Corporation as a Separate Entity (cont.)
 Alter Ego Theory
 Corporate veil may be pierced under alter ego
theory
 Requirement
 Unity of interest and control between two or more
entities (e.g. parent and subsidiary) such that they
are not considered separate
 Effect is that the entities are treated as one
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Ch. 22 – Formation and Financing of Co
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Financing the Corp.: Equity
 Equity Securities (aka stocks)
 Represents ownership rights to the corporation
 Types
 Common stock or
 Preferred stock
 Stock Subscriptions
 Agreements to purchase a corporation’s shares
 Types
 Pre-incorporation stock subscription
FBE 458 ©
 Post-incorporation stock subscription
Ch. 22 – Formation and Financing of Co
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Financing the Corp.: Equity
1. Common Stock
 A type of equity security that represents the
residual value of the corporation.
 No preference given to common stock
 Creditors and preferred shareholders receive
distributions before common shareholders
 Classes of common stock
 Par value vs. no par value shares
 Dividends
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Ch. 22 – Formation and Financing of Co
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Financing the Corp.: Equity (cont.)
2. Preferred stock
 A type of equity security that is given certain
preferences and rights over common stock
 Generally not given a right to vote
 Different classes of stock allowed
 Typical preferences given
 Dividend preference
 Liquidation preference
 Cumulative dividend right
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Ch. 22 – Formation and Financing of Co
rporations
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Financing the Corp.: Equity (cont.)
 Typical preferences given (cont.)
 Right to participate in profits
 Conversion right
 Redeemable preferred stock
 Classifying Shares
 Authorized
 Issued
 Unissued
 Treasury shares
 Outstanding shares
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Ch. 22 – Formation and Financing of Co
rporations
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Financing the Corp.: Debt
 Debt securities
 Corporations often borrow funds by issuing
debt securities
 Corporation = debtor
 Holder of security = creditor
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
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Financing the Corp.: Debt (cont.)
 Classified by time and whether security is
secured or not
 Types
 Debenture
 Long term, unsecured debt
 Bond
 Long-term, secured debt
 Note
 Short term debt, can be secured or unsecured
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
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Other Ways to Finance a Corp.
 Venture Capital
 Capital provided by professional outside
investors
 Private Equity
 Funding to purchase all or substantially all
ownership of a corporation
 Crowdfunding
 Obtaining financing by pooling funds through
the internet
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
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The S-Corporation
 C Corporation
 Default form of corporations
 S Corporation
 A closely-held corporation that is taxed like a partnership.
 Requirements:
 Corporation must be a domestic corporation
 Shareholders must be US citizens
 Shareholders must be individuals, estates or certain trusts
 100 or fewer shareholders
 Certain types of businesses are not eligible
 Only 1 class of stock (common or preferred) is permitted
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
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Problems
 Exercise
FBE 458 ©
Ch. 22 – Formation and Financing of Co
rporations
31
Chapter 23
Directors, Officers, and
Shareholders
Chapter Details
 Introduction
 Corporate Directors
 Corporate Officers
 Fiduciary Duties of Directors and Officers
 Care
 Loyalty
 Shareholders
 Rights of Shareholders
 Dissolution
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Ch. 23 – Directors, Officers, and Share
holders
2
Corporate Directors
 Directors
 Establish policy decisions of the corporation
 Adopt resolutions to specify corporate actions during board
of director meetings
 Corporations can have 1 or more directors
 Typically serve 1 year terms (unless term is staggered)
 Have inspection rights
 Compensation?
 Types
 Inside
 Outside
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
3
Corporate Directors (cont.)
 Board of Director Meetings
 Each director has one vote
 No proxy voting
 Can act without a meeting by unanimous
written consent to an action
 Quorum and Voting Requirements
 Simple majority of directors necessary for
quorum
 Simple majority necessary to approve action
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
4
Corporate Officers
 Officer
 Employee of a corporation appointed by BOD to manage
day-to-day operations
 Normally required to have: (1) CEO/President, (2)
secretary, and (3) Chief Financial Officer
 Same person can hold more than one office
 Officers are agents of the corporation
 Bylaws and articles can provide express authority.
 They can also have apparent authority to bind the
corporation
 Corporation can ratify unauthorized acts (otherwise officer is
FBE 458 ©
liable on contract for unauthorized acts)
Ch. 23 – Directors, Officers, and Share
holders
5
Fiduciary Duties of Directors and Officers
 Directors and Officers owe certain
fiduciary duties to the corporation and the
shareholders
1. Duty of Care
2. Duty of Loyalty
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Ch. 23 – Directors, Officers, and Share
holders
6
Fiduciary Duties: Care
 Duty of Care
 Must act in good faith and exercise a level of care than
a reasonable person would in similar circumstances
 Personal liability for breach
 Must be damages to show a breach of duty of care
 Often arise with a failure to:
 Make adequately informed decisions
 Regularly attend board meetings
 Request and read company reports
 Reasonably supervise
 Examined on a case-by-case basis
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Ch. 23 – Directors, Officers, and Share
holders
7
Fiduciary Duties: Care (cont.)
 Business Judgment Rule
 Court do NOT second-guess a business decision if it
was made in good faith, was informed, and had a
rational basis.
 Directors and officers are not liable for honest mistakes of
judgment.
 Duty of care measured at time of decision (not with
benefit of hindsight)
 Additional protections
 Dissenting or abstaining from corporate actions, or
 Obtaining shareholder ratification of conduct
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
8
Fiduciary Duties: Loyalty
 Duty of Loyalty
 Must subordinate personal interests to the
corporation and shareholders
 Common breaches of duty of loyalty are:
 Taking advantage of a corporate opportunity
 Competing with the corporation
 Having a personal interest that conflicts with
the interest of the corporation
 Insider trading
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
9
Fiduciary Duties: Loyalty (cont.)
 Overcoming self-interest
1. Obtain approval for the acts, or
 Prior to act, obtain consent from majority of
disinterested directors and officers or consent from
majority of disinterested shareholders
2. Prove the transaction as fair
Where no approval is obtained prior to action
 Intrinsic Fairness Test

FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
10
Shareholders
 Characteristics
 Ownership
 Agency?
 Management?
 Shareholder Meetings
 Annual
 Elect directors
 Date fixed by the bylaws
 Special
 Called by board of directors or holders of 10% of voting
FBE 458 ©
shares of corporation, or any person permitted by bylaws or
state law
Ch. 23 – Directors, Officers, and Share
11
holders
Shareholders (cont.)
 Notice of Shareholder Meeting
 Written notice required
 Only matters stated in the notice can be considered
at the meeting
 If notice is defective or not given, any action taken at
the meeting is void.
 Voting by Proxy
 The appointment of another person to vote as their
agent
 Proxy can either be directed exactly how to vote or
have discretion how to vote
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
12
Shareholders: Voting
 Voting Requirements
 Only shareholders who own stock as of the
record date may vote
 Record date is specified in the corporate bylaws
 Quorum is usually required (unless articles
provide a quorum isn’t necessary)
 Requires the majority of shares entitled to vote to
be present (or by proxy) at the meeting
 Affirmative votes require only the majority of voting
shares present to vote
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
13
Shareholders: Voting (cont.)
 Voting arrangements
 Voting Trust
 Shareholder transfers stock to a trustee
 Trustee has legal title to the shares and is empowered to
vote the shares held in the trust
 + a few other requirements
 Voting Agreements
 Where two or more shareholders agree how they will
vote
 No duration limitation
 Not filed with corporation
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
14
Shareholders: Voting (cont.)
 Types of Voting
 Regular Voting (aka Straight or Non-cumulative)
 Shareholders vote total number of shares they have for each
candidate in a position
 Cumulative Voting
 Shareholder multiplies # of shares by # of directors to be
elected.
 Can use votes for just 1 candidate or split votes to multiple
candidates
 Supermajority Voting Requirement
 Articles or bylaws may require a greater percentage to be
present for a quorum (e.g. 75%)
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
15
Shareholders: Voting (cont.)
 Shareholder Proposals (SEC Rule 14a-8)
 Certain shareholders can submit proposals to
other shareholders to change company policy
 Submitted to directors and included in proxy
materials sent to all shareholders
 To submit a proposal a shareholder: must own
at least $2,000 of stock for 3+ years, (b)
$15,000 stock for 2+ years, or (c) $25,000
worth of stock for 1+ year
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
16
Rights of Shareholders
 Preemptive Rights
 The right to existing shareholders to purchase new shares
in proportion to current ownership
 Prevents dilution of shareholder shares
 Stock Warrants
 Right to acquire stock from the corporation at an
established price and during a specified period
 Period can last up to 15 years
 Stock Options
 Right to buy company stock at a discounted or fixed price
 Terminate when association with corporation terminates
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
17
Rights of Shareholders (cont)
 Dividends
 Paid at discretion of the directors
 Inspection rights
 Right to examine limited corporate records for
a proper purpose
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
18
Shareholders: Litigation
 Derivative Actions
 Where shareholder brings lawsuit to recover
damages on behalf of the corporation against a
director of officer
 Requires
 Party was a shareholder at time of act, and either:
 Shareholder made a written demand upon board of directors and
board took no action within 90 days from receiving demand, or
 Making the written demand would be futile because a majority of
the board has been accused of wrongdoing
 Successful shareholder entitled to reasonable
expenses
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
19
Rights on Dissolution

Assets are collected, liquidated, and
distributed in following priority
 Creditors
 Preferred shareholders
 Common shareholders
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
20
Problems
 In class problems
FBE 458 ©
Ch. 23 – Directors, Officers, and Share
holders
21