Adv. Business Law- Ch 29 Corporate Formation, Merger Termination

Front 1

General Corporation Characteristics

Back 1

• Limited Liability
• Legal entity
• Taxable entity
• Share transferability
• Perpetual (indefinite) existence
• Centralized management
• Separation of ownership and control

Front 2

General Corporation Structure

Back 2

• Shareholders elect board
• Board selects officers
• Officers run the company
• Board provides broad oversight and guidance
*roles can overlap

Front 3

Constitutional Rights of Corporations

Back 3

• Freedom of Speech
• Limitations of commercial speech
• Political speech rights recently expanded
• Right of access to the courts and can sue or be sued.
• Right to due process
• Freedom from unreasonable searches and seizures and double jeopardy
• Corporations do not have the right to 5th amendment, self-incrimination

Front 4

Shareholders Liability?

Back 4

Limited Liability

• Shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments
• In certain situations a court can pierce the “corporate veil” and impose liability on shareholders for the corporation’s obligations

Front 5

When is a corporation liable for agents/officers' torts?

Back 5

• liable for the torts committed by its agents or officers within the course and scope of their employment
• follows the doctrine of respondeat superior

Front 6

When is a corporation liable for agents/officers' criminal acts?

Back 6

• corp may be held liable for the criminal acts of its agents and employees, provided the punishment is one that can be applied to the corporation (can be fined not imprisoned)

Front 7

List of Corporation Classifications (5 categories- 9 total)

Back 7

Domestic, Foreign, Alien
Public, Private
Profit, Nonprofit
S Corporations
Professional Corporations

Front 8

S Corporations

Back 8

Formed as a corporation but for tax, have special tax status only related to entity and the owners
> Limited Liability of a Corp
> Taxed like a partnership

Front 9

Professional Corporations

Back 9

> does NOT have limited liabilty
> corporation for tax purposes
> liability like a partnership
> S/H in Professional Corp NOT liable for torts committed by other professionals

Front 10

Close Corporation
> def
> critical issues

Back 10

• def: a corporation whose shareholders are limited to a small group of persons, often only family members
> transfer of shares: no trading market for shares, destroys free transferability aspect of corp
> Misappropriation of funds- results in FMV paid for shares to minority S/Hs
>

Front 11

Close Corporations- 2 Types of Shareholder Agreements

Back 11

1. Rights of First Refusal
2. Mandatory Sale

Front 12

Close Corporations- Shareholder Agreements: Rights of First Refusal

Back 12

o If offer from outsider shares offered first, pro-rata to:
• Other shareholders
• corporations
o If not bought, can sell to outsider
• s/b limited to same terms, same buyer
o Free market sets terms

Front 13

Close Corporations- Shareholder Agreements: Mandatory Sale

Back 13

o List of triggering events, such as
• Death of Shareholder
• S/h's ceasing to participate in business
• Divorce, if spouses are S/Hs
o Agreement should specify how value of shares will be determined

Front 14

Who is a promoter?

Back 14

• Promoter is one who forms a corporation
• Promoter is "agent" for not-yet-existing corporation, or not an agent at all

Front 15

A promoter is liable on contract if... (3)

Back 15

• Corporation is never formed
• corporation does not adopt contract
• corporation breaches contract

Front 16

A promoter is NOT liable on contract if..

Back 16

• 3rd party agrees up front promoter not liable
• getting release once corporation is formed
• novation after adoption

Front 17

Def: Novation

Back 17

transferring all duties and obligations from one party to another through a contract

Front 18

Basic Incorporation Procedures

Back 18

o 1. Select a state of incorporation
o 2. Secure the corporate name by confirming its availability
o 3. Prepare the articles of incorporation
o 4. File the articles of incorporation with the secretary of state w/ payment of fees

Front 19

Purpose of Registered Agent

Back 19

listed on certificate of authority, registered agent in 1) incorporated state 2) every state where the company is a certificate of authority

Front 20

Articles of Incorporation... must have

Back 20

• 1. The name of the corporation
• 2. The number of shares the corporation is authorized to issue
• 3. The name and address of the corporation’s initial registered agent (authorized to receive legal documents on the behalf of the corporation)
• 4. The name and address of each incorporator

"duration and purpose"

Front 21

Articles of Incorporation...

Back 21

o supreme law of that company
o requires a shareholder meeting to change anything
o can put other information but usually don’t provide much detail about operations (bylaws do)
o duration and purpose
> corporation has a perpetual existence unless articles state otherwise
> corp can be formed for any lawful purpose
*trend- put very little in the articles of incorporation

Front 22

Corporate Bylaws
- def
- can be changed by...

Back 22

o def: internal rules of management adopted by the corp at its first organizational meeting
o created by the board of directors
o can be changed by board of directors
o shareholders may amend or repeal the bylaws

Front 23

First Organizational Meeting to Adopt Bylaws... important functions?

Back 23

• most important function is to adopt the bylaws
• elects directors, adopt bylaws and complete routine business of incorporation (authorizing the issuance of shares and hiring employees, etc.)

Front 24

Two Forms of Corporate Powers

Back 24

Express and Implied

Front 25

Express Corporate Powers

Back 25

o from many sources: US Constitution, state constitution, state statutes, the articles of incorporation, bylaws, resolutions by board of directors

Front 26

Implied Corporate Powers

Back 26

o many powers implied in law for corporation to accomplish corporate purposes
o implied power to perform all acts reasonably appropriate and necessary to accomplish its corporate purposes
o i.e. borrow funds, corporate officers have implied power to bind the corporation in matters directly connected with the ordinary business affairs (cannot change substantial purpose of organization)

Front 27

Ultra Vires
- def
- generally is

Back 27

o Def: acts of a corporation that are beyond its express and implied powers
o Typically contracts made for unauthorized purposes
o never have the power to engage in illegal activities
o used to state a specific business purpose but they don’t really anymore so ultra vires is not a problem

Front 28

Actions in response to Ultra Vires

Back 28

• shareholders can get injunction
• corporation can sue wrongdoer
• attorney general can get an injunction or dissolve corporation

Front 29

De Jure Corporations

Back 29

o De jure: all done properly (by the law)
• Right and lawful existence
• All mandatory statutory provisions have been met with articles
• Neither state or third parties can attack its existence

Front 30

De Facto Corporations

Back 30

o de facto: something lacking
• treated as corporation but there must be:
 1. statute that allows incorporation
 2. good faith attempt to comply
 3. acted as a corporation
• still protected by limited liability
• only state can challenge status
• shareholders still protected (Estoppel)
 protects the other direction

Front 31

Corporations by Estoppel

Back 31

• If a business association holds itself out as a corporation but makes no attempts to incorporate, firm will be estopped (prevented) from denying corporate status in a lawsuit by a third party
• Therefore, third party believed they were a corp but they weren’t. Corporation cannot say in their defense that they were not a corp. Confirming corporate status doesn’t change anything except resolve the current case at hand

Front 32

def "Piercing the Corporate Veil"

Back 32

- an action in which a court disregards the corporate entity and holds the shareholders personally liable for corporate debts and obligations
- Shareholder is denied protection of limited liability
- applies to any limited liability entity

Front 33

"Piercing the Corporate Veil" Situations

Back 33

o 1. A party is tricked or misled into dealing with corp instead of individual
o 2. “Thin” Capitalization- corp set up to never made a profit, not enough capital at formation to meet prospective debts/liabilities
o 3. Statutory corporate formalities are not followed
o 4. Personal and corporate interests are comingled to the extent that they cannot be separated
5. Owner uses corporation to perpetrate fraud, circumvent the law

Front 34

Corporate Financing- types of stock

Back 34

• Common stock
o Basic ownership, similar rights, including voting and dividend, but only if declared
• Preferred
o Contractual in nature, between debt and ownership
o many variations, cumulative, participating, convertible, etc.

Front 35

Mergers

Back 35

• One of corporations survives
o Merged corporation ceases to exist
o shareholders of merged corporations can get stuff
o stock of merged corporation is retired
o acquiring corporation acquires direct ownership of merged corporation's assets and assumes its liability
• One corporation is under the assets of another corp
• major directors and shareholders of both companies have to approve

Front 36

In mergers.. shareholders of merged corporations can get... (3)

Back 36

• stock of acquiring corporation
• other securities
• other consideration (e.g. cash)

Front 37

Merger- Share exchange

Back 37

o A merger that stops one step short
o Subsidiary continues separate existence
o stocks of merged corp is not canceled
o often used to create holding companies (parent corp owns shares of subsidiary corporation)

Front 38

Merger- Consolidation

Back 38

o Two or more corporations combine in such a way that each corporation ceases to exist and a new one emerges
o A and B consolidate into C which assumes all the rights, powers, and privileges held by A and B
o seldom done today

Front 39

Which approvals are needed for a merger?

Back 39

• 1. both boards must approve and recommend to shareholders
• 2. Plan specifies any terms and conditions of the merger, specific value of shares of each merging corporation and how they will be converted into the other corp
• 3. Both corporation’s shareholders must approve
o often a supramajority requirement (e.g. 2/3)
• 4. Directors and Shareholders approve, file articles of merger
5. Issue a certificate of merger

Front 40

Short Form Merger

Back 40

o parent already owns 90%+ of subsidiary
o only approval needed: parent’s board
• Do not need board and shareholder approval in two situations: short form merger and when a much larger company acquires smaller company- acquiring company does not need shareholder approval

Front 41

Merger- Appraisal Rights

Back 41

• Do not have to be an unwilling shareholder in a corp that is new or different from the original investment, i.e. opting out of the merger
• Dissenter to a proposed merger
• Can demand cash, rather than what the merger provides
• Requirements vary by state; usually:
o Notice to corp. that exercising the right prior to vote being taken
o Not vote in favor of the action
o Once exercised, might lose s/h status
• Target crop buys back your shares as treasury stock (entitled to FMV of stock)

Front 42

Merger- Purchase of Assets

Back 42

• No entity change
• S/h approval of acquiring corp not needed
• S/h approval might be needed if new shares (often 20%) issued to enable the purchase
• *lots of fraud so there are a few exceptions, when you purchase the assets and x happens, you are also purchasing the liabilities (see next)

Front 43

Merger- Purchase of Assets: Exceptions to Liabilities

Back 43

• Generally, liabilities are not assumed
• Exceptions
o Liabilities are assumed expressly or impliedly
o It is in substance a merger or consolidation
o Purchaser continues business with same personnel
o Transaction is a fraudulent way to avoid liability

Front 44

Mergers- Tender Offers

Back 44

• Acquirer offers directly to shareholders to buy their shares
o Board rejects so shareholders never approve/reject. SO tender offers are when an acquirer goes straight to shareholders. Called a hostile takeover b/c board & managment is opposed
• Used when management of target is opposed
• Williams Act passed to address abuses
o ground rules, “not at the dealership at closing time”

Front 45

Mergers- Tender Offer Rules

Back 45

o Offer open minimum of 20 days
o Extended at least 10 days if offer:
• Increases price offered
• Increases # of shares to be purchased
o Fair price rule: any higher price goes to all, even those already tendered
o Pro-rata, if too many shares tendered
• Upper limit on shares is exceeded, have to pick an equal share of shares from shareholders

Front 46

Mergers- Defensive Measures to Tender Offers

Back 46

• Lots of management can do to avoid hostile takeover
• Business judgment rule applies if they honestly believe company would be better off NOT being taken over
• Management can have a conflict of interest

Front 47

Voluntary Dissolution

Back 47

o Notice and time for creditors’ claims
o File articles of dissolution
o Board winds ups

Front 48

Involuntary Dissolution Situations

Back 48

o Failure to comply with admin. Req
o Fraud in getting corporate charter
o Ultra vires act
o Continuing criminal violation
o Failure to get the business started
o *receiver is appointed to wind up the corporate affairs and liquidate corporate assets