Business Law Chapter 25

Front 1

Corporate Nature and Classification

Back 1

A corporation is a creature of statute, an artificial “person.”
Corporations can have one or more shareholders.
Owners can be natural persons or other businesses.
Corporation substitutes itself for shareholders.

Corporations are recognized as legal “persons” and enjoy virtually same rights and privileges under our Constitution as natural persons.

Front 2

Corporate Nature and Classification: Corporate Personnel.

Back 2

Corporate Personnel.
Responsibility for overall management of company rests with board of directors (elected by shareholders).
Board of directors makes policy decisions and hires officers to run corporation on a daily basis. ->

Shareholders can sue corporation and be sued by corporation and bring suit for corporation in some instances.

Front 3

Corporate Nature and Classification: Constitutional Rights of Corporations.

Back 3

Recognized as a legal “person” with protections under the Bill of Rights, federal, and state statutes.

Front 4

Corporate Nature and Classification: Limited Liability of Shareholders.

Back 4

Limited Liability of Shareholders.
One of the key advantages of corporations is the limited liability of shareholders
In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.

Front 5

Corporate Nature and Classification: Corporate Earnings and Taxation.

Back 5

Corporate Earnings and Taxation.
Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends.
Corporate Taxation: corporate taxes can be taxes twice, first to the corporation, then to the shareholders via dividends. 

Front 6

Corporate Nature and Classification: Torts and Criminal Acts.

Back 6

Corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. 
Corporation can be liable for criminal acts, but only fined.
Responsible officers may go to prison

Front 7

Corporate Nature and Classification: Classification of Corporations.

Back 7

Domestic Corporation: does business in its state of incorporation.
Foreign Corporation: from X state doing business in Z state.
Alien Corporation: formed in another country doing business in United States.
Public and Private Corporations.
Nonprofit Corporations. 

Front 8

Classification of Corporations.:Closely Held Corporations.

Back 8

Management of Closely Held Corporations.
Transfer of Shares
Shareholder Agreement to Restrict Stock.
Misappropriation of Closely Held Corporation Funds.

Front 9

Classification of Corporations.
“S” Corporations

Back 9

“S” Corporations: avoids federal tax under IRS Code “Subchapter S.”
Avoids federal “double taxation” of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. 

IRS requirements: Corporation is domestic, fewer than 100 shareholders, only one class of stock, no shareholder can be a non-resident alien.

Professional Corporations.

Front 10

The process of incorporation generally involves two steps:

Back 10

Promotional Activities; and 
Incorporation Procedures.

Front 11

Promotional Activities.

Back 11

Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements. 

Promoter’s Liability: Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.

Front 12

Incorporation Procedures.

Back 12

Select State of Incorporation.
Secure the Corporate Name.
Must include words that disclose corporate status.
Cannot infringe on another’s trademark name. 
Prepare the Articles of Incorporation: which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization.
File the articles with the state.

Front 13

First Organizational Meeting.

Back 13

Adopt Bylaws:
After the corporation is “chartered” (created) it can do business.
At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.

Front 14

Improper Incorporation.
De Jure

Back 14

De Jure: substantial statutory requirements are met; cannot be attacked by state or 3rd parties.

Front 15

Improper Incorporation.De Facto

Back 15

De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; can only be attacked by state. 

Front 16

Improper Incorporation.Corporation by Estoppel:

Back 16

Corporation by Estoppel: If it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

Front 17

Corporate Powers.

Express Powers.

Back 17

Found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.
Corporate by-laws may also grant or limit a corporation’s express powers.

Front 18

Corporate Powers.
Implied Powers.

Back 18

To perform all acts reasonably necessary to accomplish its corporate purposes.
A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

Front 19

Corporate Powers.
Ultra Vires Doctrine.

Back 19

Corporate acts beyond the express or implied powers of the corporation (by statute of articles of incorporation).
Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation.

Front 20

Piercing the Corporate Veil

Back 20

In certain situations, courts will “pierce the corporate veil” and hold shareholders personally liable in the interests of justice and fairness. 

Front 21

Factors That Lead Courts Use to Pierce the Veil.

Back 21

A party is tricked into dealing with a corporation rather than the individual.
Corporation is set up never to make a profit or remain insolvent or is under capitalized. 
Corporation is formed to evade an existing legal obligation.
Statutory formalities are not followed.
Commingling of personal and corporate interests or assets. 

Front 22

Corporate Financing: Bonds

Back 22

Debt

Fixed ROI

No votes

Optional

Priority over stock

Front 23

Corporate Financing: Stocks

Back 23

Ownership/equity

Dividends (variable)

Vote for Management

Required

Required

Front 24

Stocks: Issued by business firms and government at all levels.

Back 24

Normally have a maturity date – when principal is returned to investor.
Sometimes referred to as fixed-income securities, because bondholders receive fixed-dollar interest payments.
Bond indenture: lending agreement

Front 25

Common Stock:

Back 25

: represents true ownership of a corporation.

Provides pro-rata (proportional) ownership interest reflected in voting, control, earnings and assets.
Investors who assume a residual financing position (whatever is left may go to dividends to shareholders). 

Front 26

Preferred Stock:

Back 26

has preferences over common stock.

Cumulative Preferred.
Participating Preferred.
Convertible Preferred.
Redeemable or Callable Preferred.

Front 27

Venture Capital:

Back 27

start-up businesses and high-risk enterprises need start-up and expansion capital. The start-up typically gives a share of its stock.

Front 28

Private Equity Capital:

Back 28

obtain capital from wealthy investors. Ultimately, the company may sell shares in an IPO.

Front 29

Merger

Back 29

Merger: combination of two or more corporations (A & B), after which only one company remains (A), with all of B’s rights and obligations.

Front 30

Consolidation:

Back 30

Consolidation: when two or more corporations (A & B) combine and a new corporation (C) is created, with A and B ceasing to exist.

Front 31

Share Exchange:

Back 31

some or all the shares of one corporation are exchanged for some or all of the shares of another corporation.

Front 32

Merger and Acquisitions: Procedures

Back 32

Board of Directors of each corporation involved must approve the merger plan. 

Majority of shareholders of each corporation must approve.
Then, documents are filed with Secretary of State who issues a certificate of merger.

Front 33

Short-Form Mergers.

Back 33

For “Parent-Subsidiary” Merger.
No approval of shareholders needed.
Parent must own at least 90% of each class of stock of the subsidiary corporation.
Board of parent corporation approves and new articles filed.

Front 34

Merger and Acquisitions: Shareholder Approval.

Back 34

Shareholder Approval.
Merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation.

Front 35

Merger and Acquisitions: Appraisal Rights.

Back 35

Shareholder has the right to be “bought out” of his/her shares.
Procedures: corporation notifies shareholders, who can demand fair market value appraisal.
Appraisal Rights and Shareholders Status: dissenting shareholder looses voting rights.

Front 36

Mergers and Acquisitions: Purchase of Assets.

Back 36

The acquiring corporation extends its ownership and control over the physical assets of another company.
Acquiring corporation shareholders do not need to approve.
Sale of Corporate Assets.
Must have approval of directors and shareholders. 
Successor Liability in Purchases of Assets.
Generally, the purchasing corporation is not automatically responsible for the liabilities of the selling company.
In the following situations, the purchasing company will be held to have assumed both the assets and liabilities of the selling company. 

Successor Liability (cont’d). Purchasing company assumes both liabilities and assets if:
Acquiring corporation impliedly or expressly assumes the liabilities.
Sale amounts to what is really a merger or consolidation.
Purchaser continues the seller’s business and retains the same personnel. 

Purchasing company assumes both liabilities and assets if:
Sale is fraudulently executed to escape liability

Front 37

Mergers and Acquisitions: Purchase of Stock and Tender Offers.

Back 37

Purchase of Stock: Common alternative to merger or consolidation is the purchase of a controlling interest (up to 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target. 

Front 38

Purchase of Stock and Tender Offers: Tender Offers.

Back 38

A publicly advertised offer addressed to all shareholders of the target is called a tender offer.
Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares
Can be in exchange for aggressor's stock.
The SEC strictly regulates tender offers.

Front 39

Purchase of Stock and Tender Offers: Tender Offers.
Responses

Back 39

Directors may view the offer as favorable or unfavorable. If favorable, then a recommendation is made to the shareholders.
If unfavorable, directors may make a self-tender to buy stock, launch a media campaign, or issue additional stock.

Front 40

Termination: Voluntary Dissolution.

Back 40

Shareholders can initiate dissolution or the board can initiate by submitting a proposal to the shareholders.

Front 41

Termination: Winding Up.

Back 41

Voluntary Dissolution: Board liquidates and acts as trustees of assets. Court will appoint a receiver if board refuses; or creditors want a receiver.
Involuntary Dissolution: court appoints receiver.
Liquidated assets first to creditors, then shareholders.

Front 42

Termination: Involuntary Dissolution.

Back 42

State can dissolve a corporation for failure to comply with state regulations.
Court can dissolve a corporation if there is a deadlock, the acts of directors are fraudulent or illegal.

Court can dissolve if assets are being misapplied or wasted.
Shareholders are deadlocked and failed to resolve.

Front 43

Corporate Nature,
Classification, and
Powers

Back 43

A corporation is a legal entity distinct from its owners. Formal statutory requirements, which vary
somewhat from state to state, must be followed in forming a corporation.

Front 44

Corporate Nature,
Classification, and
Powers: Corporate parties

Back 44

—The shareholders own the corporation. They elect a board of directors to
govern the corporation. The board of directors hires corporate officers and other employees
to run the daily business of the firm.

Front 45

Corporate Nature,
Classification, and
Powers: Corporate taxation

Back 45

—The corporation pays income tax on net profits; shareholders pay income
tax on the disbursed dividends that they receive from the corporation (double-taxation feature).

Front 46

Corporate Nature,
Classification, and
Powers: Torts and criminal acts

Back 46

—The corporation is liable for the torts committed by its agents or
officers within the course and scope of their employment (under the doctrine of respondeat
superior). In some circumstances, a corporation can be held liable (and be fined) for the
criminal acts of its agents and employees. In certain situations, corporate officers may be held
personally liable for corporate crimes.

Front 47

Corporate Nature,
Classification, and
Powers: Domestic, foreign, and alien corporations

Back 47

—A corporation is referred to as a domestic
corporation within its home state (the state in which it incorporates). A corporation is referred
to as a foreign corporation by any state that is not its home state. A corporation is referred to
as an alien corporation if it originates in another country but does business in the United
States.

Front 48

Corporate Nature,
Classification, and
Powers: Public and private corporations

Back 48

—A public corporation is one formed by a government (for
example, cities, towns, and public projects). A private corporation is one formed wholly or in
part for private benefit. Most corporations are private corporations.

Front 49

Corporate Nature,
Classification, and
Powers: Nonprofit corporations

Back 49

—Corporations formed without a profit-making purpose (for example,
charitable, educational, and religious organizations and hospitals).

Front 50

Corporate Nature,
Classification, and
Powers: Close corporations

Back 50

—Corporations owned by a family or a relatively small number of
individuals. Transfer of shares is usually restricted, and the corporation cannot make a public
offering of its securities.

Front 51

Corporate Nature,
Classification, and
Powers: S corporations

Back 51

—Small domestic corporations (must have no more than one hundred
shareholders) that, under Subchapter S of the Internal Revenue Code, are given special tax
treatment. These corporations allow shareholders to enjoy the limited legal liability of the
corporate form but avoid its double-taxation feature (shareholders pay taxes on the income
at personal income tax rates, and the S corporation is not taxed separately).

Front 52

Corporate Nature,
Classification, and
Powers: Professional corporations

Back 52

—Corporations formed by professionals (for example, doctors and
lawyers) to obtain the benefits of incorporation (such as tax benefits and limited liability). In
most situations, the professional corporation is treated like other corporations, but sometimes
the courts will disregard the corporate form and treat the shareholders as partners.

Front 53

Corporate Nature,
Classification, and
Powers: Express powers

Back 53

—The express powers of a corporation are granted by the following laws and
documents (listed according to their priority): federal constitution, state constitutions, state
statutes, articles of incorporation, bylaws, and resolutions of the board of directors.

Front 54

Corporate Nature,
Classification, and
Powers: Implied powers

Back 54

—Barring express constitutional, statutory, or other prohibitions, the
corporation has the implied power to do all acts reasonably appropriate and necessary to
accomplish its corporate purposes.

Front 55

Corporate Nature,
Classification, and
Powers: Ultra vires doctrine

Back 55

—Any act of a corporation that is beyond its express or implied powers to
undertake is an ultra vires act. The corporation (or shareholders on behalf of the corporation)
may sue to enjoin or recover damages for ultra vires acts of corporate officers or directors.

Front 56

Corporate Formation: Promotional activities

Back 56

—Preliminary promotional activities are rarely if ever taken today. A person
who enters contracts with investors and others on behalf of the future corporation is personally
liable on all preincorporation contracts. Liability remains until the corporation is formed and
assumes the contract by novation.

Front 57

Corporate Formation: Incorporation procedures

Back 57

—Procedures for incorporation differ among states, but the basic
steps are as follows: (a) select a state of incorporation, (b) secure the corporate name,
(c) prepare the articles of incorporation, and (d) file the articles of incorporation with the
secretary of state.
a. The articles of incorporation must include the corporate name, the number of shares of
stock the corporation is authorized to issue, the registered office and agent, and the names
and addresses of the incorporators.
b. The state’s filing of the articles of incorporation (corporate charter) authorizes the
corporation to conduct business.
c. The first organizational meeting is held after incorporation. The board of directors is elected,
and other business is completed (for example, adopting bylaws and authorizing the
issuance of shares).

Front 58

Corporate Status: De jure or de facto corporation

Back 58

—If a corporation has been improperly incorporated, the courts
will sometimes impute corporate status to the firm by holding that it is a de jure corporation
(cannot be challenged by the state or third parties) or a de facto corporation (can be
challenged by the state but not by third parties).

Front 59

Corporate Status: Corporation by estoppel

Back 59

—If a firm is neither a de jure nor a de facto corporation but represents
itself to be a corporation and is sued as such by a third party, it may be held to be a
corporation by estoppel.

Front 60

Corporate Status: Disregarding the corporate entity

Back 60

—When a corporate entity is used to perpetrate a fraud or
another illegitimate purpose, courts may “pierce the corporate veil” and hold a shareholder
or shareholders personally liable for a judgment against the corporation.

Front 61

Corporate
Financing—Bonds

Back 61

Corporate bonds are securities representing corporate debt—money borrowed by a corporation.

Front 62

Corporate
Financing—Stocks

Back 62

Stocks are equity securities issued by a corporation that represent the purchase of ownership
in the business firm. Exhibit 25–3 on page 533 describes how stocks differ from bonds, and
Exhibit 25–4 on page 534 describes the various types of stocks issued by corporations, including
the two main types—common stock and preferred stock. Sometimes, entrepreneurs seek
alternative financing through venture capital or private equity capital.

Front 63

Merger and
Consolidation: Merger

Back 63

—The legal combination of two or more corporations, with the result that the surviving
corporation acquires all the assets and obligations of the other corporation, which then ceases
to exist.

Front 64

Merger and
Consolidation: Consolidation

Back 64

—The legal combination of two or more corporations, with the result that each
corporation ceases to exist and a new one emerges. The new corporation assumes all the
assets and obligations of the former corporations.

Front 65

Merger and
Consolidation: Share exchange

Back 65

—Some or all of the shares of one corporation are exchanged for some or all
of the shares of another corporation, but both corporations continue to exist.

Front 66

Merger and
Consolidation: Procedure

Back 66

—Determined by state statutes. Basic requirements are the following:
a. The board of directors of each corporation involved must approve the plan of merger,
consolidation, or share exchange.
b. The shareholders of each corporation must approve the plan at a shareholders’ meeting.
c. Articles of merger, consolidation, or share exchange (the plan) must be filed, usually with
the secretary of state.
d. The state issues a certificate of merger (or consolidation) to the surviving (or newly
consolidated) corporation.

Front 67

Merger and
Consolidation: Short-form merger (parent-subsidiary merger)

Back 67

—Possible when the parent corporation owns at
least 90 percent of the outstanding shares of each class of stock of the subsidiary corporation.
a. Shareholder approval is not required.
b. The merger must be approved only by the board of directors of the parent corporation.
c. A copy of the merger plan must be sent to each shareholder of record of the subsidiary
corporation.
d. The merger plan must be filed with the state.

Front 68

Merger and
Consolidation: Appraisal rights

Back 68

—Rights of dissenting shareholders (given by state statute) to receive the fair
value for their shares when a merger or consolidation takes place. If the shareholder and the
corporation do not agree on the fair value, a court will determine it.

Front 69

Purchase of Assets

Back 69

A purchase of assets occurs when one corporation acquires all or substantially all of the assets of
another corporation.

Front 70

Purchase of Assets: Acquiring corporation

Back 70

—The acquiring (purchasing) corporation is not required to obtain
shareholder approval; the corporation is merely increasing its assets, and no fundamental
business change occurs.

Front 71

Purchase of Assets: Acquired corporation

Back 71

—The acquired (purchased) corporation is required to obtain the approval
of both its directors and its shareholders for the sale of its assets, because the sale will
substantially change the corporation’s business position.

Front 72

Purchase of Stock

Back 72

By purchasing a substantial number of the voting shares of a firm (the target corporation), the
acquiring corporation gains control of the acquired corporation—a process commonly referred to
as a takeover. A takeover is typically accomplished through a tender offer in which the acquiring
corporation seeks to purchase shares of stock directly from the target’s shareholders.

Front 73

Termination: Dissolution

Back 73

The termination of a corporation involves the following two phases:
1 .—The legal death of the artificial “person” of the corporation. Dissolution can be
brought about voluntarily by the directors and shareholders or involuntarily by the state or
through a court order.

Front 74

Termination: Winding up (liquidation)

Back 74

The termination of a corporation involves the following two phases:—The process by which corporate assets are converted into cash and
distributed to creditors and shareholders according to specified rules of preference. May be
supervised by members of the board of directors (when dissolution is voluntary) or by a
receiver appointed by the court to wind up corporate affairs.