Mbfe 653: Chapter 42: Organization And Financial Structure Of Corporations

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The person who incorporates a business, organizes the initial management and raises the initial capital (Finds investors, negotiates initial operation contracts, etc…)

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Promoter

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When a corporation become bound to a promoters pre-incorporation contracts and accepts the contract with knowledge of all the material facts.

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Adoption

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A clause that may be requested by the promoter to have their liability cease automatically upon adoption.

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Automatic Novation Clause

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A perspective shareholder agrees to buy a specific number of shares at a stated price that can not be revoked for a 6 month period

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Preincorporation Share Subscription

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(1) Preparation of articles of incorporation. (2) Signing and authenticating the articles by one or more incorporators. (3) Filing the articles with the secretary of state accompanied by payment of specified fees. (4) Receipt of a copy of the articles of incorporation stamped "Filed" accompanied by a fee receipt. (5) Holding an organizational meeting for purpose of adopting by laws, electing officers and transacting other business.

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Steps of Incorporation

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The charter of the corporation stating many of the rights and responsibilities of the corporation and its management

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Articles of Incorporation

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Required: (1) Name (2) Number of Shares (3) Address and Name of Agent (4) Name and address of each incorporator. Optional: (1) Name and address of additional directors (2) Purpose (3) Duration (4) Par value of corporate shares (5) Additional Provisions

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Contents of Articles of Incorporation

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(1) Authority of Officers and Directors (2) Time and place annual shareholder meeting will be held (3) Procedure to hold special meeting. (4) Procedure of special meeting (e.g. majority attendance) (5) Provision for special committee. (Procedure for maintenance of share records. (7) Machinery for transfer of shares. (8) Procedure and Standards for declaration and payment of dividends.

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Contents of Bylaws

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When business managers attempt to incorporate but fail to comply with all the conditions to incorporate (e.g. failure to file articles of incorporation)

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Defective Attempts to Incorporate

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(For All Purposes) When promoters substantially comply with each of the mandatory conditions precedent to the incorporation of the business.

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De Jure Corporation

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"Shall" or "Must" provisions in corporate statutes necessary to protect the public interest.

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Mandatory Provisions

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Provisions that "may" be done but are not necessary to protect public interest

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Directory Provisions

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A corporation that complies with most, but not all mandatory provisions

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Defacto Corporation

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(1) There is a valid statute under which the corporation could be organized (2) The promoters or managers make an honest attempt to organize under the statute (3) The promoters or managers exercise corporate powers (Acting as a corporation)

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Defacto Corporation Requirements

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When people hold themselves out as representing a corporation or believe themselves to be dealing with a corporation, or a court will estop those people from denying the existence of a corporation

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Corporation by Estoppel

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(1) Shares in the corporation (2) An obligation of the corporation

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Types of Corporate Securities

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Shares that have preference with regards to assets or dividends over other classes of shares

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Preferred Shares

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A stated dollar amount that must be paid to each preferred shareholder before any common shareholder

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Liquidation Preference

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Dividends not paid in one year will accumulate

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Cumulative Dividend Preference

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Dividends that are not paid in one year do not accumulate

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Noncumulative Dividend Preference

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Preferred shares having a priority in dividends

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Participating Shares

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A corporations ability to force a buyback of shares

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Redemption

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Shares sold to stock holders

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Issued Shares

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Shares currently held by shareholders

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Outstanding Shares

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Shares bought back by a corporation that cannot be reissued

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Cancelled Shares

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Often issued to managers to top level managers of a corporation as an incentive to increase profitability of the corporation

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Options

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Options evident by certificates

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Warrants

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Short term certificated options that are transferrable

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Rights

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Long term unsecured debt

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Debentures

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Long term secured debt securities secured by collateral

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Bonds

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Short term unsecured debt

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Notes

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An arbitrary dollar amount assigned to shares by the Articles of Incorporation

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Par Value

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Shares issued for less than par value

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Discount Shares

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When a board impermissibly over values the consideration for shares

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Watered Shares

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When shares are sold for more than par value, the excess or surplus consideration received by the corporation (Eliminated by MBCA, now treated as 'Common Equity')

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Capital Surplus

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Subscription agreements made after incorporation frequently used in close corporations

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Post Incorporation Subscriptions

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Transfer of a share certificate without naming a transferee

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Street Certificate

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Requires the seller of shares to sell back to the corporation or other shareholders at an agreed upon price

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Buy and Sell Agreement

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Requires the seller to obtain consent to sell their shares before they actually sell.

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Consent restraint

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To exclude unwanted persons from buying shares, e.g. competitors

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Provision Disqualifying Purchasers