Biz Org Flashcards
What are the three primary types of business organizations?
Corporations, partnerships, LLCs.
Where can individuals and entities incorporate?
Both individuals and corporations may incorporate in any state they choose.
Why is Delaware important to corporations?
more than 50% of Fortune 500 are incorporated in Delaware.
What are shares? How are they different from stocks?
“Shares” means the units into which the proprietary interests in a corporation are divided. Share is the term used in the MBCA. Stock is used in the DGCL.
What is an outstanding share?
Authorized shares that have been issued. Only outstanding shares get to exercise the rights associated with the shares.
What is the default rule under the MBCA about what rights are associated with shares?
shares have voting rights. There is no general rule about the rights that shares entail.
What are the two types of rights typically associated with shares?
right to vote, cash flow rights.
Right to vote = vote in the general assembly, or other voting rights given with shares
Cash flow rights (dividend rights) = entitlement to a percentage of the corporation’s profits
Who decides the distribution of dividends?
The board of directors.
What is a beneficial shareholder (MBCA)?
a person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner’s behalf.
What is a distribution (MBCA)?
a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders
What is an employee (MBCA)?
includes an officer but not a director. A director may accept duties that make him also an employee.
What is an entity (MBCA)?
includes domestic and foreign business corporation; domestic and foreign nonprofit corporation; estate; trust; domestic and foreign unincorporated entity; and state, United States, and foreign government
What is an individual (MBCA)?
A natural person.
What is a person (MBCA)?
Includes an individual and an entity.
What is a record shareholder (MBCA)?
he person in whose name shares are registered in the records of the corporation or the beneficial owner of shares
What business organizations are unincorporated entities?
The term includes a general partnership, limited liability company, limited partnership, business trust, joint stock association and incorporated nonprofit association.
What is voting power (MBCA)?
means the current power to vote in the election of directors.
What happens if more shares are issued than are authorized?
it’s like the over-issued shares don’t exist. The corporation did not have the legal authority to issue the over-issued shares. ultra vires
What are the two constitutional documents of a corporation?
articles of incorporation (charter) and the bylaws.
What are the types of corporations held?
closely held———-publicly traded———-publicly traded with controlling shareholder
What is a controlling shareholder?
Publicly traded corporation but one shareholder owns a lot of shares (usually majority), like Mark Zuckerberg
What is the usual voting threshold for corporations?
A majority.
Break down the independent legal personality of a corporation.
Corporations are recognized as distinct entities by law
Corporations should be automatically authorized to engage in all acts and have all powers that an individual may have
A corporation without the corporation would be a series of complex contracts; corporations create a contractual nexus.
Corporations provide entity shielding.
Break down entity shielding.
Corporation debt creditors looking to collect can’t go after the individual, have to go after corporation
When no corporation, debt creditors can go after business assets for personal debts
Without a corporation, both business and personal creditors have priority to either asset
Does not exclude shares, since individual owns that like property
Break down limited liability of corporations.
Limited liability means that the liability of the owners of the corporation is limited to the money they invested (or promised to invest).
Default rule is to provide limited liability to all investors.
Limited liability enables diversification.
Break down transferable shares and capital lock-in of corporations.
Any partner can dissolve at will, taking their capital with them. Dissolution of a corporation is more difficult. As a default, no one has the veto power to bring the corporation’s life to an end, or take away his money from the corporation. What you can do is sell your shares to a potential investor to get money.
Break down delegated board management of corporations.
Decision making costs= costs associated with communicating with investors on how to run business. The larger the group, the higher the decision-making costs.
Final word has to go to some select delegated group (board of directors)
Rational apathy - don’t think your votes matter in the course of the business, becomes apathetic
What does the MBCA require in the articles of incorporation?
- Name
- Authorized shares (maximum)
- Registered agent (and registered office, which must be located in the state of incorporation.)
- Incorporators (names and addresses)
What are some of the more common and important optional provisions for articles of incorporation under the MBCA?
Statement of purpose
Classes and series of shares (where one or more classes of shares have certain preferential rights, those rights must be spelled out)
Director and officer indemnification and liability limitation
How may the articles of incorporation be amended?
Articles of incorporation may be amended at any time.
First, board of directors must recommend amendment to shareholders.
Second, shareholders must approve the amendment.
Third, the amendment must be filed with the secretary of state’s office.
What are bylaws, and how are they different from the articles of incorporation?
Bylaws are rules a corporation adopts to govern its internal affairs.
Bylaws don’t have to be filed with the state so they aren’t public record
Bylaws are more easily amended than articles of incorporation
Officers and directors tend to be more familiar with bylaws than with the articles
What is a subsidiary?
a corporation whose shareholders are corporations
What is the purpose of diversification?
It decreases the risk of investment.
What will sophisticated contractual creditors do in response to default rules?
Sophisticated contractual creditors will contract around default rules, like requesting a personal guarantee, or requiring collateral.
What is the default rule for ending a corporation’s existence?
corporations exist until dissolution, which can only be initiated via a lengthy procedure
How are partnerships formed?
6(1) = partnerships --no requirement of constitutional documents 7(4) = Receipt of profit of a business leads to a default assumption that that person is a partner, whether they intended to or not.
What power do partners have in relation to one another and to their partnership?
9(1) = Every partner is the agent of the partnership. Partners have the power to bind the partnership in contract. 13 = Partners have the power to bind the partnership in tort.
How do partnerships dissolve?
29 = default rule: any partner can dissolve the partnership at will. 31 = dissolution is caused by the express will of any partner 38 = partnership’s property is used to payoff whatever partnership debt there is, the remainder goes to the partners.
What power do agents have in a partnership?
An agent has the power to bind the principal. This extends into tort liability.
What are agency costs?
describes what happens when there’s a misalignment of incentives between the ultimate beneficiary and the people making the decisions
What are controlling shareholder agency costs?
Agency costs associated with having a controlling shareholder.
What is capital?
the permanent and long-term contingent claims on the corporation’s assets and future earnings issued pursuant to formal contractual instruments called securities (money that goes into the corporation)
What are the two types of capital?
Debt = creates a fixed claim Equity = contingent and residual claim
How are equity investors owners of a corporation?
Equity investors are “owners” of the corporation, but this does not mean they run the business. It gives them control rights.
Corporate law gives first ranking to equity investors. Theory = this type of ownership promotes risk taking, and risk taking is good for the economy
What are stakeholders?
environment, society, anything/anyone not equity investors but still interacts with the corporation
What is the minimum number of initial shareholders for a newly formed corporation?
1 legal person.
What is an incorporator?
An incorporator is someone who acts on behalf of the corporation that has not been formed yet. Sometimes called a promotor.
What are incorporators allowed to do before the corporation is formed?
Incorporators are allowed to sign contracts on behalf of corporations that have not been formed yet; they will sometimes be held liable for the contract.
How are partnerships created? Do they enjoy limited liability for this?
Partnerships do not require any formalities to be created; partners do not enjoy limited liability for spontaneous partnerships.
It is possible to have limited liability for partners, but that is not the default rule.
How does creating a corporation compare to a partnership? Dissolving?
Corporations are more difficult to create than partnerships; they are also more difficult to dissolve.
What are share options?
giving board members the right to purchase a share at a specific price to bridge the misalignment gap from agency costs
How is debt and equity treated in terms of repayment?
Debt gets paid first, whatever is left over goes to equity.
What are negative control rights?
veto power over certain acts.
What is pro rata distribution?
Proportionate allocation. For example, profit is generally divided among several stockholders (shareholders) on the basis of the amount of stock (number of shares) held by each.
What are hybrid examples of debt/equity classes?
Junior bonds, - Lower priority than senior bonds - Higher priority than all shares - Specified return - Contractual (negative) control rights convertible bonds, - A bond that may be converted into shares preferred shares, warrants
How many classes of shares may a corporation have?
A firm may have several classes of shares and bonds, each conveying different rights
What is the traditional and modern view of equity ownership?
Equity ownership (shareholder); traditional view → defacto constituency that the corporation is supposed to make better, corporation is supposed to make profits for the shareholder
Other view → Shareholders are not the only parties in interest. Consider employees, environment, etc.
How does a corporation determine it’s voting rights?
Share’s voting rights can be specified in the bylaws/articles, it’s like a contract
What are monitoring costs?
monitoring costs: shareholders will be spending time monitoring the corporation if they don’t have limited liability.
What are enforcement costs?
Enforcement costs - the costs of efforts in collecting debt or enforcing an agreement
What is the compensation for risk/legislative regulation balance?
Compensation for risk/legislative intervention: A certain type of creditor is able to protect themselves from the risk of liability. (Sophisticated contractual creditor). For non contractual creditors (like injured party in tort) they are protected by legislative intervention allowing for compensation of risk.
What is the dark side of limited liability?
Dark side of limited liability - tort law is meant to prevent torts by internalizing the costs of committing a tort. By having limited liability, the tortfeasors themselves are not held liable for the torts committed.
What is the doctrine of respondeat superior?
Respondeat superior (agency) = not really a corporate law doctrine, tort doctrine. An employee in the scope of employment commits a tort, the employer is liable. Usually invoked to have parent corporation liable for a subsidiary. Corporations are not employees or agents of the shareholders.
What is veil piercing?
Veil piercing (piercing the corporate veil): holding shareholders responsible for the debt of the corporation. An exception to limited liability.
What is enterprise liability?
Enterprise liability: entities can be held jointly liable for some action on the basis of being part of a shared enterprise. Holds entities liable when they try to cabin away liability into a shared enterprise. To prove enterprise liability you must prove a common enterprise - that management, sales, assets, etc. of the same enterprise are in various corporations.
What is the Van Dorn Test for piercing the corporate veil?
Van Dorn Test:
Such unity of interest between debtor and defendant that their separate personalities no longer exist; AND
Adherence to fiction of separate corporate existence would sanction fraud or promote injustice.
To determine if there is a unity of interest, the following factors apply:
Failure to maintain corporate records or comply with corporate formalities;
Commingling of funds or assets
Undercapitalization
Domination by parent’shareholder
How is legal capital like an equity cushion?
the more legal capital a corporation has, the less risk for an equity owner to invest, or the more likelihood of receiving a return(being paid back).
What are externalities? How are they created?
Limited liability creates externalities. Externalities → a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved
What alone does not satisfy the Van Dorn test?
Evidence of an unsatisfied judgment–alone–is not enough for the Van Dorn test.
What is reverse veil piercing, after one has successfully veil pierced?
Reverse veil piercing gives the piercer(Sea Land) the shares of subsidiaries of the shareholder (Marchese), thereby competing with other creditors of the subsidiaries.
How is injustice a difficult standard to measure in tests like Van Dorn?
The context of justice blurs the line in tests that use injustice in the standard.
What is Par Value?
Par value - minimum amount paid for the share; corporation may not distribute that money as a dividend.
What is legal capital?
Money shareholders pay for their shares is legal capital.
What is the Amfaq test of veil piercing?
Amfaq Test:
The debtor corporation was under actual control of the shareholder; AND
The plaintiff’s inability to collect resultedfrom shareholder’s improper conduct.
Causation: The shareholder’s control either caused the plaintiff to entertransaction or caused the defalut; and the improper conduct was in relation to plaintiff’s entering the contract or interfering with the corporation’s performance.
Examples of improper conduct:
Inadequate capitalization
Milking = shareholders syphoning profits or assets
Misrepresentation or commingling
Violation of a statute
What is odd about undercapitalization?
There is no legal requirement for capitalization at a specific or certain amount, despite undercapitalization as a factor in many tests, including both Amfaq and Van Dorn
What is equitable subordination?
Equitable subordination = in bankruptcy, shareholders are treated as second coming creditors after first creditors.
