Corporations: Generally Flashcards
Ultra Vires Doctrine
At CL: a corporation was limited to the powers enumerated in the purpose clause of its charter.
Historically, if a corporation engaged in conduct that was not authorized by its express or implied powers, the conduct was deemed “ultra vires” and void.
Whenever a transaction was beyond the corporation’s limited purposes or powers, either party to the contract could disaffirm it.
Ultra Vires TODAY
Today, Ultra Vires is VERY RARE and viewed as a historic relic.
Most modern corporation statutes expressly grant incidental/implied powers.
Corporate managers, in the absence of express restrictions, have discretionary authority to enter into contracts and transactions reasonably incidental to its business purpose, which may be broadly defined.
Internal Affairs Doctrine
The “Internal affairs” of the corporation are governed by the law of the state of incorporation.
BUT CA departs from the internal affairs doctrine: it makes “foreign” corporations with more than half of their taxable income, property, payroll, and outstanding voting shares within CA subject to certain provisions of the CA Corporations Code.
Why is Delaware Good to Incorporate In?
Nearly 60% of publicly traded U.S. corporations are incorporate in DE.
DE has:
(1) largest body of precedent interpreting its corporation code
(2) relatively stable & modern corporate law (DGCL undergoes frequent updates)
(3) a special court for business matter (Court of Chancery)
(4) procedures that facilitate timely decisions
Sources of Corporate Law
Individual state law (internal affairs doctrine)
- Model Business Corporations Act (“MBCA”)
- Delaware
Federal law
- Securities and exchange acts (’33, ’34)
- Sarbanes Oxley Act of 2002 (PPP, page 111)
- Dodd Frank Act of 2010 (PPP, page 111)
- JOBS Act of 2012
- Primarily cover “public” corporations
Key Attributes of a Corporation
A “legal person typically possessing the following attributes:
- SEPARATE LEGAL EXISTENCE from its owners
● Corporations possess some constitutional rights (e.g., free speech [Citizens United], but no personal privacy (FCC v. ATT)
● Separate taxpayer
● Requirement for formal creation - PERPETUAL EXISTENCE (designed to last forever)
● MBCA § 14.02(a): The Board of Directors may propose dissolution for submission to the shareholders by first adopting a resolution authorizing the dissolution - LIMITED LIABILITY
■ MBCA § 6.22(b): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation (but he may become personally liable by reason of his own acts or conduct.”) - CENTRALIZED MANAGEMENT
■ MBCA § 8.01(b): “All corporate powers shall be exercised by or under the authority of its board of directors - DIVISIBLE OWNERSHIP (shares of stock)
■ Claims on the corporation’s assets and future earnings are issued in the form of securities
● Securities: permanent, long-term claims on the corporation’s assets and future earnings issued pursuant to formal contractual instruments
● Capital structure: the debt securities and equity securities together constitute the firm’s capital structure - TRANSFERABLE SHARES and debt obligations (unless limitations imposed)
■ Secondary trading markets (e.g., NYSE and NASDAQ)
■ Efficient Capital Market Hypothesis: Price of a stock reflects all available information
What do the Board of Directors Do?
They direct the affairs of the corporation
They have the authority to act for (and to bind) the corporation
Directors have fiduciary duties to the corporation and the body of shareholders
Individual director acting alone generally has no rights or powers
The Board has the power to delegate authority (e.g., it can appoint officers to run the day-to-day operations, it can delegate certain authority to committees of the board, etc.)
Officers
Handle the day-to-day management of the corporation and are under the direction of the board
Execute firm strategy
Officers are appointed by the board (e.g., CEO, CFO, etc.)
They are agents of the corporation, and the scope of their power often comes down to agency principles
Financial Statements
Income statement: Financial statement that indicates results of operations over a specified period (also known as P&L statement)
Balance sheet: Summarizes the company’s financial position at a given point in time (usually the end of the month, quarter, or year)
○ Describes the assets of the business and the claim on those assets, either of creditors in form of debt, or owners in the form of equity)
Authorized Shares Definition
Number of shares the corporation can issue
Outstanding Shares Definition
Number of shares the corporation has sold and not repurchased
“Authorized but Unissued” Definition
Shares that are authorized, but not yet sold
“Treasury Shares” Definition
Shares issued and then repurchased by the firm
Book value
Measure of the equity value of the firm provided by the financial statement (balance sheet)
Market capitalization
Measure of the equity value of the firm implied by the trading value of the firm’s stock
Value of one share of stock x total number of shares outstanding
Enterprise Value
Measure of the total value of the firm’s assets implied by the trading value of the firm’s stock (determined by adding the market value to the firm’s obligations)
Limited Liability Partnerships (LLPs)
Limited liability form of the general partnership (Article 10 of RUPA)
Forming a LLP requires filing a form with the secretary of state
● Must have a signifier, i.e., “LLP”
● Effect is to shield partners from personal liability for the partnership debts, but a partner still remains personally liable for her own wrongful acts
Limited Partnerships (LPs)
A type of partnership with 2 types of partners:
○ General partners: manage the business and have the power to bind the partnership; they are personally (and jointly and severally liable) for the partnership debts
○ Limited partners: silent/passive partners without management rights; not personally liable unless they participate in management or control of the LP; current Uniform Act has modified to not personally liable except in extraordinary circumstances
● Requires a formal filing (a “certificate of limited partnership”) to create a LP
● Partnership must have at least one general partner and one limited partner & the partnership name must have a signifier – i.e., “LP”
● Default rule is that partners in a LP share profits and losses in proportion to their respective capital contributions
Limited Liability Corporation (LLC)
Formation: file with the state
IRS ruled that the LLC could qualify for partnership-like tax treatment
Flexibility: like partnership, most aspects of management and sharing dictated by the LLC’s “operating agreement”
Two types:
○ (1) member managed; all members are managers, and
○ (2) manager managed; some owners not managers and no right to vote
Limitations on capital structure complexity and share transferability
S Corp
Creation of tax code (actually a corporation)
Advantage: pass through taxation and limited liability
Disadvantage: constraints on the number of shareholders, source of corporate income, types of shareholders (one class only), deductions on pass-through losses
How Can a Board take action on Behalf of the Corporation
EITHER:
(a) at a meeting at which notice was property given and a “quorum” is present; or
(b) by written consent
● DGCL § 141(f): authorizes a board to act without a meeting by means of written consent, but it requires unanimity
Quorum: A majority of the total number of directors shall UNLESS the COI or the bylaws require a greater number.
Unless the COI provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum, in no cause shall be less than ⅓ of the total number of directors
