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Corporations > Organization & Structure > Flashcards

Organization & Structure Flashcards

1
Q

Public Corporation

A
  • Owned by large number of investors
  • 3 distinct groups
  • Federal Securities Law applies
  • Mostly incorporated in Delaware
  • Easy to sell shares, very little control power
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2
Q

Closely-held Corporation

A
  • Owned by small number of shareholders
  • Roles often overlap
  • May eliminate board of directors
  • No federal securities law requirements
  • Commonly incorporated in state of principal place of business
  • No market for shares of the corporation making it harder to exit, shareholders given more control
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3
Q

Certificate of Incorporation / Charter

A

Both MBCA & Delaware:

  • Name of corp.
  • Number of authorized shares of stock
  • Name and address of a registered agent in the state of incorporation

Delaware:
- also must include purpose of a corporation (this can be broad or general)

Some also include:
- names/addresses of initial directors

- Some charters have limitations 
3 means of enforcing a limitation:
- Shareholder suit 
- suit by corp against directors/officers for actions beyond purpose 
- involuntary judicial dissolution
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4
Q

Other provisions that might be in the charter

A
  • Management provisions: putting these in the charter instead of just the bylaws protects them from shareholder challenges
  • Bylaw provisions
  • Director liability: exculpatory provisions,
  • Indemnification: protects directors from personal liability in capacity as director
  • Only directors may propose changes to the charter
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5
Q

Capital structure

A
  • Equity: shareholders own stock, stock is an equity claim against a corp
  • Debt: connotes some fixed obligation of repayment independent of the success or failure of the business
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6
Q

Equity

A
  • Some corps have one class of equity owners
  • some corps have multiple classes: some equity holders receive dividends before others
  • All equity interests together = capital stock
  • individual = shares
  • Articles must set forth the total number of shares corp is authorized to issue
  • If there are classes: must prescribe the class and number of shares per class
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7
Q

Common Shares

A
  • 2 fundamental characteristics
    1) Unlimited voting rights (especially right to vote for directors)
    2) Right to residual assets of corp (after payment of liabilities)
  • Corp must at all times have at least one share having each of the rights of common stock
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8
Q

Preferred Shares

A
  • have some preference or priority in payment over common shares
  • terms of preferred shares set out in articles or a certificate of designations
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9
Q

Bonds

A
  • Many corps borrow money and incur indebtedness by issuing bonds
  • Bonds: a promise to repay specific sum of money at a definite time with period payments of interest
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10
Q

Benefits of Debt

A
  • Interest payments on debt are deductible to the company but dividends for stockholders are not
  • repayment of principal is a nontaxable return of capital to an investor, but dividends are ordinary income to the investor
  • if company fails, bad debt may be ordinary loss but loss of stock is capital loss to the investor
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11
Q

Risk of debt

A
  • requires repayment of fixed amounts at fixed intervals regardless of success or failure of the business
  • equity requires payment of dividends only when the business is successful
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12
Q

Shareholder view on debt

A
  • Debt enables the company to leverage the shareholder’s investment (notion that borrowers may use borrowed money to generate returns greater than the cost of borrowing
  • Excess earnings increase return on equity
  • Borrowing money increases risk
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13
Q

Directors

A
  • Usually has 3 members, only needs 1
  • Closely held corps may eliminate board
  • Number of directors usually fixed by charter or bylaws
  • role: manage/supervise the management of corp through hiring, advising, supervising, and firing CEO
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14
Q

Inside directors

A
  • employed full time by corp as corp officers in addition to their role on the board of directors, always includes CEO
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15
Q

Outside directors

A
  • don’t work for the corp, other than as members of the board
  • if they don’t have any other financial relationship with the corp, they are termed independent
  • enhances board’s decision-making due to independence but may be forced to rely on inside info due to lack of knowledge of business
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16
Q

Terms of office/Election of directors

A
  • Directors elected at annual meeting of shareholders
  • Hold their office until their successors are elected and qualified or until his/her earlier resignation or removal
  • DGCL: Staggered - always a majority of directors who are continuing without need for reelection (Prevents hostile takeover and restricts shareholder’s ability to monitor board action)
  • Classified: board that allows for classes of directors to be elected for multiple year terms
17
Q

Removal

A
  • Directors may be removed from the board by shareholders, with or without cause, unless charter provides that cause is required
    MBCA
  • If specific class of shares elects directors, only they can remove him
  • special rules for cumulative voting
  • may be removed in a judicial proceeding for bad behavior
    Delaware
  • Directors may always be removed for cause
  • Removal of directors in staggered board is only for cause unless otherwise specified
18
Q

Board Meetings

A
  • members considered present if director participates in the meeting via telephone
  • directors can act without holding meeting (unless provided otherwise) but written consent of all directors required
  • Majority of directors must be present to satisfy statutory quorum requirement but charter or bylaws may alter quorum requirement
  • board acts by majority vote unless charter or bylaws require supermajority
  • not required to meet in state of incorporation
19
Q

Board committees

A
  • board of directors may act through committees comprised of fewer than total number of directors
  • can’t delegate all matters to committee (actions that need shareholder vote)
  • can’t adopt, amend, repeal bylaws of corp
20
Q

Shareholder voting

A
  • Default rules can be altered by charter or bylaws
  • each outstanding share of common stock is entitled to one vote on each matter voted on at shareholder meeting
  • Vote on election of directors and fundamental transactions: electing, removing directors, amending charter/bylaws, approving merger/sale of all company assets not in ordinary course of business, approving dissolutions, ratifying conflict of interest transactions
21
Q

Proxy Voting

A
  • common in publicly traded companies
  • authorization given by shareholder to another person to vote his shares
  • proxy is an agent subject to the control of the shareholder and has fiduciary duties to the shareholder
22
Q

Voting Rights

A

Straight voting:
- each shareholder votes all his shares with respect to each open seat on the board
- default rule: but companies can opt for cumulative voting by amending bylaws or charter
- favors majority shareholders
Cumulative voting
- allows shareholders to concentrate their voting power by cumulating all of the votes associated with their shares and voting them in block for a limited number of nominees
- Minority shareholder representation on board is proportionate to voting strength
- common in closely held corps
- have to opt in to cumulative voting in the charter or bylaws

23
Q

Shareholder Meetings

A

Annual:
MBCA: in accord with bylaws
DGCL: in accord with charter or bylaws
Special:
MBCA: called by board or other person authorized by charter or bylaws
DGCL: called by board or other persons authorized by charter or bylaws

24
Q

Setting annual meeting date

A

MBCA:
- in accord with bylaws
- court may order if meeting is not held within 6 months of end of fiscal year or 15 mo after last annual meeting
DGCL:
- in accord with bylaws
- if not held within 30 days after designated date, the court may order a meeting
- shareholder’s right to call meetings is not provided so date regulations are less critical

25
Q

Acting on Consent

A
  • Shareholders can act without a meeting by written consent
  • Makes shareholder action easier in closely held corps
  • only used by 1/2 of public corps
    Delaware:
  • can be used to allow majority coalition of shareholders to aact without being subject to board’s tactical decisions to delay calling special meeting
    MBCA
  • not as significant because unanimous shareholder consent is required
26
Q

Notice

A
  • proper notice must be complied with for all meetings

- if improper notice, actions taken at meeting can be voided by shareholders who didn’t attend

27
Q

Quorum requirements

A
  • shareholders holding a majority of shares must be present in person or by proxy
28
Q

Issuing Dividend

A
  • payment, usually in cash, from a corp to its shareholders calculated on a per share basis
  • timing and amount determined by board of directors
29
Q

Repurchases

A
  • redemption of shares reduces number of outstanding shares but doesn’t change the fact that the shares that remain outstanding own 100% of residual value of corp
  • Pays money to shareholders and retires the shares
30
Q

Solvency Test

A
  • Prohibits distributions that would result in insolvency
  • Insolvency: corp unable to pay debts as they become due in ordinary course of business
    Delaware
  • does not adhere to this test
    MBCA:
  • corp unable to pay debts as they become due in ordinary course of business
31
Q

Balance Sheet Test

A
  • measured by financial statements
    2 types:
    1) Impairment of capital: permit distribution out of surplus, which means all capital in excess of the aggregate par values of the issue shares plus any amounts the board has elected to add to its capital account
    Delaware:
  • directors may declare dividends out of surplus

2) Technical Insolvency Test: prohibits distributions that would result in total assets being insufficient to pay the sum of the corp’s liability and any liquidation preferences that would be owing if the corp dissolved at the time of distribution
MBCA:
- par value eliminated. board must determine what consideration is adequate and shareholder obligated by contract to pay that amount and no more

32
Q

Par value

A

initially was equivalent to the sale prices of shares (no longer relevant

33
Q

Legal capital

A
  • par value per share times the number of shares outstanding

- distribution that exceeds the surplus results in impairment of capital

34
Q

Wholly owned subsidiary

A
  • legal entity separately incorporated from parent corp, but where the parent owns 100% of stock of subsidiary
35
Q

Piercing the Corporate Veil

A
  • Some instances courts will require shareholders to pay the entire amount of a contract/judgment on tort claim beyond shareholders investment
  • More likely in close corps
  • When corp is a sole shareholder “alter ego”
  • Undercapitalization
  • Intermingling of funds

Corporations (4 decks)

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