Chapter 36 Corporate Formation and Financing. Introduction Corporation: A fictitious legal entity...

Chapter 36Corporate Formation and Financing

Introduction

Corporation: A fictitious legal entity that is created according to statutory requirements

Shareholders: Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation

Corporations codes: State statutes that regulate the formation, operation, and dissolution of corporations Courts interpret state corporation statutes to decide

individual corporate and shareholder disputes

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The Corporation as a Legal “Person”

A corporation is a separate legal entity (or legal person)

Corporations can Sue or be sued in their own names Enter into and enforce contracts Hold title to and transfer property Be found civilly and criminally liable for

violations of law


Characteristics of Corporations

Free Transferability of Shares National securities markets have been developed

for the organized sale of securities Perpetual existence (unless a specific duration is

stated in a corporation’s articles of incorporation) Its existence can be voluntarily terminated by the

shareholders


Characteristics of Corporations

Centralized Management Board of directors makes policy decisions

concerning the operation of a corporation Limited Liability of Shareholders

Corporations are liable for their own debts and obligations


Corporation

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Key Term Description

Board of directors A panel of persons who are elected by the shareholders that make policy decisions concerning the operation of a

corporation

Corporate officers Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations

of the corporation

Limited liability of shareholders

A general rule of corporate law that provides that generally shareholders are liable only to the extent of

their capital contributions for the debts and obligations of their corporation and are not personally liable for the

debts and obligations of the corporation

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Exhibit 36.1: Corporation


Case 36.1– Shareholder’s Limited Liability

Case Menendez v. O’Niell 986 So.2d 255 (2008) Court of Appeal of Louisiana

Issue Is Fraioli personally liable for the debts of

Triumvirate, a corporation of which is the sole shareholder?


Public and Private Coorporations

Public Corporation A corporation formed to meet a specific

governmental or political purpose Local government corporations are often called

municipal corporations Private Corporation

A corporation formed to conduct privately owned business


Profit and Not-for-Profit Corporations

Profit Corporation Created to conduct a business for profit Can distribute profits to shareholders in the form

of dividends Not-for-profit Corporation

A corporation formed to operate charitable institutions, colleges, universities, and other not-for-profit entities


Publicly Held and Closely Held Corporations

Publicly Held Corporation Many shareholders Shares traded on organized security markets Shareholders rarely involved in management

Closely Held Corporation Few shareholders Shareholders may have buy-and-sell agreements Shareholders often involved in management


Professional Corporation

A corporation formed by lawyers, doctors, or other professionals Shareholders are called members

Members not usually liable for torts committed by agents or employees

May be liable for malpractice of members


Types of Corporations

Types of Corporations

Description

Domestic A corporation is a domestic corporation in the state in which it is incorporated

Foreign A corporation is a foreign corporation in states other than the one in which it is

incorporated

Alien A corporation is an alien corporation in the United States if it is incorporated in

another country


Selecting a State for Incorporating

A corporation can be incorporated in only one state Can do business in all other states in which it

qualifies to do business Selecting a corporate name

Must contain corporation, company, incorporated, or limited

Cannot be trademarked by another company Availability as a domain name on the Internet


Incorporators

The person or persons, partnerships, or corporations that are responsible for incorporation of a corporation. Primary duty – sign the articles of incorporation

Promoter: A person or persons who organize and start a corporation, or Negotiate and enter into contracts in advance of its

formation Find the initial investors to finance the corporation


Promoters’ Liability for Preincorporation Contracts

Corporation never comes into existence – promoters have joint personal liability on the contract Unless exempted by the third party

Corporation is formed – it is liable on a promoter’s contract only if it agrees to become bound to the contract

Corporation agrees to be bound to promoter’s contract – promoter remains liable Unless the parties enter into a novation


Articles of Incorporation

Basic governing document of the corporation Must be filed with secretary of state of state of

incorporation Contains name of corporation, number of shares

authorized, name and address for registered agent and incorporators

May contain term, purpose, limitations, regulations of affairs


Amending the Articles

Amendments made to contain any provision that could have been lawfully included in the original document

Corporate status RMBCA provides that corporate existence begins

when the articles of incorporation are filed Conclusive proof – secretary of state’s filing of the

articles of incorporation


Purpose of a Corporation

Key Terms Description

General-purpose clause

A clause that can be included in the articles of incorporation that permits the corporation to engage

in any activity permitted by law

Limited-purpose clause

A clause that can be included in the articles of incorporation that stipulates the activities that the

corporation can engage in

Registered agent A person or corporation that is empowered to accept service of process on behalf of a corporation


Corporate Bylaws

A detailed set of rules adopted by the board of directors after the corporation is incorporated Contains provisions for managing the business and

the affairs of the corporation Governs internal management structure May be amended by the board of directors

Corporate seal – A design that contains the name of the corporation and the date of incorporation


Organizational Meeting of the Board of Directors

Organizational meeting: A meeting held by the initial directors of the corporation after the articles of incorporation are filed

Directors adopt bylaws, elect officers, and transact business


Corporate Powers

Key Terms Description

S Corporation A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes

C Corporation A corporation that does not qualify for or has not elected to be taxed as an S corporation

Express powers Powers given to a corporation by (1) the U.S. Constitution, (2) state constitutions, (3) federal statutes, (4) state statues, (5)

articles of incorporation, (6) bylaws, and (7) resolutions of the board of directors

Implied powers Powers beyond express powers that allow a corporation to accomplish its corporate purpose

Ultra vires act An act by a corporation that is beyond its express or implied powers


Delaware Attracts Corporate Formations

More than 50 percent of the publicly traded corporations in America are incorporated in Delaware 60 percent of the Fortune 500 companies

Delaware General Corporation Law – most advanced corporation law in the country

Court of chancery – hears and decides business cases Judges are experts at deciding business disputes

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Financing the Corporation

Equity securities (stocks): Representation of ownership rights to a corporation

Common Stock: A type of equity security that represents the residual value of a corporation Has no preferences Does not have a fixed maturity date Par value shares – common stock on which the

corporation has set the lowest price No par value shares – no assigned par value


Preferred Stock

A type of equity security that is given certain preferences and rights over common stock

Preferred stockholder: A person who owns preferred stock

Dividend preference: The right to receive a fixed dividend at stipulated periods during the year

Liquidation preference: The right to be paid a stated dollar amount if a corporation is dissolved and liquidated


Preferred Stock

Cumulative dividend right – Corporations must pay a preferred dividend if they have the earnings to do so

Right to participate in profits – Allows a preferred stockholder to participate in the profits of the corporation along with the common stockholders

Conversion right – Convertible preferred stock permits the preferred stockholders to convert their shares into common stock


Redeemable Preferred Stock

Stock that permits a corporation to buy back the preferred stock at some future date Terms of the redemption are established when the

shares are issued Nonredeemable stock is more common than

redeemable stock


Types of Shares

Type of Share Description

Authorized Shares authorized in the corporation’s articles of incorporation

Issued Shares sold by the corporation

Treasury Shares repurchased by the corporation; these shares do not have the right to vote

Outstanding Issued shares minus treasury shares; these shares have the right to vote


Types of Debt Securities

Debt Instrument Description

Debenture A long-term, unsecured debt instrument that is based on a corporation’s general credit rating

Bond A long-term debt security that is secured by some form of property

Note A short-term debt instrument with a maturity of five years or less; notes can be either unsecured or secured


Consideration to be paid for shares – RMBCA allows shares to be issued in exchange for any benefit to the corporation

Indenture agreement: Contract between the corporation and the holder that contains the terms of debt security

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Voluntary Dissolution

Dissolution of a corporation that has begun business or issued shares upon recommendation of the board of directors and a majority vote of the shares entitled to vote

Articles of dissolution must be filed with the secretary of state of the state of incorporation


Administrative Dissolution

Secretary of state will administratively dissolve corporation if it: Failed to file annual report Failed to maintain registered agent for 60 days Failed to file change of registered agent Did not pay franchise fee Period of duration stated in articles has expired

Secretary issues a certificate of dissolution


Judicial Dissolution

Dissolution of a corporation through a court proceeding instituted by the state

Instituted by attorney general of state of incorporation Procured articles through fraud Exceeded or abused authority

Decree of dissolution issued


Winding-up and Liquidation

The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to Creditors Shareholders Other claimants


Termination

The ending of a corporation that occurs only after the: Winding-up of the corporation’s affairs Liquidation of its assets Distribution of the proceeds to the claimants


Chapter 36 Corporate Formation and Financing. Introduction Corporation: A fictitious legal entity...

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Transcript of Chapter 36 Corporate Formation and Financing. Introduction Corporation: A fictitious legal entity...