Formation of the Corporation

A. Characteristics of Corporations

1. Corporations provide limited liability to SH

   1. Shareholders are not personally liable for corporate obligations

   2. Managers generally not personally liable

2. Free transferability of ownership interests

   1. Ownership or “equity,” represented by shares of stock, can be freely sold

3. Continuity of existence

   1. Legal existence is usually forever

   2. Can specify a shorter duration on certificate of incorporation

4. Centralized management

   1. Power is legally vested in a Board of Directors

   2. Shareholders have no right to participate in management

5. Entity status

   1. Corporation is a legal person

   2. Corporation exercises powers and has rights in its own name

6. Corporation is preferred form for publicly-held companies, but for privately held companies, the choice of form is more complex

   1. Owners may value certain partnership attributes

   2. Enterprise could be a:

      1. Corporation

      2. Limited liability company (LLC)

      3. General partnership

      4. Limited partnership

      5. Limited liability partnership

7. Corporate law consists of four major modules:

   1. State statutory law

   2. Model Business Corporations Act (MBCA)

      1. Delaware, NY, and Cal don’t use it

   3. State judge-made law

   4. Federal law (example. Securities Acts and Sarbanes-Oxley)

   5. Private ordering (ex. soft-exchange rules for listed companies)

B. Selecting a Corporate Domicile: Internal Affairs Doctrine

1. Firms can incorporate wherever they want

   1. Close corporations (corporations with a few owners) incorporate locally in the principal place of business

   2. Publicly held corporations usually incorporate in DE or a state that has adopted the MBCA

2. Why Delaware?

   1. Broadly enabling statute that protects management

   2. Judiciary

      1. Justices all practiced corporate law

   3. Stable body of law

      1. Provides certainty

      2. Requires 2/3 vote (super vote) of legislature to amend statute

   4. Rich case law

   5. Network effects

   6. Everyone uses Delaware law

3. Delaware: “Race to the Bottom” Theory (William Cary)

   1. Corporate law is a product that states sell—broadly enabling statutes attract corporations

   2. Del wants corps because of their taxes

   3. State legislature has an incentive to give managers “side payments” (ways to regulate their conflicts of interest) to induce them to cause their corps to incorporate in the states

   4. This leads to suboptimal statutes

   5. Cary argues that we should have federal regulations that will create minimum standards for corporate law

4. Delaware: “Race to the Top” Theory (Ralph Winter)

   1. Counter-position to Cary

   2. If law is a product and it’s bad, people won’t buy it

   3. An optimal statute will attract the most corporations

   4. The incentive for states to sell corporate charters must lead states to produce an optimal statutory corporate law regime

5. Reincorporation in Delaware

   1. Create a DE shell by filing articles in DE

   2. Take existing operating company and merge with shell

   3. Specify in merger agreement that resulting company will be a DE company

   4. Requires board approval and shareholder...

Buy the full version of these notes or essay plans and more in our Business Association (Duke Cox) Outlines.