Basic Concepts Outline

Basic Concepts

1. Types of Corporations

   1. For-profit

   2. Non-profit

   3. Public corporations

      1. Market for corporate securities

   4. Close corporations

      1. Typically no market for corporate securities

2. Corporate Statutes

   1. No Federal Corporate Statute

   2. Model Business Corporations Act (MBCA)

   3. Delaware General Corporation Law (DGCL)

   4. NOTE: The statutes create the default rules, but there is great flexibility to modify

3. Corporate Actors

   1. Shareholders (a.k.a. stockholders (Del.))

   2. Board of Directors

      1. "All corporate powers shall be exercised by or under the authority of, and the business affairs of the corporation managed by or under the direction of, the board of directors . . . ." MBCA § 8.01(b).

      2. "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of the board of directors . . . ." DGCL § 141(a).

   3. Officers

   4. NOTE: This structure embodies the separation of ownership and control

4. Organic Documents

   1. Articles of Incorporation (MBCA)/Certificate of Incorporation (DGCL)

      1. Cannot conflict with statute under which the corporation is organized

   2. Bylaws

      1. Cannot conflict with the statute or the Articles/Certificate

5. Corporate Securities

   1. Equity Securities

      1. Common Stock

      2. Preferred Stock

      3. Authorized Stock: Articles/Certificate specifies how many shares of the common/preferred the corporation is authorized to issue

      4. Outstanding Stock: The portion of the authorized stock that has been sold and remains in the hands of the shareholders is the outstanding stock

      5. Authorized But Unissued Stock: Authorized stock but not outstanding stock (a.k.a. Treasury Shares)

   2. Debt Securities

      1. Bonds

      2. Debentures

      3. Notes

6. Choice of Law

   1. A corporation can incorporate under the laws of whatever state suits it best

   2. Internal Affairs Doctrine: The law of the state of incorporation, with rare exceptions, governs the "internal affairs" of the corporation

      1. Disputes between the shareholders and managers (directors and officers) are governed by the laws of the state of incorporation

      2. Applies to the set of rules defining the fiduciary duties that managers of a corporation owe to the corporation and its shareholders

         • "It . . . is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares." CTS Corp. v. Dynamics Corp. of America - pg. 49

      3. The "external affairs" of a corporation are generally governed by the law of the place where the activities occur and by federal and state regulatory statutes rather than by the place of incorporation

         • Ex: State's Labor Laws, State Tax Law, Franchise Taxes

      4. Antitakeover statutes: Constitutional insofar as they do not impose undue burden on interstate commerce

         • "To the limited extent that the Act affects the interstate commerce, this is justified by the state's interests in defining the attributes of shares in its corporations and in protecting shareholders." CTS Corp. v. Dynamics Corp. of America - pg. 50

           • UNCONSTITUTIONAL where statute applies to foreign corporations BUT CONSTITUTIONAL where does not apply to foreign corporations

             • But see Wilson v. Louisiana-Pacific Resources, Inc. - pg. 59-60: In Wilson, the court in California held that antitakeover statute applied to foreign corporation was constitutional where (1) average of defendant's property, payroll, and sales exceeded 50% and (2) more than 50% of its shareholders entitled to vote resided in California

7. Fiduciary Duties

   1. Duty of Care: Requires the director to act in the corporation's best interests and to exercise reasonable care in overseeing the corporations's affairs and in...

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