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Corporations I. Basic Concepts A. Types of Corporations i. For-profit ii. Non-profit iii. Public corporations a) Market for corporate securities iv. Close corporations a) Typically no market for corporate securities B. Corporate Statutes i. No Federal Corporate Statute ii. Model Business Corporations Act (MBCA) iii. Delaware General Corporation Law (DGCL) iv. NOTE: The statutes create the default rules, but there is great flexibility to modify C. Corporate Actors i. Shareholders (a.k.a. stockholders (Del.)) ii. Board of Directors a) "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 SS 8.01(b). b) "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 SS 141(a). iii. Officers iv. NOTE: This structure embodies the separation of ownership and control D. Organic Documents i. Articles of Incorporation (MBCA)/Certificate of Incorporation (DGCL) a) Cannot conflict with statute under which the corporation is organized ii. Bylaws a) Cannot conflict with the statute or the Articles/Certificate E. Corporate Securities i. Equity Securities a) Common Stock b) Preferred Stock c) Authorized Stock: Articles/Certificate specifies how many shares of the common/preferred the corporation is authorized to issue d) Outstanding Stock: The portion of the authorized stock that has been sold and remains in the hands of the shareholders is the outstanding stock e) Authorized But Unissued Stock: Authorized stock but not outstanding stock (a.k.a. Treasury Shares) ii. Debt Securities a) Bonds b) Debentures 1
c) Notes F. Choice of Law i. A corporation can incorporate under the laws of whatever state suits it best ii. Internal Affairs Doctrine: The law of the state of incorporation, with rare exceptions, governs the "internal affairs" of the corporation a) Disputes between the shareholders and managers (directors and officers) are governed by the laws of the state of incorporation b) 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 c) 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 d) 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 G. Fiduciary Duties i. 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 making business decisions ii. Duty of Loyalty: Requires a director to place the best interests of the corporation above his own personal interests a) "The fiduciary must subordinate his individual and private interests to his duty to the corporation whenever the two conflict." Bayer v. Beran - pg. 25 iii. Business Judgment Rule: Creates a presumption that, "in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." 2
a) Under Delaware Law, the business and affairs of a Delaware corporation are by managed by or under its board of directors. DGCL SS 141(a). b) "[A] breach of either the duty of loyalty or the duty of care rebuts the presumption that the directors have acted in the best interests of the shareholders, and requires the directors to prove that the transaction was entirely fair." Cede II - pg. 703 H. Equitable Limitations i. SPLIT a) Inequitable action does not become permissible simply because it is legally possible Schnell v. Chris-Craft Industries, Inc. - pg. 31 b) Doctrine of Individual Legal Significance: "[T]he validity of corporate action taken pursuant to one section is not necessarily dependent upon its being valid under another section." Bove v. Comm. Hotel Corp. - pg. 33 I. Accountability i. Exit: A person can sever her connection with the organization ii. Voice: A person can remain within the organization and attempt to remedy the situation J. Purpose of Corporation i. Ultra Vires a) According to common law, "a corporation could not engage in activities outside the scope of its defined purposes." (pg. 159) b) BUT, typically the default rule under statutes today provide that every corporation may engage in "any lawful business." See MBCA SS 3.01(a); see also DGCL SS 122 (setting out the extensive powers of corporations).
? See also MBCA SS 3.04 (addressing and limiting Ultra Vires).
? See also DGCL SS 124 (addressing and limiting Ultra Vires). ii. Political Expenditures a) "[T]he Government may not suppress political speech on the basis of the speaker's corporate identity." Citizens United v. Federal Election Comm. Supp. pg. 7 iii. SPLIT re Charitable Contributions a) Traditional Rule: Maximization of shareholder value
?????"A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself. .
. ." Dodge v. Ford Motor Co. - pg. 81 b) Modern Rule: Allows Charitable Donations
? MBCA SS 3.02(13): A corporation has the power "to make donations for the public welfare or for charitable, scientific, or educational purposes . . . ."
? DGCL SS 122(9): A corporation has the power to "[m]ake donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof . . . ."
? The TEST is that of reasonableness: "[A] corporate charitable or 3
educational gift to be valid must merely be within reasonable limits both as to amount and purpose." Theodora Holding Corp. v. Henderson - pg. 108
? Look to Business Judgment Rule
? BUT SEE ALSO FACTORS from Kahn v. Sullivan - pg. 114:
? (1) Net Worth of Company
? (2) Annual Income Before Taxes
? (3) Tax Benefits
? (4) Reputational Benefits (ONLY IN NOTES) II. Choice of Organizational Form A. Formation i. Corporation: Requires formal action with the state (File Articles/Certificate, etc.) ii. General Partnership: Generally created by contract BUT may be formed by operation of law as simply defined as "an association of two or more persons to carry on as co-owners a business for profit" iii. Limited Partnership: Requires the filing with the state of a certificate of partnership setting forth the rights and duties of the partners a) Typically, also execute a written partnership agreement iv. LLC: (1) Requires the filing of articles of organization, (2) ALSO enter into an operating agreement (a.k.a. "regulations" of the LLC), (3) ALSO enter into the "limited liability company agreement" (a.k.a. member control agreement") B. Limited Liability i. Corporation: A shareholder's liability is limited to original investment EXCEPT (1) where the corporation is not properly formed, (2) for unpaid capital contributions that the shareholder has agreed to make, or (3) where the veil of limited liability is pierced for equitable reasons. ii. General Partnership: The partners, as individuals, can be held jointly and severally liable for partnership obligations iii. Limited Partnership: General partners have the same unlimited liability as in the case of a general partnership. Liability of limited partners is limited to the amount of their investment in the partnership UNLESS they "participate" in management a) "Participation" does not include such activities as advising the general partner or voting on certain critical transactions
? NOTE: A limited partnership can be structured such that a corporation is the general partner and the individuals are all limited partners thereby allowing limited liability for all the individuals involved iv. LLC: Limited liability for all members and managers BUT may be liable (1) where the corporation is not properly formed, (2) for unpaid capital contributions, or (3) where the veil of limited liability is pierced for equitable reasons. C. Management i. Corporation: Centralized in the board of directors BUT the board delegates dayto-day operations to officers of whom the board appoints a) By default, in most statutes, directors are elected by a plurality of shares 4
entitled to vote ii. General Partnership: Management authority vested in all the partners iii. Limited Partnership: General partners have responsibility for most management decisions. Limited partners may not participate in management ELSE may lose limited liability iv. LLC a) Member-managed: all members have authority to make management decisions b) Manager-managed: members are not agents of the entity and make only major decisions D. Continuity of Existence i. Corporation: Exists in perpetuity ii. General Partnership: (1) At-will (default) or (2) for a definite period of time a) At-will: Dissolved on the death, bankruptcy, or withdrawal of any partner b) For a definite period of time: Exists for period of time set forth in partnership agreement. If no such time stated, it is an at-will general partnership iii. Limited Partnership: Business generally continues after death, bankruptcy, or withdrawal of a limited partner BUT partnership agreement must specify the latest date upon which the partnership must be dissolved a) ONLY dissolved upon the withdrawal of a general partner iv. LLC: Exists in perpetuity E. Transferability of Interests i. Corporation: Shareholders are free to transfer stock a) RE Close Corporations: Articles/Certificate generally includes provision that restricts transferability of stock ii. General Partnership: All current partners must consent to the transfer of partnership interest and the admission of a new partner BUT a partner can transfer economic interest while retaining governance interest iii. Limited Partnership: Limited partners can transfer their financial interest BUT the assignee may only exercise the governance rights of a limited partner with the consent of all the remaining partners iv. LLC: Most statutes allow free transferability of member rights. a) Previous statutes contained restrictions similar to that of general partnerships, that is could transfer economic interest but not management rights without unanimous consent of the other partners F. Fiduciary Duties i. Corporation: Directors, officers, and controlling shareholders owe fiduciary duties to the corporation and to the shareholders ii. General Partnership/Limited Partnership/LLC: The same duties do not necessarily exist BUT can be limited or expanded in organic documents. a) General concepts of Contract Law apply SUCH AS Good Faith and Fair Dealing b) NOTE: If the agreement is silent on fiduciary duties, a court can apply them as they exist in the corporate context 5
G. Dissolution (Only Corporation and General Partnership discussed) i. Corporation: Some statutes allow a minority shareholder to seek involuntary dissolution on the grounds that the majority's actions are oppressive and have frustrated the minority's reasonable expectations ii. General Partnership: Default rule allows at-will dissolution H. Tax i. Corporation: Treated as a taxpaying entity separate from the shareholders ii. Partnership (General or Limited): Treated as an aggregate of individuals rather than a separate taxable entity a) Partnership income and expenses "flow-through" to the partners in proportion to their ownership interests b) Can use partnership losses to offset ordinary income from other sources BUT ONLY IF the partner materially participates in the partnership's business iii. LLC: Allowed to choose whether to be taxed like a corporation or like a partnership ("Check the box") a) Default Rule: Every LLC is taxed as a partnership UNLESS it elects to be taxed as a corporation iv. Subchapter S Corporation: Allows a corporation to elect to be taxed like a partnership a) Income and expenses "flow-through" to the partners in proportion to their ownership interests III. Forming a Corporation (See MBCA SSSS 2.01-2.07) A. Steps to Follow i. Step 1: Draft Articles/Certificate of Incorporation (MBCA SS 2.02; see also DGCL
SS 102) a) MUST INCLUDE:
? Name of Corporation (MCBA SS 2.02(a)(1))
? Number of shares authorized to issue (MBCA SS 2.02(a)(2))
? Address of Corporations initial registered office and name of initial registered agent (MBCA SS 2.02(a)(3))
? Name and address of each incorporator (MBCA SS 2.02(a)(4))
? Anyone can sign it (purely administrative) b) MAY INCLUDE:
? Names of people who will be directors (MBCA SS 2.02(b)(1))
? Purposes of Corporation (MBCA SS 2.02(b)(2)(i))
? BUT default rule is that corporation can engage in "any lawful business" (MBCA 3.01(a))
? A Provision limiting liability of directors (MBCA SS2.02(b)(4)) BUT NOT
? (A) the amount of a financial benefit received by a director to which he is not entitled;
? (B) an intentional infliction of harm on the corporation or the shareholders;
? (C) a violation of section 8.33 [Unlawful Distribution]; 6
? (D) an intentional violation of criminal law. A Provision permitting or making obligatory indemnification of a director for liability (MCBA 2.02(b)(5)) BUT NOT
? (A) receipt of a financial benefit to which he is not entitled;
? (B) an intentional infliction of harm on the corporation or its shareholders;
? (C) a violation of section 8.33 [Unlawful Distribution];
?????(D) an intentional violation of criminal law. ii. Step 2: Execute Articles of Incorporation and File with the Secretary of State iii. Step 3: Have an organizational meeting a) Adopt bylaws (MBCA SS 2.06) b) Elect Board of Directors c) Elect Officers d) Resolution adopting all acts e) Banking resolution
? Adopt such form as required by bank B. Choice of State of Incorporation i. Generally between the company's state of location and Delaware ii. FACTORS a) Tax rates and franchise tax rates b) Ease of operation c) Regulation of the sale of stock d) Payment of dividends e) Existence of special provisions for close corporations f) Possible liability of shareholders for wages (rare) C. Professional Responsibility: Who is the Client?
i. ABA Model Rules of Professional Conduct a) An attorney-client relationship is either formed  explicitly by a formal contractual agreement or  implicitly by the client requesting, and the attorney performing, legal services for the client. Restatement (Third) of the Law Governing Lawyers SS 14. b) Once a lawyer-client relationship is established, the lawyer must "comply with obligations concerning the client's confidences and property, avoid impermissible conflicting interests, deal honestly with the client, and not employ advantages arising from the client-lawyer relationship in a manner adverse to the client." Restatement (Third) of the Law Governing Lawyers SS
16 c) Model Rule 1.2 - Scope of Representation and Allocation of Authority Between Client and Lawyer (Quoted)
? (a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client's decisions concerning the objectives of representation and, as required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued. A lawyer may take such action on behalf of the client as is7
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