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Corporations Outline

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This is an extract of our Corporations document, which we sell as part of our Business Associations Outlines collection written by the top tier of Thomas Jefferson School Of Law students.

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IV. Corporations: Officers (day-to-day operations), Directors (manage officers), Shareholders (vote, sell, or sue) A. Closed Corporation (Closely Held) v. Open Corporation (Public)- The

distinction is public corp. is more likely to have separation where management place own interest above shareholder interest (shares bought on open market, governed through formal procedure, annual election of directors, subject to disclosure under Securities Law)

B. Articles of Incorporation, Corporate Charter (MBCASS2.02) a. Charter must have: corporate name stating is incorporated, # of

shares authorized to issue, address of registered office and names of registered agents at that office, name and address of each incorporator (Only Delaware requires a purpose in the charter) i. Charter may have: provisions not inconsistent with law such

as par value, imposition of liability on shareholders for debts of the corporation, limiting powers of its board, corp., shareholders

1. Charter may not have: changes the rights to bylaws

controlled by shareholders or eliminate director liability in only the following areas: a. Receipt of financial benefit which he is not

entitled, b. Intentional infliction of harm on corp. or

shareholders, c. Unlawful distribution if corp. not able to pay its

debts as they come due, corp. total assets are less than sum of total liabilities plus amount needed, or shareholder preferential rights are superior than those receiving the distribution (MBCASS8.33) d. Intentional violation of criminal law

C. Capital Structure- Equity and Debt (no protection for debt holders) raises

capital for corporation a. Equity- stock is an equity claim against a corporation (equity is

ownership which gives shareholders an ability to own the corporation through voting or receive assets upon liquidation) i. Shares of stock are issued when sold and if owed by

shareholders they are shares outstanding (if repurchased by corporation they are treasury shares or issued by not outstanding)

1. Types of shares- Common stock (corp. must have at

least 1 share that gives unlimited voting rights & rights to corporate assets) and Preferred Stock (some level of priority in repayment) b. Debt- bonds not set out in charter which are promises by corp. to repay

over time at specific intervals and commonly divided into ratings of either investment grade or junk bonds (lower rating, higher interest rate) i. Bonds are created by indentures which set out promises that

limit corporate actions such as events that will trigger default or repurchase by corp. (may be convertible into shares of stock)

1. Moody and Standard & Poors can lower credit ratings

to create accountability for directors

c. Distribution to Shareholders (MBCASS6.40) i. Dividends- payment made to shareholders determined by

directors (corp. also distributes money to shareholders through share repurchase)

1. Corporation cannot pay a dividend that will result in

insolvency except in Delaware (no distribution if total liabilities exceed total assets or corporation is not able to pay its debt b/c distribution may only be made from surplus) a. Surplus is all capital in excess of aggregate par

value of issued shares plus any other amount the board designates as being the company's capital account (par value equals a penny)

b. Publicly traded companies have their financial

statements prepared in accordance w/ GAAP (privately held companies do not)

2. Creditors also have interest in assets (shareholders are

the residuary claimants which only take after all debts have been paid) a. Veil Piercing is a limited liability theory in

closed corporations which effectuates a transfer from tort creditors to shareholders (going after shareholder by piercing the corporate veil) i. Open to liability when blurring the line

of corporation through comingling funds or not being able to keep the books straight, courts will look at the following factors before enforcing liability on shareholders:

1. Can shareholder be reached


2. Were corporate formalities

followed? if followed, often shield from veil piercing)

3. Fairness concerns? 3rd party not

on notice to corporate shield due to individual actions or shareholder treats corporate funds as their own (Soerries) a. Public policy- should be

looking at substance of harm when underage girl died leaving bar rather than if bar is keeping books straight (have formalities been followed?)

D. Directors- Public corp. must have board of directors (closed corp. can

eliminate board by shareholder agreement)

a. Two types of directors: Inside directors (employed by corp. such as

officers) and Outside directors (does not work directly for corp. where no financial ties exist making oversight difficult) i. Staggered Directors- elected multi-term years where majority

of directors are not up for re-election and terms are divided by total # of directors into 2 or 3 groups & group 1 expires at first annual meeting then group 2 expires at second annual meeting and so forth to succeed those whose terms expire; anti-takeover device which must be stated in the charter, (MBCASS8.06) (Delaware- called Classified Board, must be specified by charter or bylaws) ii. Directors elected typically once a year

1. Directors may be removed from the board with or

without cause (corporate charter, court and shareholders may limit removal for cause) a. Charter may provide that directors may only be

removed for cause where removal occurs only at a meeting called for the purpose of removing him and notice must state that purpose, (MBCASS8.08) (141(a)) b. Exceptions: if classified board, must be for

cause; if certificate of incorporate states can only remove for cause

2. All board actions are conducted through board meetings

which require a quorum (majority or as set out in the charter) and delegates committees (board committees cannot amend bylaws (but can add bylaws), fill vacancies or authorize dividends), (MBCASS8.20) (141(b)), if bylaws state can be as little as 1/3 a. Directors don't have to be present to vote and

may choose to act by consent where a mail in vote will allow to effect majority, but all directors must agree if by consent, (MBCASS8.21) i. Unless charter or bylaws provide

otherwise regular meetings of board may be held without notice of the date, time, place, or purpose of the meeting; however, special meetings must be

preceded by at least 2 days notice of the date, time, place of meeting, (MBCASS8.22) ii. Majority wins by default (then plurality

if not majority) for voting where a quorum is a majority (those who attend that are present to vote is the majority); however, the charter or bylaws may authorize the quorum of the board to consist no fewer than 1/3 of the prescribed # of directors, (MBCASS8.24) b. # of elected directors set out in charter or bylaws

(141(b)), can elect staggered board of directors only if in charter or bylaws (141(d)), can schedule meetings out of state c. Constructing a board w/ an even number of

directors invites deadlock, the responsibilities of the board are limited by the charter and include: (MBCASS8.01) i. Business performance and plans ii. Major risks to which the corporation is

or may be exposed iii. Performance and compensation of senior

officers iv. Policies and practices to foster

corporation's compliance with law and ethical conduct v. Preparation of the corporation's financial

statements vi. Effectiveness of the corporations internal

controls vii. Arrangements for providing adequate &

timely info to other directors viii. Composition of the board and its

committees taking into account role of independent directors

3. Qualifications of Directors, (MBCASS8.02) a. Directors need not be residents of the state or a

shareholder of the corporation unless prescribed by the charter or by-laws

4. Directors are elected at 1st annual shareholder's meeting

& each annual meeting thereafter unless their terms are staggered which is set out in the charter or by-laws, (MBCASS8.03) a. The directors term turns over annually unless

staggered (MBCASS8.05)

5. Payment: $20,000/yr usually

6. Picking Board Members: people who are trusted and

have some kind of name recognition

7. Committees: repealing bylaws, anything sending to

shareholders have to be done by whole board , otherwise committee can do it

8. 141(g) can meet out state, (i) can call into board

meetings, (e) directors can rely in good faith on info presented by officers and employees, (f) actions by consent: anything you can do at board mtg can do w/o board mtg if all members consent in writing

E. Bylaws (109)- Incorporators adopt them before anyone buys in, after

corporation has received $ then stockholders entitled to vote a. Before: a corporation may put in its charter that directors can change

bylaws but charter cannot take the power away from the shareholders b. After: shareholders must vote

F. Charters (241) before anyone buys in, easy to amend a. (242) change company name, company purpose, increase or decrease

authorized stock, create new classes of stock b. (242) Amending the charter after people buy in: board adopts

resolution asking shareholders if they want to and giving an opinion,

then have a special or annual mtg w/ notice and summary and take a vote, then change it at state level i. If board in rebellion against shareholders, cannot amend the


G. Shareholders hold shareholder meetings (211), location is in bylaws or

charters a. 211(b) annual meetings shall be held for elections of directors i. Proxy voting: 212(b), can authorize someone else to act as your

proxy and vote for you

1. Can be for voting on anything- board of directors,

changing bylaws ii. Consent iii. Special meetings b. Shareholders have 1 vote by default, charter can provide for otherwise c. Voting is done by people who are shareholders as of some date and

time because shares are bought and sold all the time and it would be impossible to keep it up to date d. Straight voting is the default e. Majority wins by default (212) i. Exception: director elections (majority not required because if

there's more than 2 people, there may not be a majority)

1. 216 Directors elected by a plurality f.

Consent: shareholders can act by consent (218?)

g. People want to be shareholders b/c when the company makes money,

they get some of it i. Corporation has to decided its giving dividends and then can

pass $ onto shareholders

H. Dividends

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