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The Corporate Structure Outline

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Introduction: The Corporate Structure

Office hour: mon, wed 11:30am, by appointment; 11:15-12:35 Thurs class time; TA office hr: Wed 4-5
Basic Terms
- Corporation: artificial and separate legal entity (give rise to problems which we will focus on)
o Have assets and liabilities, enter into legal obligation through contract, can violate law, can sue/ to be sued

Separate from the stockholders/ shareholders (owners of the corporation/ shares of stocks - equity interest)
- Shares/ shares of stock/ stock

We focus on public corporations with a large no. of shareholders

C.f. closely held/ privately held corporation
- Creditors: people whom the corporation owe money to

Mostly people who lend money to the corporation
- Directors/ managers: people with legal power to run the corporation

Note difference between directors and managers
We will focus on the relationship of powers and conflicts that arise between
- Corporation, directors and shareholders;
- Corporation, directors and creditors
- Form by: certificate of incorporation  file at the state you want (e.g. Delaware)  fee
- In the US, 60% public companies are incorporated in Delaware - other states often look to Delaware
- Companies need not have domicile in that state
- Place of corporation affects internal affairs rules - e.g. subject to Delaware law and Court
- Shareholders elect directors  directors run the corporation  directors owe duties to corporation and shareholders
 Shareholders approve "major" changes of a corporation
Basic Power Structure: Shareholder Elect Directors
- General rule: one year term
- Board of directors
- Elected during the annual meeting of shareholders
- Removal of directors before term expires
A. The Corporate Form-Corporation is the standard form of most large US firms, main features:

1. Limited liability for investors

2. Free transferability of investor interests

3. Legal personality (entity-attributable powers, indefinite life span, and purpose) and

4. Centralized management
State corporation statutes

establish the separate legal identity (from shareholders and directors)
o provide rules governing relationships among shareholders, directors and mangers
Small/ closely-held corporation incorporated for tax/ liability purposes
Corporate law generally better suited to large firms with numerous shareholders (public firms)
Corporate form is designed to raise funds on capital markets
Incorporation process in Delaware

Filing a certificate of incorporation at the Secretary of State + pay fee

Can be done by anyone + for any lawful purpose

1 Introduction: The Corporate Structure

Sources of Corporate Law

1. State Corporation Law (most important)
a) Corporation Statutes
 Corporations are primarily governed by the state corporation statute where it is incorporated
 chosen from 50 states, regardless of where they conduct most of their operations
 large US corps usually choose Delaware)
 Delaware General Corporation Law (DGCL)
 Ch 1-3: formation of a corporation

Subchapter 1: formation process, certificate of incorporation, by-laws

Subchapter 2: corporate powers

Subchapter 3: procedure requirements

Subchapter 4: directors and officer

Subchapter 5: stocks and dividends

Subchapter 6: stock transfer restrictions + Delaware anti-takeover provision

Subchapter 7: stockholder/ shareholder's voting

Subchapter 8: change in certificate of incorporation/ equity capital structure

Subchapter 9: merger

Subchapter 10: major asset sales and dissolution

Subchapter 11: insolvency

Subchapter 12: raising of he dead

Subchapter 13: procedure for suing corporations

Subchapter 14: special provisions for corporations that elect to be 'close'
o Subchapters 15, 26': non-Delaware corporations that want to do business in/
become domestic in Delaware

Subchapter 17: miscellaneous provisions - sections on taxes and fees
 Shareholders/ stockholders
 Main source of power: elect directors each year at AGM
 Remove of director (other than when term ends on AGM) by:

1. Special meeting (in between annual meetings) or
 Rule in Delaware: only board of director can call special meeting

2. Written consent (majority signing a form stating they want to remove them)
 Directors: legal power to manage the corporation
 Decide how to run the business operations, how much salary they receive, how much is distributed to shareholders in dividends, borrowing money, selling some additional stocks
 Dividends - distributions to shareholders by the corporation, when and how much are determined by directors, not compulsory for the company to pay dividend [c.f. creditors must be paid principal and interests]
 Not bound by shareholders in management
 Officers of corporation (CEO/ CFO/ COO/President):
o Individuals who help directors to manage day-to-day business operations

Directors can delegate rights to officers, bound by directions given to them by the board
 Inside directors/ management (directors that are also officers)
o Mostly have 2: CEO and president

2 Introduction: The Corporate Structure

Advantages over outside - full time job to run corporation  more information
+ paid a lot more + care more about professional reputation + more influential
(since officers are subordinate to directors)
o Varies in different companies: some board rubber stamps officers; some don't
 C.f. outside directors

don't spend much time managing the company

picked by inside directors

receive a relatively small amount of compensation
 Law provides that all directors have equal powers, but the real power is often exercised by CEO
Shareholder management power - must approve "major" changes
 Directors have general power to manage corporation, but extraordinary decisions require shareholders' approval:

1. Dissolution of corporation, liquidation

2. Sale by corporation of all its assets

3. Merger of corporation with another corporation (become one corp that holds all assets + owe all liabilities previously held/ owed by either one)

4. Amendment to certificate of incorporation

5. Consolidation o

b) State Case Law - Directors duties

1. Duty of care: not to be negligent in managing the corporation - to make informed decisions

2. Duty of loyalty: manage company for benefit of shareholders, not for own personal benefit
[fiduciary duty]
 Delaware - most important domicile + influential - has an unique court system

1. Chancery Court

Expertise: in Delaware (but not in other states), corporate cases are heard by this specialised trial court on corporate law

Their precedents governs many corporate disputes, corporations often domicile in Delaware, and hence binding on them

5 judges: 1 Chancellor + 4 Vice-Chancellors

Jurisdiction over all dispute arising under Delaware corporate law
 90% are corporate cases

No juries, judges all have fair degree of subject-matter expertise

2. Supreme Court

Appeals heard by Delaware Supreme Court

5 judges, normally sits in panels of 3 judges

Chief Justice often a former Chancellor
 5 judges in Chancery + 5 judges in supreme court make most of US' corporate law precedents
 Jurisprudence

2. Federal Law and Regulations

Supplements State law

Securities Exchange Act 1934 (1934 Act/ Exchange Act) - forms complex regulatory scheme (with 1933
o Congress established Securities Exchange Commission (SEC) + empower it to enforce the provision of the
Exchange Act + promulgate detailed rules/ regulations

3 Introduction: The Corporate Structure


3. Most important regulation are those on voting, acquisitions of corporations, insider trading

The Certificate of Incorporation
Corporate Contracts  drafted by lawyers to lay down rules
General Rule
Amend bylaws
Only shareholders
[option: board/ shareholders]
Director term 1 year (not in DGCL)
No cause if non-staggered; cause if staggered
Special meeting
Only board
Written consent
Vote on charter amendment Majority entitled [50%]

1. XYZ Charter
Board/ shareholders 3 years (after phase in)
Only for cause
Only board
Not available 70% of shares entitle

Certificate of Incorporation (charter)
 Corporation is formed by filing the charter with the Secretary of State
 Contains mandatory and optional provisions a) Mandatory (listed in DGCL s.102(a))
i. Name of corporation

1. Form of corporation: limited liability, domestic/ foreign corporation, partnership
(unless waived)

2. Unless permitted under s.395, cannot contain the word 'trust'

3. Cannot contain the word bank ii. Address of the corporation's registered office iii. Nature of business/ purpose to be conducted/ promoted

1. Engage in any lawful act or activity: will cover anything iv. Total number of shares authorised (unless nonstock corporation) and par value (if any)

1. Right after filing Cert of incorporation + paying fees  co. owns nth + issued no shares

2. The max no. of shares which the board of directors are permitted to issue in the future v. Name and mailing address of the incorporator(s)
vi. Powers of the incorporator(s), first directors

Example: XYZ Certificate of Incorporation i.
Name - mandatory s.102(a)(i)

ii. Address/ agent - mandatory s.102(a)(v)

iii. Purpose - mandatory s.102(a)(iii)

iv. Shares - mandatory s.102(a)(iv)

v. Business managed by the Board of directors, election vi.
Director not personally liable ix.
Vote, Amendments - optional s.102(b)(4)

Not all mandatory provisions are contained in the charter

Missing s.102(a)(v): name and mailing address of incorporator(s)  mandatory
 Incorporators are people who filed the certificate of incorporation
 To know who are in charge before corporation take its existence, but not relevant in later stages of corporate life

4 Introduction: The Corporate Structure


 S.245(c) can be omitted in later versions
Missing s.102(a)(vi): if the powers of the incorporator(s)  not a required a provision

b) Optional provision for
 Management of the business and conduct of affairs of incorporation;
creating, defining, limiting and regulating powers of corporation, directors and (class of)

If such provision is not contrary to the laws of this state
 For a corporation other than a nonstock corporation

Compromise/arrangement proposed between this corporation and
 its creditors or any class of them
 stockholders or any class of them any court of equitable jurisdiction within the State of Delaware may
 (on summary application of this corporation/ its creditor/ stockholder/
receiver(s) appointed under s.291 or appointed by trustee in dissolution)
 order a meeting of the (class of) creditors, and/or (class of)
stockholders to be summoned in such manner as the court directs
 if ¾ majority in (class of) creditors and/or (class of) stockholders agree to any compromise/ arrangement/ reorganization  (if sanctioned by the court) shall be binding on all (class of) creditors, and/or (class of)
stockholders, and may also on the corporation

For a nonstock corporation

Whenever a compromise is proposed between the corporation and
 (class of) creditors and/or (class of) members any court of equitable jurisdiction within the State of Delaware may
 (on summary application of this corporation/ its creditor/ stockholder/
receiver(s) appointed under s.291 or appointed by trustee in dissolution)
 order a meeting of the (class of) creditors, and/or (class of) members to be summoned in such manner as the court directs
 if ¾ majority in (class of) creditors and/or (class of) stockholders agree to any compromise/ arrangement/ reorganization  (if sanctioned by the court) shall be binding on all (class of) creditors, and/or (class of)
members, and may also on the corporation
Why are these provision included?
o Common theme?
o Affect the standard allocation of power between shareholders and current directors

Question 2: P.6 Comparing the charter provisions with DGCL

1. Fifth B with DGCL §109(a);
 S.109(a) "the original or other bylaws of a corporation may be adopted, amended or repealed by initial directors if named in certificate of incorporation/ before corporation received payment for stock, by its board directors"

5 Introduction: The Corporate Structure

2. 3.

Fifth B "Board is expressly authorised to adopt, amend or repeal the By-Laws of the

Fifth D with DGCL §141(d);
 §141(d) director may by COI/ bylaw, be divided into 1-3 classes, term of office of the 1st class will expire at 1st annual meeting; 2nd class expire after 2nd meeting and 3rd class after 3rd meeting.
i. Staggered board

1. 1st class for 1 year term
[phase in period]

2. 2 class for 2 year term
[phase in period]

3. 3rd class for 3 year term
[phase in period]

4. Directors can be chosen on full term afterwards

5. i.e. each year, ~1/3 of the board will come out of election

6. if there are only 2 classes  only 2 year term, very rare to have 2 ii. General rule: 1 year  not provided in Charter, but it is a common practice
 Fifth D: Directors are elected for 3 years term, elect new directors in annual meeting
Fifth G with DGCL §141(k)(1);
 §141(k)(1): Director(s) may be removed by majority shareholders, with or without cause by vote at an election, except when the Board is classified as under (d) [i.e. staggered],
shareholders can effect such removal only for cause, unless provided in certificate of incorporation otherwise [for a staggered board]
i. General rule: with or without cause ii. Options: none, but required majority can (probably) be increased - 102(b)(4)
iii. For companies with classified boards

1. General rule: only for cause

2. Options: with or without cause iv. Not staggered  can be removed without cause, no reason required
 But directors are changed more often in non-staggered board
 No option for non-staggered board v. Staggered  can only be removed for cause
 The whole point of a staggered board is to give directors a long term tenor
 Gives job security
 But this general rule can be modified by providing in the COI, e.g. to remove only with cause vi. E.g. of cause: not acting in interest of shareholders
 Directors of a public co. never removed by cause  practically would usually resign/ convicted criminally
 Incompetent is not a cause - difficult to decide
 Fifth G: notwithstanding Certificate of Incorporation or by-laws, any director/ board may only be removed with cause + by affirmative vote of the holders of a majority shareholders i. If there is no longer a staggered board  becomes a non-staggered board  general rule for non-staggered board = can be removal without cause under DGCL  Fifth
G requires removal only with cause = would be contradicting §141(k)(1)
ii. If a co. wants to remove without cause, need to amend the charter:

1. establish staggered board; and

2. allow removal with or without cause iii. XYZ can adopt a shareholders resolution to amend Fifth G: "director may be removed with or without cause" [if there is no 5G, need a new provision]

6 Introduction: The Corporate Structure

But to amend anything in 5 would need 70%  more difficult to change than other articles, which only need regular majority

2. To make it more difficult to change, co. can include in the charter
Seventh A with DGCL §211(d);
 §211(d): special meetings of stockholders may be called by the board/ person authorised by certificate of incorporation/ bylaws i. if the charter is silence, general rule would apply ii. any person can be authorised, person authorised are likely to be individual directors,
CEO, secretary, chairman, flexible iii. Entrenched but diff from 141, which can only be changed in charter
 Seventh A: special meetings can only be called by the Board + stockholders have no power to do so for any and all purposes i. Charter repeats the general rule, but the majority can amend the article 7 + change in bylaw ii. To ensure rule is not changed, if charter silent and bylaw allows special meeting to be called by shareholder  the charter should be amend to deny shareholders to have such power under the bylaw iii. The bylaws can be amended by the directors/ shareholders  but cannot deny shareholder's right to amend the charter  bylaw contradicts the charter, it will be invalid

1. 4.

5. Seventh B with DGCL §228(a);
 §228(a): unless COI provided, action required to be taken at any annual/special meeting of stockholders may be taken without a meeting/ prior notice and vote, if necessary no. of stockholders signed written consent on the action, delivered to US register office of the co. by hand or registered mail with return receipt i. General rule: shareholders can act by written consent, unless charter provides otherwise ii. Sometimes, written consent requires more votes than at the meeting

1. Majority entitle: majority of the shares that are entitled to vote

2. Majority voting: majority who vote

3. Plurality: general election - person with the most votes wins
 If voting standard would have otherwise been majority voting/ plurality 
the voting standard becomes majority entitled, as you cannot vote no for written consent  assumed that anyone who doesn't consent means they oppose

Seventh B: no written consent

6. Ninth with DGCL §242(b)(1).
 §242(b)(1): amendments shall be made and effect in the following manner i. If co. has capital stock, its board shall recommend a charter amendment and then majority of the entitled shareholders to vote

1. i.e. both the board and the shareholders must be in favour of the amendment

2. unless required by COI expressly, no meeting/ vote shall be required to adopt an amendment that effects on the corporate name/ delete name of incorporator(s) or provisions necessary to effect a change (a)(1)&(7).
 Ninth: affirmative vote of the holders of at least 70% of total voting power of all outstanding shares shall be required to amend, alter, change or repeal any one or more


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