Corporations and the Sarbanes-Oxley Act Chapter 16 Corporations and the Sarbanes-Oxley Act

Nature of the Corporation A fictitious legal entity that is created according to statutory requirements Corporation codes: State statutes that regulate the formation, operation, and dissolution of corporations Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Nature of the Corporation Characteristics of a corporation: Free transferability of shares Perpetual existence Centralized management Limited liability of shareholders: A general rule of corporate law which provides that generally shareholders are liable only to the extent of their capital contributions for the debts and obligations of the corporation and are not personally liable for the debts and obligations of the corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 16.1 Corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Publicly Held and Closely Held Corporations Publicly held corporation: Has many shareholders - securities are usually traded on national stock exchanges Closely held corporation: A corporation owned by one or a few shareholders Revised Model Business Corporation Act: A 1984 revision of the MBCA Arranges the provisions of the act more logically Revises the language to be more consistent Makes substantial changes in the provisions Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Incorporation Procedures Procedure for incorporating a corporation varies somewhat from state to state Domestic corporation: A corporation doing business in the state in which it was formed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Incorporation Procedures Articles of incorporation: The basic governing documents of a corporation, which must be filed with the secretary of state of the state of incorporation Name of corporation Number of shares authorized Address of registered office and agent Name and address of each incorporator Registered agent: A person or corporation that is empowered to accept service of process on behalf of a corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Incorporation Procedures Corporate bylaws: A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation Organizational meeting: A meeting that must be held by the initial directors of a corporation after the articles of incorporation are filed Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Incorporation Procedures S Corporations: A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes Pays no federal income tax at the corporate level Income or loss flows to the shareholders and must be reported on the shareholders’ individual income tax returns Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Financing the Corporation Equity securities: Representation of ownership rights in a corporation Equity securities can be: Common stock Preferred stock Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Common Stock An equity security that represents the residual value of a corporation Common stockholder: A person who owns common stock Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Preferred Stock Equity security that is given certain preferences and rights over common stock Preferred stock may have any or all of the following preferences, rights, or attributes: Dividend preference Liquidation preference Cumulative dividend right Right to participate in profits Conversion right Redeemable preferred stock Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Authorized, Issued, and Outstanding Shares Authorized shares: The number of shares provided for in a corporation’s articles of incorporation Issued shares: Authorized shares that have been sold by a corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Debt Securities Securities that establish a debtor–creditor relationship in which the corporation borrows money from the investor to whom a debt security is issued Classifications: Debenture Bond Note Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Indenture Agreement Contract between the corporation and a holder of a debt security Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Shareholders Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 16.3 Shareholders Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Shareholders Shareholders meetings: A meeting of the shareholders of a corporation that must be held by the corporation to elect directors and to vote on other matters Annual Special Proxy Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Shareholders Quorum: The number of directors necessary to hold a board meeting or transact business of the board Supramajority voting requirement: A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Shareholders Straight voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open Cumulative voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Shareholders Dividend: A distribution of profits of the corporation to shareholders Piercing the corporate veil: A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Board of Directors A panel of persons who are elected by shareholders to make policy decisions concerning the operation of a corporation Inside director Outside director Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 16.4 Board of Directors Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Board of Directors Regular meetings of a board of directors are held at the times and places established in the bylaws A board can call special meetings of the board of directors as provided in the bylaws Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Corporate Officers Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 16.5 Corporate Officers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Fiduciary Duties of Directors and Officers The duties of care and loyalty owed by directors and officers to their corporation and its shareholders Duty of loyalty: A duty that directors and officers have not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders Duty of care: A duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Sarbanes-Oxley Act A federal statute enacted by Congress to improve corporate governance The goals of the Sarbanes-Oxley Act are to improve corporate governance rules, eliminate conflicts of interest, and instill confidence in investors and the public that management will run public companies in the best interests of all constituents Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Mergers and Acquisitions A situation in which one corporation is absorbed into another corporation and ceases to exist A merger occurs when one corporation is absorbed into another corporation Surviving corporation Merged corporation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 16.6 Merger Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Dissolution of the Corporation Voluntary dissolution Administrative dissolution Judicial dissolution Winding up, liquidation, and termination Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Multinational Corporations Multinational corporations operate in more than one country Operate in other countries through a variety of means, including the use of agents, branch offices, subsidiary corporations, business alliances, strategic partnerships, franchising, and other arrangements Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.