P A R T P A R T Corporations History & Nature of Corporations Organizational and Financial Structure of Corporations Management of Corporations 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

P A R T P A R T Corporations Shareholders’ Rights & Liabilities Securities Regulation Legal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

History and Nature of Corporations PA E TR HC 41 “In every era, society must strike the right balance between the freedom businesses need to compete for a market share and to make profits and the preservation of family and community values.” Hillary Clinton, It Takes a Village (1996)

Learning Objectives  History of corporations  Classifications of corporations  Regulation of for-profit corporations  Regulation of nonprofit corporations  Regulation of foreign and alien corporations  Piercing the corporate veil

 In 1886, the private corporation gained legal status as a "natural person" under the U.S. Constitution with the associated protections  Corporations today have legal status as a person, specific authority for operation and management, limited liability for owners, easy transferability of an owner’s interest, and the obligation to pay taxes  See Fig. 1, page 969 The Corporation As a Person

 By purpose:  For-profit corporations  Not-for-profit corporations  By ownership:  Publicly held (shareholders)  Close (a few shareholders)  Subchapter S  Government-owned corporations Classes of U.S. Corporations

 By origin – a company is:  Domestic in the state in which the company incorporates  Foreign in all other states in which a company operates  Alien in all countries other than the country in which it incorporated Classes of U.S. Corporations

 Federal government has power to regulate interstate commerce under the Commerce Clause of the U.S. Constitution  Due Process Clause of Fourteenth Amendment interpreted to allow a state to exercise jurisdiction over foreign corporation if firm has sufficient minimum contacts with a state  “Doing business” will allow jurisdiction, but minimum contacts may be lesser activity Federal Regulation of Firms

 Not doing business:  Soliciting orders, sales through independent contractors, owning property for investment, conducting isolated transaction, maintaining bank account for collection purposes  Doing business :  Maintaining an office, contracts with local businesses, using real property, maintaining inventory for order fulfillment, performing service activities Doing Business Within a State

 Corporation law provides an imaginary wall – the corporate veil – between a corporation and its shareholders to protect owners from personal liability for corporation’s actions  A court may pierce the corporate veil to reach individual shareholders if the shareholders dominate the corporation (alter ego) or the corporation is used for an improper purpose  See Fig. 2, page 979 Piercing the Corporate Veil

Test Your Knowledge  True=A, False = B  A corporation is a fictitious, but legal, person.  Corporations may be classified only in terms of ownership.  Under the Commerce Clause, states have the power to regulate interstate commerce.  Texas Shipping, Inc. owns buildings and has employees in Houston, TX and New Orleans, LA, but “does business” only in Texas

Test Your Knowledge  True=A, False = B  A state organized under Kansas corporate law is a domestic company when it operates within the state of Kansas and a foreign company in any state other than Kansas.  Cole Inc. is owned by two people. Each owner built a home with money obtained by a loan from State Bank to Cole Inc. The corporate shield provides absolute protection to both owners from personal liability for repayment of the loans

Test Your Knowledge  Multiple Choice  A state law that regulates business activities of a foreign corporation is constitutional if :  (a) It serves a legitimate state interest  (b) The legitimate state interest outweighs the burden on interstate commerce  (c) It is the most burdensome means of promoting that interest  (d) All of the above  (e) A and B, but not C

Test Your Knowledge  Multiple Choice  Which of the following activities meet the requirements for doing business in a state?  (a) Owning personal property as investment  (b) Maintaining a bank account for collection purposes  (c) Maintaining a storefront for product sales  (d) Soliciting product orders through a catalog  (e) All of the above

Thought Questions  Does an online stock transaction meet the sufficient minimum contacts criteria of the International Shoe ruling? In other words, if a consumer is injured by an online stock trade, could the consumer sue the company in her or her state court system?