Prentice Hall © PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 5E, by Henry R. Cheeseman Chapter 16 Corporate Formation, Financing, and Multinational Corporations

Prentice Hall © Nature of the Corporation A corporation is a legal entity, treated as an artificial person under the law. A corporation is owned by shareholders. Corporations are formed under state laws.

Prentice Hall © Characteristics of Corporations Limited liability of shareholders Shareholders are liable only to the extent of their contribution. Shareholders have no personal liability for debts of corporation. Free transferability of shares Shareholders may agree to restrictions.

Prentice Hall © Characteristics of Corporations Perpetual existence Centralized management Board of directors makes policy decisions. Board appoints officers to conduct day-to-day operations.

Prentice Hall © Classification of Corporations Profit corporations Publicly held corporations Usually have many shareholders Closely held corporations Usually have few shareholders Shareholders are frequently involved in management of the corporation. Not-for-profit corporations Formed for charitable or other purposes May not distribute profits to members

Prentice Hall © Incorporation Procedures Selecting a state for incorporation Domestic corporation – a corporation doing business in the state in which it was formed Foreign corporation – a corporation doing business in any state other than the one in which it was formed Alien corporation – a corporation incorporated in another country

Prentice Hall © Incorporation Procedures Articles of incorporation are filed with the state. Articles include the following information: Name of corporation Number of shares authorized Address of registered office and agent Name and address of each incorporator

Prentice Hall © Incorporation Procedures Corporate bylaws Govern internal management of the corporation Are binding on directors, officers, shareholders A corporate seal may be adopted. Organizational meeting Directors adopt bylaws, authorize stock, ratify promoters’ contracts.

Prentice Hall © S Corporations S Corporations do not pay corporate income tax, but income or loss flows to shareholders. Some criteria for S Corporations: Must be a domestic corporation Cannot be affiliate member of larger corporation Can have no more than 75 shareholders

Prentice Hall © Financing the Corporation Equity securities (stock) Common stock Preferred stock Redeemable preferred stock Authorized shares Issued or unissued Outstanding or treasury

Prentice Hall © Financing the Corporation Debt securities Debentures – long-term unsecured debt Bond – long-term secured debt Note – short-term debt, may be secured or unsecured Indenture agreement – contract between the corporation and a holder of a debt security

Prentice Hall © Mergers and Acquisitions A merger occurs when one corporation is absorbed into another corporation and ceases to exist. Requirements for merger Recommendation of board of directors of each corporation Approval of majority of shareholders of each corporation Dissenting shareholder appraisal right

Prentice Hall © Example of a Merger Corporation A Corporation B Corporation A + =

Prentice Hall © Tender Offer If the board of directors of the target corporation does not agree to a merger, the acquiring corporation may make a tender offer directly to the shareholders. Williams Act – Federal law that regulates tender offers

Prentice Hall © Illustration of a Tender Offer Tender offeror Target corporation Shareholders Tender offer is made to the shareholders of the target corporation. The tender offeror offers to purchase their shares in the target corporation.

Prentice Hall © Fighting a Tender Offer Management of a target company may fight a tender offer in various ways. Persuasion of its shareholders Delaying lawsuits Selling a “crown jewel” Adopting a poison pill White knight merger

Prentice Hall © Fighting a Tender Offer Pac-Man (or reverse) tender offer Issuing additional stock Creating an employee stock ownership plan Flip-over and flip-in rights plans Greenmail and standstill agreements

Prentice Hall © Dissolution of the Corporation Voluntary dissolution Administrative dissolution Judicial dissolution Winding up, liquidation, and termination

Prentice Hall © Multinational Corporations Multinational corporations operate in more than one country. International branch office An office established in a foreign country Not a separate legal entity; no tort liability shield for corporation

Prentice Hall © Multinational Corporations International subsidiary Parent company usually owns a majority of shares. Is a separate legal entity; the parent company not liable for the subsidiary’s torts.