1. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Slides developed by Les Wiletzky PowerPoint Slides to Accompany ESSENTIALS OF BUSINESS AND ONLINE COMMERCE LAW 1 st Edition by Henry R. Cheeseman Chapter 17 Corporations Chapter 17 Corporations

2. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 2 Nature of the Corporation  Corporations can only be created pursuant to the laws of the state of incorporation  Corporations Codes  Corporations Codes – State statutes that regulate the formation, operation, and dissolution of corporations  The courts interpret state corporation statutes to decide individual corporate and shareholder disputes

3. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 3 The Corporation as a Legal “Person” legal entity legal person  A corporation is a separate legal entity (or legal person) artificial persons  Corporations are treated as artificial persons created by the state that can: Sue or be sued in their own names Enter into and enforce contracts Hold title to and transfer property Be found civilly and criminally liable for violations of law

4. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 4 1. Limited Liability of Shareholders 2. Free Transferability of Shares 3. Perpetual Existence 4. Centralized Management Characteristics of Corporations

5. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 5 Corporation Liability limited to capital contribution No personal liability for company’s debts and obligations Capital investment Debt or obligation owed CorporationThird Party Shareholder

6. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 6 Revised Model Business Corporation Act (RMBCA)  Model Business Corporation Act (MBCA) Model act drafted in 1950 Was intended to provide a uniform law for regulation of corporations  Revised Model Business Corporation Act (RMBCA) 1984 revision of the MBCA Many states have adopted all or part of the RMBCA

7. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 7 Classification of Corporations  Domestic Corporation A corporation in the state in which it was formed  Foreign Corporation A corporation in any state or jurisdiction other than the one in which it was formed  Alien Corporation A corporation that is incorporated in another country

8. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 8 Incorporation  Corporations are creatures of statute  The organizers of the corporation must comply with the state’s incorporation statute to form a corporation  A corporation can be incorporated in only one state even though it can do business in all other states in which it qualifies to do business

9. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 9 Incorporation Procedures (1 of 2)  Selecting a Corporate Name  Selecting a Corporate Name – Organizers must ensure that the name is not already in use and available  Articles of Incorporation  Articles of Incorporation – The basic governing documents of the corporation Must be filed with the secretary of state of the state of incorporation Can be amended to contain any provision that could have been lawfully included in the original document

10. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 10 Incorporation Procedures (2 of 2)  Corporate Bylaws  Corporate Bylaws – A detailed set of rules adopted by the board of directors after the corporation is incorporated Contains provisions for managing the business and the affairs of the corporation  Organizational Meeting  Organizational Meeting – A meeting that must be held by the initial directors of the corporation after the articles of incorporation are filed

11. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 11 S Corporations (1 of 2)  Corporations are separate legal entities  They generally must pay corporate income taxes to federal and state governments  If a corporation distributes its profits to shareholders in the form of dividends, shareholders must pay personal income tax on the dividends double taxation  This double taxation of corporations is a disadvantage of doing business

12. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 12 S Corporations (2 of 2)  Some corporations and their shareholders can avoid double taxation by electing to be an S Corporation  If a corporation elects to be taxed as an S Corporation, it pays no federal income tax at the corporate level  The corporation’s income or loss flows to the shareholders’ individual income tax returns  Election is made by filing IRS Form 2553

13. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 13 C Corporations  A corporation that does not qualify to or does not elect to be taxed as an S corporation  Any corporation with over 75 shareholders is automatically a C corporation  A C corporation must pay federal income tax at the corporate level  In addition, if a C corporation distributes its profits to shareholders in the form of dividends, the shareholders must pay personal income tax on the dividends

14. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 14 Types of Shares Type of ShareDescription AuthorizedShares authorized in the corporation’s articles of incorporation. IssuedShares sold by the corporation. TreasuryShares repurchased by the corporation. They do not have the right to vote. OutstandingShares of stock that are in shareholder hands. These shares have the right to vote.

15. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 15 Financing the Corporation  A corporation needs to finance the operation of its business: Equity securitiesstocks Equity securities (or stocks) – represent ownership rights in the corporation Debt securities Debt securities – establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom the debt security is issued

16. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 16 Common Stock  A type of equity security that represents the residual value of the corporation: Common stock has no preferences Common stock does not have a fixed maturity date Corporations may issue different classes of common stock Common shareholders have limited liability

17. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 17 Preferred Stock  A type of equity security that is given certain preferences and rights over common stock: Preferred stock can be issued in classes or series One class of preferred stock can be given preferences over another class of preferred stock Preferred shareholders have limited liability

18. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 18 Preferred Stock: Preferences and Rights 3. Cumulative Dividend Right 4. Right to Participate in Profits 5. Conversion Right 1. Dividend Preference 2. Liquidation Preference

19. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 19 Debt Securities  Debenture  Debenture – A long-term unsecured debt instrument that is based on the corporation’s general credit standing  Bond  Bond – A long-term debt security that is secured by some form of collateral  Note  Note – A debt security with a maturity of five years or less

20. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 20 Conducting International Business Using a Branch Office (1 of 2)  Branch Office  Branch Office – used where a corporation wants to enter a foreign market in a substantial way but wants to retain exclusive control over the operation It is not a separate corporation or legal entity It is an extension of the corporate owner It is wholly owned by the home corporation

21. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 21 Conducting International Business Using a Branch Office (2 of 2) Corporation A (in Country A) Branch Office (in Country B) The branch office is not a separate legal entity. No limited liability shield – Corporation A in Country A is liable for the tort and contract liabilities of its branch office in Country B.

22. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 22 Conducting International Business Using a Subsidiary Corporation (1 of 2)  Subsidiary Corporation parent corporation  Subsidiary Corporation – A separate corporation established by the parent corporation to conduct business in a foreign country Must be formed pursuant to the laws of the country in which it is to be located The parent corporation and the subsidiary organization are separate legal entities that are individually capitalized

23. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 23 Conducting International Business Using a Subsidiary Corporation (2 of 2) Corporation A (in Country A) Corporation B is a separate legal entity. Limited liability shield – Corporation A in Country A is not liable for the tort and contract liabilities of its subsidiary corporation in Country B except up to its capital contribution in Corporation B. Corporation B (in Country B)

24. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 24 Shareholders  A corporation’s shareholders own the corporation  Shareholders are not agents of the corporation  They cannot bind the corporation to contracts  Shareholders have the right to vote on matters such as: the election of directors, and the approval of fundamental changes in the corporation

25. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 25 Shareholders’ Meetings  Annual Shareholders’ Meeting  Annual Shareholders’ Meeting – Meeting of the shareholders of a corporation that must be held annually by the corporation to elect directors and vote on other matters Shareholders do not have to attend the shareholders’ meeting to vote proxy Shareholders may vote by proxy  Special Shareholders’ Meetings

26. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 26 Proxy Solicitation  Corporate shareholders have the right to vote on the election of directors, mergers, and charter amendments proxy  They can exercise their power to vote either in person or by proxy  Proxy Card  Proxy Card – A written document signed by a shareholder that authorizes another person to vote the shareholder’s shares

27. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 27 Voting Requirements  At least one class of shares of the corporation must have voting rights Record date Quorum Straight voting Cumulative voting Supramajority voting requirement

28. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 28 Preemptive Rights  Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests diluted  Such a purchase can prevent a shareholder’s interest in the corporation from being diluted

29. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 29 Shareholder Resolution  Resolution submitted by a shareholder to other shareholders Shareholder must meet certain requirements of the Securities Exchange Act of 1934 and SEC rules adopted thereunder  The SEC determines if a shareholder proposal qualifies to be submitted to other shareholders for vote

30. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 30 Dividends  Dividends are not automatically paid to shareholders  Dividends are paid at the discretion of the board of directors  Record date  Record date – a date that determines whether a shareholder receives payment of a declared dividend  Stock dividend  Stock dividend – additional shares of stock paid as a dividend

31. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 31 Derivative Lawsuit  A lawsuit a shareholder brings against an offending party when the corporation fails to bring the lawsuit derivative lawsuit  A derivative lawsuit will be dismissed by the court if either a majority of independent directors or a panel of independent persons appointed by the court determines that the lawsuit is not in the best interests of the corporation

32. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 32 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

33. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 33 Board of Directors  A panel of decision makers elected by the shareholders policy decisions  The directors of a corporation are responsible for formulating the policy decisions affecting the corporation  The board may initiate certain actions that require shareholders’ approval

34. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 34 Selecting Directors  Inside Director  Inside Director – a member of the board of directors who is also an officer of the corporation  Outside Director  Outside Director – A member of the board of directors who is not an officer of the corporation  Term of Office  Term of Office – The term of a director’s office expires at the next annual shareholders’ meeting following his or her election unless terms are staggered

35. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 35 Meetings of the Board of Directors (1 of 2)  The directors can only act as a board  They cannot act individually on the corporation’s behalf  Every director has the right to participate in any meeting of the board of directors  Each director has one vote  Directors cannot vote by proxy

36. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 36 Meetings of the Board of Directors (2 of 2)  Regular Meeting A meeting held by the board of directors at the time and place established by the bylaws  Special Meeting A meeting convened by the board of directors to discuss new shares, merger proposals, etc.  Quorum The number of directors necessary to hold a board of directors’ meeting or transact business of the board

37. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 37 Committees of the Board of Directors  The board of directors may create committees of the board and delegate certain powers to those committees  All members of these committees must be directors  An act of a committee pursuant to delegated authority is the act of the board of directors

38. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 38 Corporate Officers  Officers  Officers – Employees of the corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation  Officers of the corporation have such authority as may be provided in the bylaws of the corporation or as determined by resolution of the board of directors

39. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 39 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 loyalty  Breach of the duty of loyalty usually occurs because of intentional conduct

40. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 40 Duty of Care  Duty of Care A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation  Negligence Failure of a corporate director or officer to exercise the duty of care while conducting the corporation’s business  Business Judgment Rule Directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment

41. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 41 Sarbanes-Oxley Act (2002)  Federal statute enacted by Congress to: Improve corporate governance rules Establish independence between public accounting firms and the public companies they audit Eliminate conflicts of interest  Auditing and accounting rules  Corporate governance rules

42. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 42 Mergers and Acquisitions friendly  Corporations may agree to friendly acquisitions or combinations of one another: Merger Consolidation Share Exchange Consolidation of Assets

43. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 43 Merger  Occurs when one corporation is absorbed into another corporation and ceases to exist surviving corporation merged corporation  The surviving corporation gains all the rights, privileges, powers, duties, obligations, and liabilities of the merged corporation  The shareholders of the merged corporation receive stock or securities of the surviving corporation as provided in the plan of merger  Occurs when one corporation is absorbed into another corporation and ceases to exist surviving corporation merged corporation  The surviving corporation gains all the rights, privileges, powers, duties, obligations, and liabilities of the merged corporation  The shareholders of the merged corporation receive stock or securities of the surviving corporation as provided in the plan of merger

44. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 44 Example of a Merger += Corporation A Corporation B Corporation A

45. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 45 Tender Offer  An offer that an acquirer makes directly to a target corporation’s shareholders in an effort to acquire the target corporation  The tender offeror’s board of directors must approve the offer The shareholders do not have to approve  The tendering corporation and the target corporation retain their separate legal status

46. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 46 Example 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.

47. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 17 - 47 Termination of a Corporation  The methods for dissolving and terminating corporations include: Voluntary Dissolution Voluntary Dissolution Administrative Dissolution Administrative Dissolution Judicial Dissolution Judicial Dissolution  The methods for dissolving and terminating corporations include: Voluntary Dissolution Voluntary Dissolution Administrative Dissolution Administrative Dissolution Judicial Dissolution Judicial Dissolution