1. Chapter 36 Corporate Formation and Financing

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Introduction
Corporation: A fictitious legal entity that is created according to statutory requirements
Shareholders: Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation
Corporations codes: State statutes that regulate the formation, operation, and dissolution of corporations
Courts interpret state corporation statutes to decide individual corporate and shareholder disputes
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3. The Corporation as a Legal “Person”
A corporation is a separate legal entity (or legal person)
Corporations 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
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4. Characteristics of Corporations
Free Transferability of Shares
National securities markets have been developed for the organized sale of securities
Perpetual existence (unless a specific duration is stated in a corporation’s articles of incorporation)
Its existence can be voluntarily terminated by the shareholders
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5. Characteristics of Corporations
Centralized Management
Board of directors makes policy decisions concerning the operation of a corporation
Limited Liability of Shareholders
Corporations are liable for their own debts and obligations
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6. Corporation Key Term Description Board of directors
A panel of persons who are elected by the shareholders that make policy decisions concerning the operation of a corporation
Corporate officers
Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation
Limited liability of shareholders
A general rule of corporate law that provides that generally shareholders are liable only to the extent of their capital contributions for the debts and obligations of their corporation and are not personally liable for the debts and obligations of the corporation
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Exhibit 36.1: Corporation
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8. Case 36.1– Shareholder’s Limited Liability
Menendez v. O’Niell
986 So.2d 255 (2008)
Court of Appeal of Louisiana
Issue
Is Fraioli personally liable for the debts of Triumvirate, a corporation of which is the sole shareholder?
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9. Public and Private Coorporations
Public Corporation
A corporation formed to meet a specific governmental or political purpose
Local government corporations are often called municipal corporations
Private Corporation
A corporation formed to conduct privately owned business
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10. Profit and Not-for-Profit Corporations
Created to conduct a business for profit
Can distribute profits to shareholders in the form of dividends
Not-for-profit Corporation
A corporation formed to operate charitable institutions, colleges, universities, and other not- for-profit entities
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11. Publicly Held and Closely Held Corporations
Publicly Held Corporation
Many shareholders
Shares traded on organized security markets
Shareholders rarely involved in management
Closely Held Corporation
Few shareholders
Shareholders may have buy-and-sell agreements
Shareholders often involved in management
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12. Professional Corporation
A corporation formed by lawyers, doctors, or other professionals
Shareholders are called members
Members not usually liable for torts committed by agents or employees
May be liable for malpractice of members
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Types of Corporations
Types of Corporations
Description
Domestic
A corporation is a domestic corporation in the state in which it is incorporated
Foreign
A corporation is a foreign corporation in states other than the one in which it is incorporated
Alien
A corporation is an alien corporation in the United States if it is incorporated in another country
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14. Selecting a State for Incorporating
A corporation can be incorporated in only one state
Can do business in all other states in which it qualifies to do business
Selecting a corporate name
Must contain corporation, company, incorporated, or limited
Cannot be trademarked by another company
Availability as a domain name on the Internet
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Incorporators
The person or persons, partnerships, or corporations that are responsible for incorporation of a corporation.
Primary duty – sign the articles of incorporation
Promoter: A person or persons who organize and start a corporation, or
Negotiate and enter into contracts in advance of its formation
Find the initial investors to finance the corporation
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16. Promoters’ Liability for Preincorporation Contracts
Corporation never comes into existence – promoters have joint personal liability on the contract
Unless exempted by the third party
Corporation is formed – it is liable on a promoter’s contract only if it agrees to become bound to the contract
Corporation agrees to be bound to promoter’s contract – promoter remains liable
Unless the parties enter into a novation
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17. Articles of Incorporation
Basic governing document of the corporation
Must be filed with secretary of state of state of incorporation
Contains name of corporation, number of shares authorized, name and address for registered agent and incorporators
May contain term, purpose, limitations, regulations of affairs
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Amending the Articles
Amendments made to contain any provision that could have been lawfully included in the original document
Corporate status
RMBCA provides that corporate existence begins when the articles of incorporation are filed
Conclusive proof – secretary of state’s filing of the articles of incorporation
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19. Purpose of a Corporation
Key Terms
Description
General-purpose clause
A clause that can be included in the articles of incorporation that permits the corporation to engage in any activity permitted by law
Limited-purpose clause
A clause that can be included in the articles of incorporation that stipulates the activities that the corporation can engage in
Registered agent
A person or corporation that is empowered to accept service of process on behalf of a corporation
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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
Governs internal management structure
May be amended by the board of directors
Corporate seal – A design that contains the name of the corporation and the date of incorporation
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21. Organizational Meeting of the Board of Directors
Organizational meeting: A meeting held by the initial directors of the corporation after the articles of incorporation are filed
Directors adopt bylaws, elect officers, and transact business
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22. Corporate Powers Key Terms Description S Corporation
A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes
C Corporation
A corporation that does not qualify for or has not elected to be taxed as an S corporation
Express powers
Powers given to a corporation by (1) the U.S. Constitution, (2) state constitutions, (3) federal statutes, (4) state statues, (5) articles of incorporation, (6) bylaws, and (7) resolutions of the board of directors
Implied powers
Powers beyond express powers that allow a corporation to accomplish its corporate purpose
Ultra vires act
An act by a corporation that is beyond its express or implied powers
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23. Delaware Attracts Corporate Formations
More than 50 percent of the publicly traded corporations in America are incorporated in Delaware
60 percent of the Fortune 500 companies
Delaware General Corporation Law – most advanced corporation law in the country
Court of chancery – hears and decides business cases
Judges are experts at deciding business disputes
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24. Financing the Corporation
Equity securities (stocks): Representation of ownership rights to a corporation
Common Stock: A type of equity security that represents the residual value of a corporation
Has no preferences
Does not have a fixed maturity date
Par value shares – common stock on which the corporation has set the lowest price
No par value shares – no assigned par value
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Preferred Stock
A type of equity security that is given certain preferences and rights over common stock
Preferred stockholder: A person who owns preferred stock
Dividend preference: The right to receive a fixed dividend at stipulated periods during the year
Liquidation preference: The right to be paid a stated dollar amount if a corporation is dissolved and liquidated
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Preferred Stock
Cumulative dividend right – Corporations must pay a preferred dividend if they have the earnings to do so
Right to participate in profits – Allows a preferred stockholder to participate in the profits of the corporation along with the common stockholders
Conversion right – Convertible preferred stock permits the preferred stockholders to convert their shares into common stock
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27. Redeemable Preferred Stock
Stock that permits a corporation to buy back the preferred stock at some future date
Terms of the redemption are established when the shares are issued
Nonredeemable stock is more common than redeemable stock
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28. Types of Shares Type of Share Description Authorized
Shares authorized in the corporation’s articles of incorporation
Issued
Shares sold by the corporation
Treasury
Shares repurchased by the corporation; these shares do not have the right to vote
Outstanding
Issued shares minus treasury shares; these shares have the right to vote
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29. Types of Debt Securities
Debt Instrument
Description
Debenture
A long-term, unsecured debt instrument that is based on a corporation’s general credit rating
Bond
A long-term debt security that is secured by some form of property
Note
A short-term debt instrument with a maturity of five years or less; notes can be either unsecured or secured
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30. Consideration to be paid for shares – RMBCA allows shares to be issued in exchange for any benefit to the corporation
Indenture agreement: Contract between the corporation and the holder that contains the terms of debt security
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31. Voluntary Dissolution
Dissolution of a corporation that has begun business or issued shares upon recommendation of the board of directors and a majority vote of the shares entitled to vote
Articles of dissolution must be filed with the secretary of state of the state of incorporation
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32. Administrative Dissolution
Secretary of state will administratively dissolve corporation if it:
Failed to file annual report
Failed to maintain registered agent for 60 days
Failed to file change of registered agent
Did not pay franchise fee
Period of duration stated in articles has expired
Secretary issues a certificate of dissolution
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Judicial Dissolution
Dissolution of a corporation through a court proceeding instituted by the state
Instituted by attorney general of state of incorporation
Procured articles through fraud
Exceeded or abused authority
Decree of dissolution issued
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34. Winding-up and Liquidation
The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to
Creditors
Shareholders
Other claimants
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Termination
The ending of a corporation that occurs only after the:
Winding-up of the corporation’s affairs
Liquidation of its assets
Distribution of the proceeds to the claimants
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