1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Corporations Chapter 20 BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objectives  What steps are involved in bringing a corporation into existence?  In what circumstances might a court disregard the corporate entity (“pierce the veil”) and hold shareholders personally liable?  What are the duties of corporate directors and officers?  What is a voting proxy? What is cumulative voting?  What are the differences between a merger, a consolidation, and a share exchange?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3  A corporation is a legal entity, a creature of statute, an artificial “person.” Most states follow the Model Business Corporation Act (MBCA) or the RMBCA, that are model corporation laws. Most states follow the Model Business Corporation Act (MBCA) or the RMBCA, that are model corporation laws.  The shares (stock) of a corporation are owned by at least one shareholder (stockholder). The Nature of the Corporation

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Corporate Personnel  Board of Directors: manage the big picture, set policy, hire officers.  Officers: manage the day-to-day operations of the corporation.

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5  A corporation is an artificial “person” and has constitutional rights to: Equal protection; Equal protection; Access to the courts, can sue and be sued; Access to the courts, can sue and be sued; Right to due process before denial of life, liability or property. Right to due process before denial of life, liability or property. Constitutional Rights of Corporations

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6  Corporation’s rights (cont’d): Freedom from unreasonable search and seizure and double jeopardy. Freedom from unreasonable search and seizure and double jeopardy. Freedom of speech. Freedom of speech. Only officers and directors have protection against self-incrimination.Only officers and directors have protection against self-incrimination. However, corporations do not have full protection of privileges and immunities clause. However, corporations do not have full protection of privileges and immunities clause. Constitutional Rights of Corporations

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7  The corporation provides limited liability for stockholders.  In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable. Limited Liability of Shareholders

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8  Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends.  Corporate profits are taxed under federal and state law as a separate “person” from its shareholders.  Taxation: Regular “C” corporations are taxed twice: at the corporate level and at the shareholder level.  Holding Companies: used to defer U.S. income taxes (hold shares of another). Corporate Earnings and Taxation

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9  A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior.  Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison. Torts and Criminal Acts

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10  Domestic corporation does business in its state of incorporation.  Foreign corporation from X state doing business in Z state.  Alien Corporation: formed in another country doing business in United States. Classification of Corporations

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Classification of Corporations  Public and Private.  Nonprofit.  Close Corporations. Shares held by family members or very few shareholders. Management is information, similar to a partnership. Shares held by family members or very few shareholders. Management is information, similar to a partnership. Transfer of shares is restricted. Transfer of shares is restricted. Misappropriation of Funds is a major issue. Misappropriation of Funds is a major issue. CASE 20.1 Williams v. Stanford. (2008). Two minority shareholders prevented one 70% shareholder from transferring of corporate assets after proving abuse and fraud. CASE 20.1 Williams v. Stanford. (2008). Two minority shareholders prevented one 70% shareholder from transferring of corporate assets after proving abuse and fraud.

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12  “S Corporations”: Avoids the federal “double taxation” of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. IRS requirements: Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non- resident alien. Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non- resident alien.  Professional Corporations. Classification of Corporations

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13  The process of incorporation generally involves two steps: Promotional Activities; and Promotional Activities; and The Legal Process of Incorporation. The Legal Process of Incorporation. Corporate Formation and Powers

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Promotion Name Search File Articles of Incorporation Subscribers 1st Organiza- tional Meeting State Charter Incorporation Procedures

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15  State Chartering: Select state (some states such as Delaware cater to corporations). Articles of Incorporation: primary enabling document filed with the Secretary of State that includes basic information about the corporation. Articles of Incorporation: primary enabling document filed with the Secretary of State that includes basic information about the corporation. Person(s) who execute the articles are the incorporators (and maybe the promoters). Person(s) who execute the articles are the incorporators (and maybe the promoters). Selecting the State

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Securing the Corporate Name  Choose and reserve a Corporate Name.  Name must have the proper suffix: “corporation,” “corp.,” “Incorporated.”  You should also consider registering the corporation as a “dot com” at networksolutions.com or register.com. networksolutions.comregister.com. networksolutions.comregister.com.

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17  Purpose: trend towards “any legal business.”  Duration: usually perpetual.  Capital Structure: Most states requires some minimal capitalization (Texas requires $1,000), plus number and class(es) of shares authorized and “par value” of shares at incorporation. Preparing the Articles of Incorporation

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18  Internal Organization: usually included in the bylaws.  Registered Office and Agent: specific person that will receive any legal notice and documents from state and/or 3 rd parties.  Incorporators (usually the promoter): at least one with name and address. Preparing the Articles of Incorporation

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19  The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.  Corporate by-laws may also grant or limit a corporation’s express powers. Corporate Powers

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20  Corporation has implied powers to: to perform all acts reasonably necessary to accomplish its corporate purposes, e.g.,: Borrow and lend money.Borrow and lend money. Extend credit.Extend credit. Make charitable contributions.Make charitable contributions. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise. Corporate Powers

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21  Corporation By Estoppel: if it acts like a corporation, cannot avoid liability by claiming that no corporation exists.  CASE 20.2 Brown v. W.P. Media, Inc. (2009). Firm that represented itself as a corporate entity is estopped from denying liability for breach of contract even if it was did not exist at the time of the contract. Corporation by Estoppel

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22  “ Piercing the Corporate Veil” occurs when a court, in the interest of justice or fairness,” holds shareholders personally liable for corporate acts.  Court concludes that shareholders used corporation as a “shield” from illegal activity.  Factors a court considers: 3 rd party tricked into dealing with a corporation rather than the individual.  3 rd party tricked into dealing with a corporation rather than the individual.  Piercing the Corporate Veil

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23  Was corporation set up to not make a profit, remain insolvent, or be under capitalized?  Were statutory formalities followed?  Was the corporation an “alter ego” of a majority shareholder, with personal and corporate interests commingled such that the corporation has no separate identity? Issues: Piercing the Corporate Veil

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Bonds vs. Stocks Stocks DebtOwnership/equity Fixed ROI Dividends (variable) No votes Vote for Management OptionalRequired Priority over stock Paid last Corporate Financing

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 BondsTypeDefinitionDebentures No specific corporate assets are pledged as collateral. Backed by corporation’s general credit rating. Mortgages Pledge specific real estate. If corporation defaults, bondholders can foreclose. Convertible Conditions trigger bonds to convert to corporate stock. Callable Can be “called in” by principal and repaid according to bond conditions.

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26  Common Stock: represents true ownership of a corporation. Provides pro-rata (proportional) ownership interest reflected in control, earnings and assets.  Preferred Stock: has preferences over common stock. Cumulative Preferred. Cumulative Preferred. Participating Preferred. Participating Preferred. Convertible Preferred. Convertible Preferred. Redeemable or Callable Preferred. Redeemable or Callable Preferred. Stocks

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 Venture Capital and Private Equity Capital  Venture Capital: start-up businesses and high-risk enterprises need start-up and expansion capital. The start-up typically gives a share of its stock.  Private Equity Capital: obtain capital from wealthy investors. Ultimately, the company may sell shares in an IPO.  Locating potential investors online.

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Roles of Directors and Officers  Every corporation is governed by a board of directors.  Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation.  A director can also be a shareholder, especially in closely-held corporations.

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Election and Compensation of Directors  Subject to statutory limitations, the number of directors is set forth in the articles of incorporation: Directors appointed at the first organizational meeting. Directors appointed at the first organizational meeting. In closely held companies, directors are generally the incorporators and/or the shareholders. In closely held companies, directors are generally the incorporators and/or the shareholders. Term of office is generally for one year. Term of office is generally for one year. Director can be removed for cause (for failing to perform a required duty). Director can be removed for cause (for failing to perform a required duty).  In very large companies, directors can be compensated, and may be officers as well.

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Board of Directors’ Meetings  Directors hold meetings pursuant to bylaws with recorded minutes.  Special meetings may be called with sufficient notice.  Meetings require QUORUM (minimum number of directors to conduct official corporate business, usually majority).  Each director generally has one vote.

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 Rights of Directors  Directors have the right to: Participate in corporate decisions and inspect corporate books and records. Participate in corporate decisions and inspect corporate books and records. Compensation (usually a nominal sum) and indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability. Compensation (usually a nominal sum) and indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability.

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 Committees of the Board of Directors  With large numbers of directors, various sub-committees can be formed: Executive Committee. Executive Committee. Audit Committee. Audit Committee. Nominating Committee. Nominating Committee. Compensation Committee. Compensation Committee. Litigation Committee. Litigation Committee.

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33  Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well.  Their employment relationships are generally governed by contract law and employment law.  Officers may be terminated for cause. Corporate Officers and Executives

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34  Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders:  Duty of Care : Directors/officers are expected to act in good faith and the best interests of the corporation. Failure to exercise due care may subject individual directors or officers personally liable. Duties and Liabilities of Directors and Officers

35. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35  Duty of Care (cont’d): Make informed and reasonable decisions; Make informed and reasonable decisions; Rely on competent consultants and experts; and Rely on competent consultants and experts; and Exercise reasonable supervision. Exercise reasonable supervision.  A dissenting director is rarely held liable for mismanagement of corporation. Dissent must be registered with the corporate secretary and posted in the minutes of the meetings. Duties and Liabilities of Directors and Officers

36. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36  Duty of Loyalty: subordination of personal interests to the welfare of the corporation. No competition with Corporation. No competition with Corporation. No “corporate opportunity.” No “corporate opportunity.” No conflict of interests. No conflict of interests. No insider trading. No insider trading. No transaction that is detrimental to minority shareholders. No transaction that is detrimental to minority shareholders.  CASE 20.3 Guth v. Loft, Inc. (1939). Guth violated his fiduciary duty by acquiring the Pepsi-Cola trademark for himself, putting himself in a competitive position with the company he worked for. Duty of Loyalty

37. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 Business Judgment Rule  Immunizes a director or officer from liability from consequences of a business decision that turned sour.  Court will not require directors or officers to manage “in hindsight.”  As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.

38. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 Conflicts of Interest  Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally.  However, if transaction was fair and reasonable, it will not be voidable if approved by majority of disinterested directors.

39. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 Role of Shareholders  Ownership of shares grants a shareholder an equitable ownership interest in a corporation.  Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.  Shareholders are generally protected from personally liability by the corporate veil of limited liability.

40. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 Shareholders’ Powers  Shareholder powers include approving all fundamental changes to the corporation: Amending articles of incorporation or bylaws. Amending articles of incorporation or bylaws. Approval of mergers or acquisition. Approval of mergers or acquisition. Sale of all corporate assets or dissolution. Sale of all corporate assets or dissolution.  Shareholders also elect and remove the board of directors.

41. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 Shareholders’ Meetings  Shareholders’ meetings must occur at least annually. Voting requirements and procedures are: Quorum of shareholders owning more than 50% of shares must be present to conduct business; Quorum of shareholders owning more than 50% of shares must be present to conduct business; Shareholders may appoint a proxy or enter into a voting trust agreement. Shareholders may appoint a proxy or enter into a voting trust agreement.

42. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42  Common shareholder entitled to one vote per share.  Articles and by-laws can exclude or limit voting rights of certain classes of stock.  Quorum must be present -- shareholders representing more than 50% of outstanding shares must be present.  Cumulative Voting: allows minority shareholders to get a board member elected. Shareholder Voting

43. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43  Shareholders have the right: To vote. To vote. To have a stock certificate. To have a stock certificate. To purchase newly issued stock. To purchase newly issued stock. To dividends, when declared by board. To dividends, when declared by board. To inspect corporate records. To inspect corporate records. To transfer shares, with some exceptions. To transfer shares, with some exceptions. To a proportionate share of corporate assets on dissolution. To a proportionate share of corporate assets on dissolution. To file suit on behalf of corporation. To file suit on behalf of corporation. Rights of Shareholders

44. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44  Common law concept which is a preference to existing shareholders to purchase a pro-rated share of newly- issued stock within a certain period of time.  Provided for in the articles of incorporation.  Significant in a close corporation to prevent dilution and loss of control. Preemptive Rights

45. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45  Distribution of corporate profits or income.  Only as ordered by the Board.  Can be stock, cash, property, stock of other corporations.  State laws control the sources of revenues for dividends, which may be paid from retained earnings, net profits and surplus.  What are “illegal dividends”? Dividends

46. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46  When directors fail to declare a dividend, shareholders can sue.  Directors do not have to declare if they have a rational basis for withholding a dividend (a bona fide purpose).  Often, profits are retained for expansion, research or upgrades. Directors’ Failure to Declare a Dividend

47. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47  Shareholders can inspect books for a proper purpose. But corporation can protect trade secrets, other confidential information. But corporation can protect trade secrets, other confidential information. Shareholder must have held a minimum number of shares for a minimum amount of time. Shareholder must have held a minimum number of shares for a minimum amount of time.  All shareholders can see list of other shareholders of record. Inspection Rights

48. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48  Shares are freely transferable unless restricted by articles and noted on the stock certificate.  Closely held corporations may have “right of first refusal” or preemptive rights.  Transfer accomplished by delivery or endorsement to corporate secretary.  New shareholder must be recorded on corporate books. Transfer of Shares

49. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49  Shareholders can sue a 3 rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury.  Directors may refuse to take action because they might personally be liable.  Any damages recovered go to corporation’s treasury. The Shareholder’s Derivative Suit

50. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50  Shareholders are generally not liable for the contracts or torts of the corporation.  If the corporation fails, shareholders cannot lose more than their investment, except when: A shareholder hasn’t paid for stock pursuant to the stock subscription agreement. A shareholder hasn’t paid for stock pursuant to the stock subscription agreement. Shareholder buys “watered stock” which is below the stock’s par value. Shareholder buys “watered stock” which is below the stock’s par value. Duties and Liabilities of Shareholders

51. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51  Majority shareholders own enough shares to exercise de facto (actual) control over the corporation.  Majority shareholders owe a fiduciary duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of control. Duties of Majority Shareholders

52. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52  Corporations can grow and expand by: Mergers. Mergers. Consolidation. Consolidation. Purchase of another corporation’s assets. Purchase of another corporation’s assets. Purchases of a controlling interest in another corporation. Purchases of a controlling interest in another corporation. Mergers and Acquisitions

53. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 53  Legal combination of two or more corporations (A & B) after which only A corporation remains. A’s articles of incorporation are amended to include articles of merger.  After merger, A continues as the surviving corporation with all of B’s rights and obligations. AABBMerger AA

54. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 54  Occurs when two or more corporations (A & B) combine such that both cease to exist and a new corporation emerges which has all the rights and obligations previously held by A and B.  C’s articles of consolidation take the place of the original articles of A and B. AABB Consolidation CC

55. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 55 Share Exchange  Some or all of the shares of one corporation are exchanged for some or all of the shares of another corporation, but both corporations continue to exist.  Share exchanges are often used to create holding companies.

56. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 56  Board of directors of each corporation involved must approve the merger plan.  Next shareholder approval of each corporation.  Then, articles filed with Secretary of State and who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation. Merger, Consolidation and Share Exchange Procedures

57. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 57  When allowed by state statute, a shareholder has the right to dissent and be bought out” of his/her shares (shareholder’s appraisal right).  In cases of: merger, consolidation, purchase of assets not in the ordinary course of business, adverse amendments to the articles of incorporation.  Short-Form Mergers. Merger, Consolidation and Share Exchange Procedures

58. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 58 Appraisal Rights  Appraisal Rights. Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation. Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation.

59. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 59 Purchase of Assets and Potential Liability  Sale of Corporate Assets. Occurs when a corporation acquires all or substantially all of the assets of another corporation by direct purchase. Occurs when a corporation acquires all or substantially all of the assets of another corporation by direct purchase. The purchasing, or acquiring corporation simply extends its ownership and control over more assets. The purchasing, or acquiring corporation simply extends its ownership and control over more assets. Shareholder approval is not required because there is no change in the legal entity. Shareholder approval is not required because there is no change in the legal entity.

60. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 60 Purchase of Assets and Potential Liability  General Rule: corporation that purchases the assets of another corporation is not automatically responsible for the liabilities of the selling corporation.  Exceptions to the rule are: 1. When purchasing corporation assumes the seller’s liabilities. 1. When purchasing corporation assumes the seller’s liabilities. 2. When transaction is actually a merger or consolidation. 2. When transaction is actually a merger or consolidation. 3. When purchasing corporation is a continuation of the selling corporation (same operations and personnel). 3. When purchasing corporation is a continuation of the selling corporation (same operations and personnel). 4. When sale is entered into fraudulently for the purpose of escaping liability. 4. When sale is entered into fraudulently for the purpose of escaping liability.  In any of these situations, the acquiring corporation will be held to have assumed both the assets and the liabilities of the selling corporation.

61. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 61  Alternative to merger or consolidation is the purchase of a controlling interest (e.g., 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target.  The aggressor deals entirely with the target’s shareholders. Proxy Fight, Leveraged Buyout. Proxy Fight, Leveraged Buyout. Purchase of Stock and Tender Offers

62. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 62  Tender Offers. A publicly advertised offer addressed to all shareholders of the target is called a tender offer. A publicly advertised offer addressed to all shareholders of the target is called a tender offer. Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares. Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares. Can be in exchange for aggressor's stock.Can be in exchange for aggressor's stock. Sec strictly regulates tender offers.Sec strictly regulates tender offers. Purchase of Stock and Tender Offers

63. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 63 Responses to Tender Offers: Defenses

64. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 64  Termination of a corporation, like a partnership, consists of two phases: Dissolution (voluntary or involuntary); and Dissolution (voluntary or involuntary); and Liquidation. Liquidation.  Dissolution can brought about by: Act of legislature. Act of legislature. Certificate expiration. Certificate expiration. Voluntary approval by shareholders and board. Voluntary approval by shareholders and board. Unanimous action by all shareholders. Unanimous action by all shareholders. Court order. Court order. Termination

65. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 65  Shareholders can initiate dissolution by a unanimous vote to dissolve.  Or, the Board can initiate by submitting a proposal to the shareholders for a vote at the annual shareholder meeting or specially-called meeting. Voluntary Dissolution

66. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 66  Secretary of State or Attorney General can dissolve if Corporation: Fails to pay taxes. Fails to pay taxes. Fails to file annual report. Fails to file annual report. Fails to designate registered agent for service. Fails to designate registered agent for service. Secured its charter through fraud. Secured its charter through fraud. Abused its corporate power. Abused its corporate power. Violated criminal laws. Violated criminal laws. Failed to commence business operations. Failed to commence business operations. Abandoned operations before start-up. Abandoned operations before start-up. Involuntary Dissolution

67. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 67  Court can dissolve a corporation if: Board is deadlocked and irreparable damage to corporation will ensue. Board is deadlocked and irreparable damage to corporation will ensue. Mismanagement. Mismanagement. Minority shareholder is “frozen out” or oppressed. Minority shareholder is “frozen out” or oppressed. Involuntary Dissolution

68. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 68  Board liquidates and acts as trustees of assets. Court will appoint a receiver if: Board refuses; or Board refuses; or Creditors want a receiver. Creditors want a receiver.  Winding Up. Directors act as trustees of corporate assets, and personally liable. Directors act as trustees of corporate assets, and personally liable. Courts may also appoint a receiver to wind up the corporate affairs. Courts may also appoint a receiver to wind up the corporate affairs. Termination and Winding Up