1. © 2008 West Legal Studies in Business A Division of Thomson Learning 1 BUSINESS LAW TODAY Essentials 8 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 20 Corporations

2. © 2008 West Legal Studies in Business A Division of Thomson Learning 2 Learning Objectives  What are the express and implied powers of corporations? On what sources are these powers based?  What are the duties of corporate directors and officers?  What must directors do to avoid liability for honest mistakes of judgment and poor business decisions?  What role do corporate shareholders play in the corporate enterprise? What are some important rights of shareholders?  What is the difference between a corporate merger and a corporate consolidation?

3. © 2008 West Legal Studies in Business A Division of Thomson Learning 3  A corporation is an artificial “person” and has constitutional rights to: Equal protection; Access to the courts, can sue and be sued; Right to due process before denial of life, liability or property. Constitutional Rights of Corporations

4. © 2008 West Legal Studies in Business A Division of Thomson Learning 4 Constitutional Rights of Corporations  Corporation’s rights (cont’d): Freedom from unreasonable search and seizure and double jeopardy. Freedom of speech. Only officers and directors have protection against self-incrimination. However, corporations do not have full protection of privileges and immunities clause.

5. © 2008 West Legal Studies in Business A Division of Thomson Learning 5 Limited Liability of Shareholders  The corporation provides limited liability for stockholders.  In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.

6. © 2008 West Legal Studies in Business A Division of Thomson Learning 6  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.  Regular “C” corporations are taxed twice: at the corporate level and at the shareholder level. Corporate Taxation

7. © 2008 West Legal Studies in Business A Division of Thomson Learning 7  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.  CASE 20.1 Commonwealth v. Angelo Todesca Corp. (2006). Torts and Criminal Acts

8. © 2008 West Legal Studies in Business A Division of Thomson Learning 8  A corporation may act and enter into contracts as any natural person, except as limited by: U.S. Constitution. State constitutions. State statutes. Its own articles of incorporation. Its own corporate bylaws. Resolutions by its own board. Corporate Powers

9. © 2008 West Legal Studies in Business A Division of Thomson Learning 9  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. Express Corporate Powers

10. © 2008 West Legal Studies in Business A Division of Thomson Learning 10  Corporation has implied powers to: to perform all acts reasonably necessary to accomplish its corporate purposes, e.g.,: Borrow and lend money. Extend credit. Make charitable contributions. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise. Implied Powers

11. © 2008 West Legal Studies in Business A Division of Thomson Learning 11 Classification of Corporations  Public and Private.  Nonprofit.  Close Corporations. Shares held by few shareholders. More informal management,similar to a partnership. Restriction on transfer of shares.

12. © 2008 West Legal Studies in Business A Division of Thomson Learning 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.  Professional Corporations. Classification of Corporations

13. © 2008 West Legal Studies in Business A Division of Thomson Learning 13  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

14. © 2008 West Legal Studies in Business A Division of Thomson Learning 14 Select State Secure Name File Articles of Incorporation Incorporators 1st Organiza- tional Meeting State Charter Corporate Formation

15. © 2008 West Legal Studies in Business A Division of Thomson Learning 15 Incorporation Process  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. Person(s) who execute the articles are the incorporators.

16. © 2008 West Legal Studies in Business A Division of Thomson Learning 16 Incorporation Process  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.

17. © 2008 West Legal Studies in Business A Division of Thomson Learning 17 Bonds vs. Stocks DebtOwnership/equity Fixed ROIDividends (variable) No votesVote for Management OptionalRequired Priority over stockPaid last Corporate Financing

18. © 2008 West Legal Studies in Business A Division of Thomson Learning 18 Corporate Management: Directors and Officers  Every corporation is governed by a board of directors, and operated by its officers.  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 an officer and a shareholder, especially in closely-held corporations.

19. © 2008 West Legal Studies in Business A Division of Thomson Learning 19 Election 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. In closely held companies, directors are generally the incorporators and/or the shareholders. Term of office is generally for one year. Director can be removed for cause (for failing to perform a required duty).  CASE 20.2 Relational Investors, LLC v. Sovereign Bancorp, Inc. (2006).

20. © 2008 West Legal Studies in Business A Division of Thomson Learning 20 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.

21. © 2008 West Legal Studies in Business A Division of Thomson Learning 21 Directors’ Rights and Compensation  Directors have the right to: 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.

22. © 2008 West Legal Studies in Business A Division of Thomson Learning 22 Directors’ Management Responsibilities  Declaration and payment of corporate dividends.  Authorization for major corporate policy decisions.  Appointment, supervision and removal of corporate officers.  Financial decisions.

23. © 2008 West Legal Studies in Business A Division of Thomson Learning 23  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

24. © 2008 West Legal Studies in Business A Division of Thomson Learning 24 Duties and Liabilities of Directors and Officers  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.

25. © 2008 West Legal Studies in Business A Division of Thomson Learning 25  Duty of Care (cont’d): Make informed and reasonable decisions; Rely on competent consultants and experts; and Exercise reasonable supervision. Duties and Liabilities of Directors and Officers

26. © 2008 West Legal Studies in Business A Division of Thomson Learning 26  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

27. © 2008 West Legal Studies in Business A Division of Thomson Learning 27  Duty of Loyalty: subordination of personal interests to the welfare of the corporation. No competition with Corporation. No “corporate opportunity.” No conflict of interests. No insider trading. No transaction that is detrimental to minority shareholders. Duties and Liabilities of Directors and Officers

28. © 2008 West Legal Studies in Business A Division of Thomson Learning 28 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.

29. © 2008 West Legal Studies in Business A Division of Thomson Learning 29  Directors and officers may be liable for negligent acts that breach the standard of due care: Crimes and torts committed by individually and/or those committed by employees under their supervision. Shareholder derivative suits where shareholder(s) sue directors on behalf of corporation]. Liability of Directors and Officers

30. © 2008 West Legal Studies in Business A Division of Thomson Learning 30 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.

31. © 2008 West Legal Studies in Business A Division of Thomson Learning 31 Corporate Ownership - 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.

32. © 2008 West Legal Studies in Business A Division of Thomson Learning 32 Shareholders’ Powers  Shareholder powers include approving all fundamental changes to the corporation: Amending articles of incorporation or bylaws. Approval of mergers or acquisition. Sale of all corporate assets or dissolution.  Shareholders also elect and remove the board of directors.

33. © 2008 West Legal Studies in Business A Division of Thomson Learning 33 Shareholder’s 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; Shareholders may appoint a proxy or enter into a voting trust agreement.

34. © 2008 West Legal Studies in Business A Division of Thomson Learning 34  For special shareholder meetings: Notice and time of meetings must be sent in writing to each shareholder within a reasonable time ahead of the meeting. Notice must state reason for meeting and only deal with this matter. Shareholder’s Meetings

35. © 2008 West Legal Studies in Business A Division of Thomson Learning 35  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. Shareholder Voting

36. © 2008 West Legal Studies in Business A Division of Thomson Learning 36 Shareholder Voting  Shareholders may vote on resolutions. Need majority present for most resolutions. Need a “super majority” (e.g., 67%) for important matters: sale of assets, etc..  Voting lists by corporate secretary contains record of stock ownership. [Cut off date 70 days ahead of action (notice, dividends, etc..)]

37. © 2008 West Legal Studies in Business A Division of Thomson Learning 37 Shareholder Voting  Methods of Increasing Minority Share- holder Power Within the Corporation: Cumulative Voting allows minority shareholders to get a board member elected. x # to be elected x shareholders # of shares = shareholder can cast them all for one board nominee. Shareholder Voting Agreements. Voting Trusts.

38. © 2008 West Legal Studies in Business A Division of Thomson Learning 38  Shareholders have the right: To vote. To have a stock certificate. To purchase newly issued stock. To dividends, when declared by board. To inspect corporate records. To transfer shares, with some exceptions. To a proportionate share of corporate assets on dissolution. To file suit on behalf of corporation. Rights of Shareholders

39. © 2008 West Legal Studies in Business A Division of Thomson Learning 39  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. Dividends

40. © 2008 West Legal Studies in Business A Division of Thomson Learning 40  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

41. © 2008 West Legal Studies in Business A Division of Thomson Learning 41  Shareholders can inspect books for a proper purpose. But corporation can protect trade secrets, other confidential information. 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

42. © 2008 West Legal Studies in Business A Division of Thomson Learning 42  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

43. © 2008 West Legal Studies in Business A Division of Thomson Learning 43 Rights on Dissolution  Shareholders have right to pro-rata share of assets upon liquidation.  Shareholder may petition the court for dissolution of the corporation for following reasons: Board mishandling corporate assets. Board deadlocked and irreparable injury will result. Acts of directors are illegal, oppressive, or fraudulent. Shareholders are deadlocked for two meetings and can’t elect directors.

44. © 2008 West Legal Studies in Business A Division of Thomson Learning 44  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. Shareholder’s Derivative Suit

45. © 2008 West Legal Studies in Business A Division of Thomson Learning 45  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

46. © 2008 West Legal Studies in Business A Division of Thomson Learning 46  Corporations can grow and expand by: Mergers. Consolidation. Purchase of another corporation’s assets. Purchases of a controlling interest in another corporation. Merger and Consolidation

47. © 2008 West Legal Studies in Business A Division of Thomson Learning 47  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.AABBAA Merger

48. © 2008 West Legal Studies in Business A Division of Thomson Learning 48  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.AABBCC Consolidation

49. © 2008 West Legal Studies in Business A Division of Thomson Learning 49  Step 1: Board of Directors of each corporation involved must approve the merger plan.  Step 2: Shareholders of each corporation must approve.  Step 3: Articles filed with Secretary of State.  Step 4: State issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation. Steps for Merger or Consolidation

50. © 2008 West Legal Studies in Business A Division of Thomson Learning 50  The acquiring corporation extends its ownership and control over the physical assets of another company.  Acquiring corporation shareholders do not need to approve unless: Acquiring corporation is paying for assets with its own stock and there is not enough stock authorized or Acquiring corporation sells on a national exchange, is paying with its own stock, and newly issued stock = 20% or more than the outstanding shares. Purchase of Assets or Stock

51. © 2008 West Legal Studies in Business A Division of Thomson Learning 51  Generally, an acquiring corporation is not liable for liabilities of selling corporation unless: The acquiring corporation impliedly or expressly assumes the liabilities. Sale amounts to what is really a merger or consolidation. Purchaser continues the seller’s business and retains the same personnel. Sale is fraudulently executed to escape liability.  The selling corporation needs both board and shareholder approval. Purchase of Assets: Liability

52. © 2008 West Legal Studies in Business A Division of Thomson Learning 52  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. Purchase of Stock/Tender

53. © 2008 West Legal Studies in Business A Division of Thomson Learning 53  Tender Offers. 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. Can be in exchange for aggressor's stock. Sec strictly regulates tender offers. Purchase of Stock/Tender

54. © 2008 West Legal Studies in Business A Division of Thomson Learning 54  Termination of a corporation, like a partnership, consists of two phases: Dissolution (voluntary or involuntary); and Liquidation.  Dissolution can brought about by: Act of legislature. Certificate expiration. Voluntary approval by shareholders and board. Unanimous action by all shareholders. Court order. Termination

55. © 2008 West Legal Studies in Business A Division of Thomson Learning 55  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. Dissolution

56. © 2008 West Legal Studies in Business A Division of Thomson Learning 56  Secretary of State or Attorney General can dissolve if Corporation: Fails to pay taxes. Fails to file annual report. Fails to designate registered agent for service. Secured its charter through fraud. Abused its corporate power. Violated criminal laws. Failed to commence business operations. Abandoned operations before start-up.  CASE 20.3 Sartori v. S & S Trucking, Inc. (2006). Involuntary Dissolution

57. © 2008 West Legal Studies in Business A Division of Thomson Learning 57  Close corporations: May be able to be dissolved by one shareholder on the happening of a certain event. Gives the same power to a shareholder to dissolve as a partner has for a partnership. Involuntary Dissolution

58. © 2008 West Legal Studies in Business A Division of Thomson Learning 58  Court can dissolve a corporation if: Board is deadlocked and irreparable damage to corporation will ensue. Mismanagement. Minority shareholder is “frozen out” or oppressed. Involuntary Dissolution

59. © 2008 West Legal Studies in Business A Division of Thomson Learning 59  Voluntary Dissolution. Board liquidates and acts as trustees of assets. Court will appoint a receiver if: Board refuses; or Creditors want a receiver.  Involuntary Dissolution. Court appoints receiver. Winding Up