1. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM BBR Title Slide SPRING 2006 INSTRUCTOR: RON BANKSTON B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM This presentation is copyrighted work, and may not be reproduced, published or displayed without the express written consent of Ronald G. Bankston.

2. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM BBR Title Slide CONTACT INFORMATION : RON BANKSTON rbankston@bankstonriley.com 713.759.1230 B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM

3. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM BBR Title Slide REVIEW: MARCH 8, 2006 B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM FINAL EXAM: MARCH 15, 2006

4. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM BBR Title Slide B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM FINAL EXAM: MARCH 15, 2006 MULTIPLE CHOICE APPROX. 50 QUESTIONS

5. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Defective Incorporation Doctrines De Jure Corporation De Jure Corporation –= valid corporation Complies with all state statutory requirements Complies with all state statutory requirements Corporation cannot be set aside Corporation cannot be set aside –E.g., shareholders cannot be held liable for corp debts But if corporation does not comply with statutory requirements… But if corporation does not comply with statutory requirements… Corporate structure may be set aside and shareholders may be personally liable for obligations of the corporation Corporate structure may be set aside and shareholders may be personally liable for obligations of the corporation

6. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Shielding Shareholders of a Defective Corporation A defective corporate structure may be upheld under the following doctrines: A defective corporate structure may be upheld under the following doctrines: –1. De Facto Corporation Business owner has, in good faith: Business owner has, in good faith: –(1) attempted to comply with state statutory requirements –(2) operated as a corporation (e.g., uses corporate name) –2. Corporation by Estoppel Applicable only to contract disputes Applicable only to contract disputes –If a party to a contract represents itself as a corporation, other party may not be able to set aside the corporate existence Reflects contract expectations Reflects contract expectations

7. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Taxation Considerations Corporation Federal Income Tax Federal Income Tax –Corporation taxed as “a person” on profits –Shareholders taxed on dividends (corporate profits) Shareholder: Dividends Taxed Corporation Profits Taxed Shareholder: Dividends Taxed Directors & Officers: Dividends Taxed

8. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Taxation Considerations Corporation State Income Taxation State Income Taxation –Prorated State Taxing Each state in which the corporation transacts business may tax corporation Each state in which the corporation transacts business may tax corporation

9. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Corporate Organizational Structure Shareholders…………. Corporate Owners Shareholders…………. Corporate Owners –Elect directors –Vote on extraordinary corporate matters Directors………………. Policy Makers Directors………………. Policy Makers –Make corporate policy –Determine management of corporation Officers…………………Daily Managers Officers…………………Daily Managers –Implement corporate policies –Manage daily operations of corporation

10. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Shareholders: Corporate Owners Contribute investment capital for shares Contribute investment capital for shares –Ownership right to receive corporate profits, elect/remove directors, vote on extraordinary corporate matters, receive corporate assets in dissolution right to receive corporate profits, elect/remove directors, vote on extraordinary corporate matters, receive corporate assets in dissolution –No management rights Therefore, no personal liability Therefore, no personal liability

11. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Shareholders’ rights 1. Inspection Rights 1. Inspection Rights –Inspect corporate books to oversee management 2. Voting Rights 2. Voting Rights –Elect/remove directors –Extraordinary corporate matters Amendment of Articles of Incorporation, mergers, sale of corporate assets not in ordinary course of business, dissolution Amendment of Articles of Incorporation, mergers, sale of corporate assets not in ordinary course of business, dissolution –Voting Mechanisms Quorum: Minimum # of shares for valid vote Quorum: Minimum # of shares for valid vote Per Articles of Incorporation or Bylaws Per Articles of Incorporation or Bylaws RMBCA = majority of votes RMBCA = majority of votes –Binding vote = majority of quorum Adjourn and re-schedule if no quorum Adjourn and re-schedule if no quorum Proxies Proxies –Voting another shareholder’s votes

12. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM 3. Preemptive Rights 3. Preemptive Rights –Shareholders’ right to maintain proportionate ownership interest (control of corporation) Prevents outsiders from taking over corporation Prevents outsiders from taking over corporation 4. Meeting Rights 4. Meeting Rights –Meeting prerequisites Shareholders eligible to vote Shareholders eligible to vote –Shareholders owning stock on date of notice of meeting (record date) may vote Notice of meeting (date, place, time) Notice of meeting (date, place, time) –Shareholders must have reasonable notice –May waive notice

13. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Shareholders Meetings Annual Meetings Annual Meetings –Purpose: elect new directors, amend articles, consider mergers, etc. Special Meetings Special Meetings –Between annual meetings Meetings by Written Consent Meetings by Written Consent –Votes must be unanimous (all shareholders) **Minutes of all corporate meetings must be maintained**

14. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Shareholders’ Liability No personal liability No personal liability –Shareholders generally have no personal liability VEIL between corporation and shareholders VEIL between corporation and shareholders –Veil may be pierced (1) prevent fraud/injustice (1) prevent fraud/injustice (2) shareholder personally guarantees loans (2) shareholder personally guarantees loans –Piercing the Corporate Veil To prevent fraud/injustice: To prevent fraud/injustice: –3 reasons: 1. Lack of corporate formalities 1. Lack of corporate formalities 2. Commingling of corporate/personal assets 2. Commingling of corporate/personal assets 3. Inadequate capitalization 3. Inadequate capitalization Personal guarantee by shareholder Personal guarantee by shareholder –Voluntary agreement by shareholder to be personally liable for specific debts of corporation maintains liability protection for other debts maintains liability protection for other debts –Purpose: Financing for corporation

15. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Directors: Corporate Policymakers Election of Directors: Election of Directors: –May be appointed in Articles of Incorporation or –Elected by shareholders at annual meetings Voting mechanisms: Voting mechanisms: –Plurality of outstanding shares Cumulative voting vs. straight voting Cumulative voting vs. straight voting

16. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Directors: Corporate Policymakers –Removal of Directors 10% vote of shareholders to remove director 10% vote of shareholders to remove director

17. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Directors’ Duties Management Responsibilities Management Responsibilities –Make corporate policy –Declare corporate dividends –Elect and remove officers of the corporation –Initiate extraordinary corporate matters Director’s Meetings (look to bylaws) Director’s Meetings (look to bylaws) –Voting requirements and restrictions Majority of directors must at meeting for valid vote Majority of directors must at meeting for valid vote

18. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Fiduciary Duties of Directors Duty of Care Duty of Care –Would RPP act the same? Business Judgment Rule Business Judgment Rule Duty of Loyalty Duty of Loyalty –Conflict of Interest 1. Personal interest in corporate transaction 1. Personal interest in corporate transaction –Full Disclosure: 1. Disclosure Interest 1. Disclosure Interest 2. Transaction fair to corporation 2. Transaction fair to corporation 2. Usurpation of corporate opportunity 2. Usurpation of corporate opportunity 3. Insider Trading 3. Insider Trading –Trading on corporation’s stock with inside information (information not available to general public)

19. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Director’s Liability Director’s liability insurance Director’s liability insurance –Ultra Vires Acts Director exceeds authority granted Director exceeds authority granted –Breach of Fiduciary Duties Duty of Care Duty of Care Duty of Loyalty Duty of Loyalty –Conflict of Interest –Usurpation of Corporate Opportunity –Insider Trading

20. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Officers: Corporate Managers Officers: Officers: –President –Vice-President –Secretary –Treasurer Appointment and Removal of Officers Appointment and Removal of Officers –By Board of Directors Officers’ Duties Officers’ Duties –President: oversees general management –Vice-President: variable duties –Secretary: maintains records of corporation –Treasurer: Responsible for financial

21. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Officers: Agency Express Authority Express Authority –Granted by: Articles of Incorporation Articles of Incorporation Bylaws Bylaws Board of Directors Board of Directors Implied Authority Implied Authority –Authority public assumes officers have Apparent Authority Apparent Authority –Corporation gives impression officer has authority Purpose: protect public from unauthorized acts of officers Purpose: protect public from unauthorized acts of officers

22. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Officers: Fiduciary Duties Duty of Care Duty of Care –Directors must use reasonable care Duty of Loyalty Duty of Loyalty –Directors must be loyal to the corporation’s interests Breach of Fiduciary Duties Breach of Fiduciary Duties –Creates personal liability –Business Judgment Rule Protects officers if they exercise business judgment Protects officers if they exercise business judgment

23. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Fundamental Changes in Corporate Structure Fundamental Changes Fundamental Changes –Merger –Consolidation –Sale, lease, exchange of corporate assets not in the ordinary course of business –Amendment to Articles of Incorporation –Dissolution

24. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Fundamental Changes in Corporate Structure Standard Approval Procedure Standard Approval Procedure –(1) Board of Directors must approve change Standard: Is change in the best interests of shareholders? Standard: Is change in the best interests of shareholders? If approved by Board, then submit to shareholders If approved by Board, then submit to shareholders –(2) Shareholders must approve change Approval by majority (2/3) Approval by majority (2/3) Dissenters’ Rights Dissenters’ Rights – (3) Articles of Amendment must be filed with Secretary of State

25. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Fundamental Changes in Corporate Structure 1. Merger 1. Merger –One or more corporations (merged corporations) absorbed into another corporation (surviving corporation) File Articles of Merger with SOS File Articles of Merger with SOS 2. Consolidation 2. Consolidation –One or more corporations merge and form a new corporation File Articles of Consolidation with SOS File Articles of Consolidation with SOS 3. Sale of Corporate Assets 3. Sale of Corporate Assets –Corporation buys all or substantially all of the assets of another corporation (not in ordinary course of business) Purpose: Escape liabilities of selling corporation Purpose: Escape liabilities of selling corporation

26. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM 4. Amendment to Articles of Incorporation 4. Amendment to Articles of Incorporation –Articles create and organize, therefore amendment = fundamental change File Articles of Amendment with SOS File Articles of Amendment with SOS

27. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM 5. Hostile Takeovers –Take over management and/or ownership of corporation without approval of BD or SH

28. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM 6. Dissolution of Corporation 6. Dissolution of Corporation –2-step process: (1) Dissolve corporate form (1) Dissolve corporate form (2) Liquidate corporate assets (2) Liquidate corporate assets

29. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Dissolution of Corporation Voluntary Voluntary –By Board of Directors or Shareholders Involuntary Involuntary –[caused by poor/ineffective management] –Parties: By state By state By shareholders By shareholders By corporate creditors By corporate creditors

30. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Dissolution Procedures Liquidation of corporate assets Liquidation of corporate assets –Turning assets into cash (1) Creditors’ Claims (1) Creditors’ Claims Paid before distribution made to SH Paid before distribution made to SH (2) Distributions to shareholders (2) Distributions to shareholders File Articles of Dissolution with SOS File Articles of Dissolution with SOS

31. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Limited Liability Companies Unincorporated entity offering members: Unincorporated entity offering members: –(1) limited personal liability –(2) Management rights –(3) Partnership taxation “pass through” taxation “pass through” taxation

32. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Limited Liability Companies Member-Managers Member-Managers –Members may be managers but not necessarily managers

33. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Liability LLCs Members are not personally liable for debts/obligations of LLC Members are not personally liable for debts/obligations of LLC –Exceptions: (1) capital contributions (1) capital contributions (2) written agreement (2) written agreement (3) violation of environmental laws (3) violation of environmental laws (4) unpaid taxes (4) unpaid taxes (5) fraud (5) fraud

34. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Liability LLCs LLC statutes in some states require INSURANCE coverage to protect public

35. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Management & Taxation LLC Management Management –All members have the right to participate in management –Right may be waived by electing: Board of Managers Board of Managers –Fiduciary Duties: Duty of Loyalty & Duty of Care Taxation Taxation –Entity Classification Election (“check-the- box”) Pass through taxation if elected Pass through taxation if elected

36. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM LLC vs. Corporation LLC shares 2 of 4 corporate characteristics: LLC shares 2 of 4 corporate characteristics: –(1) Continuity of Life –Historically, LLC required to have limited duration (e.g., 30 years) Rationale: Time limitations prevent LLCs from looking like a corporation for taxation purposes Rationale: Time limitations prevent LLCs from looking like a corporation for taxation purposes –(2) Centralization of Management –LLC generally is member-managed –(3) Limited Liability –LLC offers limited liability from tort or contract –(4) Free Transferability of Interests –Ownership transfer only gives right to receive profits Management rights cannot be transferred w/o consent Management rights cannot be transferred w/o consent

37. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Formation LLC Requirements Requirements –Apply for tax identification number with IRS/state LLC Requirements: Designate LLC in name Designate LLC in name File Articles of Organization with SOS File Articles of Organization with SOS Prepare and Sign Operating Agreement (“Regulations”). Prepare and Sign Operating Agreement (“Regulations”).

38. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Formation Considerations LLC Name Name –Designate as LLC/Ltd. Liability Co. Purpose Purpose –“Any and all lawful business” Potential liability problems because each member can bind LLC Potential liability problems because each member can bind LLC Registration of LLC Registration of LLC –File Articles of Organization with SOS LLC existence begins with Certificate of Acceptance LLC existence begins with Certificate of Acceptance

39. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Formation Considerations LLC Operating Agreement signed by all members Operating Agreement signed by all members –Similar to Partnership Agreement Include: Voting/management rights of members, capital contributions of members, profit sharing, duration Include: Voting/management rights of members, capital contributions of members, profit sharing, duration –Unlike Partnership, statute provides few “default” regulations

40. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM Termination of LLC Dissolution Dissolution –Due to: Termination per Operating Agreement Termination per Operating Agreement Death, bankruptcy, etc. of members Death, bankruptcy, etc. of members Agreement by members Agreement by members Court order Court order Election for Continuation Election for Continuation –Members may agree to continue business Creates new LLC therefore no continuity of life Creates new LLC therefore no continuity of life Winding Up Winding Up

41. B USINESS O RGANIZATIONS RICE UNIVERSITY PARALEGAL PROGRAM MRS. RILEY … AND ONLY MRS. RILEY …