1. 42-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 42-2 10 History and Nature of Corporations Organization and Financial Structure of Corporations Management of Corporations Shareholders’ Rights and Liabilities Securities Regulation Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals Corporations P A R T

3. 42-3 Organization and Financial Structure of Corporations PA E TR HC 42 Our business is company creation. Ann Winblad, venture capitalist, quoted in Fortune magazine (Sellen and Daniels, Oct. 1999)

4. 42-4 Learning Objectives Appreciate the risk of liability for corporate promoters Understand the process for incorporating a business Know the appropriate sources for financing a business Explain share-transfer restrictions

5. 42-5 Each state has enacted laws detailing how a corporation may be created A promoter of a corporation incorporates the business, organizes initial management team, and raises initial capital A promoter may be the person who originated the idea for the firm or may be a professional hired to undertake incorporation activities Overview

6. 42-6 A promoter will be liable for contracts made during the preincorporation period unless the corporation adopts the contracts made by the promoter (adoption) and the third party agrees to substitute the corporation for the promoter (novation) –Like agency ratification, may be express or implied –Contracts adopted typically: employment and real property lease or purchase Preincorporation Contracts

7. 42-7 Preincorporation share subscriptions are contracts in which a prospective shareholder offers to buy a specific number of shares in a new corporation at a stated price Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a six-month periodModel Business Corporation Act Share Subscriptions

8. 42-8 A U.S. business may incorporate in any state by following basic steps: 1.Prepare articles of incorporation 2.Sign and authenticate articles by one or more incorporators 3.File articles with secretary of state and pay fees 4.Receive copy of articles of incorporation stamped “Filed” by secretary of state & fee receipt 5.Hold organizational meeting for purpose of adopting bylaws, electing officers, and other business Incorporation

9. 42-9 De jure corporation: exists when promoters and incorporators substantially comply with each mandatory (shall, must) requirement to incorporate the business The validity of a de jure (by law) corporation cannot be attacked except by the state of incorporation due to noncompliance with state corporation laws De Jure Corporation

10. 42-10 De facto corporation: exists when promoters fail to comply with all of the mandatory requirements, yet comply with most of the mandatory provisions Validity of a de facto corporation could be attacked by a third party, or itself, or the state of incorporation, but may be treated by as a corporation under the judicial doctrine of corporation by estoppel De Facto Corporation

11. 42-11 A non-profit corporation incorporates in same way as a profit corporation, but must declare whether it is a: –public benefit corporation, mutual benefit corporation, or religious corporation Nonprofit corporation’s articles must also state whether it will have members Non-Profit Incorporation

12. 42-12 For-profit corporations are financed by: –Sale of securities: shares, debentures, bonds, and long-term notes payable –Short-term financing (e.g., inventory financing) –Bank loans Financing Corporations

13. 42-13 Equity securities, better known as stock or shares, create an ownership relationship, thus stockholders or shareholders own a corporation State laws permit corporations to issue classes of shares with specific rights: –Common –Preferred Equity Securities

14. 42-14 Common shareholder claims for dividend payments or asset distribution on liquidation are subordinate to creditor or preferred shareholder claims Preferred shareholders generally receive liquidation and dividend preferences over common shareholders Shareholder Rights

15. 42-15 A board of directors may issue options for purchasing the corporation’s shares –Issued to top-level managers as an incentive Warrants are options evidenced by certificates Rights are short-term certificated options that are usually transferable –Used to give present security holders an option to subscribe to more shares Options, Warrants, & Rights

16. 42-16 Corporations may borrow money to operate by issuing debt securities: –Debentures are long-term, unsecured debt securities with a 10 to 30 years term –Bonds are long-term, secured debt securities –Notes generally have less than a five year term and may secured or unsecured Debt Securities

17. 42-17 MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation, including cash, promissory notes, contracts for services to be performed for the corporation, services performed for the corporation, and securities of the corporation or another corporation Consideration for Shares

18. 42-18 MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation The board must issue shares for an adequate dollar amount of consideration Par value is an arbitrary dollar amount that may be assigned to shares by the articles of incorporation Consideration for Shares

19. 42-19 Share certificates are registered with the corporation in name of a specific person Indorsement of a share certificate on back by the registered owner and delivery of the certificate to another person transfers ownership of the shares Under the UCC, a corporation owes a duty to register transfer of any registered shares, provided it has proper indorsement Transfer of Shares

20. 42-20 Thought Question Do you believe that a company’s stock price reflects a company’s value or success in (a) the marketplace, and (b) society?