Business 2

Introduction

All forms of businesses have their advantages and disadvantages. There are different business models that can be rolled out for different form of business. In addition, the scope of activity that different forms of businesses are able and allowed to carry out varies. The legal perception of the different business forms also varies widely. Lack of clear understanding of what laws govern the different forms of business can be a leading cause to court cases and other related problems. It is important for people to clearly understand and differentiate between the different forms of businesses and be able to clearly draw a line between one form and the other.

I-Corporate formation

In today’s world, formation of a corporation is a relatively easy process which involves the presentation of papers that contain specified information. The incorporators are required only to fill certain articles, and then deliver the same to the state of incorporation’s secretary of state’s office. The incorporators also need to pay incorporation fees as well as as provide tax information. During the process of registration, the incorporators office makes a copy of the registration documents and delivers the same to the incorporators alongside a receipt for payment of the incorporation fee. In today’s world, incorporation is a relatively easy process, involving the filling in of a few simple forms. (Corporate formation, pg 189, ¶ 2).

For example, the Model Business Corporation Act only requires incorporators to fill the name, shares, agent and incorporators’ details. While selecting the name, it should not be the same as that of another incorporation, and so extensive search has to be done to ensure that the name is lawful, logical and unique. It should not be been close to another corporation’s, as this might cause confusion. The name must also contain the ‘inc’ mark of Incorporated (Corporate formation, pg 189, ¶2).

In the MBCA documents, the firm must also indicate the maximum number of shares it can give as well as the name and physical location of its registered agent as well as name and address of all incorporators. In as much as is needed, there is also a host of optional information that the incorporation can also fill during registration. These details include the class and series of shares that will demarcate the different levels of shareholders. The other optional detail that the incorporators can fill is the statement of purpose. This is generally the reason for the formation of the incorporation, what activities it will be engaging in, what its scope and mandate will be, and other details that would help to give more information on the working of the newly registered corporation. The incorporators may also choose to indicate the indemnification as well as liability limitations for directors and other officers of the incorporation. This is an important clause as it determines how much liability the incorporators bear by being in business (Corporate formation, pg 190, ¶ 1).

In as much as these details may seem deep and sensitive, they can be amended at any time, as per the provision of the law. In the event that there is need for an amendment of the law, the members of the board of the incorporation must notify the shareholders. Upon receipt of notice, the shareholders have to meet and vote on the proposed amendment. At this point, the amendments can be rejected or accepted. Should they be accepted, they have to be compiled and files with the office of the secretary of state. In addition to the filling in of those forms to abide by the national law, the corporation can also come up with another set of laws to govern its internal matters. This new set of laws are known as the bylaws. Because the bylaws govern the internal operations of the corporation which are, they every day running of the organization, they are far more detailed than the articles of incorporation (Corporate formation, pg 189, ¶ 2).

Boilermakers Local 154 Retirement Fund v. Chevron Corporation:

In this case, the plaintiffs accused the defendant of using its powers to make bylaws to make unilateral bylaws that did not tally with the contract entered between the two parties. The bylaws go to the very core of activities within the corporation, to try and lay out every aspect in the most clear manner possible. There is no requirement for the bylaws to be filed with the government office. This means that they are not necessarily available to the general public. In addition, since they're internal, they are easily amended without having to go through a lengthy process. The fact that articles of corporation are stored so far away from the daily operations of the corporation, makes them far less popular and familiar among the officers of the corporation as compared to the bylaws. The defendant had made a bylaw requiring that all legal matters related to its internal operations should be conducted in Delaware, the same state as its incorporation. The plaintiffs felt that the company had breached its contract by failing to consult and seek the opinion of its other stakeholders, rather it came up with a unilateral decision which would bind all other stakeholders (Boilermakers Local 154 Retirement Fund, pg 191).

The main question in this case was who really had the power to vote and to make decisions on amendments that need to be carried out within a corporation. According to section 8 article 109 (a) of the Delaware General Corporation Law, the power to make such amendments lay in the hands of the stockholders. However, in the event that a corporation would like to confer the power to adopt and amend bylaws to its directors, that should be clearly stated in its certificate of incorporation. In its ruling, the court found that the board-adopted bylaws are not contractually invalid as forum selection clauses because they were adopted unilaterally by the board, and this was allowable under section 8 article 109 (a) of the Delaware General Corporation Law

(Boilermakers Local 154 Retirement Fund, pg 191, ¶ 2). As such, based on the fact that the corporation acted within its mandate, the amendments were statutorily valid, and they are enforceable.

Personal opinion:

In my opinion, thus ruling was fair and just. The stockholders in this case, seemed not to have properly understood their mandate, in relation to this specific corporation. In as much as they were the default decision makers, they simply assumed that this applied to all avenues, and failed to bother to check whether this specific corporation had other specifications provided in the certificate of corporation. Since the clause allowing the directors to be the default decision makers for Chevron had been made way before the decision to change the litigation destination to Delaware was made, the decision was not malicious, neither was it out of order. However, the bylaw was made in such a manner as was unfair to the stockholders and caused frustration on their side as it restricted their control and decision-making powers in the organization.

II-The Corporate Entity and limited liability:

Walkovszky v. Carlton (1966).

In this case, the plaintiff accuses the defendant of defrauding him by vesting the ownership of their taxi fleet to many corporations in order to shortchange members of the general public who might be injured by the taxi cabs. The court found that in this case, there had to be a clear definition of the principal and the stockholder. In this case, it was important to determine whether the corporations were fragments of other larger corporate entities that were conducting the business, or whether the corporations were dummies of a stockholder who was actually conducting business for personal rather than corporate gains. Each of these considerations would come with a different approach to the endgame of the case. In each of these considerations, the corporate veil would have to be pierced to reach the principal. In the first case, it would be the principal who would be held financially liable, whereas in the second case, it would be the individual stockholder who would be held liable. The assumption here is that the individual stockholder was carrying out business in their individual capacity of they were not doing so.

In the event that the stockholder was acting in their capacity as the stockholder, then they would be held liable, but in the event that there was found to be another larger entity that the stockholder was acting for, then it was the larger entity that would have been held liable. Although the plaintiff insisted that the defendant was running a fragmented corporate entity, there was no evidence to show that this was actually taking place. In fact, even if it was, there was no evidence to show that the defendant was doing so in their individual capacity. The court found that the claims and evidence presented were not adequate. It failed to put into perspective the very many cabs that were also owned by individual drivers and operated under different corporations. If such drivers and car owners, including Carlton were to be held responsible, then this would have had to go through the legislature to make such a law and not the court (Walkovszky, pg 199, ¶ 1).

In as much as it would have been fair for the insurance companies to provide fair compensation for their tort liability victims, this was a matter that was supposed to be addressed by the Legislature as required by the constitution. By becoming a member of many corporations, a taxi cab owner does not become fraudulent. The court rules that the tort liability on a victim remains the same, regardless of whether they were struck by a cab belonging to one corporation or another. Whether or not a taxi cab owner has their cabs registered under many companies or under one company, they are mandated to compensate the victim, as required under the principles of respondeat superior, which requires him to be responsible for the actions of his agents (Walkovszky, pg 301, ¶ 3).

In addition, the defendant was riding on the fact that since he had met the financial threshold for the insurance, the corporate veil could not have been used against him. However, this judgment was dissented by Judge Keating who pointed out that from the very beginning, the different small corporate entities were designed to be undercapitalized in order to avoid the financial responsibility that would follow the occurrence of accidents. The judge ruled that all the individuals involved in the case as defendants should be held individually responsible for the accident. The judge found that it is the very inherent nature of the cars to cause accidents that held to the adoption of section 388 of the Vehicle Traffic Law which sought to require the owner of a car to bear the burden of any accidents caused by a car that they owned. Based on this finding, the defendant was to bear the burden of negligence of their car, whether or not they managed it directly or through multiple corporate entities (Walkovszky, pg 302, ¶ 3).

Personal opinion:

In my personal opinion, I think that the defendant should have been held liable for the damage inflicted on the plaintiff. This was because he knew very well that the insurance companies that he was investing in were very well undercapitalized, and, therefore, were not in position to compensate a victim. In as much as there seemed to have been no evidence to implicate the defendant based on the fact that he was actively involved in the operation of the corporations that he had placed his cars under, there was sufficient evidence to implicate him on grounds of fraud, based on the fact that he had placed his cars under the supervision of multiple undercapitalized corporate entities, unable to compensate victims of negligent driving.

III-The role and purpose of corporations

1. P. Smith Mfg. Co. v. Barlow (1953):

In a case lodged at the Chancery Division and ruled by Judge Stein, the defendant was accused of going far and beyond its purpose by making inappropriate donations to Princetown University. The stockholders of the accused company felt that the company overstepped its mandate by making the $1,500 donation to the university (A. P. Smith Mfg. Co, pg 214, ¶ 3). The president of the corporation tried to convince the stockholder that the action was justifiable in that it was done out of charity, and that it was carried out to aid in the development of the institution, as one way of corporate social responsibility. The judge, while giving his opinion noted that the giving of the donation was in no way illegal since it was not done as a way of petting a charitable organization registered by any of the directors. The court found that the action was merely an act of charity extended to the institution of higher learning.

Under the Delaware General Corporation law section 122, corporations have been granted power to make donations meant for public welfare, for charity scientific or educational purposes. Such corporations can also aid the society during times of war. Section 207 article e of the California Corporations Code is even more clearer, allowing corporations to make donations, regardless of the specific benefits they are likely to gain from the donations (A. P. Smith Mfg. Co, pg 219, ¶ 3). In Pennsylvania, the law providers that directors should weigh the action they are about to take, and its effects on other partners before choosing to make such a donation. The decision on what to do is left at the discretion of the directors, whose decision is to be considered to be in the best interest of the society (A. P. Smith Mfg. Co, pg 214, ¶ 5).

Personal Opinion

In my personal opinion, the best way to deal with this is the Pennsylvanian way. Leaving the directors to weigh the outcome of their actions and how it would affect concerned parties would be a great way to get the corporations to do the right thing. Sometimes, corporation may take actions which are not meant for personal gain, but from the outside world, the actions may be interpreted as meant for personal gain. Therefore, instead of going back and forth over the action, it is best to allow the corporations to adopt an effective corporate social responsibility policy that would guide their actions.

Shlensky v. Wrigley (1968):

In this case, there was a complaint lodged by the plaintiff, seeking to sue the directors of a corporation for mismanagement and negligence. In this case, the plaintiff was not happy at the fact that the corporation had failed to perform it duty by installing lights in a baseball field, hence the actions of the corporation influenced by its directors hindered the plaintiff from executing their business. The ‘negligent actions’ of the corporation and its directors were directly affecting the plaintiff’s, in that failure to install the lights in the baseball field led to losses incurred by the plaintiff as the corporation was not able to hold baseball matches at night when there would have been more turn out. The plaintiff was also a stockholder of the defendant corporation, although a minor stockholder (Shlensky, pg 226, ¶ 1).

The plaintiff sought the help of the court in instructing the defendant corporation and its directors to invest in the installation of lights since the data from their competitors’ records showed that the corporation would be able to earn much more from the week-night games than its road games. According to the plaintiff, the whole case was not just a matter of lack of funds since the funds were readily available, and in any case, the funds would have been recovered through the high income from the week-night games revenue. The plaintiff accused the defendant of failing to install the lights purely for personal reasons and not for the general welfare of the organization. The plaintiff felt that defendant was failing to install the lights because of a personal belief that the baseball game is best played during the day. As a result, there was a conflict of interest where the directors acted out of personal opinions rather than from the mandate they had. The plaintiff felt that the other directors were also acting out of negligence, and that they had allowed the president of the corporation to dominate the board, thus preventing the corporation from executing its mandate due to personal issues (Shlensky, pg 227, para 2).

Cases of conflict of interest between major stockholders and the minors ones are often seen in cases such as this, and the Davis v. Louisville Gas & Electric Co., where the minority stockholders, who were more in number than the majority stockholders, sought to have the court bar the latter from amending the certificate of incorporation (Shlensky, pg 227, ¶ 7). In this case, the court ruled that it did not have the jurisdiction to intervene in such matters of business management. Based on the court ruling, any decision taken by directors is final unless it is shown to have been made out of fraud. In the Shlensky case, the court failed to find cause of negligence, and as such, there was no grounds to implicate the corporation or its directors based on claims of negligence.

Personal opinion

In this case, I feel that the court gave the right ruling. The fact that minor stockholders may be many in numbers does not mean that their decisions are always right. Like in the Davis v. Louisville Gas & Electric Co case, unless there is cause to implicate the corporations and its directors on fraud, the directors should be given permission to act on their own, with the best interest of the corporation at heart. Since the directors are placed in that position by minor stockholders, then the stockholders should be willing to let the directors work according to their stands.

References:

Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del.Ch.2013).

Walkovszky v. Carlton, 16 N.Y.2d 414.267 N.Y.S.2d 585,233 N.E.2d 6 (1966).

A.P. Smith Mfg. Co. v. Barlow, 13N.J 145,98 A.2d 581, appeal dismissed, 346 U.S.861 (1953).

Shlensky v. Wrigley, 95 III .App.2d 1730237 N.E2d 776 (1968).