Business law essay questions
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Chapter29.pptCorporations
- Promoter: Someone who organizes a corporation
Personally liable on any contracts he signs before the corporation is formed
- After it is formed, a corporation can adopt the contract
Adopt: Agree to be bound by the terms of a contract
- Promoter can get off the hook if the other party agrees to a novation
Novation: A new contract with different parties
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- Where to incorporate
Domestic corporation: A company in the state where it incorporates
Foreign corporation: A corporation formed in another state
- Companies generally incorporate either in:
The state where they conduct most of their business
Delaware: Offers several advantages
Laws that favor management
An efficient court system
Established body of precedent
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- The Charter: Defines the corporation, including:
Name of corporation
Address and registered agent
Incorporator: Person who signs the charter and delivers it to the Secretary of State
Purpose
Stock
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- The charter must provide three items of information about the company’s stock
Par value
Number of shares
Authorized and unissued: Stock that has been authorized, but not yet sold
Authorized and issued: Stock that has been authorized and sold
Treasury stock: Stock that a company has sold, but later bought back
Classes and series
Class: Categories into which stock can be divided
Series: Classes that are further divided into subcategories
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- Preferred stock: The owners have preference on dividends and in liquidation
Cumulative preferred stock
Non-cumulative preferred stock
Participating preferred stock
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- Directors and officers: A corporation is required to have at least one director, unless:
All shareholders sign an agreement that eliminates the board
The corporation has 50 or fewer shareholders
- Written consent: Through which shareholders elect directors
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- Minute book: The official record of a corporation
- Bylaws: A document that specifies the organizational rules of a corporation or other organization
Quorum: The percentage of voters who must be present for a meeting to count
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- Issuing debt: Corporations need to borrow funds for start-up
Bonds: Long-term secured debt
Debentures: Long-term unsecured debt
Notes: A short-term debt, either secured or unsecured, payable within five years
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- Voluntary: Shareholders elect to terminate the corporation
- Forced: By court order
- Pierce the corporate veil: A court holds shareholders personally liable for debt of a corporations under four circumstances:
Failure to observe formalities
Commingling of assets
Inadequate capitalization
Fraud
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- Terminating a corporation is a three-step process:
Vote
Filing
Winding up
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- Stakeholders: Anyone who is affected by the activities of a corporation, such as:
Shareholders
Employees
Customers
Creditors
Suppliers
Neighbors
- Managers have a fiduciary duty to act in the best interests of the shareholders
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- If managers comply with the business judgment rule, a court will not:
Hold them personally liable for any harm their decisions cause the company
Rescind their decisions
- Accomplishes three goals:
Permits directors to do their job
Keeps judges out of corporate management
Encourages directors to serve
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- The obligation of a manager to act without conflict of interest
Prohibits managers from making a decision that benefits them at the expense of the corporation
- Self-Dealing: A manager makes a decision benefiting either himself or another company with which he has a relationship
Valid when:
Disinterested members of the board of directors approve the transaction
Disinterested shareholders approve it
The transaction was entirely fair to the corporation
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- Corporate opportunity
Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent
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- Requires officers and directors to:
Act in the best interests of the corporation
Use the same care that an ordinarily prudent person would in the management of her own needs
Rational business purpose
Legality
Informed decisions
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- Shareholders don’t have the right or the obligation to manage the day-to-day business of the enterprise
Right to information
Under the Model Act, shareholders with proper purpose have the right to inspect and copy corporation’s minute book, accounting records, and shareholder lists
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- Right to vote
Corporation must have at least one class of stock with voting rights
Shareholder meetings: Norm for publicly traded companies
- Proxies: The person whom a shareholder appoints to vote for her at a meeting of the corporation
The document a shareholder signs appointing this substitute voter
Annual report: A document containing financial data
Securities and Exchange Commission (SEC) requires that public companies provide it to their shareholders each year
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- Shareholder proposals
Under SEC rules, any shareholder who has continuously owned for one year at least 1% of the company or $2,000 of stock:
Can require that one proposal be placed in the company’s proxy statement to be voted on at the shareholder meeting
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- A nominating committee from the board of directors produces a slate of directors, with one name per opening
Leads to a complex and expensive process
Disruptive to the company
- Plurality voting: To be elected, a candidate only needs to receive more votes than her opponent, not a majority of the votes cast
A traditional corporate voting method
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- Majority voting systems: 79% of S&P 500 refuse to seat a director if:
Fewer than half of the shares that vote tick off her name on the ballot
- Independent Directors: Sarbanes-Oxley Act (SOX) stipulates that all members of a board’s audit committee must be independent
At least one of these members must be a financial expert
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- The NYSE and NASDAQ require that, for companies listed with them:
Independent directors must comprise a majority of the board
They must meet regularly on their own, without inside directors
Only independent directors can serve an audit, compensation, or nominating committees
Audit committees must have at least three directors who are financially literate
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- Shareholder Activists: A new development in corporate democracy
Advise institutional investors on how to vote their shares
- Proxy access: Required companies to include in their proxy material the names of board nominees selected by large shareholders
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- Stock options
- Termination, retirement plans, and death benefits
- Lavish perks
- Directors, not shareholders, set executive compensation
- Shareholders bear the risk
- Benchmarking games
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- The CEO gets all the credit
- The busier the directors, the higher the executive pay
- Most executives are above average
- Compensation consultants have conflicts of interest
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- The Solution:
Proxy rules: Amended by the SEC to require more information about executive compensation
Must include a summary table setting out the full amount of compensation for the five highest-earning executives
- SOX
Under SOX, a Company:
Cannot make personal loans to its directors or officers
Must follow through the “claw-back provision”
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- Dodd-Frank:
Requires that compensation committees for all corporations listed on a stock exchange must be composed solely of independent directors
Strengthens the claw-back provisions of SOX and extends it to three years
Requires ‘say on pay’
Requires companies to take a nonbonding shareholder vote
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- Shareholders have right to nonbinding vote in the event of merger or sale of company assets
- Companies must disclose the relationship between financial performance and executive compensation
- Must disclose the CEO’s compensation and the median compensation of all other company employees
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- Emerging Growth Companies:
Have annual gross revenues of less than $1 billion
Stock has been publicly traded for less than five years
Have issued less than $700 million publicly in traded stock
Have issued less than $1 billion in convertible debt in a three-year period
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- A corporation must seek shareholder approval before undergoing any of the following fundamental changes:
Mergers
Sales of assets
Dissolution
Amendments to the Charter
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- If a private corporation decides to undertake a fundamental change:
The Model Act and many state laws require the company to buy back the stock of any shareholders who object
Referred to as dissenters’ right
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- Anyone who owns enough stock to control a corporation has a fiduciary duty to the minority shareholders
Minority shareholders: Those with less than a controlling interest
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- Derivative lawsuits
Brought by shareholders to remedy a wrong that the board of directors has committed against the corporation
- Direct lawsuits
Shareholders are permitted to sue the corporation directly only if their own rights have been harmed
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
