Corporations Flashcards
Who are the owners of a corporation?
Shareholders possess important control rights—including the right to elect directors and to vote on fundamental transactions, such as mergers—as well as the right to all of the assets of the corporation once the corporation’s creditors have been paid in a liquidation or a sale of the corporation.
Are shareholders liable for company debts?
no
Who makes day to day decisions for the company?
Officers are the most senior employees of the corporation, and they make many of the decisions that define a corporation’s activities.
Who represents the shareholders for the company?
Directors are elected by shareholders to supervise the officers, and make many other decisions for the Corp, as we’ll discuss.
Directors typically have no authority to act individually. They act as a collective body known as the board of directors
What is a public corp?
A corporation where the shares are owned by a large number of investors and are traded in the public securities markets.
These tend to be what you think about when you think about corporations – companies you can trade on the stock exchanges.
Ex. Google, Amazon, IBM, General Motors, Ford, etc.
What is a closely held corp?
A corporation whose shares are owned by a small number of shareholders and do not have access to the public securities markets (i.e. stock exchanges).
These are also known as Close Corporations or Private Corporations.
Ex. Chic-fil-A, Ernst & Young, Hobby Lobby, etc.
Note: Nearly all publicly traded corporations started off as a closely held corporation. (Some started off as LLCs, sole proprietorships, or partnerships, but morphed over time.)
Ex. Walmart & Google were close corporations before they went public
What law governs the relationships between shareholders, directors, and officers?
Generally, the rules governing the relations between officers, directors, and shareholders are taken from the state of incorporation (called the internal affairs doctrine)
Model Business Corporation Act (MBCA)
Delaware General Corporation Law (DGCL)
How does federal law impact corps?
For closely held corporations, federal law doesn’t have much impact on the corporate operations
Except for things like tax laws, not violating federal statutes, the constitution, etc.
For public corporations, federal securities regulation is critical and shapes much of corporate decisionmaking. But so does state law for much of the day-to-day operations.
What document do you need to incorpoerate?
it is usually referred to either as a charter or certificate of incorpoeration
What are corporate bylaws?
Corporate bylaws contain the basic rules for the conduct of the corporation’s business and affairs.
The bylaws may contain any provision for managing the business and regulating the corporation’s affairs that is not inconsistent with statutory law or the corporation’s Articles of Incorporation.
Can you amend bylaws?
Yes, but the process for this (whether shareholders or board of directors control) vary by state
Can a single person be the board of directors?
yes but is dbuois
What are the 2 types of claim sold by corporations?
Equity and Debt
What is equity?
Equity (purchaser becomes owner)
Authorized by the articles/charter – charter defines the total number, type, and rights of equity interests that the corporation is allowed to sell.
Things like dividends, liquidation rights, voting rights, conversion rights, redemption rights, etc.
Must also specify a “par value” for the shares if a Delaware corp.
Par value is the nominal value of the share of stock – which is not it’s actual price to purchase is in a stock market.
Common – typically include unlimited voting rights and the right to residual assets of the corporation
Preferred – shares with some preference over common, but rights could be limited (or enhanced) in some way.
Equity is Issued when sold
Equity is Outstanding when held by a shareholder
What is debt?
Debt (purchaser becomes lender/creditor)
Promise to repay with periodic payments of interest
Evidenced by contract (e.g., indenture, credit agreement) - contains extensive covenants, events of default, redemption rights, priority, conversion to stock, etc.
Debt has tax advantages over equity
Interest payments on debt are tax deductible
Repayment of principal is a nontaxable return of capital
Debt enables company to use borrowed money to generate returns greater than the cost of borrowing (leverage)
What happens when a corp repurchases its own shares?
Under Delaware law, these shares are called treasury shares and considered issued but not outstanding.
The MCBA gets rid of the concept of treasury shares and says that these repurchased shares are not issued shares.
What controls how many shares of a company there are?
The Articles of Incoroperation/Charter
What does it mean to take subscriptions of for additional shares?
Subscribed” is a term used to describenewly issued shares that an investor agrees to purchase before the official issue date.
This term if often used when discussing IPOs – initial public offerings.
What is the role of the board of directors?
In a public corporation, the formal mechanisms of control are exercised primarily by the board of directors, which has the statutory power to manage the affairs of the corporation.
DGCL 141(a); MBCA 8.01(a)
Centralized control, unlike partnership and member-managed LLCs
In a public corporation, the Board role includes hiring, advising, supervising, and (when necessary) firing the chief executive officer of the corporation.
Directors are agents of corporations and shareholders
Directors typically meet 4 to 12 times a year, depending on the corp.
Each public corporation must have a board of directors, while closely held corporations can do away with the board of directors by agreement among the shareholders. MCBA §§8.01(a) & 7.32
Traditionally, corporations were required to have at least three directors.
Modern corporation statutes usually allow boards to have only one director, with the exact number or a range to be specified in the charter or bylaws. Model Act §8.03(a); DGCL §141(b).
What is the difference between inside and independent directors?
Inside directors are full-time employees of the company
Disney’s CEO, for example, is on the Board of Directors of Disney.
Independent directors have no financial relationship with the company other than through their service on the board
In the recent past, Disney board included:
The Architect who designed Disney theme parks
The Headmaster of private school where Disney CEO’s (Michael Isner’s) children used to go to school
Are these types of directors truly “independent”?
What is the difference between straight and cumulative voting?
Under straight voting, a majority voting coalition wins every time.
One share = one vote
Cumulative voting allows shareholder to “cumulate” all votes and vote them in a block toward their favored nominees.
So if there are 3 open board positions, a shareholder would have 3 votes (points) that they could use to vote for one candidate, instead of having to vote for 3 separate people under straight voting.
Cumulative voting is a way to allow minority shareholders or lesser-opinions to rise to the top.
How do you remove a director?
Directors are removable by shareholders with or without cause unless the charter provides that directors may be removed only for cause. (MBCA 8.08(a); DGCL 141(k)).
In Delaware, directors of staggered boards may only be removed for cause unless charter provides otherwise (DGCL 141(k))
In addition to removal by shareholders, MCBA §8.09 allows directors to be removed by a judicial proceeding for fraudulent or dishonest conduct or gross abuse of authority.
Who owns a corp?
Shareholders
Are shareholders personally liable for company debts?
No
Who runs the day to day activities of a corp?
Officers
