Corporations: Generally

Question 1

Ultra Vires Doctrine

Answer 1

At CL: a corporation was limited to the powers enumerated in the purpose clause of its charter.

Historically, if a corporation engaged in conduct that was not authorized by its express or implied powers, the conduct was deemed “ultra vires” and void.

Whenever a transaction was beyond the corporation’s limited purposes or powers, either party to the contract could disaffirm it.

Question 2

Ultra Vires TODAY

Answer 2

Today, Ultra Vires is VERY RARE and viewed as a historic relic.

Most modern corporation statutes expressly grant incidental/implied powers.

Corporate managers, in the absence of express restrictions, have discretionary authority to enter into contracts and transactions reasonably incidental to its business purpose, which may be broadly defined.

Question 3

Internal Affairs Doctrine

Answer 3

The “Internal affairs” of the corporation are governed by the law of the state of incorporation.

BUT CA departs from the internal affairs doctrine: it makes “foreign” corporations with more than half of their taxable income, property, payroll, and outstanding voting shares within CA subject to certain provisions of the CA Corporations Code.

Question 4

Why is Delaware Good to Incorporate In?

Answer 4

Nearly 60% of publicly traded U.S. corporations are incorporate in DE.

DE has:
(1) largest body of precedent interpreting its corporation code

(2) relatively stable & modern corporate law (DGCL undergoes frequent updates)

(3) a special court for business matter (Court of Chancery)

(4) procedures that facilitate timely decisions

Question 5

Sources of Corporate Law

Answer 5

Individual state law (internal affairs doctrine)
- Model Business Corporations Act (“MBCA”)
- Delaware

Federal law
- Securities and exchange acts (’33, ’34)
- Sarbanes Oxley Act of 2002 (PPP, page 111)
- Dodd Frank Act of 2010 (PPP, page 111)
- JOBS Act of 2012
- Primarily cover “public” corporations

Question 6

Key Attributes of a Corporation

Answer 6

A “legal person typically possessing the following attributes:

1. SEPARATE LEGAL EXISTENCE from its owners
   ● Corporations possess some constitutional rights (e.g., free speech [Citizens United], but no personal privacy (FCC v. ATT)
   ● Separate taxpayer
   ● Requirement for formal creation
2. PERPETUAL EXISTENCE (designed to last forever)
   ● MBCA § 14.02(a): The Board of Directors may propose dissolution for submission to the shareholders by first adopting a resolution authorizing the dissolution
3. LIMITED LIABILITY
   ■ MBCA § 6.22(b): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation (but he may become personally liable by reason of his own acts or conduct.”)
4. CENTRALIZED MANAGEMENT
   ■ MBCA § 8.01(b): “All corporate powers shall be exercised by or under the authority of its board of directors
5. DIVISIBLE OWNERSHIP (shares of stock)
   ■ Claims on the corporation’s assets and future earnings are issued in the form of securities
   ● Securities: permanent, long-term claims on the corporation’s assets and future earnings issued pursuant to formal contractual instruments
   ● Capital structure: the debt securities and equity securities together constitute the firm’s capital structure
6. TRANSFERABLE SHARES and debt obligations (unless limitations imposed)
   ■ Secondary trading markets (e.g., NYSE and NASDAQ)
   ■ Efficient Capital Market Hypothesis: Price of a stock reflects all available information

Question 7

What do the Board of Directors Do?

Answer 7

They direct the affairs of the corporation

They have the authority to act for (and to bind) the corporation

Directors have fiduciary duties to the corporation and the body of shareholders

Individual director acting alone generally has no rights or powers

The Board has the power to delegate authority (e.g., it can appoint officers to run the day-to-day operations, it can delegate certain authority to committees of the board, etc.)

Question 8

Officers

Answer 8

Handle the day-to-day management of the corporation and are under the direction of the board

Execute firm strategy

Officers are appointed by the board (e.g., CEO, CFO, etc.)

They are agents of the corporation, and the scope of their power often comes down to agency principles

Question 9

Financial Statements

Answer 9

Income statement: Financial statement that indicates results of operations over a specified period (also known as P&L statement)

Balance sheet: Summarizes the company’s financial position at a given point in time (usually the end of the month, quarter, or year)
○ Describes the assets of the business and the claim on those assets, either of creditors in form of debt, or owners in the form of equity)

Question 10

Authorized Shares Definition

Answer 10

Number of shares the corporation can issue

Question 11

Outstanding Shares Definition

Answer 11

Number of shares the corporation has sold and not repurchased

Question 12

“Authorized but Unissued” Definition

Answer 12

Shares that are authorized, but not yet sold

Question 13

“Treasury Shares” Definition

Answer 13

Shares issued and then repurchased by the firm

Question 14

Book value

Answer 14

Measure of the equity value of the firm provided by the financial statement (balance sheet)

Question 15

Market capitalization

Answer 15

Measure of the equity value of the firm implied by the trading value of the firm’s stock

Value of one share of stock x total number of shares outstanding

Question 16

Enterprise Value

Answer 16

Measure of the total value of the firm’s assets implied by the trading value of the firm’s stock (determined by adding the market value to the firm’s obligations)

Question 17

Limited Liability Partnerships (LLPs)

Answer 17

Limited liability form of the general partnership (Article 10 of RUPA)

Forming a LLP requires filing a form with the secretary of state
● Must have a signifier, i.e., “LLP”
● Effect is to shield partners from personal liability for the partnership debts, but a partner still remains personally liable for her own wrongful acts

Question 18

Limited Partnerships (LPs)

Answer 18

A type of partnership with 2 types of partners:
○ General partners: manage the business and have the power to bind the partnership; they are personally (and jointly and severally liable) for the partnership debts
○ Limited partners: silent/passive partners without management rights; not personally liable unless they participate in management or control of the LP; current Uniform Act has modified to not personally liable except in extraordinary circumstances
● Requires a formal filing (a “certificate of limited partnership”) to create a LP
● Partnership must have at least one general partner and one limited partner & the partnership name must have a signifier – i.e., “LP”
● Default rule is that partners in a LP share profits and losses in proportion to their respective capital contributions

Question 19

Limited Liability Corporation (LLC)

Answer 19

Formation: file with the state

IRS ruled that the LLC could qualify for partnership-like tax treatment

Flexibility: like partnership, most aspects of management and sharing dictated by the LLC’s “operating agreement”

Two types:
○ (1) member managed; all members are managers, and
○ (2) manager managed; some owners not managers and no right to vote

Limitations on capital structure complexity and share transferability

Question 20

S Corp

Answer 20

Creation of tax code (actually a corporation)

Advantage: pass through taxation and limited liability

Disadvantage: constraints on the number of shareholders, source of corporate income, types of shareholders (one class only), deductions on pass-through losses

Question 21

How Can a Board take action on Behalf of the Corporation

Answer 21

EITHER:

(a) at a meeting at which notice was property given and a “quorum” is present; or

(b) by written consent
● DGCL § 141(f): authorizes a board to act without a meeting by means of written consent, but it requires unanimity

Quorum: A majority of the total number of directors shall UNLESS the COI or the bylaws require a greater number.

Unless the COI provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum, in no cause shall be less than ⅓ of the total number of directors