Organization & Structure

Question 1

Public Corporation

Answer 1

• Owned by large number of investors
• 3 distinct groups
• Federal Securities Law applies
• Mostly incorporated in Delaware
• Easy to sell shares, very little control power

Question 2

Closely-held Corporation

Answer 2

• Owned by small number of shareholders
• Roles often overlap
• May eliminate board of directors
• No federal securities law requirements
• Commonly incorporated in state of principal place of business
• No market for shares of the corporation making it harder to exit, shareholders given more control

Question 3

Certificate of Incorporation / Charter

Answer 3

Both MBCA & Delaware:

• Name of corp.
• Number of authorized shares of stock
• Name and address of a registered agent in the state of incorporation

Delaware:
- also must include purpose of a corporation (this can be broad or general)

Some also include:
- names/addresses of initial directors

- Some charters have limitations 
3 means of enforcing a limitation:
- Shareholder suit 
- suit by corp against directors/officers for actions beyond purpose 
- involuntary judicial dissolution

Question 4

Other provisions that might be in the charter

Answer 4

• Management provisions: putting these in the charter instead of just the bylaws protects them from shareholder challenges
• Bylaw provisions
• Director liability: exculpatory provisions,
• Indemnification: protects directors from personal liability in capacity as director
• Only directors may propose changes to the charter

Question 5

Capital structure

Answer 5

• Equity: shareholders own stock, stock is an equity claim against a corp
• Debt: connotes some fixed obligation of repayment independent of the success or failure of the business

Question 6

Equity

Answer 6

• Some corps have one class of equity owners
• some corps have multiple classes: some equity holders receive dividends before others
• All equity interests together = capital stock
• individual = shares
• Articles must set forth the total number of shares corp is authorized to issue
• If there are classes: must prescribe the class and number of shares per class

Question 7

Common Shares

Answer 7

• 2 fundamental characteristics
  1) Unlimited voting rights (especially right to vote for directors)
  2) Right to residual assets of corp (after payment of liabilities)
• Corp must at all times have at least one share having each of the rights of common stock

Question 8

Preferred Shares

Answer 8

• have some preference or priority in payment over common shares
• terms of preferred shares set out in articles or a certificate of designations

Question 9

Bonds

Answer 9

• Many corps borrow money and incur indebtedness by issuing bonds
• Bonds: a promise to repay specific sum of money at a definite time with period payments of interest

Question 10

Benefits of Debt

Answer 10

• Interest payments on debt are deductible to the company but dividends for stockholders are not
• repayment of principal is a nontaxable return of capital to an investor, but dividends are ordinary income to the investor
• if company fails, bad debt may be ordinary loss but loss of stock is capital loss to the investor

Question 11

Risk of debt

Answer 11

• requires repayment of fixed amounts at fixed intervals regardless of success or failure of the business
• equity requires payment of dividends only when the business is successful

Question 12

Shareholder view on debt

Answer 12

• Debt enables the company to leverage the shareholder’s investment (notion that borrowers may use borrowed money to generate returns greater than the cost of borrowing
• Excess earnings increase return on equity
• Borrowing money increases risk

Question 13

Directors

Answer 13

• Usually has 3 members, only needs 1
• Closely held corps may eliminate board
• Number of directors usually fixed by charter or bylaws
• role: manage/supervise the management of corp through hiring, advising, supervising, and firing CEO

Question 14

Inside directors

Answer 14

• employed full time by corp as corp officers in addition to their role on the board of directors, always includes CEO

Question 15

Outside directors

Answer 15

• don’t work for the corp, other than as members of the board
• if they don’t have any other financial relationship with the corp, they are termed independent
• enhances board’s decision-making due to independence but may be forced to rely on inside info due to lack of knowledge of business

Question 16

Terms of office/Election of directors

Answer 16

• Directors elected at annual meeting of shareholders
• Hold their office until their successors are elected and qualified or until his/her earlier resignation or removal
• DGCL: Staggered - always a majority of directors who are continuing without need for reelection (Prevents hostile takeover and restricts shareholder’s ability to monitor board action)
• Classified: board that allows for classes of directors to be elected for multiple year terms

Question 17

Removal

Answer 17

• Directors may be removed from the board by shareholders, with or without cause, unless charter provides that cause is required
  MBCA
• If specific class of shares elects directors, only they can remove him
• special rules for cumulative voting
• may be removed in a judicial proceeding for bad behavior
  Delaware
• Directors may always be removed for cause
• Removal of directors in staggered board is only for cause unless otherwise specified

Question 18

Board Meetings

Answer 18

• members considered present if director participates in the meeting via telephone
• directors can act without holding meeting (unless provided otherwise) but written consent of all directors required
• Majority of directors must be present to satisfy statutory quorum requirement but charter or bylaws may alter quorum requirement
• board acts by majority vote unless charter or bylaws require supermajority
• not required to meet in state of incorporation

Question 19

Board committees

Answer 19

• board of directors may act through committees comprised of fewer than total number of directors
• can’t delegate all matters to committee (actions that need shareholder vote)
• can’t adopt, amend, repeal bylaws of corp

Question 20

Shareholder voting

Answer 20

• Default rules can be altered by charter or bylaws
• each outstanding share of common stock is entitled to one vote on each matter voted on at shareholder meeting
• Vote on election of directors and fundamental transactions: electing, removing directors, amending charter/bylaws, approving merger/sale of all company assets not in ordinary course of business, approving dissolutions, ratifying conflict of interest transactions

Question 21

Proxy Voting

Answer 21

• common in publicly traded companies
• authorization given by shareholder to another person to vote his shares
• proxy is an agent subject to the control of the shareholder and has fiduciary duties to the shareholder

Question 22

Voting Rights

Answer 22

Straight voting:
- each shareholder votes all his shares with respect to each open seat on the board
- default rule: but companies can opt for cumulative voting by amending bylaws or charter
- favors majority shareholders
Cumulative voting
- allows shareholders to concentrate their voting power by cumulating all of the votes associated with their shares and voting them in block for a limited number of nominees
- Minority shareholder representation on board is proportionate to voting strength
- common in closely held corps
- have to opt in to cumulative voting in the charter or bylaws

Question 23

Shareholder Meetings

Answer 23

Annual:
MBCA: in accord with bylaws
DGCL: in accord with charter or bylaws
Special:
MBCA: called by board or other person authorized by charter or bylaws
DGCL: called by board or other persons authorized by charter or bylaws

Question 24

Setting annual meeting date

Answer 24

MBCA:
- in accord with bylaws
- court may order if meeting is not held within 6 months of end of fiscal year or 15 mo after last annual meeting
DGCL:
- in accord with bylaws
- if not held within 30 days after designated date, the court may order a meeting
- shareholder’s right to call meetings is not provided so date regulations are less critical

Question 25

Acting on Consent

Answer 25

- Shareholders can act without a meeting by written consent - Makes shareholder action easier in closely held corps - only used by 1/2 of public corps Delaware: - can be used to allow majority coalition of shareholders to aact without being subject to board's tactical decisions to delay calling special meeting MBCA - not as significant because unanimous shareholder consent is required

Question 26

Notice

Answer 26

- proper notice must be complied with for all meetings | - if improper notice, actions taken at meeting can be voided by shareholders who didn't attend

Question 27

Quorum requirements

Answer 27

- shareholders holding a majority of shares must be present in person or by proxy

Question 28

Issuing Dividend

Answer 28

- payment, usually in cash, from a corp to its shareholders calculated on a per share basis - timing and amount determined by board of directors

Question 29

Repurchases

Answer 29

- redemption of shares reduces number of outstanding shares but doesn't change the fact that the shares that remain outstanding own 100% of residual value of corp - Pays money to shareholders and retires the shares

Question 30

Solvency Test

Answer 30

- Prohibits distributions that would result in insolvency - Insolvency: corp unable to pay debts as they become due in ordinary course of business Delaware - does not adhere to this test MBCA: - corp unable to pay debts as they become due in ordinary course of business

Question 31

Balance Sheet Test

Answer 31

- measured by financial statements 2 types: 1) Impairment of capital: permit distribution out of surplus, which means all capital in excess of the aggregate par values of the issue shares plus any amounts the board has elected to add to its capital account Delaware: - directors may declare dividends out of surplus 2) Technical Insolvency Test: prohibits distributions that would result in total assets being insufficient to pay the sum of the corp's liability and any liquidation preferences that would be owing if the corp dissolved at the time of distribution MBCA: - par value eliminated. board must determine what consideration is adequate and shareholder obligated by contract to pay that amount and no more

Question 32

Par value

Answer 32

initially was equivalent to the sale prices of shares (no longer relevant

Question 33

Legal capital

Answer 33

- par value per share times the number of shares outstanding | - distribution that exceeds the surplus results in impairment of capital

Question 34

Wholly owned subsidiary

Answer 34

- legal entity separately incorporated from parent corp, but where the parent owns 100% of stock of subsidiary

Question 35

Piercing the Corporate Veil

Answer 35

- Some instances courts will require shareholders to pay the entire amount of a contract/judgment on tort claim beyond shareholders investment - More likely in close corps - When corp is a sole shareholder "alter ego" - Undercapitalization - Intermingling of funds