Bus law today 9th ed ch20

BUSINESS LAW TODAY
Essentials 9th Ed.

Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus

Chapter

20

Corporations

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1


Learning Objectives
 What steps are involved in bringing a

corporation into existence?
 In what circumstances might a court
disregard the corporate entity (“pierce the
veil”) and hold shareholders personally
liable?

 What are the duties of corporate directors and



officers?
What is a voting proxy? What is cumulative
voting?
What are the differences between a merger, a
consolidation, and a share exchange?

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2


The Nature of the Corporation
 A corporation is a legal entity, a
creature of statute, an artificial
“person.”
Most states follow the Model Business
Corporation Act (MBCA) or the RMBCA, that
are model corporation laws.

 The shares (stock) of a corporation are
owned by at least one shareholder
(stockholder).
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3


Corporate Personnel

 Board of Directors: manage the big
picture, set policy, hire officers.
 Officers: manage the day-to-day
operations of the corporation.

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4


Constitutional Rights of
Corporations
 A corporation is an artificial “person”
and has constitutional rights to:
Equal protection;
Access to the courts, can sue and be sued;
Right to due process before denial of life,
liability or property.

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Constitutional Rights of
Corporations
 Corporation’s rights (cont’d):
Freedom from unreasonable search and seizure

and double jeopardy.
Freedom of speech.
• Only officers and directors have protection against
self-incrimination.

However, corporations do not have full
protection of privileges and immunities clause.

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6


Limited Liability of
Shareholders

 The corporation provides limited
liability for stockholders.
 In certain situations, the corporate
“veil” of limited liability can be
pierced, holding the shareholders
personally liable.

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7

Corporate Earnings and
Taxation
 Corporate profits can either be kept as retained




earnings or passed on to the shareholders as
dividends.
Corporate profits are taxed under federal and
state law as a separate “person” from its
shareholders.
Taxation: Regular “C” corporations are taxed
twice: at the corporate level and at the
shareholder level.
Holding Companies: used to defer U.S. income
taxes (hold shares of another).

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8


Torts and Criminal Acts
 A corporation is liable for the torts
committed by its agents or officers
within the course and scope of their
employment under the doctrine of
respondeat superior.

 Corporation can be liable for criminal
acts, but only fined. Responsible
officers may go to prison.
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9


Classification of Corporations
 Domestic corporation does business in

its state of incorporation.
 Foreign corporation from X state doing
business in Z state.
 Alien Corporation: formed in another
country doing business in United States.

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10


Classification of Corporations
 Public and Private.
 Nonprofit.
 Close Corporations.
 Shares held by family members or very few
shareholders. Management is information, similar to a

partnership.
 Transfer of shares is restricted.
 Misappropriation of Funds is a major issue.
 CASE 20.1 Williams v. Stanford. (2008). Two
minority shareholders prevented one 70% shareholder
from transferring of corporate assets after proving
abuse and fraud.
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Classification of Corporations
 “S Corporations”: Avoids the federal
“double taxation” of regular corporations at
the corporate level. Only dividends are taxed
to the shareholders as personal income. IRS
requirements:
 Corporation is domestic, fewer than 75 shareholders,
only one class of stock, no shareholder can be a nonresident alien.

 Professional Corporations.
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Corporate Formation and

Powers

 The process of incorporation
generally involves two steps:
Promotional Activities; and
The Legal Process of Incorporation.

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13


Incorporation Procedures
Promotio
n

File Articles of
Incorporation

Name
Search

State
Charter

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Subscriber

s

1st Organizational Meeting

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Selecting the State
 State Chartering: Select state (some
states such as Delaware cater to
corporations).

Articles of Incorporation: primary enabling
document filed with the Secretary of State that
includes basic information about the
corporation.
Person(s) who execute the articles are the
incorporators (and maybe the promoters).

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15


Securing the Corporate Name
 Choose and reserve a Corporate Name.
 Name must have the proper suffix:
“corporation,” “corp.,” “Incorporated.”
 You should also consider registering the

corporation as a “dot com” at
networksolutions.com or register.com.

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Preparing the Articles of
Incorporation
 Purpose: trend towards “any legal
business.”
 Duration: usually perpetual.
 Capital Structure: Most states requires
some minimal capitalization (Texas
requires $1,000), plus number and
class(es) of shares authorized and
“par value” of shares at incorporation.

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17


Preparing the Articles of
Incorporation
 Internal Organization: usually included in
the bylaws.

 Registered Office and Agent: specific
person that will receive any legal notice
and documents from state and/or 3rd
parties.
 Incorporators (usually the promoter): at
least one with name and address.

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18


Corporate Powers
 The express powers of a corporation
are found in the corporation’s articles
of incorporation, the laws of the state
of incorporation, and in the state and
federal corporations.
 Corporate by-laws may also grant or
limit a corporation’s express powers.

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Corporate Powers
 Corporation has implied powers to: to

perform all acts reasonably necessary
to accomplish its corporate purposes,
e.g.,:
•
•
•

Borrow and lend money.
Extend credit.
Make charitable contributions.

A corporate officer can bind corporation in
contract in matters connected with the
ordinary business affairs of the enterprise.
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20


Corporation by Estoppel
 Corporation By Estoppel: if it acts like
a corporation, cannot avoid liability by
claiming that no corporation exists.
 CASE 20.2 Brown v. W.P. Media, Inc.
(2009). Firm that represented itself as a
corporate entity is estopped from denying
liability for breach of contract even if it was
did not exist at the time of the contract.

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21


Piercing the Corporate Veil

 “Piercing the Corporate Veil” occurs when
a court, in the interest of justice or
fairness,” holds shareholders personally
liable for corporate acts.
 Court concludes that shareholders used
corporation as a “shield” from illegal
activity.

 Factors a court considers:
3rd party tricked into dealing with a
corporation rather than the individual. 
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Issues: Piercing the Corporate
Veil
 Was corporation set up to not make a profit,
remain insolvent, or be under capitalized?
 Were statutory formalities followed?

 Was the corporation an “alter ego” of a
majority shareholder, with personal and
corporate interests commingled such that
the corporation has no separate identity?

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Corporate Financing
Bonds
vs.

Stocks

Debt

Ownership/equity

Fixed ROI

Dividends (variable)

No votes

Vote for Management

Optional

Required

Priority over stock

Paid last

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Bonds
Type

Definition

Debentures

No specific corporate assets are pledged as
collateral. Backed by corporation’s general
credit rating.

Mortgages

Pledge specific real estate. If corporation
defaults, bondholders can foreclose.

Convertible

Conditions trigger bonds to convert to
corporate stock.

Callable

Can be “called in” by principal and repaid
according to bond conditions.

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