Module 38Business structure (Corporation).doc

Module 38 Business Structure- Corporation (C and S)C-CorporationWiley book 2010 Page 38 43 has discussed the characteristics, types and how to form a corporation.Just want to supplement some terminology that the book hasnt explained in much details. De Facto Corporation DoctrineIf the incorporators made a good faith attempt to incorporate and operated as if they had incorporated (sometimes described as operating under the corporate form), the business will be treated as a corporation in all respects, except the state may bring an action (called a quo warranto action) challenging the corporations status. Doctrine of Incorporation by EstoppelThe doctrine of incorporation by estoppel is much more limited than the de facto corporation doctrine. Under the estoppel doctrine, a party who treats a business as if it were a validly formed corporation will be estopped (legally barred) from claiming in a legal preceding that the corporation was not validly formed. This applies to third parties who treat the business as a corporation as well as to the business itself. Ultra Vires ActIf a corporation has a narrow purpose clause and the corporation undertakes business outside the clause (or outside the business permitted by statute) it is said to be acting ultra vires. Traditionally, if a corporation undertook an ultra vires act, the action was void.The action can be challenged in three circumstances:(1) A shareholder can seek an injunction (an order from a court) prohibiting the corporation from performing the ultra vires act;(2) The corporation or shareholders may sue to recover damages from the officers or directors who authorized the ultra vires act; and(3) The state (usually the attorney general) may bring an action to have the corporation dissolved for committing the ultra vires act. Piercing the Corporate VeilThe court will pierce the corporate veil and hold shareholders personally liable for all the corporations debts. A situation that may cause the court to act in this manner includes:(1) Undercapitalized- inadequate amount to meet the reasonable foreseeable financial needs.(2) Shareholder fraud- the shareholders are intentionally using the corporation for illegal activities(3) Direct actions- The shareholders are running the business directly , without electing board of directors or no board meeting throughout the year(4) Commingling assets- The shareholders are treating corporate assets as if they were personal assets, regularly using them for personal purposes such as home mortgage payments or grocery purchases for their family.Other than the above content that you need to know, your main focus will be the rights and obligations of shareholders, directors and management, respectively1. Board of DirectorsThe principal agent of the corporation is the board of directors, which will at least meet once a year. They are in charge of the general management of an operation.The following are some fundamental principles you need to know regarding board of directors Act as a board (as a group)A director has a vote in the board meetings. However, directors may not enter into contracts on behalf of the corporation individually (Not agent of corporation). The directors must be present in the board of directors meeting in order to vote (they cannot vote by proxy) Issuing stocksThe board can authorize to issue the stocks Repurchasing stocksThe board has the implied authority to repurchase the outstanding stocks in the open market or in private arrangement with specific shareholders. Remember the treasury stock? Hiring the officersThe board will hire, fire and set the compensation of the officers. The board has the right to fire an officer, even in breach of contract, if it believes this is in the best interests of corporation and its shareholders. Declaration of dividendsThe board determines if and when dividends will be declared and paid to common and preferred shareholders. Until declaration, the corporation has no liability to the shareholders. Other than the rights as discussed above related to the board of directors, they also have duties. Fiduciary duty (to act loyally in the best interests of the corporation and its shareholders)The directors are not liable for honest errors of judgment, but can be held individually liable for acts of bad faith or negligence (such as Ultra Vires act). The doctrine of respondent superior provides that the employer is responsible for the torts committed by employees in the normal scope of duties. Business Judgment RuleThis is a rule that protects the directors from personal liability for acts performed in good faith (not liable for errors of judgment) on behalf of a corporation. However, they are liable for negligence and fraud.2. OfficersThe following are the main points you need to know about the officers In charge of the day-to-day operation Officers are agent of corporationOfficers of a corporation owe the fiduciary duty to the corporation and shareholders. So they must act with duty of care and with duty of loyalty. They cannot: Compete with the corporation Take advantage of a corporate opportunity for personal gains Engage in insider trading Have conflict of interests3. ShareholdersThe following are the main points you need to know about the shareholdersRights of shareholders Right to vote (can vote by proxy)1) Board of directors2) Liquidating dividends3) Dissolve corporation4) Mergers and acquisitions5) Amend the articles of incorporation Shareholders are not agent Normally shareholders can transfer the shares without approval ( restrictions are permitted for closely-held corporations, but must be printed directly on the stock certificate to be enforceable) Right to declared dividends (unsecured creditor) Right to inspect books and records (inspect rights)-Page 47 Wiley book 2010 Appraisal right- In case of mergers and acquisition, if there are any shareholders that dissents from the combination is entitled to make written demand for appraisal of their shares, which the board must then repurchase at the appraised amount-Page 48 Right to bring a derivative lawsuit Preemptive right-Page 47 Wiley book 2010 Limited liabilitiesShareholders liabilitiesShareholders liabilities are not always limited to the amount of their investment. In the case of watered stock, the shareholders acquiring such shares(as well as a subsequent shareholder who knew the stock was watered when they acquired it) has contingent liability for the differences between the issue price and par value. Concentration of voting powerSome mechanisms can enable groups of shareholders to combine their voting power for purposes such as obtaining or maintaining control or maximizing the impact of cumulative voting. The common types are Proxy Voting trust Shareholder agreements4. Dissolution of corporation-Wiley Book 2010 Page 485. S Corporation-Page 48-496. Some other topics that may occasionally appear in the exam are: Majority ownership- The majo