chapter 36 corporate formation and financing. introduction corporation: a fictitious legal entity...
TRANSCRIPT
Chapter 36Corporate Formation and Financing
Introduction
Corporation: A fictitious legal entity that is created according to statutory requirements
Shareholders: Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation
Corporations codes: State statutes that regulate the formation, operation, and dissolution of corporations Courts interpret state corporation statutes to decide
individual corporate and shareholder disputes
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The Corporation as a Legal “Person”
A corporation is a separate legal entity (or legal person)
Corporations can Sue or be sued in their own names Enter into and enforce contracts Hold title to and transfer property Be found civilly and criminally liable for
violations of law
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Characteristics of Corporations
Free Transferability of Shares National securities markets have been developed
for the organized sale of securities Perpetual existence (unless a specific duration is
stated in a corporation’s articles of incorporation) Its existence can be voluntarily terminated by the
shareholders
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Characteristics of Corporations
Centralized Management Board of directors makes policy decisions
concerning the operation of a corporation Limited Liability of Shareholders
Corporations are liable for their own debts and obligations
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Corporation
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Key Term Description
Board of directors A panel of persons who are elected by the shareholders that make policy decisions concerning the operation of a
corporation
Corporate officers Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations
of the corporation
Limited liability of shareholders
A general rule of corporate law that provides that generally shareholders are liable only to the extent of
their capital contributions for the debts and obligations of their corporation and are not personally liable for the
debts and obligations of the corporation
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Exhibit 36.1: Corporation
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Case 36.1– Shareholder’s Limited Liability
Case Menendez v. O’Niell 986 So.2d 255 (2008) Court of Appeal of Louisiana
Issue Is Fraioli personally liable for the debts of
Triumvirate, a corporation of which is the sole shareholder?
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Public and Private Coorporations
Public Corporation A corporation formed to meet a specific
governmental or political purpose Local government corporations are often called
municipal corporations Private Corporation
A corporation formed to conduct privately owned business
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Profit and Not-for-Profit Corporations
Profit Corporation Created to conduct a business for profit Can distribute profits to shareholders in the form
of dividends Not-for-profit Corporation
A corporation formed to operate charitable institutions, colleges, universities, and other not-for-profit entities
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Publicly Held and Closely Held Corporations
Publicly Held Corporation Many shareholders Shares traded on organized security markets Shareholders rarely involved in management
Closely Held Corporation Few shareholders Shareholders may have buy-and-sell agreements Shareholders often involved in management
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Professional Corporation
A corporation formed by lawyers, doctors, or other professionals Shareholders are called members
Members not usually liable for torts committed by agents or employees
May be liable for malpractice of members
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Types of Corporations
Types of Corporations
Description
Domestic A corporation is a domestic corporation in the state in which it is incorporated
Foreign A corporation is a foreign corporation in states other than the one in which it is
incorporated
Alien A corporation is an alien corporation in the United States if it is incorporated in
another country
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Selecting a State for Incorporating
A corporation can be incorporated in only one state Can do business in all other states in which it
qualifies to do business Selecting a corporate name
Must contain corporation, company, incorporated, or limited
Cannot be trademarked by another company Availability as a domain name on the Internet
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Incorporators
The person or persons, partnerships, or corporations that are responsible for incorporation of a corporation. Primary duty – sign the articles of incorporation
Promoter: A person or persons who organize and start a corporation, or Negotiate and enter into contracts in advance of its
formation Find the initial investors to finance the corporation
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Promoters’ Liability for Preincorporation Contracts
Corporation never comes into existence – promoters have joint personal liability on the contract Unless exempted by the third party
Corporation is formed – it is liable on a promoter’s contract only if it agrees to become bound to the contract
Corporation agrees to be bound to promoter’s contract – promoter remains liable Unless the parties enter into a novation
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Articles of Incorporation
Basic governing document of the corporation Must be filed with secretary of state of state of
incorporation Contains name of corporation, number of shares
authorized, name and address for registered agent and incorporators
May contain term, purpose, limitations, regulations of affairs
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Amending the Articles
Amendments made to contain any provision that could have been lawfully included in the original document
Corporate status RMBCA provides that corporate existence begins
when the articles of incorporation are filed Conclusive proof – secretary of state’s filing of the
articles of incorporation
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Purpose of a Corporation
Key Terms Description
General-purpose clause
A clause that can be included in the articles of incorporation that permits the corporation to engage
in any activity permitted by law
Limited-purpose clause
A clause that can be included in the articles of incorporation that stipulates the activities that the
corporation can engage in
Registered agent A person or corporation that is empowered to accept service of process on behalf of a corporation
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Corporate Bylaws
A detailed set of rules adopted by the board of directors after the corporation is incorporated Contains provisions for managing the business and
the affairs of the corporation Governs internal management structure May be amended by the board of directors
Corporate seal – A design that contains the name of the corporation and the date of incorporation
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Organizational Meeting of the Board of Directors
Organizational meeting: A meeting held by the initial directors of the corporation after the articles of incorporation are filed
Directors adopt bylaws, elect officers, and transact business
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Corporate Powers
Key Terms Description
S Corporation A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes
C Corporation A corporation that does not qualify for or has not elected to be taxed as an S corporation
Express powers Powers given to a corporation by (1) the U.S. Constitution, (2) state constitutions, (3) federal statutes, (4) state statues, (5)
articles of incorporation, (6) bylaws, and (7) resolutions of the board of directors
Implied powers Powers beyond express powers that allow a corporation to accomplish its corporate purpose
Ultra vires act An act by a corporation that is beyond its express or implied powers
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Delaware Attracts Corporate Formations
More than 50 percent of the publicly traded corporations in America are incorporated in Delaware 60 percent of the Fortune 500 companies
Delaware General Corporation Law – most advanced corporation law in the country
Court of chancery – hears and decides business cases Judges are experts at deciding business disputes
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Financing the Corporation
Equity securities (stocks): Representation of ownership rights to a corporation
Common Stock: A type of equity security that represents the residual value of a corporation Has no preferences Does not have a fixed maturity date Par value shares – common stock on which the
corporation has set the lowest price No par value shares – no assigned par value
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Preferred Stock
A type of equity security that is given certain preferences and rights over common stock
Preferred stockholder: A person who owns preferred stock
Dividend preference: The right to receive a fixed dividend at stipulated periods during the year
Liquidation preference: The right to be paid a stated dollar amount if a corporation is dissolved and liquidated
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Preferred Stock
Cumulative dividend right – Corporations must pay a preferred dividend if they have the earnings to do so
Right to participate in profits – Allows a preferred stockholder to participate in the profits of the corporation along with the common stockholders
Conversion right – Convertible preferred stock permits the preferred stockholders to convert their shares into common stock
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Redeemable Preferred Stock
Stock that permits a corporation to buy back the preferred stock at some future date Terms of the redemption are established when the
shares are issued Nonredeemable stock is more common than
redeemable stock
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Types of Shares
Type of Share Description
Authorized Shares authorized in the corporation’s articles of incorporation
Issued Shares sold by the corporation
Treasury Shares repurchased by the corporation; these shares do not have the right to vote
Outstanding Issued shares minus treasury shares; these shares have the right to vote
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Types of Debt Securities
Debt Instrument Description
Debenture A long-term, unsecured debt instrument that is based on a corporation’s general credit rating
Bond A long-term debt security that is secured by some form of property
Note A short-term debt instrument with a maturity of five years or less; notes can be either unsecured or secured
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Consideration to be paid for shares – RMBCA allows shares to be issued in exchange for any benefit to the corporation
Indenture agreement: Contract between the corporation and the holder that contains the terms of debt security
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Voluntary Dissolution
Dissolution of a corporation that has begun business or issued shares upon recommendation of the board of directors and a majority vote of the shares entitled to vote
Articles of dissolution must be filed with the secretary of state of the state of incorporation
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Administrative Dissolution
Secretary of state will administratively dissolve corporation if it: Failed to file annual report Failed to maintain registered agent for 60 days Failed to file change of registered agent Did not pay franchise fee Period of duration stated in articles has expired
Secretary issues a certificate of dissolution
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Judicial Dissolution
Dissolution of a corporation through a court proceeding instituted by the state
Instituted by attorney general of state of incorporation Procured articles through fraud Exceeded or abused authority
Decree of dissolution issued
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Winding-up and Liquidation
The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to Creditors Shareholders Other claimants
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Termination
The ending of a corporation that occurs only after the: Winding-up of the corporation’s affairs Liquidation of its assets Distribution of the proceeds to the claimants
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