Chapter 36- Corporate Formation and financing

Corporation

A fictitious legal entity that is created according to the statutory requirements

Shareholders

Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation

Corporation Codes

State statutes that regulate the formation, operation, and dissolution of corporations

• Courts interpret state corporation statutes to decide individual corporate and shareholder disputes

The Corporation as a Legal “Person”

• A corporation is a separate legal entity

• A corporation can

  • sue or be used 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

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

• Centralized Management

  • The board of directors makes policy decisions concerning the operation of a corporation

• Limited Liability Shareholders

  • Corporations are liable for their own debts and obligations

Board of directors

A panel of people who are elected by the shareholders to 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

Private Corporation

A corporation formed to conduct a privately owned business

Profit Corporation

• Created to conduct a business for profit

• can distribute profits to shareholders in the form of dividends

Publicly Held Corporation

• Many shareholders

• Shares traded on organized security markets

• Shareholders are rarely involved in management

Closely Held Corporation

• Few shareholders

• Shareholders may have buy-and-sell agreements

• Shareholders are often involved in management

Typically not publicly traded to trade

Professional Corporation

A corporation formed by lawyers, doctors, or other professionals

Not-Profit Corporations

Formed to operate charitable institutions, colleges, universities, and other not-for-profit entities

• Have no shareholders

Government- Owed Corporation

Corporation formed to meet a specific governmental or political purpose

Types of Corporations

1. Domestic

2. Foreign

3. Alien

Domestic corporation

A corporation is a domestic corporation in the state in which it is incorporated

Foreign Corporations

A corporation is a foreign corporation in state other than the one in which it is incorporated

Alien Corporation

A corporation that is incoporated in another country

Selecting a State for incorporation

• 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

Incorporators

The parties who sign the articles of incorporation

Promoter

A person or people who organize and start a corporation or

• Negotiate and enter into the contracts in advance of their formation

• Find the initial investors to finance the corporation,

Promoters’ Contracts

A collective term for items entered into by promoters on behalf of the proposed corporation prior to its actual incorporation

Promoters’ Liability for Pre-incorporation 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 agreed to become bound to the contract

• Corporation agrees to be bound to promoters contract

  • Promoter remains liable

  • Unless the parties enter into a novation

Articles of Incorporation

• Basic governing document of the corporation

  • Must be filed with the Secretary of State of the state of incorporation

  • Contains the name of the corporation, the number of shares authorized, the name and address of the registered agent and incorporators

  • May contain term, purpose, limitations, regulations of affairs

Amending the Articles

• Amendments made to contain any provision that could have been lawfully included in the original document

• Corporate Status

  • RMBCA provided that corporate existence beings when the articles of incorporation are filed

  • Conclusive proof- Secretary of state’s filing of the articles of incorporation

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 the 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.

Restricts the use of information, materials, or rights to specifically defined activities, preventing misuse or unauthorized exploitation

Registered Agent

• Person or corporation that is empowered to accept service of process on behalf of a corporation

• Close corporation: Small corporation that has met specified requirements

  • Has selected to be a close corporation under state law

  • The corporation dispenses with many corporate formalities

• a privately held company with a limited number of shareholders, often managed directly by owners without a formal board of directors

Corporate By Laws

• A detailed set of rules adopted by the board of directors after the corporation is incorporated

  • contains provision for managing structure

  • governs internal management structure

  • May be amended by the board of directors

• Corperate seal- A design that contains the name of the corporation and the date of incorporation

Corporate powers

• S corporation

• C Corporation

• Express powers

• Implied powers

• Ultra Vires Act

S corporations

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 corperation 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. Us constituion

2. State constitutions

3. Federal statues

4. state statues

5. articles of icnporation

6. bylaws

7. resolutions of the board of directors

Implied powers

Powers beyond express powers that allow a corporation to accomplish its corporate purpose

Necesaary powers to execute job

Ultra Vires Act

An act by a corporation that is beyond its express or implied powers

Equity Securities (stocks)

Representation of ownership right to a corporation

Common Stock

A type of equity security that represents the residual value of a corporation

• has no prefernces

• Does not have a fixed maturity date

• Par value shares- common stock on whoch the corporation has set the lowest price

• No par value shares- no assigned per value

Preferred Stock

• A type of equity security that is given certain preferences and rights over common stock

• Preferred stockholder- A person who owns a 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

• Cumulative dividend right- Corporations must pay the 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

• cumulative preferred stock: Stock for which any missed dividend payments must be paid in the future to the preferred shareholders

  • Before the common shareholders can receive any dividends

• Participating Preferred Stock: Allows the preferred stockholder to participate in the profits of the corporation along with the common stockholders

Reedemeable preffered stock: Permits a corporation to buy back the preferred stock at some future date

Redeemable Preferred stock

Stock that permits a corporation to buy the preferred stock at some future date

• Terms of the redemption are established when the shares are issued

• Nonredeemable stock is more common that redeemable stock

Types of Shares

1. Authorized- Shares authorized in the corporation’s articles of incorporation

2. Issued- Shares sold by the corporation

3. Treasury- Shares repurchases by the corporation; these shares do not have a right to vote

4. Outstanding- Issues shared minus treasury shares; these shares have the right to vote

Debt Securities

Securities that establish a debtor-creditor relationship

• The corporation borrows money from the investor to whom a debt security is issued

• The corporation promises to pay interest on the amount borrowed

  • Promises to repay the principal at some stated maturity date in the future

Debenture

A long-term, unsecured debt instrument that is based on a corporations 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

Indenture Agreement

• Contract between the corporation and the holder that contains the terms of the debt security

• Contains:

  • Maturity date of the debt security

  • Required interest payment

  • Collateral

  • Rights to conversion into common or preferred stock

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

Administrative Dissolution

• Secretary of state will administratively dissolve a corporation if it:​

  • Failed to file annual report​

  • Failed to maintain a registered agent for 60 days​

  • Failed to file a change of registered agent​

  • Did not pay franchise fee​

  • The period of duration stated in the articles has expired​

• Secretary issues a certificate of dissolution

Judicial Dissolution​

• Dissolution of a corporation through a court proceeding instituted bythe state​

• Instituted by attorney general of state of incorporation​

• Procured articles through fraud​

• Exceeded or abused authority​

• Decree of dissolution issued

Winding-up and Liquidation​

• The process by which a dissolved corporation’sassets are collected, liquidated, and distributed to​

• Creditors​

• Preferred shareholders​

• Common shareholders

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