2. P A R T P A R T Corporations History & Nature of Corporations Organizational and Financial Structure of Corporations Management of Corporations 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. P A R T P A R T Corporations Shareholders’ Rights & Liabilities Securities Regulation Legal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Organization and Financial Structure of Corporations PA E TR HC 42 “Our business is company creation.” Ann Winblad, venture capitalist, quoted in Fortune (Sellen and Daniels, Oct. 1999)

5. Learning Objectives  Promoters and preincorporation transactions  Incorporation and defective attempts  Financing for-profit and nonprofit corporations  The nature and operation of shares 42 - 5

6.  As a fiduciary, a promoter incorporates the business, organizes the initial management team, and raises the initial capital  Promoter is liable for contracts made during preincorporation period unless corporation adopts preincorporation contracts made by promoter ( adoption ) and third party agrees to replace promoter with corporation ( novation )  See Crye-Leike Realtors v. WDM, Inc. Promoter Activities 42 - 6

7. 1. Prepare articles of incorporation 2. Sign and authenticate articles by one or more incorporators 3. File articles with secretary of state and pay fees 4. Receive articles of incorporation stamped “Filed” by secretary of state, with fee receipt 5. Hold organizational meeting to adopt bylaws, elect officers, and transact other business Steps in Incorporation 42 - 7

8.  Articles of incorporation (or charter) is the basic document stating rights and duties of corporation, its management, shareholders  Other provisions (consistent with law) may be added to articles of incorporation or included within corporate bylaws  If the attempt to incorporate fails, corporate shield does not exist to protect shareholders, officers, and directors from personal liability Incorporation Details 42 - 8

9.  De jure corporation : exists when promoters and incorporators substantially comply with each mandatory (shall, must) requirement to incorporate the business  Filing articles of incorporation is conclusive proof that corporation exists (MBCA)  De facto corporation : exists when promoters fail to comply with all mandatory rules, but comply with most mandatory requirements De Jure Corporation 42 - 9

10.  For-profit corporations are financed by sale of securities (e.g., shares, debentures, bonds, long-term notes payable), bank loans, and short-term financing (e.g., inventory financing) Financing Corporations 42 - 10

11.  For-profit corporations are financed by sale of securities, bank loans, and short-term financing  Equity securities, better known as stock or shares, create an ownership relationship, thus stockholders or shareholders own a corporation  Debt securities – bonds, debentures, notes payable – create creditor-debtor relationship between corporation and security holder Financing & Securities 42 - 11

12.  Corporations may issue classes of shares with specific rights: common or preferred  Common shareholder claims are subordinate to creditor or preferred shareholder claims, but common shareholders have exclusive right to elect corporate directors  Preferred shareholders receive liquidation and dividend preferences over common shareholders Shareholder Classes 42 - 12

13.  Authorized shares : shares a corporation may issue according to articles of incorporation  Issued shares : shares sold to shareholders  Outstanding shares : held by shareholders  A board of directors may issue options for purchasing the corporation’s shares  Warrants : options evidenced by certificates  Rights: short-term certificated options Details About Shares 42 - 13

14.  Under the terms of a share subscription, a prospective shareholder promises to buy a specific number of shares at a stated price  The board must issue shares for an adequate dollar amount of consideration ( par value )  Shares may be issued in return for any tangible or intangible property or benefit to the corporation (MBCA) Purchase of Shares 42 - 14

15.  Share certificates are r egistered with the corporation in name of a specific person  Indorsement of a share certificate on back by registered owner and delivery of certificate to another transfers ownership of shares Transfer of Shares 42 - 15  Generally, shares in a publicly held corporation are freely transferable

16. Test Your Knowledge  True=A, False = B  A promoter is always liable for contracts made during the preincorporation period.  A U.S. business may incorporate in any state.  A de facto corporation exists when promoters and incorporators in fact comply with each mandatory requirement to incorporate.  Warrants are stock options evidenced by certificates. 42 - 16

17. Test Your Knowledge  True=A, False = B  Preferred shareholders have the exclusive right to elect corporate directors and the exclusive right to dividend payments.  For-profit corporations are financed only by issuing securities in the form of shares.  The MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation. 42 - 17

18. Test Your Knowledge  Multiple Choice  Which of the following is not a debt security:  (a) Stock  (b) Bond  (c) Debenture  (d) Note  (e) none of the above 42 - 18

19. Test Your Knowledge  Multiple Choice  The Steel Inc. Board of Directors plan to issue dividends this year. Which of the following is false?  (a) Preferred shareholders receive their dividends before common shareholders  (b) Creditors receive their dividends before common shareholders  (c) Common shareholders receive their dividends before either creditors or preferred shareholders 42 - 19

20. Thought Question  Do you believe that a company’s stock price reflects a company’s value or success in (a) the marketplace, and (b) society? 42 - 20