1. Corporations and the Sarbanes-Oxley Act
Chapter 16
Corporations and the Sarbanes-Oxley Act

2. Nature of the Corporation
A fictitious legal entity that is created according to statutory requirements
Corporation codes: State statutes that regulate the formation, operation, and dissolution of corporations
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

3. Nature of the Corporation
Characteristics of a corporation:
Free transferability of shares
Perpetual existence
Centralized management
Limited liability of shareholders: A general rule of corporate law which provides that generally shareholders are liable only to the extent of their capital contributions for the debts and obligations of the corporation and are not personally liable for the debts and obligations of the corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

4. Exhibit 16.1 Corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

5. Publicly Held and Closely Held Corporations
Publicly held corporation: Has many shareholders - securities are usually traded on national stock exchanges
Closely held corporation: A corporation owned by one or a few shareholders
Revised Model Business Corporation Act: A 1984 revision of the MBCA
Arranges the provisions of the act more logically
Revises the language to be more consistent
Makes substantial changes in the provisions
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

6. Incorporation Procedures
Procedure for incorporating a corporation varies somewhat from state to state
Domestic corporation: A corporation doing business in the state in which it was formed
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

7. Incorporation Procedures
Articles of incorporation: The basic governing documents of a corporation, which must be filed with the secretary of state of the state of incorporation
Name of corporation
Number of shares authorized
Address of registered office and agent
Name and address of each incorporator
Registered agent: A person or corporation that is empowered to accept service of process on behalf of a corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

8. Incorporation Procedures
Corporate bylaws: A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation
Organizational meeting: A meeting that must be held by the initial directors of a corporation after the articles of incorporation are filed
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

9. Incorporation Procedures
S Corporations: A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes
Pays no federal income tax at the corporate level
Income or loss flows to the shareholders and must be reported on the shareholders’ individual income tax returns
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

10. Financing the Corporation
Equity securities: Representation of ownership rights in a corporation
Equity securities can be:
Common stock
Preferred stock
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

11. Common Stock
An equity security that represents the residual value of a corporation
Common stockholder: A person who owns common stock
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

12. Preferred Stock
Equity security that is given certain preferences and rights over common stock
Preferred stock may have any or all of the following preferences, rights, or attributes:
Dividend preference
Liquidation preference
Cumulative dividend right
Right to participate in profits
Conversion right
Redeemable preferred stock
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

13. Authorized, Issued, and Outstanding Shares
Authorized shares: The number of shares provided for in a corporation’s articles of incorporation
Issued shares: Authorized shares that have been sold by a corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

14. Debt Securities
Securities that establish a debtor–creditor relationship in which the corporation borrows money from the investor to whom a debt security is issued
Classifications:
Debenture
Bond
Note
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

15. Indenture Agreement
Contract between the corporation and a holder of a debt security
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

16. Shareholders
Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

17. Exhibit 16.3 Shareholders
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

18. Shareholders
Shareholders meetings: A meeting of the shareholders of a corporation that must be held by the corporation to elect directors and to vote on other matters
Annual
Special
Proxy
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

19. Shareholders
Quorum: The number of directors necessary to hold a board meeting or transact business of the board
Supramajority voting requirement: A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

20. Shareholders
Straight voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open
Cumulative voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

21. Shareholders
Dividend: A distribution of profits of the corporation to shareholders
Piercing the corporate veil: A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

22. Board of Directors
A panel of persons who are elected by shareholders to make policy decisions concerning the operation of a corporation
Inside director
Outside director
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

23. Exhibit 16.4 Board of Directors
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

24. Board of Directors
Regular meetings of a board of directors are held at the times and places established in the bylaws
A board can call special meetings of the board of directors as provided in the bylaws
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

25. Corporate Officers
Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

26. Exhibit 16.5 Corporate Officers
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

27. Fiduciary Duties of Directors and Officers
The duties of care and loyalty owed by directors and officers to their corporation and its shareholders
Duty of loyalty: A duty that directors and officers have not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders
Duty of care: A duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

28. Sarbanes-Oxley Act
A federal statute enacted by Congress to improve corporate governance
The goals of the Sarbanes-Oxley Act are to improve corporate governance rules, eliminate conflicts of interest, and instill confidence in investors and the public that management will run public companies in the best interests of all constituents
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

29. Mergers and Acquisitions
A situation in which one corporation is absorbed into another corporation and ceases to exist
A merger occurs when one corporation is absorbed into another corporation
Surviving corporation
Merged corporation
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

30. Exhibit 16.6 Merger
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

31. Dissolution of the Corporation
Voluntary dissolution
Administrative dissolution
Judicial dissolution
Winding up, liquidation, and termination
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

32. Multinational Corporations
Multinational corporations operate in more than one country
Operate in other countries through a variety of means, including the use of agents, branch offices, subsidiary corporations, business alliances, strategic partnerships, franchising, and other arrangements
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

33. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.