1. Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 26 Formation and Operation of Domestic and Multinational Corporations

2. 26 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Corporation A fictitious legal entity that is created according to statutory requirements.

3. 26 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Nature of the Corporation Corporations can only be created pursuant to the laws of the state of incorporation Corporations Codes Corporations Codes – State statutes that regulate the formation, operation, and dissolution of corporations The courts interpret state corporation statutes to decide individual corporate and shareholder disputes

4. 26 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Corporation as a Legal “Person” legal entity legal person A corporation is a separate legal entity (or legal person) artificial persons Corporations are treated as artificial persons created by the state that 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

5. 26 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 1. Limited Liability of Shareholders 2. Free Transferability of Shares 3. Perpetual Existence 4. Centralized Management Characteristics of Corporations

6. 26 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Corporation Liability limited to capital contribution No personal liability for company’s debts and obligations Capital investment Debt or obligation owed Corporation Third Party Share- holder

7. 26 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Revised Model Business Corporation Act (RMBCA) Model Business Corporation Act (MBCA) Model Business Corporation Act (MBCA) Model act drafted in 1950 Was intended to provide a uniform law for regulation of corporations Revised Model Business Corporation Act (RMBCA) Revised Model Business Corporation Act (RMBCA) 1984 revision of the MBCA Many states have adopted all or part of the RMBCA

8. 26 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. There is no general federal corporations law governing the formation and operation of private corporations. Many federal laws regulate the operation of private corporations.

9. 26 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Classifications of Corporations (1 of 3) Profit Corporation Profit Corporation A corporation created to conduct a business for profit Can distribute profits to shareholders in the form of dividends Nonprofit Corporation Nonprofit Corporation A corporation that is formed to operate charitable institutions, colleges, universities, and other not-for-profit entities

10. 26 - 10Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Classifications of Corporations (2 of 3) Public Corporation Public Corporation A corporation formed to meet a specific governmental or political purpose Private Corporation Private Corporation A corporation formed to conduct privately owned business Professional Corporation Professional Corporation A corporation formed by lawyers, doctors, or other professionals

11. 26 - 11Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Classifications of Corporations (3 of 3) Publicly Held Corporation Publicly Held Corporation A corporation that has many shareholders It’s securities are often traded on national stock exchanges Closely Held Corporation Closely Held Corporation A corporation owned by one or a few shareholders

12. 26 - 12Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Promoters’ Liability (1 of 2) Promoters often enter into contracts on behalf of the corporation prior to its actual incorporation If the corporation never comes into existence, the promoters have joint personal liability on the contract unless the third party specifically exempts them from such liability

13. 26 - 13Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Promoters’ Liability (2 of 2) If the corporation is formed, it becomes liable on a promoter’s contract only if it agrees to to become bound to the contract novation The promoter remains liable on the contract unless the parties enter into a novation

14. 26 - 14Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Corporations are creatures of statute The organizers of the corporation must comply with the state’s incorporation statute to form a corporation A corporation can be incorporated in only one state even though it can do business in all other states in which it qualifies to do business

15. 26 - 15Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Procedures (1 of 5) Incorporator Incorporator – The person or persons, partnerships, or corporations that are responsible for incorporation of a corporation Articles of Incorporation Articles of Incorporation – The basic governing documents of the corporation Must be filed with the secretary of state of the state of incorporation Can be amended to contain any provision that could have been lawfully included in the original document

16. 26 - 16Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Procedures (2 of 5) Selecting a Corporate Name Selecting a Corporate Name – Organizers must ensure that the name is not already in use and available General-Purpose Clause General-Purpose Clause – A clause often included in the articles of incorporation that authorizes the corporation to engage in any activity permitted corporations by law

17. 26 - 17Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Procedures (3 of 5) Registered Agent Registered Agent – A person or corporation that is empowered to accept service of process on behalf of the corporation Corporate Bylaws 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

18. 26 - 18Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Procedures (4 of 5) Organizational Meeting Organizational Meeting – A meeting that must be held by the initial directors of the corporation after the articles of incorporation are filed Corporate Seal Corporate Seal – A design containing the name of the corporation and the date of incorporation It is imprinted by the corporate secretary using a metal stamp on certain legal documents

19. 26 - 19Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Incorporation Procedures (5 of 5) Corporate Status Corporate Status – The RMBCA provides that corporate existence begins when the articles of incorporation are filed: The filing of the articles of incorporation is conclusive proof that a corporation exists After that, only the state can challenge the status of the corporation Third parties cannot thereafter challenge the existence of the corporation

20. 26 - 20Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Corporations Type of Corporation Description DomesticA corporation is a domestic corporation in the state in which it is incorporated ForeignA corporation is a foreign corporation in states other than the one in which it is incorporated AlienA corporation is an alien corporation in the United States if it is incorporated in another country.

21. 26 - 21Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. S Corporations (1 of 2) Corporations are separate legal entities They generally must pay corporate income taxes to federal and state governments If a corporation distributes its profits to shareholders in the form of dividends, shareholders must pay personal income tax on the dividends double taxation This double taxation of corporations is a disadvantage of doing business

22. 26 - 22Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. S Corporations (2 of 2) Some corporations and their shareholders can avoid double taxation by electing to be an S Corporation If a corporation elects to be taxed as an S Corporation, it pays no federal income tax at the corporate level The corporation’s income or loss flows to the shareholders’ individual income tax returns Election is made by filing IRS Form 2553

23. 26 - 23Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Financing the Corporation A corporation needs to finance the operation of its business: Equity securitiesstocks Equity securities (or stocks) – represent ownership rights in the corporation Debt securities Debt securities – establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom the debt security is issued

24. 26 - 24Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Common Stock A type of equity security that represents the residual value of the corporation: Common stock has no preferences Common stock does not have a fixed maturity date Corporations may issue different classes of common stock Common shareholders have limited liability

25. 26 - 25Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Preferred Stock A type of equity security that is given certain preferences and rights over common stock: Preferred stock can be issued in classes or series One class of preferred stock can be given preferences over another class of preferred stock Preferred shareholders have limited liability

26. 26 - 26Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Preferred Stock: Preferences and Rights 3. Cumulative Dividend Right 4. Right to Participate in Profits 5. Conversion Right 1. Dividend Preference 2. Liquidation Preference

27. 26 - 27Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Shares Type of ShareDescription AuthorizedShares authorized in the corporation’s articles of incorporation. IssuedShares sold by the corporation. TreasuryShares repurchased by the corporation. They do not have the right to vote. OutstandingShares of stock that are in shareholder hands. These shares have the right to vote.

28. 26 - 28Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Debt Securities Debenture Debenture – A long-term unsecured debt instrument that is based on the corporation’s general credit standing Bond Bond – A long-term debt security that is secured by some form of collateral Note Note – A debt security with a maturity of five years or less

29. 26 - 29Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Express Powers of a Corporation (1 of 2) A corporation has the same basic rights to perform acts and enter into contracts as a physical person express powers A corporation’s express powers are found in: (1)(2)(3) (4)(5) (6)(7) (1) the U.S. Constitution, (2) state constitutions, (3) federal statutes, (4) state statutes, (5) articles of incorporation, (6) bylaws, and (7) resolutions of the board of directors

30. 26 - 30Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Express Powers of a Corporation (2 of 2) Generally, a corporation has the power to: Purchase, own, lease, sell, mortgage, or otherwise deal in real and personal property Make contracts Lend and borrow money Incur liabilities Issue notes, bonds, and other obligations Invest and reinvest funds Sue and be sued in its corporate name

31. 26 - 31Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Implied Powers of a Corporation Powers beyond express powers that allow a corporation to accomplish its corporate purpose: e.g., a corporation has the implied power to open a bank account e.g., a corporation has the implied power to to reimburse its employees for expenses

32. 26 - 32Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ultra Vires Act An act by a corporation that is beyond its express or implied powers Shareholders can sue for an injunction to prevent the corporation from engaging in the act The corporation can sue the officers or directors who caused the act for damages The attorney general of the state of incorporation can sue to enjoin the act

33. 26 - 33Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Dissolution and Termination of Corporations The methods for dissolving and terminating corporations include: Voluntary Dissolution Voluntary Dissolution Administrative Dissolution Administrative Dissolution Judicial Dissolution Judicial Dissolution The methods for dissolving and terminating corporations include: Voluntary Dissolution Voluntary Dissolution Administrative Dissolution Administrative Dissolution Judicial Dissolution Judicial Dissolution

34. 26 - 34Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Winding-up and Liquidation The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to: Creditors Shareholders Other claimants The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to: Creditors Shareholders Other claimants

35. 26 - 35Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 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

36. 26 - 36Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Conducting International Business Using a Branch Office (1 of 2) Branch Office Branch Office – used where a corporation wants to enter a foreign market in a substantial way but wants to retain exclusive control over the operation It is not a separate corporation or legal entity It is an extension of the corporate owner It is wholly owned by the home corporation

37. 26 - 37Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Conducting International Business Using a Branch Office (2 of 2) Corporation A (in Country A) Branch Office (in Country B) The branch office is not a separate legal entity. No limited liability shield – Corporation A in Country A is liable for the tort and contract liabilities of its branch office in Country B.

38. 26 - 38Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Conducting International Business Using a Subsidiary Corporation (1 of 2) Subsidiary Corporation parent corporation Subsidiary Corporation – A separate corporation established by the parent corporation to conduct business in a foreign country Must be formed pursuant to the laws of the country in which it is to be located The parent corporation and the subsidiary organization are separate legal entities that are individually capitalized

39. 26 - 39Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Conducting International Business Using a Subsidiary Corporation (2 of 2) Corporation A (in Country A) Corporation B is a separate legal entity. Limited liability shield – Corporation A in Country A is not liable for the tort and contract liabilities of its subsidiary corporation in Country B except up to its capital contribution in Corporation B. Corporation B (in Country B)