1. Corporations

2. “Corporations, which should be the carefully restrained creatures of the law and servants of the people, are fast becoming the people’s masters.” Grover Cleveland, United States President

3.  Promoter: Someone who organizes a corporation ◦ Personally liable on any contracts he signs before the corporation is formed  After it is formed, a corporation can adopt the contract ◦ Adopt: Agree to be bound by the terms of a contract  Promoter can get off the hook if the other party agrees to a novation ◦ Novation: A new contract with different parties

4.  Where to incorporate ◦ Domestic corporation: a company in the state where it incorporates ◦ Foreign corporation: A corporation formed in another state  Companies generally incorporate either in: ◦ The state where they most of their business ◦ Delaware – Offers several advantages  Laws that favor management  An efficient court system

5.  The charter – Defines the corporation, including: ◦ Name of corporation ◦ Address and registered agent ◦ Incorporator – Person who signs the charter and delivers it to the Secretary of State ◦ Purpose ◦ Stock

6.  The charter must provide three items of information about the company’s stock ◦ Par value ◦ Number of shares  Authorized and unissued: Stock that has been authorized, but not yet sold  Authorized and issued: Stock that has been authorized and sold  Treasury stock: Stock that a company has sold, but later bought back ◦ Classes and series  Class: Categories into which stock can be divided  Series: Classes that are further divided into subcategories

7.  Preferred stock: The owners have preference on dividends and in liquidation ◦ Cumulative preferred stock ◦ Non-cumulative preferred stock ◦ Participating preferred stock

8.  Directors and officers - A corporation is required to have at least one director, unless: ◦ All shareholders sign an agreement that eliminates the board ◦ The corporation has 50 or fewer shareholders  Written consent: Through which shareholders elect directors

9.  Minute book: The official record of a corporation  Bylaws: A document that specifies the organizational rules of a corporation or other organization ◦ Quorum: The percentage of voters who must be present for a meeting to count

10.  Issuing debt – Corporations need to borrow funds for start-up ◦ Bonds: Long-term secured debt ◦ Debentures: Long-term unsecured debt ◦ Notes: A short-term debt, either secured or unsecured, payable within five years

11.  Voluntary - Shareholders elect to terminate the corporation  Forced - By court order  Pierce the corporate veil: A court holds shareholders personally liable for debt of a corporations under four circumstances: ◦ Failure to observe formalities ◦ Commingling of assets ◦ Inadequate capitalization ◦ Fraud

12.  Terminating a corporation is a three-step process: ◦ Vote ◦ Filing ◦ Winding up

13.  Stakeholders: Anyone who is affected by the activities of a corporation, such as: ◦ Shareholders ◦ Employees ◦ Customers ◦ Creditors ◦ Suppliers ◦ Neighbors  Managers have a fiduciary duty to act in the best interests of the shareholders

14.  If managers comply with the business judgment rule, a court will not: ◦ Hold them personally liable for any harm their decisions cause the company ◦ Rescind their decisions  Accomplishes three goals: ◦ Permits directors to do their job ◦ Keeps judges out of corporate management ◦ Encourages directors to serve

15.  The obligation of a manager to act without conflict of interest ◦ Prohibits managers from making a decision that benefits them at the expense of the corporation  Self-dealing - A manager makes a decision benefiting either himself or another company with which he has a relationship ◦ Valid when:  Disinterested members of the board of directors approve the transaction  Disinterested shareholders approve it  The transaction was entirely fair to the corporation

16.  Corporate opportunity ◦ Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent

17.  Requires officers and directors to: ◦ Act in the best interests of the corporation ◦ Use the same care that an ordinarily prudent person would in the management of her own needs  Rational business purpose  Legality  Informed decisions

18.  Shareholders don’t have the right or the obligation to manage the day-to-day business of the enterprise ◦ Right to information  Under the Model Act, shareholders with proper purpose have the right to inspect and copy corporation’s minute book, accounting records, and shareholder lists

19. ◦ Right to vote  Corporation must have at least one class of stock with voting rights  Shareholder meetings - Norm for publicly traded companies ◦ Proxies: The person whom a shareholder appoints to vote for her at a meeting of the corporation  The document a shareholder signs appointing this substitute voter  Annual report: A document containing financial data  Securities and Exchange Commission (SEC) requires that public companies provide it to their shareholders each year

20. ◦ Shareholder proposals  Under SEC rules, any shareholder who has continuously owned for one year at least 1 percent of the company or $2,000 of stock:  Can require that one proposal be placed in the company’s proxy statement to be voted on at the shareholder meeting

21.  A nominating committee from the board of directors produces a slate of directors, with one name per opening ◦ Leads to a complex and expensive process  Disruptive to the company  Plurality voting: To be elected, a candidate only needs to receive more votes than her opponent, not a majority of the votes cast ◦ A traditional corporate voting method

22.  Majority voting systems - 79 percent of S&P 500 refuse to seat a director if: ◦ Fewer than half of the shares that vote tick off her name on the ballot  Independent directors – Sarbanes-Oxley Act (SOX) stipulates that all members of a board’s audit committee must be independent ◦ At least one of these members must be a financial expert

23.  The NYSE and NASDAQ require that, for companies listed with them: ◦ Independent directors must comprise a majority of the board ◦ They must meet regularly on their own, without inside directors ◦ Only independent directors can serve an audit, compensation, or nominating committees ◦ Audit committees must have at least three directors who are financially literate

24.  Shareholder activists – A new development in corporate democracy ◦ Advise institutional investors on how to vote their shares  Proxy access – Required companies to include in their proxy material the names of board nominees selected by large shareholders

25.  Stock options  Termination, retirement plans, and death benefits  Lavish perks  Directors, not shareholders, set executive compensation  Shareholders bear the risk  Benchmarking games

26.  The CEO gets all the credit  The busier the directors, the higher the executive pay  Most executives are above average  Compensation consultants have conflicts of interest

27.  The solution: ◦ Proxy rules – Amended by the SEC to require more information about executive compensation  Must include a summary table setting out the full amount of compensation for the five highest-earning executives  SOX ◦ Under SOX: A company  Cannot make personal loans to its directors or officers  Must follow through the so-called claw-back provision

28.  Dodd-Frank: ◦ Requires that compensation committees for all corporations listed on a stock exchange must be composed solely of independent directors ◦ Strengthens the claw-back provisions of SOX and extends it to three years ◦ Requires ‘say on pay’ ◦ Requires companies to take a nonbonding shareholder vote

29. ◦ Shareholders have right to nonbinding vote in the event of merger or sale of company assets ◦ Companies must disclose the relationship between financial performance and executive compensation ◦ Must disclose the CEO’s compensation and the median compensation of all other company employees

30.  Emerging growth companies ◦ Have annual gross revenues of less than $1 billion ◦ Stock has been publicly traded for less than five years ◦ Have issued less than $700 million publicly in traded stock ◦ Have issued less than $1 billion in convertible debt in a three-year period

31.  A corporation must seek shareholder approval before undergoing any of the following fundamental changes: ◦ Mergers ◦ Sales of assets ◦ Dissolution ◦ Amendments to the Charter

32.  If a private corporation decides to undertake a fundamental change: ◦ The Model Act and many state laws require the company to buy back the stock of any shareholders who object  Referred to as dissenters’ right

33.  Anyone who owns enough stock to control a corporation has a fiduciary duty to the minority shareholders ◦ Minority shareholders – Those with less than a controlling interest

34.  Derivative lawsuits ◦ Brought by shareholders to remedy a wrong that the board of directors has committed against the corporation  Direct lawsuits ◦ Shareholders are permitted to sue the corporation directly only if their own rights have been harmed

35. “ We are now engaged in a great experiment—what can shareholders do, with and without government aid, to improve corporate accountability and performance? What is the right balance of power between shareholders and managers?”