BUSINESS LAW TodaySTANDARD EDITION TEXT & SUMMARIZED CASES, 12e

Roger LeRoy Miller

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporations and Financing

Chapter 33

Chapter Outline

33-1 Nature and Classification

33-2 Formation and Powers

33-3 Piercing the Corporate Veil

33-4 Corporate Financing

Learning Objectives

What is a close corporation?

What four steps are involved in bringing a corporation into existence?

In what circumstances might a court disregard the corporate entity (“pierce the corporate veil”) and hold the shareholders personally liable?

What is the difference between stocks and bonds?

33-1 Nature and Classification (slide 1 of 2)

A corporation is a legal entity created and recognized by state law.

33-1a Corporate Personnel

A board of directors handles the overall management of the firm.

Corporate officers and employees run the corporation’s daily business operations.

33-1b The Limited Liability of Shareholders

Corporate shareholders’ liability is limited to the amount of their investments.

33-1 Nature and Classification (slide 2 of 2)

33-1c Corporate Earnings and Taxation

Corporations can pay out profits to shareholders (dividends) or retain them (retained earnings).

33-1d Torts and Criminal Acts

A corporation may be held liable for the criminal acts of its agents and employees.

Case Example 33.1 Belmont v. MB Investment Partners, Inc. (2013)

33-1e Classification of Corporations (slide 1 of 4)

Domestic, Foreign, and Alien Corporations

Public and Private Corporations

Public corporation: One formed by the government to meet some political or governmental purpose

Publicly held corporation: Any corporation whose shares are publicly traded in securities markets

Nonprofit Corporations

Corporations that are formed without a profit-making purpose. Examples include hospitals, educational institutions, and charities.

33-1e Classification of Corporations (slide 2 of 4)

Close Corporations

One whose shares are held by relatively few persons, often members of a family

Management of Close Corporations

The management of a close corporation resembles a sole proprietorship or partnership but the firm must meet all specific legal requirements in state statutes.

Transfer of Shares in Close Corporations

The transfer of one shareholder’s shares to someone else can cause serious management problems.

Misappropriation of Close Corporation Funds

33-1e Classification of Corporations (slide 3 of 4)

S Corporations

Important Requirements

Domestic corporation

Not be member of affiliated group of corporations

Shareholders must be individuals, estates, or certain trusts

No more than 100 shareholders

Only one class of stock

No shareholder may be a nonresident alien

S corporations are taxed like partnerships.

33-1e Classification of Corporations (slide 4 of 4)

Professional Corporations

An entity used by physicians, lawyers, dentists, and accountants to incorporate

Benefit Corporations

A for-profit corporation that seeks to have a material positive impact on society and the environment. It differs from traditional corporations in the following ways:

Purpose

Accountability

Transparency

Case 33.1

Drake Manufacturing Co. v. Polyflow, Inc. (2015)

Why would the appellate court permit Polyflow to get away with not paying for delivered and presumably merchantable goods?

33-2 Formation and Powers (slide 1 of 3)

33-2a Promotional Activities

Businesspersons are personally liable for any preincorporation contracts made with investors, accountants, or others on behalf of the future corporation.

Liability continues until the corporation is formed and explicitly assumes the contract by novation.

33-2 Formation and Powers (slide 2 of 3)

33-2b Incorporation Procedures

Select the State of Incorporation

Secure an Appropriate Corporate Name

Prepare the Articles of Incorporation

Generally, the articles must include:

The corporation’s name

Number of shares of stock that the corporation is authorized to issue

Name and street address of the corporation’s initial registered agent and registered office

The name and address of each incorporator

33-2 Formation and Powers (slide 3 of 3)

33-2b Incorporation Procedures

Prepare the Articles of Incorporation

A corporation can be formed for any lawful purpose, and no specific statement of purpose is required.

File the Articles of Incorporation

Once prepared and signed by the incorporators, the articles are sent to the appropriate state official (often the secretary of state).

33-2c First Organizational Meeting to Adopt Bylaws

33-2d Improper Incorporation

De Jure Corporations

De Facto Corporations

State statute exists under which corporation can be validly incorporated

Parties have made good faith attempt to comply with statute

Parties have undertaken to do business as a corporation

Corporation by Estoppel

Case Example 33.2 Lamancusa v. Big Little Farms, Inc. (2013)

33-2e Corporate Powers (slide 1 of 2)

Express Powers

A firm’s express powers are found in its articles of incorporation, in the law of the state of incorporation, in the state and federal constitutions, and the corporation’s bylaws.

Implied Powers

Corporations have the implied power to perform all acts reasonably appropriate and necessary to accomplish their corporate purposes (barring express constitutional, statutory, or other prohibitions).

33-2e Corporate Powers (slide 2 of 2)

Ultra Vires Doctrine

Ultra vires acts: Acts of a corporation that are beyond its express and implied powers to undertake.

Cases that allege ultra vires usually involve nonprofit corporations or municipal (public) corporations.

Shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ultra vires acts.

33-3 Piercing the Corporate Veil (slide 1 of 2)

33-3a Factors That Lead Courts to Pierce the Corporate Veil

A party is tricked or misled into dealing with the corporation rather than the individual.

The corporation is set up never to make a profit or always to be insolvent, or it is too thinly capitalized.

Statutory corporate formalities, such as holding required corporation meetings, are not followed.

Personal and corporate interests are commingled (no longer having separate identities) such that corporation has no separate identity.

33-3 Piercing the Corporate Veil (slide 2 of 2)

33-3b A Potential Problem for Close Corporations

Potential for corporate assets to be used for personal benefit is especially great in a close corporation.

Spotlight Case Example 33.4 Brennan’s, Inc. v. Colbert (2012)

33-4 Corporate Financing (slide 1 of 3)

33-4a Bonds

Bond: A security that evidences a corporate (or government) debt.

33-4b Stocks

Stock: An ownership (equity) interest in a corporation, measured in units of shares.

Common Stock: Shares of ownership in a corporation that give the owner a proportionate interest in the corporation with regard to control, earnings, and net assets.

33-4 Corporate Financing (slide 2 of 3)

Preferred Stock: Stock that has priority over common stock as to payment of dividends and distribution of assets on the corporation’s dissolution.

34-4c Venture Capital

Venture capital: Financing provided by professional, outside investors (venture capitalists) to new business ventures.

33-4d Private Equity Capital

Private equity capital: Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it.

33-4e Crowdfunding

Crowdfunding: A cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause (such as disaster relief) or invest in a venture (business).

33-4 Corporate Financing (slide 3 of 3)

Miller, Business Law Today, Standard Edition: Text & Summarized Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Miller_BLTC12E_PPT_ch33.pptx

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