BUSINESS LAW TODAY Essentials 9th Ed Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A Jentz - University of Texas at Austin, Emeritus Chapter 20 Corporations © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objectives  What steps are involved in bringing a corporation into existence?  In what circumstances might a court disregard the corporate entity (“pierce the veil”) and hold shareholders personally liable?  What are the duties of corporate directors and   officers? What is a voting proxy? What is cumulative voting? What are the differences between a merger, a consolidation, and a share exchange? © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use The Nature of the Corporation  A corporation is a legal entity, a creature of statute, an artificial “person.” Most states follow the Model Business Corporation Act (MBCA) or the RMBCA, that are model corporation laws  The shares (stock) of a corporation are owned by at least one shareholder (stockholder) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Corporate Personnel  Board of Directors: manage the big picture, set policy, hire officers  Officers: manage the day-to-day operations of the corporation © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Constitutional Rights of Corporations  A corporation is an artificial “person” and has constitutional rights to: Equal protection; Access to the courts, can sue and be sued; Right to due process before denial of life, liability or property © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Constitutional Rights of Corporations  Corporation’s rights (cont’d): Freedom from unreasonable search and seizure and double jeopardy Freedom of speech • Only officers and directors have protection against self-incrimination However, corporations not have full protection of privileges and immunities clause © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Limited Liability of Shareholders  The corporation provides limited liability for stockholders  In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Corporate Earnings and Taxation  Corporate profits can either be kept as retained    earnings or passed on to the shareholders as dividends Corporate profits are taxed under federal and state law as a separate “person” from its shareholders Taxation: Regular “C” corporations are taxed twice: at the corporate level and at the shareholder level Holding Companies: used to defer U.S income taxes (hold shares of another) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Torts and Criminal Acts  A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior  Corporation can be liable for criminal acts, but only fined Responsible officers may go to prison © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Classification of Corporations  Domestic corporation does business in its state of incorporation  Foreign corporation from X state doing business in Z state  Alien Corporation: formed in another country doing business in United States © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 10 Consolidation  Occurs when two or more  corporations (A & B) combine such that both cease to exist and a new corporation emerges which has all the rights and obligations previously held by A and B C’s articles of consolidation take the place of the original articles of A and B © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use A A B B C C 54 Share Exchange  Some or all of the shares of one corporation are exchanged for some or all of the shares of another corporation, but both corporations continue to exist  Share exchanges are often used to create holding companies © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 55 Merger, Consolidation and Share Exchange Procedures    Board of directors of each corporation involved must approve the merger plan Next shareholder approval of each corporation Then, articles filed with Secretary of State and who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 56 Merger, Consolidation and Share Exchange Procedures  When allowed by state statute, a shareholder has the right to dissent and be bought out” of his/her shares (shareholder’s appraisal right)  In cases of: merger, consolidation, purchase of assets not in the ordinary course of business, adverse amendments to the articles of incorporation  Short-Form Mergers © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 57 Appraisal Rights  Appraisal Rights Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 58 Purchase of Assets and Potential Liability  Sale of Corporate Assets Occurs when a corporation acquires all or substantially all of the assets of another corporation by direct purchase The purchasing, or acquiring corporation simply extends its ownership and control over more assets Shareholder approval is not required because there is no change in the legal entity © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 59   Purchase of Assets and Potential Liability General Rule: corporation that purchases the assets of another corporation is not automatically responsible for the liabilities of the selling corporation Exceptions to the rule are:  When purchasing corporation assumes the seller’s liabilities  When transaction is actually a merger or consolidation  When purchasing corporation is a continuation of the selling corporation (same operations and personnel)  When sale is entered into fraudulently for the purpose of escaping liability  In any of these situations, the acquiring corporation will be held to have assumed both the assets and the liabilities of the selling corporation © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 60 Purchase of Stock and Tender Offers  Alternative to merger or consolidation is  the purchase of a controlling interest (e.g., 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target The aggressor deals entirely with the target’s shareholders Proxy Fight, Leveraged Buyout © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 61 Purchase of Stock and Tender Offers  Tender Offers A publicly advertised offer addressed to all shareholders of the target is called a tender offer Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares • Can be in exchange for aggressor's stock • Sec strictly regulates tender offers © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 62 Responses to Tender Offers: Defenses © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 63 Termination  Termination of a corporation, like a partnership, consists of two phases:  Dissolution (voluntary or involuntary); and  Liquidation  Dissolution can brought about by:  Act of legislature  Certificate expiration  Voluntary approval by shareholders and board  Unanimous action by all shareholders  Court order © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 64 Voluntary Dissolution  Shareholders can initiate dissolution by a unanimous vote to dissolve  Or, the Board can initiate by submitting a proposal to the shareholders for a vote at the annual shareholder meeting or specially-called meeting © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 65 Involuntary Dissolution  Secretary of State or Attorney General can dissolve if Corporation:  Fails to pay taxes  Fails to file annual report  Fails to designate registered agent for service  Secured its charter through fraud  Abused its corporate power  Violated criminal laws  Failed to commence business operations  Abandoned operations before start-up © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 66 Involuntary Dissolution  Court can dissolve a corporation if: Board is deadlocked and irreparable damage to corporation will ensue Mismanagement Minority shareholder is “frozen out” or oppressed © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 67 Termination and Winding Up  Board liquidates and acts as trustees of assets Court will appoint a receiver if: Board refuses; or Creditors want a receiver  Winding Up Directors act as trustees of corporate assets, and personally liable Courts may also appoint a receiver to wind up the corporate affairs © 2011 Cengage Learning All Rights Reserved 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