Corporation Intro
i.
II.
iv.
shareholders at $3.60 a
share
2. Repurchased Stock
a. Corporation comes to shareholder and buys back the
stock
3. Redemption (rare)
a. Must be set in the AoI
i. AoI says there is a class of stock (redeemable
Stocks) that the corporation can force the
shareholder to sell back to it at a set price
IV.
Propriety of Distribution
Law imposes restrictions on when a corporation can make a
distribution
A. Two Schools of Thought: Historical/Fund Approach and Modern
Approach
1. Historical/Fund Approach-must know about 3 types of
funds in the life of the Corp
a. Earned Surplus: The corporation earned this money
by doing well out in the market.
i. Corporations earning more than it spends
ii.
Proper fund for distributions
b. Stated Capital & Capital Surplus
i. These funds are created by issuing stocks
ii.
Every time the corporation issues stocks every
penny from that issuance must be allocated
between these Stated Capital & Capital Surplus
Stated Capital may never be used for
distributions
o Fund to protect creditors
iii.
How to determine what is stated capital and
what is capital surplus
Stated Capital is the par value of a par
issuance
Capital Surplus is the excess over par
value
o Hypo: Corporation issues 401k
shares of $2 par and issues it for
50K
Stated Capital here is $20k
Capital Surplus is $30K
When no par is stated in the AoI the
BoD decides how much goes to Stated
Capital and what goes to Capital
Surplus
I.
Background on Directors
A. Directors are either named in the articles or elected by the
incorporators
B. After that the directors are elected by the shareholders at the
annual shareholder meeting
1. Annual meeting is a requirement
2. If the annual meeting is late the Directors are called holdover directors until the meeting is held and Directors are
elected
C. Only need 1 or more directors
D. How many directors can there be?
1. Some states the AoI must set
2. Some states say it needs to be in the bylaws
3. In Model Act can be either
E. Directors must be human
1. Whereas an incorporation could be any entity
F. Individual directors are not agents of the corp
1. Means that individual directors have no authority to bind
the corporation to a K
a. Though Officers are agents
2. Directors must act as a group
G. BoD (acting together) responsible for the direction and the
management of the corporation
1. Small corporations the BoD does the day to day decisionmaking
a. May only be one person
2. In Large Corporations the BoD Doesnt get engaged in the
day to day
a. Here the BoD oversee the management but the day
to day is taken care of by the senior officers
H. The ultimate locust of power/decision making/authority in the
BoD
1. Set management policies and make the big decisions
2. Decides when stock is going to be issued and at what
price
3. Hires and monitors officers
I. In Large corporation it is common to have both inside and
outside directors
1. Inside director is both a director and employed full time
by the corporation
a. This is always going to be officer
b. Aka a management director
2. Outside Director-their day job is not with the corp
J. Shareholders do not manage the corporation but they do elect
the BoD
II.
III.
IV.
V.
VI.
ii.
ii.
iii.
VII.
iv.
II.
III.
IV.
We Inc. so that the S have limited liability but there are circumstances
where a corporation will allow a third party to sue the shareholders for
corporation debt.
A. Piercing the Corporate Veil
1.
Only happens in close corp
a. Policy: If you want the benefits of limited liability (meaning you
are not personally on the hook for what the business does) you
must take the corporation seriously
i. Must Capitalize Efficiently
1. At the outset investors must invest enough money to
cover prospective liabilities
ii. Must treat the Corporation with respect
1. Must go thru all the motions of a corporation by the
book
a. Appt officers
b. Have shareholder meetings
c. Have director meetings
d. Have minutes and records of the meetings
e. Etc.
iii. If the corporation does not do these things a ct may say
that the shareholder is treating the corporation as an alter
ego (not respecting the corporate form).
1. Then the ct reaches thru the corporate view to
impose liability on the shareholders
a. 3 Ct differ as to what it takes to pierce the
corporate veil
i. Cts tend to say that being sloppy with
corporation formalities is not enough but
then they go then cts list all the
corporation formalities that were not
followed
ii. Fact Pattern: S set up a corporation that
is involved in a dangerous activity, but
the S invest very little money, only
capitalize it with $1000 and they fail to
buy insurance. Insurance is a way to
capitalize against those business risks.
Then they fail to run the business with
corporation formalities and now a third
party is injured. The Plaintiff would sue
the corporation but the corporation has
no money so the P wants to pierce the
corporation veil and go after the
shareholders. P might succeed
1. No way to predict how a ct will rule
here but there is the argument that
A.
B.
VII.
A.
B.
C.
VIII.
A.
B.
C.
D.
V.