CORPORATIONS OUTLINEINTRODUCTIONI.HYPO: JC works at MIT and is trying to get a startup started called Skynet. JC is designingthe machine, writing the code, contacting suppliers, paying/sending bills, etc. (engineeringwork, office work, janitorial work). JC’s compensation, to make sense, must match marketvalue for all the jobs he is doing for the company. He’s also investing (no angel, VC) his own$. Also going to want market compensation for his $ (return if he invested it elsewhere, likeVanguard).JC calls Kyle to do the software for machine. Hires Sarah to do the office work/accountspayable. JC knows his time is best spent on expertise. But where does he get the $ to payKyle and Sarah? Gets a loan from the bank but bank demands JC puts up some $ himself.Now he has debt to the bank and equity from his own investment.Where is the business risk? Principally being born by JC. Bank bears some risk. Kyle andSarah could lose jobs, so some risk. In legal hierarchy, employees and bank get paid beforeequity holder (JC, AKA residual claimant). Risk if the business goes bad, but reward if itgoes well b/c bank and employees are only entitled to the $ they are owed.Now JC wants to expand, can’t afford it and bank says no. Goes to politician friend, AS, andasks him to invest. Now he needs to start thinking about organizational form. JC and AS haveboth invested $ and AS wants some control. If they share profits, control, etc. then that is apartnership.If JC does not invest any of his own $ and AS puts it all in, then JC is just a senioremployee. AS is the equity holder w/ final say. If they want to form a corporation, file papers,etc. (covered later) and have shareholders (equity holders) in this case, AS, who owns all thestock. Shareholders elect a board of directors, who hire the people who actually run Skynet.Board hires JC as President and delegate power to hire to him.Why is the board elected by the shareholders? Because AS is the residual claimant.Bears all the risk.Bank continues to lend $, workers hired to build product, Skynet buys supplies formsuppliers, customers buy product, etc. None of this is part of corporate law. We are talkingabout the relationship b/w equity investors (AS), the board of directors, and the officers(senior employees) of the firm. Corporate Law in a nutshell.Essentially, it’s a series of contracts b/w those three parties. Optimal execution ofcorporate law is a set of waiverable default terms.
