Corporations(Toolbox)--Tsuk--Fall2004-1 - TOOLBOX...

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TOOLBOX Corporations Professor Tsuk Fall 2004 Semester
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CORPORATIONS GENERALLY A.) Corporate law is all about facilitating relationships between people: (i.) among owners/shareholders; (ii.) between shareholders and corporate B.) Corporate law is built around rules to enhance efficiency , not fairness. II. THE CORPORATE FORM (BEST INVENTION EVER?) A.) Creation of a Fictional Entity i. Corporations are separate legal bodies; main traits: (i.) limited liability for owners; (ii.) easy transferability of investment (shares); (iii.) centralized management (the board structure with a CEO). ii. To make, file articles of incorporation/charter+bylaws with a state. 1. Charter states purpose (“any legal”); bylaws are the guts. 2. Closely held usually use home state; public usually use DE. B.) Centralized Management (larger sizes/complexity make this more useful) i. Owners generally have very little say in day-to-day operations. They delegate broad power to elected board of directors. DE § 141 . 1. Shareholders do get to vote on extraordinary changes. 2. The board then appoints officers—people with real power. a. Corporate officers, such as CEOs, have substantial inherent authority . Menard . (<rank = <authority). ii. Shareholders can contract out of majority voting; they can structure their relation to the board any way. Auto Self-Cleaning . iii. Shareholders (even 99%) cannot dissolve the corporation or sell its assets if the board opposes doing so. DE § 271 . 1. Must be suggested by board and ratified by shareholders. iv. Only board can initiate changes to the charter. DE § 242(b)(1) . v. But, only the shareholders can amend corporate by-laws. DE § 109 vi. Shareholders can increase size of board, but board fills. DE § 223 . III. DEBT, EQUITY, AND VALUATION A.) Capital Structure from junior to senior (paid first): (i.) equity [common<preferred stock]; < (ii.) debt [subordinated<bank<secured]. B.) Valuation i. Calculate future expected value of present investments-$ timevalue ii. Diversifying can help mitigate a lot of risk. ~affect risk premium. iii. Key assumption: efficient market hypothesis (markets = unbiased). iv. Crucial to keep track of the balance of debt and equity (leverage). IV. CREDITOR PROTECTION A.) Mandatory disclosure is pretty intense for federal securities. On the state level, however, not much goes on. Better to rely on credit agencies. B.) Capital Regulation [ex ante creditor protection] i. Dividend distributions are constrained by several tests: 1. Stated capital: dividends can’t impair SC. NY § 510 . 2. Earned surplus is only fund dividends can come from. 3.
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Corporations(Toolbox)--Tsuk--Fall2004-1 - TOOLBOX...

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