lecture 9 - Lecture#9 Corporaons Wednesday March 2 2016...

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Unformatted text preview: Lecture #9: Corporaons Wednesday, March 2, 2016 5:52 PM Benefits of incorpora鋙on Easier to raise capital compared to other business organiza鋙ons Shareholders do not have to be ac鋙vely involved with the business in order to invest money The corpora鋙on is a separate legal en鋙ty This means that shareholders are not liable for the debts and obliga鋙ons of the corpora鋙on because the corpora鋙on, as a separate legal person, is responsible for its own wrongful conduct Shareholders are also protected from unexpected lawsuits and demands from suppliers if the corpora鋙on goes insolvent Taxes It completely depends on the situa鋙on Generally, there are some benefits provincially but that’s it Shareholder's can benefit from capital gains Succession and Transferability Shares can be transferred from one person to another which is why a corpora鋙on can last forever unless the directors take specific steps to end it Obliga鋙ons of Shareholders Shareholders do not have any fiduciary duty to act in their best interests of the corpora鋙on Obliga鋙ons and restric鋙ons in shareholder ac鋙vity only gets imposed when the shareholder has purchased a sufficient number of shares in the corpora鋙on Management The shareholders elect a board of directors that controls the business in turn, can also hire professional managers who can make sound business decisions for the corpora鋙on The shareholders do have the power to change management if they are unhappy with how to corpora鋙on is being operated Cons of incorpora鋙on Shareholders are not fully protected from limited liability For instance, Banks usually insist on a personal guarantee from the major shareholders meaning that they might have to pay the bank for the corpora鋙ons unpaid debts Taxes Since the federal tax system is so complicated, corpora鋙ons will probably end up paying so much taxes Expensive to run Corpora鋙ons have so many government regula鋙ons to follow Corpora鋙ons have to constantly provide informa鋙on to the public which costs money Restric鋙on in transferability of shares Through shareholder agreements, there are limita鋙ons on when the shareholder can sell their shares as they some鋙mes have to get approved by the corpora鋙on Role of Agents Since the corporate en鋙ty is a legal fic鋙on, all of its ac鋙vi鋙es must be carried out through the services of real people ac鋙ng as agents. Therefore, Directors and employees from officers to clerks may have actual or apparent authority to bind the corpora鋙on depending on their jobs Process of incorpora鋙on Ar鋙cles of Incorpora鋙on Name‐ NVANS # Company Registered Address Number of directors A minimum of 1, a maximum of 10 Names and addresses of ini鋙al director Residency Restric鋙ons on ac鋙vi鋙es‐ NONE Descrip鋙on of share capital Authorized capital Share features Private Corpora鋙on Form 1 > Corpora鋙on informa鋙on Act Up‐ to‐ date info about names and addresses of direc鋙ons and officers Minute Book By‐laws Minutes of directors mee鋙ngs Registered ledgers Separate Legal Personhood Limited Liability Flexibility of Transfers Con鋙nuous existence MOST IMPORTANT: Separa鋙on of management from ownership Abuses of the Corpora鋙on‐ Solomon's Case "piercing the corporate veil" 1) Creditors 1. Secured creditors 2. Preferred creditors 3. Unsecured creditors 2) Owners 1. Preferred Shareholders 2. Common Shareholders If the courts find that the objec鋙ve of the corpora鋙on was to get around some government regula鋙ons or to commit a fraud, the courts will ignore the separate legal en鋙ty aspect of the corpora鋙on and "li� the corporate veil" so they can focus their a태en鋙on on the directors, shareholders or officers that were commiỠng the fraud Associated corpora鋙ons Share structure Right with shares 1) Vote 2)Dividend 3) No par value shares: Shares that are valued by the marketplace via stock exchange Par‐Value shares: Shares that have given a specific value such as $2 at the 鋙me of issuance You can have: Vo鋙ng shares Non‐vo鋙ng shares If there are no preferred shares in a corpora鋙on, the common shares must include the rights: to vote at shareholder mee鋙ngs, right to receive dividends that are declared by the corpora鋙on To receive the property of the corpora鋙on on its dissolu鋙on Preferred shareholders generally have no vo鋙ng rights unless: 1. The corpora鋙on fails to pay a declared dividend 2. When major changes occur in the corpora鋙on that would materially affect the posi鋙on of the preferred shareholders For example, say a corpora鋙on wants to sell some major assets, it wont be able to do that without having the preferred shareholders have their vote at the ma태er of hand as well Also, when the corpora鋙on is dissolved, preferred shareholders usually have the right to have those shares repaid before funds are paid out to the common shareholders Dividend rights Preferred shareholders gets the exclusive rights to dividends once they have been declared by the corpora鋙on Cumula鋙ve vs. Non‐ Cumula鋙ve dividends Cumula鋙ve dividends‐ Make more notes Non‐cumula鋙ve‐ Make more notes Redeemable‐"call" Retractable‐ "put" A specific type of preferred stock that lets the owner sell the share back to the issuer at a set price. Typically, the issuer can force the redemption of the retractable preferred share for cash at maturity. Rights on liquida鋙on Conversion Protec鋙on of the Public Indoor Management Rule‐ Sec鋙on 19 Pre‐incorpora鋙on contracts Dividends The corpora鋙on shall not pay a dividend unless the directors are sa鋙sfied that a�er the dividend is paid that The Corpora鋙on can meet two tests: A) The corpora鋙on can sa鋙sfy its debts as they come due‐Solvency test B) The realizable of assets will exceed liabili鋙es plus stated capital‐ Balance Sheet Test Borrowing A corpora鋙on can also borrow funds, thus accumula鋙ng debt. This can be done by issuing bonds or debentures either secured or unsecured. This results in a debtor‐ creditor rela鋙onship where the creditor has the right to the corpora鋙ons assets if it is unable to pay its debt Bondholders are en鋙tled to a por鋙on of the repayment at a set rate of interest. They are free to sell such claims to others, some鋙mes at a premium or discount depending on the market Thus, bondholders are just simply creditors while shareholders are just par鋙cipants in the corpora鋙on as they do not have the rights to demand payment of a dividend or repayment of the cost of the share Ac鋙ons a�er dissolu鋙on ...
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