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B USINESS O RGANIZATIONS P ROFESSOR W ADE J AMES M ORGAN F ALL 2004 *This outline is good for day to day classroom purposes. Please see other condensed outline for studying for the final* ROLE & PURPOSE OF CORPORATIONS What is a corporation? A separate legal entity that is jointly owned by stockholders. The identity of the corporation is separate from any officer or director. A corporation can sue in its own name, enter into a contract, etc. Three groups that make up the basic structure of a corporation are: o Shareholders : owners of the company that have a residual interest in the corporation o Board of Directors : meet once a month and has two duties: Make broad policy decision for the corporation. Responsible for monitoring management. o Management/ Officers : CEO and all lower officers who tell the employees what to do. Make the day-to-day decisions for the company. Additional Corporate Constituencies: o Suppliers; Consumers; Creditors; & Employees ** The Corporation DOES NOT OWE ANY DUTY to these three additional groups. The only duty the corporation owes is to the SHAREHOLDERS. ** The additional groups have other laws which protect them. Only shareholders need fiduciary duty protection. However, sometimes considering the interest of the other constituencies will maximize the profit and be best for the shareholders. Corporate Social Responsibility : Whether a corporation should be managed solely for the benefit of its Shareholders or should corporations be allowed to do good, even at the expense of profit maximization? Two approaches: Communitarian Approach: Although you do not have a duty to other than stockholders, you should consider other groups that are affected by corporate activity. A corporation is defined by all those groups that make the corporation successful so you must take those interests into consideration. o Concern with society as a whole Contractarian Approach: a way of defining the corporation as a nexus of contracts. A corporation is simply the place where a bunch of contracts come together. o Concern here is with Profit Maximization with profit serving as the measuring stick of success towards that goal
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o All parties bargain for their position and there are federal and state law that intervene. Therefore, the courts do not need to do anything else. Profit Maximization is the role of a corporation. When officers go outside the Profit Maximization goal and breach the duty owed to shareholders? Courts usually apply the BUSINESS JUDGMENT RULE BUSINESS JUDGMENT RULE : presumption that the decision made by the officer was a valid exercise of business judgment. o Shareholders can rebut this presumption by showing fraud. AP Smith Mfg. V. Barlo : Charitable contributions are perfectly acceptable, but there has to be some benefit to the corporation. They are appropriate with respect to long-term interest of shareholders (However, you can define anything as potentially being in the long term interest of shareholders).
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