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Unformatted text preview: Kulper - Econ 189 Kulper 1 Incorporation Process • The person who organizes a corporation is • • called a promoter. The promoter is personally liable on any contract signed before formation. The corporation is not liable unless it adopts the contract after incorporation. The promoter is no longer liable if the other party agrees to a novation – a new contract. Where to Incorporate? – Either the home state of the business or a state which has favorable laws for corporations (often Delaware) Kulper - Econ 189 Kulper 2 • Charter’s Required Provisions Incorporation Process – Name of corporation – Address and Registered Agent – Incorporator –person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter) – Purpose –can be a broad statement, such as “to conduct lawful business” – Stock – number, par value and types (classes and series) offered Kulper - Econ 189 Kulper 3 • Stock can be: – – – Stock • Par value ­ minimum issue price • Classes and series Authorized and unissued Authorized and issued or outstanding Treasury stock (been issued, then bought back by company) – Owners of preferred stock have preference on dividends and liquidation. – Common stock is last in line for any corporate payouts, including dividends and liquidation. Kulper - Econ 189 Kulper 4 After Incorporation • Directors and officers are elected, unless – Small corporations may elect directors by written consent. all shareholders agree to not have a board of directors. • Minute book holds records of all meetings. • Bylaws set the rules for the corporation. Kulper - Econ 189 Kulper 5 • May be voluntary (shareholders’ vote) or forced • (by court order). Piercing the Corporate Veil – court may hold shareholders liable for debt in the case of: Death of a Corporation – Failure to observe formalities (such as holding meetings, keeping records) – Commingling of assets (using corporate funds to pay personal debts, etc.) – Inadequate capitalization (the corporation should obtain insurance against liability for torts) – Fraud (injured party may recover from the guilty party, even if the action was the corporation’s) Kulper - Econ 189 Kulper 6 Termination • Terminating a corporation is a three­step process: – Vote by a majority of the shareholders. – Filing Articles of Dissolution with the Secretary of State. – Winding up – paying debts and distributing assets. Kulper - Econ 189 Kulper 7 • Managers – want, first to keep their jobs and second, to build a strong company. – Managers have a fiduciary duty to act in the best interests of the shareholders. Managers vs. Shareholders: The Inherent Conflict • Shareholders – want the price of stock to increase. • Stakeholders – want the business to grow and continue to use the stakeholders’ services. Kulper - Econ 189 Kulper 8 • Business Judgment Rule – The manager has a duty of loyalty and a duty of care. – The manager must act without a conflict of interest, with the care of an ordinary prudent person and in the best interests of the company. Resolving the Conflict: The Business Judgment Rule • This rule allows directors to do their job without fear of excessive court intervention. remaining with the company; protected by BJR?) (Lippman v. Shaffer: Board decision to pay out “severance” to officer Kulper - Econ 189 Kulper 9 • The duty of loyalty prohibits managers Duty of Loyalty from making a decision that benefits them at theexpense of the corporation. • Self­Dealing is a violation of the duty of loyalty (next slide) • Corporate Opportunity – Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent. Kulper - Econ 189 Kulper 10 • A manager makes decisions that benefit himself or another company associated with the manager. • Self­dealing transactions may be acceptable if: Self­Dealing – The disinterested members of the board of directors approve the transaction. – The disinterested shareholders approve it. – The transaction was fair to the corporation. Kulper - Econ 189 Kulper 11 • The duty of care requires officers and Duty of Care directors to act in the best interests of the corporation and to use the same care that an ordinarily prudent person would in the management of her own needs. – Decisions must have a rational business purpose. – Decisions and actions are legal. – Managers must make informed decisions. (RSL Communications v. Bildirici: Board failed to meet to discuss $100M loan from founder) Kulper - Econ 189 Kulper 12 Rights of Shareholders • Shareholders have neither the right nor the obligation to manage the day­to­day business of the enterprise. • Right to Information • Right to Vote – Under the Model Act, shareholders with a proper purpose have the right to inspect and copy the corporation’s minute book, accounting records, and shareholder lists. – A corporation must have at least one class of stock with voting rights. Kulper - Econ 189 Kulper 13 Shareholder Meetings • Annual meeting of shareholders are the norm for publicly traded companies. • Companies whose stock is not publicly traded may either hold an annual meeting or use written consent from their shareholders. Kulper - Econ 189 Kulper 14 Officers and Directors • Election and Removal of Directors – Shareholders have the right to elect directors and also to remove them from office, though this is a complex and expensive process and is rarely done. – Typically, directors set their own compensation (unless the charter or bylaws provide otherwise). Kulper - Econ 189 Kulper 15 • Compensation for Officers and Directors Fundamental Corporate Changes • A corporation must seek shareholder – Mergers – Sales of Assets – Dissolution – Amendments to the Charter – Amendments to the Bylaws Kulper - Econ 189 Kulper approval before undergoing any of the following fundamental changes: 16 • In response to corporate scandals, Congress passed the Sarbanes­Oxley Act in 2002. – Requires all publicly­traded companies to adopt effective financial controls. – CEOs and CFOs must personally certify their company’s financial statements. – A board’s audit committee must be independent. – No personal loans to directors or officers. – If a company has to restate its earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock in the past year. – Each company must disclose if it has an ethics code and, if it does not, why not. – It is a felony to interfere with a federal fraud investigation. – Whistleblowing employees are protected. – A new Public Accounting Oversight Board has been established to oversee the auditing of public companies. Kulper - Econ 189 Kulper 17 Sarbanes­Oxley Act ...
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This note was uploaded on 03/17/2010 for the course ECON 100B taught by Professor Kilenthong during the Spring '08 term at UCSB.

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