BCOR 320 1nd Edition Lecture 37 Chapter 20: CorporationsPromoter’s liability before the corporation is formed:  Promoter: Someone who organizes a corporation◦ Personally liable on any contracts he signs before the corporation is formed After it is formed, a corporation can adopt the contract◦ Adopt: Agree to be bound by the terms of a contract Promoter can get off the hook if the other party agrees to a novation◦ Novation: A new contract with different partiesIncorporation process:  Where to incorporate◦ Domestic corporation: a company in the state where it incorporates◦ Foreign corporation: A corporation formed in another state Companies generally incorporate either in:◦ The state where they most of their business ◦ Delaware – Offers several advantages Laws that favor management An efficient court system The charter – Defines the corporation, including:◦ Name of corporation◦ Address and registered agent◦ Incorporator – Person who signs the charter and delivers it to the Secretary of State◦ Purpose◦ StockThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Stock:  The charter must provide three items of information about the company’s stock◦ Par value◦ Number of shares Authorized and unissued: Stock that has been authorized, but not yet sold Authorized and issued: Stock that has been authorized and sold Treasury stock: Stock that a company has sold, but later bought back◦ Classes and series Class: Categories into which stock can be divided Series: Classes that are further divided into subcategories Preferred stock: The owners have preference on dividends and in liquidation◦ Cumulative preferred stock◦ Non-cumulative preferred stock◦ Participating preferred stockAfter incorporation: Directors and officers - A corporation is required to have at least one director, unless:◦ All shareholders sign an agreement that eliminates the board◦ The corporation has 50 or fewer shareholders Written consent: Through which shareholders elect directors Minute book: The official record of a corporation Bylaws: A document that specifies the organizational rules of a corporation or other organization◦ Quorum: The percentage of voters who must be present for a meeting to count Issuing debt – Corporations need to borrow funds for start-up◦ Bonds: Long-term secured debt◦ Debentures: Long-term unsecured debt◦ Notes: A short-term debt, either secured or unsecured, payable within five yearsDeath of a corporation:  Voluntary - Shareholders elect to terminate the corporation Forced - By court order Pierce the corporate veil: A court holds shareholders personally liable for debt of a corporations under four circumstances:◦ Failure to observe formalities◦ Commingling of assets ◦ Inadequate capitalization ◦ FraudTermination: Terminating a corporation is a three-step process:◦ Vote◦ Filing◦ Winding up The role of the corporate management:Stakeholders: Anyone who is affected by the activities of a corporation, such as:◦ Shareholders◦ Employees◦ Customers◦ Creditors◦ Suppliers◦ Neighbors Managers have a fiduciary duty to act in the best interests of the shareholdersThe business judgment rule: If managers comply with the business judgment rule, a court will not:◦ Hold them personally liable for any harm their decisions cause the company◦ Rescind their decisions Accomplishes three goals:◦ Permits directors to do their job◦ Keeps judges out of corporate management◦ Encourages directors to serveDuty of loyalty: The obligation of a manager to act without conflict of interest◦ Prohibits managers from making a decision that benefits them at the expense of the corporation Self-dealing - A manager makes a decision benefiting either himself or another company with which he has a relationship◦ Valid when: Disinterested members of the board of directors approve the transaction Disinterested shareholders approve it The transaction was entirely fair to the corporation Corporate opportunity◦ Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consentDuty of care: Requires officers and directors to:◦ Act in the best interests of the corporation ◦ Use the same care that an ordinarily prudent person would in the management of her own needs Rational business purpose Legality Informed decisionsRights of shareholders: Shareholders don’t have the right or the obligation to manage the day-to-day business of the enterprise◦ Right to information  Under the Model Act, shareholders with proper purpose have the right to inspect and copy corporation’s minute book, accounting records, and shareholder