Business Law Final Exam Review Chapter 18 PDF

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From chapter 18,19,20 review for the final exam. The final exam for business law is not commutative ...

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Business Law Final Exam Review (Chapters 18, 19, 20) Chapter 18 (Corporations) 1)Promoters Liability a) Someone who organizes a corporation is called a Promoter b) A promoter is personally liable on any contract he signs before the corporation is formed c) After formation, the corporation can adopt the contract, in which case, the corporation and promoter are liable d) Promoter can get off the hook personally only if the landlord agrees to a novation i) Novation is a new contract with the corporation alone e) Hardy vs. Southwestern Bell Yellow Pages (2001) i) Deals with the entrepreneur not understanding the rules of promoter liability ii) Hardy signed a contract on behalf of A-Z business products agreeing to pay Southwestern Bell $23,240 for an advertisement in yellow pages. Hardy signed the contract as president of the company before the company was actually formed, then didn’t make any payments on the contract, resulting in him, individually, being sued by Southwestern. Trial court ruled in favor of Southwestern, Hardy Appealed iii) Issue: is Hardy personally liable on the contract with Southwestern Bell? iv) Excerpts for Decision: The evidence is legally and factually sufficient to support the trial court’s verdict that Hardy is personally liable on the contract. 2)Incorporation Process a) Fill out the incorporation form online or mail or fax it to the Secretary of State for your state. Corporate character defines the corporation, including everything from the companies name to the number of shares it will issue. b) There is no federal corporation code, which means that a company can incorporate only under state, not federal, law. No matter where a company actually does business, it may incorporate in any state. c) Model Business Corporation Act (The Model Act) was a guide for similarity among state corporation statutes, drafted by the American Bar Association d) Delaware: does not use Model Act as a guide i) Despite its small size, it has a disproportionate influence on corporate law ii) Although only 1% of US Population lives in Delaware, more than half of all public companies have incorporated there, including 58% of Fortune 500 Companies e) Where to Incorporate i) A company is called a Domestic corporation in the state where it incorporates and a foreign corporation everywhere else. ii) Companies generally corporate in the state they conduct most of their business, or in Delaware iii) Typically must pay filing fees and franchise taxes in their state of incorporation as well as in any state they do business (1) To avoid double fees, a business operating primarily in one state would select that state for incorporation, but if a company were going to do business in several states it would choose Delaware or another state with sophisticated corporate laws. iv) Delaware offers corporations several advantages: (1) Laws that Favor Management

(a) For example, if the shareholders want to take a vote in writing instead of holding a meeting, many other states require the vote be unanimous. Delaware requires only a majority to agree. The Delaware legislature also tries to keep up-to-date by changing its code to reflect new corporate laws developments (2) An Efficient Court System (a) Delaware has a special court, called the Chancery Court, that hears nothing but business cases and has judges who are experts in corporate law (3) An Established Body of Precedent (a) Because so many businesses incorporate in the state, its courts hear a vast number of corporate cases, creating a large body of precedent. Thus, lawyers feel they can more easily predict the outcome of a case in Delaware than anywhere else. f) The Charter i) One a company decides where to incorporate, the next step is to prepare and file the charter. The charter must always be filed with the Secretary of State, and sometimes also with a county office. ii) Name (1) The Model Act imposes two name requirements (a) All corporations must use the one of the following words in their name: (i) “Corporation”, “Incorporated”, “Company” or “Limited” 1. Delaware also allows “Association or Institute” (b) Under both the Model act and Delaware Law, a new corporate name must be different from that of any corporation, limited liability company or limited partnership that already exists in that state iii) Address and Registered Agent (1) Companies must have an official address in their state of incorporation so that the Secretary of State knows where to contact it and that complaints can be sent there. (2) Registered Agents are representatives for a company in states where they don’t have offices, serving as their official presence, typically charging $100 annually for the service iv) Incorporator (1) This person signs the charter and delivers it to the Secretary of State for filing. This person is not required to buy stock or have any future relationship with the company. It is usually the lawyer who forms the corporation v) Purpose (1) Corporation is required to give a purpose for its existence vi) Stock (1) Charter must provide three items of info about companies stock: (a) Par Value (i) The concept of par value was designed to protect investors, originally supposed to be a number close to market price. A company couldn’t sell for less than par value. In modern times, par value does not relate to market value, it is usually a nominal figure such as $1 per share. Some companies may even issue stock with no par value (b) Number of Shares

(i) Can authorize as many shares as they want, but the more shares, the higher the filing fee. (ii) In Delaware, the basic filing fee for a certificate of incorporation is $89, which includes 1500 shares at no par value. (iii) Stock that has been authorized but not yet sold is called authorized and unissued (iv)Stock that has been sold is termed authorized and issued or outstanding (v) Stock that the company has sold but later bought back is treasury stock (c) Classes and Series (i) Stock can be divided into categories called classes, and then subdivided into categories called series. All stocks in a series have the same rights, and all series are fundamentally the same except for a few minor distinctions. (ii) Dividend Rights 1. The charter establishes if shareholders are entitled to dividends, and if so, in what amount (iii) Voting Rights 1. Shareholders are usually entitled to elect directors and vote on charter amendments, among other issues, but these rights can vary among different series and classes of stock (iv)Liquidation Rights 1. The charter specifies the order in which classes of stockholders will be paid upon dissolution of the company (v) Preferred and Common Stock are two classic types 1. Owners of preferred stock have preference on dividends and also, typically, in liquidation. If a class of preferred stock is entitled to dividends, then it received dividends before common stockholders are paid theirs. If holders of Cumulative Preferred Stock miss their dividend one year, common shareholders cannot receive a dividend until the cumulative preferred shareholders have been paid, no matter how long it takes. Non Cumulative Preferred Stock holders lose an annual dividend for good if the company cannot afford it in the year it is due. 2. Common Stock is last in line for any corporate payouts, including dividends and liquidation payments. If a company is liquidated, creditors of the company and preferred shareholders are paid before common shareholders 3)After Incorporation a) Directors and Officers i) Once the corporation is organized, the incorporators elect the first set of directors. Therefore, the shareholders elect directors ii) Under the Model Act, a corporation is required to have at least one director, unless (1) All the shareholders sign an agreement that eliminates the board (2) The corporation has 50 or fewer shareholders iii) To elect directors, shareholders hold a meeting, or, more likely for a small company, the elect directors by written consent.

iv) Once directors are chosen, the directors must elect the officers of the corporation. They can use a consent form if they wish. The Model Act simply requires that a corporation has whatever officers are described in its bylaws. v) A Minute Book is the official record book of the corporation, where written consent and records of meetings are kept. b) Bylaws i) Bylaws list all the “housekeeping” details for the corporation, like the date of annual shareholders meetings, establish the fiscal year of the corporation, indicate how many directors there will be, etc… c) Issuing Debt i) Most startup companies begin with some combination of equity and debt. Equity (stock) is described in the charter, but debt is not. There are several types of debt: (1) Bonds are long-term debt secured by the company assets. If the company is unable to pay the debt, creditors have a right to specific assets, such as accounts receivable or inventory (2) Debentures are long term unsecured debt. If the company cannot meet its obligations, the debenture holders are paid after bondholders but before stockholders (3) Notes are short-term debt, typically payable within five years. They may be either secured or unsecured 4)Death of the Corporation a) Voluntary Death (the shareholders elect to terminate the corporation) or Forced Death (by court order). Sometimes a court takes a step that is much more damaging to shareholders than simply dissolving the corporation-it removes the shareholders’ limited liability b) Piercing the Corporate Veil i) One of the major purposes of a corporation is to protect its owners-the shareholders-, from personal liability for the debts of the organization. Sometimes, however, a court will pierce the corporate veil. That is, the court will hold shareholders personally liable for the debts of the corporation. Courts generally pierce a corporate veil in four circumstances: (1) Failure to Observe Formalities: if an organization does not act like a corporation, it will not be treated like one. It must, for example, hold required shareholders and directors meeting (or sign consents), keep a minute book as a record of these meetings, and make all the required state filings. In addition, officers must be careful to sign all corporate documents with a corporate title, not as an individual. (Corporation Name->Person’s Signature->Persons Name and Title) (2) Commingling of Assets: Nothing makes a court more willing to pierce a corporate veil than evidence that shareholders have mixed their assets with those of the corporation. For example, shareholders may use corporate assets to pay their personal debts. If shareholders commingle assets, it is difficult for creditors to determine which assets belong to who, and the confusion is generally resolved in favor of the creditors-all assets are deemed to belong to the corporation (3) Inadequate Capitalization: If the founders of a corporation do not raise enough capital (either through debt or equity) to give the business a fighting chance of paying its debts, courts may require shareholders to pay corporate obligations.

Therefore, if the corporation does not have sufficient capital, it needs to buy insurance, particularly to protect against tort liability. (4) Fraud: If fraud is committed in the name of a corporation, victims can make a claim against the personal assets of the shareholders who profited from the fraud ii) Brooks vs. Becker (1) Facts: Brooks sued Becker in an attempt to pierce the corporate veil and hold Becker personally liable for the debts of the corporation (2) Issues: Can Brooks pierce the corporate veil? Is Becker personally liable for the debts of the corporation? (3) Excerpts from Judges Decision: Court rules against Becker in the amount of $54,597.09 for being a corporate scumbag c) Termination i) Terminating a corporation is a three step process: (1) Vote: the directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree (2) Filing: the corporation files “Articles of Dissolution: with the Secretary of State (3) Winding Up: The officers of the corporation pay its debts and distribute the remaining property to shareholders. When the winding up is completed, the corporation ceases to exist. ii) The Secretary of State may dissolve a corporation that violates state law. Many corporations, particularly smaller ones, do not bother with the formal dissolution process, choosing to cease paying their require annual fees and letting the Secretary of State act. A court may dissolve a corporation if it is insolvent or if its directors and shareholders cannot resolve conflict over how the corporation should be managed. The court will then appoint a receiver to oversee the winding up. 5) The Role of Corporate Management a) Managers have a fiduciary duty to act in the best interests of the corporation’s shareholders. Because shareholders are primarily concerned about their return on investment, managers must maximize shareholder value, which is providing shareholders with the highest possible financial return from dividends and stock price. b) It is often difficult to determine which strategy best maximizes shareholder value, resulting in some states adopting statutes permitting directors to take into account the interests of stakeholders as well as stockholders. i) Indiana Code: permits directors to consider “both the short term and long term best interests of the corporation, taking into account, and weighing as the directors deem appropriate, the effects thereof on the corporation’s shareholders and the other corporate constituent groups…” 6) The Business Judgment Rule a) Courts allow managers great leeway in carrying out the responsibility of acting in the best interest of stockholders. The business judgment rule is a common law concept virtually every court in the country recognizes. To be protected by this rule, managers must act in good faith: i) Duty of Loyalty: Without a conflict of interest ii) Duty of Care: With the care that an ordinarily prudent person would take in a similar situation and in a manner they reasonably believe to be in the best interests of the corporation

b) It protects both the manager and her decision, protecting her personal liability and not rescinding her decision in court if properly complied with. However, if violated, then she has the burden of proving her decision was fair to shareholders. If not fair, she may be held personally liable and the decision can be rescinded. The business judgment rule accomplishes three goals: i) It permits directors to do their job: If directors were afraid they would be liable for every decision that led to a loss, they would never make a decision, or at least not a risky one ii) It keeps judges out of corporate management: Without the business judgment rule, judges would be tempted, if not required, to second guess managers decisions iii) It encourages directors to serve: No one in his right mind would serve as a director if he knew that every decision was open to attack in the courtroom c) Analysis of the business judgment rule is divided into two parts: i) Duty of Loyalty (1) The duty of loyalty prohibits managers from making a decision that benefits them at the expense of the corporation (2) Self Dealing (a) Self-Dealing means that a manager makes a decision benefiting either himself or another company with which he has a relationship. (i) Example) While working at Blue Moon Restaurant, Mike signs a contract on behalf of the restaurant to purchase bread from Rising Sun Bakery. Unbeknownst to anyone at Blue moon, he is a part owner of Rising Sun (b) Once a manager engages in self-dealing, the business judgment rule no longer applies. He is not automatically liable to the corporation or that his decision is automatically void, it just means that the court will no longer presume that the transaction was acceptable. Instead, the court will scrutinize the deal more carefully. A self-dealing transaction is valid in any of the following situations: (i) The disinterested members of the board of directors approve the transaction. These are members that do not personally benefit (ii) The disinterested shareholders approve it (iii) The transaction was entirely fair to the corporation, in determining this, the court will consider the impact of the transaction on the corporation and whether the price was reasonable. 1. If a manager engages in self-dealing, it must not be approved by shareholders or board members and deemed unfair to the corporation in order for him to be liable and have the decision revoked. (3) Corporate Opportunity (a) Prohibits managers from excluding their company from favorable deals. Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent (b) Charles Guth was president of Loft, Inc, which operated a chain of candy stores. These stores sold Coca-Cola. Guth purchased the Pepsi-Cola Co., personally, without offering the opportunity to Loft Inc. The Delaware court found that Guth violated the corporate opportunity doctrine and ordered him to transfer all his shares in Pepsi to Loft. This happened in 1939, when PepsiCola was bankrupt, and today they are worth $96 billion.

ii) Duty of Care (1) The duty of care requires officers and 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 assets (2) Rational Business Purpose (a) Courts generally agree in principle that directors and officers are liable for decisions that have no rational business purpose. In practice, however, those same courts have been extremely supportive of managerial decisions, looking hard to find some justification. (i) The Chicago Cubs don’t have lights installed in Wrigley Field, stopping the team from playing night games, resulting in shareholders suing on the grounds that this limited the Cubs’ revenues. The Cubs defended their decision, saying that a large night crowd would cause the neighborhood to deteriorate, depressing the value of Wrigley Field, (which was not owned by the Cubs). The court found the Cubs’ excuse to be a rational purpose (3) Legality (a) Courts are generally unsympathetic to managers who engage in illegal behavior, even if their goal is to help the company. (4) Informed Decision (a) Generally, courts will protect managers who make an informed decision, even if the decision ultimately harms the company. Making an informed decision means carefully investigating the facts. However, even if the decision is uninformed, the directors will not be held liable if the decision was entirely fair to the shareholders. 7)Takeovers a) The business judgment rule is an important guideline for officers and directors in the routine management of corporations. It also plays a crucial role in the regulation of hostile takeovers. In addition, both Congress and many state legislatures have passed statutes that define the roles of the various combatants in takeovers. These are the three ways to acquire control of a company: i) Buy The Company’s Assets: Such a sale must be approved by both the shareholders and the board of directors of the acquired company ii) Merge with the Company: In a merger, one company absorbs another. The acquired company ceases to exist. The shareholders, and the board of directors of the target company must also approve a merger. If the current directors object, an acquiring company could buy enough stock to replace the board, but these battles are difficult and often end in defeat for the acquirer. iii) Buy Stock from the Shareholders: This method is called a “Tender Offer” because the acquirer asks shareholders to “tender”, or offer their stock for sale. Unlike other methods of obtaining control, approval from the board of directors of the target company is not strictly necessary. As long as shareholders tender enough stock, the acquirer gains control. A tender offer is called a hostile takeover if the board of the target resists. b) Federal Regulation of Tender Offers: The Williams Act i) The Williams Act applies only if the target company’s stock is publicly traded. Under the Williams Act:

(1) Any individual or group who together acquire more than 5% of a companies stock must file a public disclosure document (calle...