Corporations

2. 10 Corporations History & Nature of Corporations Organizational and Financial Structure of Corporations Management of Corporations McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 10 Corporations Shareholders’ Rights & Liabilities Securities Regulation Legal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Organization and Financial Structure of Corporations 42 C H E A P T R “Our business is company creation.” Ann Winblad, venture capitalist, quoted in Fortune (Sellen and Daniels, Oct. 1999)

5. Learning Objectives • Promoters and preincorporation transactions • Incorporation and defective attempts • Financing for-profit and nonprofit corporations • The nature and operation of shares 42 - 5

6. Promoter Activities • As a fiduciary, a promoter incorporates the business, organizes the initial management team, and raises the initial capital • Promoter is liable for contracts made during preincorporation period unless corporation adopts preincorporation contracts made by promoter (adoption) and third party agrees to replace promoter with corporation (novation) • See Crye-Leike Realtors v. WDM, Inc. 42 - 6

7. Steps in Incorporation • Prepare articles of incorporation • Sign and authenticate articles by one or more incorporators • File articles with secretary of state and pay fees • Receive articles of incorporation stamped “Filed” by secretary of state, with fee receipt • Hold organizational meeting to adopt bylaws, elect officers, and transact other business 42 - 7

8. Incorporation Details • Articles of incorporation (or charter) is the basic document stating rights and duties of corporation, its management, shareholders • Other provisions (consistent with law) may be added to articles of incorporation or included within corporate bylaws • If the attempt to incorporate fails, corporate shield does not exist to protect shareholders, officers, and directors from personal liability 42 - 8

9. De Jure Corporation • De jure corporation: exists when promoters and incorporators substantially comply with each mandatory (shall, must) requirement to incorporate the business • Filing articles of incorporation is conclusive proof that corporation exists (MBCA) • De facto corporation: exists when promoters fail to comply with all mandatory rules, but comply with most mandatory requirements 42 - 9

10. Financing Corporations • For-profit corporations are financed by sale of securities (e.g., shares, debentures, bonds, long-term notes payable), bank loans, and short-term financing (e.g., inventory financing) 42 - 10

11. Financing & Securities • For-profit corporations are financed by sale of securities, bank loans, and short-term financing • Equity securities, better known as stock or shares, create an ownership relationship, thus stockholders or shareholders own a corporation • Debt securities – bonds, debentures, notes payable – create creditor-debtor relationship between corporation and security holder 42 - 11

12. Shareholder Classes • Corporations may issue classes of shares with specific rights: common or preferred • Common shareholder claims are subordinate to creditor or preferred shareholder claims, but common shareholders have exclusive right to elect corporate directors • Preferred shareholders receive liquidation and dividend preferences over common shareholders 42 - 12

13. Details About Shares • Authorized shares: shares a corporation may issue according to articles of incorporation • Issued shares: shares sold to shareholders • Outstanding shares: held by shareholders • A board of directors may issue options for purchasing the corporation’s shares • Warrants: options evidenced by certificates • Rights: short-term certificated options 42 - 13

14. Purchase of Shares • Under the terms of a share subscription, a prospective shareholder promises to buy a specific number of shares at a stated price • The board must issue shares for an adequate dollar amount of consideration (par value) • Shares may be issued in return for any tangible or intangible property or benefit to the corporation (MBCA) 42 - 14

15. Transfer of Shares • Share certificates are registered with the corporation in name of a specific person • Indorsement of a share certificate on back by registered owner and delivery of certificate to another transfers ownership of shares • Generally, shares in a publicly held corporation are freely transferable 42 - 15

16. Test Your Knowledge • True=A, False = B • A promoter is always liable for contracts made during the preincorporation period. • A U.S. business may incorporate in any state. • A de facto corporation exists when promoters and incorporators in fact comply with each mandatory requirement to incorporate. • Warrants are stock options evidenced by certificates. 42 - 16

17. Test Your Knowledge • True=A, False = B • Preferred shareholders have the exclusive right to elect corporate directors and the exclusive right to dividend payments. • For-profit corporations are financed only by issuing securities in the form of shares. • The MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation. 42 - 17

18. Test Your Knowledge • Multiple Choice • Which of the following is not a debt security: • (a) Stock • (b) Bond • (c) Debenture • (d) Note • (e) none of the above 42 - 18

19. Test Your Knowledge • Multiple Choice • The Steel Inc. Board of Directors plan to issue dividends this year. Which of the following is false? • (a) Preferred shareholders receive their dividends before common shareholders • (b) Creditors receive their dividends before common shareholders • (c) Common shareholders receive their dividends before either creditors or preferred shareholders 42 - 19

20. Thought Question • Do you believe that a company’s stock price reflects a company’s value or success in (a) the marketplace, and (b) society? 42 - 20