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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. 10. Corporations. Shareholders’ Rights & Liabilities

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corporations

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.

corporations1

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.

history and nature of corporations

History and Nature of Corporations

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“In every era, society must strike the right balance between the freedom businesses need to compete for a market share and to make profits and the preservation of family and community values.”

Hillary Clinton, It Takes a Village (1996)

learning objectives
Learning Objectives
  • History of corporations
  • Classifications of corporations
  • Regulation of for-profit corporations
  • Regulation of nonprofit corporations
  • Regulation of foreign and alien corporations
  • Piercing the corporate veil

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slide6

The Corporation As a Person

  • In 1886, the private corporation gained legal status as a "natural person" under the U.S. Constitution with the associated protections
  • Corporations today have legal status as a person, specific authority for operation and management, limited liability for owners, easy transferability of an owner’s interest, and the obligation to pay taxes
    • See Fig. 1, page 969

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slide7

Classes of U.S. Corporations

  • By purpose:
    • For-profit corporations
    • Not-for-profit corporations
  • By ownership:
    • Publicly held (shareholders)
    • Close (a few shareholders)
      • Subchapter S
    • Government-owned corporations

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slide8

Classes of U.S. Corporations

  • By origin – a company is:
    • Domestic in the state in which the company incorporates
    • Foreign in all other states in which a company operates
    • Alien in all countries other than the country in which it incorporated

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slide9

Federal Regulation of Firms

  • Federal government has power to regulate interstate commerce under the Commerce Clause of the U.S. Constitution
  • Due Process Clause of Fourteenth Amendment interpreted to allow a state to exercise jurisdiction over foreign corporation if firm has sufficient minimum contacts with a state
    • “Doing business” will allow jurisdiction, but minimum contacts may be lesser activity

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slide10

Doing Business Within a State

  • Not doing business:
    • Soliciting orders, sales through independent contractors, owning property for investment, conducting isolated transaction, maintaining bank account for collection purposes
  • Doing business:
    • Maintaining an office, contracts with local businesses, using real property, maintaining inventory for order fulfillment, performing service activities

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slide11

Piercing the Corporate Veil

  • Corporation law provides an imaginary wall – the corporate veil – between a corporation and its shareholders to protect owners from personal liability for corporation’s actions
  • A court may pierce the corporate veil to reach individual shareholders if the shareholders dominate the corporation (alter ego) or the corporation is used for an improper purpose
    • See Fig. 2, page 979

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test your knowledge
Test Your Knowledge
  • True=A, False = B
    • A corporation is a fictitious, but legal, person.
    • Corporations may be classified only in terms of ownership.
    • Under the Commerce Clause, states have the power to regulate interstate commerce.
    • Texas Shipping, Inc. owns buildings and has employees in Houston, TX and New Orleans, LA, but “does business” only in Texas.

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test your knowledge1
Test Your Knowledge
  • True=A, False = B
    • A state organized under Kansas corporate law is a domestic company when it operates within the state of Kansas and a foreign company in any state other than Kansas.
    • Cole Inc. is owned by two people. Each owner built a home with money obtained by a loan from State Bank to Cole Inc. The corporate shield provides absolute protection to both owners from personal liability for repayment of the loans.

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test your knowledge2
Test Your Knowledge
  • Multiple Choice
    • A state law that regulates business activities of a foreign corporation is constitutional if :
      • (a) It serves a legitimate state interest
      • (b) The legitimate state interest outweighs the burden on interstate commerce
      • (c) It is the most burdensome means of promoting that interest
      • (d) All of the above
      • (e) A and B, but not C

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test your knowledge3
Test Your Knowledge
  • Multiple Choice
    • Which of the following activities meet the requirements for doing business in a state?
      • (a) Owning personal property as investment
      • (b) Maintaining a bank account for collection purposes
      • (c) Maintaining a storefront for product sales
      • (d) Soliciting product orders through a catalog
      • (e) All of the above

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thought questions
Thought Questions
  • Does an online stock transaction meet the sufficient minimum contacts criteria of the International Shoe ruling? In other words, if a consumer is injured by an online stock trade, could the consumer sue the company in her or her state court system?

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