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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. 10. Corporations. Shareholders’ Rights & Liabilities

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Corporations

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  1. 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.

  2. 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.

  3. History and Nature of Corporations 41 C H E A P T R “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)

  4. 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 41 - 5

  5. 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 41 - 6

  6. 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 41 - 7

  7. 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 41 - 8

  8. 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 41 - 9

  9. 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 41 - 10

  10. 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 41 - 11

  11. 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. 41 - 12

  12. 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. 41 - 13

  13. 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 41 - 14

  14. 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 41 - 15

  15. 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? 41 - 16

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