Chapter 2
Chapter 2
Chapter Outline
(last updated 21 Aug 06)
Chapter 2 Introduction to Corporate Law
A. Overview
• Key characteristics of the basic business corporation
o separate entity
o perpetual existence
o limited liability
o centralized management
o transferability of ownership interests
• Overarching legal question: How do law and contract enable each of the participants protect themselves?
• Overarching policy question: For whose benefit should the corporation be run?
B. Some basic terms and concepts
1. corporate statutes: MBCA vs. Delaware
2. judge-made corporate Law
3. corporate choice of law: the internal affairs doctrine
4. organic documents: Articles vs. Bylaws
5. the corporate actors: shareholders / directors / officers
6. corporate securities: common stock / preferred stock / debt
7. corporate Planning
C. Fiduciary duties and the business judgment rule
• limits on agent's actions
• nature of fiduciary duties
o source
o modify by contract?
• Duty of care
o aspirational standards
o Business Judgment Rule
• Duty of loyalty
o direct and indirect conflicts
o judicial intervention
• Duties of shareholders
D. Equitable limitations on corporate actions
• valid action, but inconsistent with limits placed on other powers
o avoiding statutory protection not improper
o independent legal significance
• valid action, but violation of duty
o perpetuating in office is "inequitable purpose"
o judiciary intervention
Chapter 2
An Introduction to the Law of Corporations
Class Notes
A. Overview
B. Some Basic terms and concepts
|1. Corporate statutes: MBCA vs. Delaware |
|Which statute appears to be older? Compare the structure of each: |
|MBCA (on which NC Business Corporation Act is modeled) |
|Delaware General Corporation Law |
|Does either statute mention fiduciary duties? duty of care? business judgment rule? |
|MBCA § 8.30 |
|Delaware § 144 |
| |
|4. Organic documents: articles vs. bylaws |
|How do you know when a corporation's annual meeting of shareholders will be held? |
|NC BCA § 55-7-01 (annual meeting) |
|Who controls the contents of the bylaws? |
|NC BCA § 55-10- 20 (amendment of bylaws) |
| |
|5. The corporate actors: shareholders / directors / officers |
|What are the functions of and who chooses -- |
|shareholders |
|directors |
|officers |
C. Fiduciary duties and the business judgment rule
|Bayer v. Beran |NY court: |
|(NY Sup. Ct. 1944) |Eliminating for the moment the part played by Miss Tennyson in the |
| |radio advertising campaign, it is clear that the character of the |
|Celanese Corporation of America is a large publicly traded |advertising, the amount to be expended therefor, and the manner in |
|corporation. Even though WWII is raging, the company wants to |which it should be used, are all matters of business judgment and |
|advertise itself on radio. Its president Camille Dreyfus is married|rest peculiarly with the discretion of the board of directors. ...|
|to an entertainer, Jean Tennyson. Dreyfus asks the board to approve|The expenditure was not reckless or unconscionable. |
|a $1 million advertising program to sponsor a classical music radio |Now we have to take up an unfortunate incident, one which cannot be |
|show. The board approves. Unknown to the directors, Tennyson is |viewed with the complacency displayed by some of the directors of |
|one of the featured singers on the radio show, earning $500 per |the company... |
|evening. Put yourself in the position of a Celanese shareholder. | |
|What's wrong with this arrangement? |After such careful scrutiny.... the evidence fails to show that the |
|How does the court describe a director's duties? |program was designed to foster the career of Miss Tennyson as an |
|What is the difference between duty of care and duty of loyalty? |artists.... there is nothing in the testimony to show that some |
|Where do these duties come from - statute, corporate documents, |other soprano would have enhanced the artistic quality of the |
|court imagination? |program or its advertising appeal ... her compensation was in |
|To what extent does the court inquire into the wisdom of the |conformity with that paid for comparable work ... She received less |
|corporate decision to sponsor a radio show? |that other artists on the program ... It also appears that the |
|To what extent does the court inquire into the specifics of Ms. |popularity of the program has increased since it was inaugurated |
|Tennyson's relationship with the radio show? | |
|Why the different level of inquiry? | |
|What is the risk that the court seeks to guard against? | |
|Gamble v. Queens County Water Co. |New York court: |
|(NY 1890) |A shareholder has a legal right at a meeting of the shareholders to |
| |vote upon a measure, even though he has a personal interest therein |
|Mullins, an entrepreneur, built a water system that he sold to the |separate from other shareholders. In such a meeting, each |
|local water company, Queens County Water Co. One of the Water Co |shareholder represents himself and his own interests. |
|shareholders complained that Mullins was a Water Co. shareholder and| |
|should not be able to engage in self-dealing. |[The majority's action] must not be so detrimental to the interests |
| |of the corporation [as to constitute] a wanton or a fraudulent |
|Should a shareholder be subject to the same duties as a corporate |destruction of the rights of the minority. |
|director? | |
|What's wrong with shareholder self-dealing? |Generally, the rule must be that in such cases the will of the |
|Should things be different if the shareholder has voting control of |majority shall govern. The court would not be justified in |
|the board of directors? |interfering, even in doubtful cases, where the action of the |
| |majority might be susceptible of different constructions. ... |
| |Otherwise the court might be called upon to balance probabilities of|
| |profitable results ... This no business for any court to follow. |
D. Equitable limitations on corporate actions
|Bove v. Community Hotel Corp of Newport, (RI 1969) |Rhode Island court: |
| |The question is not whether recapitalization by the merger route is |
|Newport Hotel's business has floundered for a long time, and the |a subterfuge, but whether a merger which is designated for the sole |
|company has not paid dividends to its long-suffering preferred |purpose of canceling the rights of preferred stockholders with the |
|shareholders for 24 years! But there's a chance for a turnaround. |consent of less than all has been authorized by the legislature. |
|An investor group is willing to put in new capital, on the condition| |
|they receive a large chunk of common stock. The problem is that |... that a possible effect of cooperate action under the merger |
|there can't be a new issue until any arrears on preferred dividends |statute is not possible, or is even forbidden, under another section|
|have been paid. |of the general corporation law is of no import ... |
| | |
|What can be done? The charter could be amended to rescind the | |
|rights to dividends in arrears - but all the preferred would have to| |
|approve unanimously. Or the corporation could be merged into a new | |
|corporation under terms which would pay preferred shareholders only | |
|the current value of their stock - which would require only a 2/3 | |
|vote of preferred. What does management choose? Why might some | |
|preferred shareholders want a merger? What's the argument of the | |
|holdout shareholders? | |
|Schnell v. Chris-Craft Industries |Delaware Supreme Court: |
|(Del. Sup. Ct. 1971) | "... Management has attempted to utilize the corporate machinery |
| |... for the purpose of perpetuating itself in office ... for |
|A group of Chris-Craft shareholders, unhappy with management's |the purpose of obstructing legitimate efforts of dissident |
|lackluster performance, sought to replace the board. |stockholders ... to undertake a proxy contest against management....|
| | |
|Can shareholders vote out the board because the company is in the | |
|"doldrums"? Because shareholders just dislike the directors? | "These are inequitable purposes, contrary to the established |
|How did the Chris-Craft board of directors respond? |principles of corporate democracy." |
|How did the board justify its actions? | |
|How did the dissident shareholders respond? |Compare two cases: |
|What duty did the incumbent board violate? |Can you distinguish Schnell and Bove? In both cases the board could|
| |do something, but it was "inequitable" in one and of "equal legal |
| |significance" in the other? |
| | |
| Board action - Timeline - 1971 |Delaware's pre-eminence |
| Sep 17 - Shareholder group forms |Notice how long it took the Delaware judiciary to decide the case? |
| Oct 18 - Board meeting amending bylaws |Does this decision help attract incorporation in Delaware? |
| Oct 27 - Shareholder group learns of new meeting date |Nov 1 - Shareholders group files action |
| Dec 08 - Proposed new date for meeting (Cortland, NY) |Nov 10 - Chancery Court grants group access to shareholders' list |
| Jan 11 - Original date for meeting (bylaws) |Nov 18 - Chancery Court denies preliminary injunction |
|Bylaw amendment of October 18: |Nov 29 - Supreme Court remands case to postpone meeting |
| "1. Annual Meeting. The annual meeting of stockholders of | |
|Chris-Craft Industries, Inc. (hereinafter called the "Corporation") | |
|shall be held for the election of the directors * * * in the two | |
|month period commencing December 1 and ending on January 31 and at | |
|such time as shall be designated by the Board." | |
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