Updated 04/28/11 10:11:00 PMPage 1 of 58
Class 1 (August 18)
§ 1Exam Information
Exam will be take-home. Response of about 1,200 words is expected.
§ 2Overview of Corporations
When we talk about “corporations,” we generally mean publicly tradedcorporations. Publicly traded corporations are distinguished from other types of corporations, such as limited liability corporations (LLCs).
§ 3What is a corporation?
Prof. Goshen: “A corporation is a make-believe game for adults.” A corporation isa legal person whose existence is specified in a paper document. A manager isthen appointed to make the corporation “do” things.
§ 4The First Corporations Case
Solomon v. Solomon Inc.
, Adam Solomon owned a business in which producedletter products. Adam wanted to organize his business as a corporation. At thattime, the law required that at least seven people participate in the formation of acorporation. The corporation had 1,000 shares, of which 994 were owned byAdam. The remaining six shares were owned by his wife and children. Adam thensold the letter-making business to his corporation. Of course, the seller was Adamin his personal capacity whereas the buyer was the corporation. Because Adamasked for a price that was higher than what the corporation’s assets allowed, Adamdecided to give a loan to his corporation. The sale created a situation in which thecorporation owed Adam some amount (let’s say £1,000). Adam thereby became asecured creditor.As it turned out, the business ultimately failed. Adam claimed that he, as asecured creditor, meant that he had first dibs to the corporation’s remainingassets. Adam prevailed on appeal, where the court said that the corporation wasnot an “alter-ego” of Adam. Rather, it was to be treated as an entirely separatelegal entity. The court said that the other creditors should have realized thatcorporation was a distinct entity even though Adam had made the loan to“himself.”
§ 5A Second Corporations Case
Lee v. Lee’s
, Lee created a corporation that owned one small aircraft used foragricultural purposes. Lee owned the vast majority of the shares and piloted theairplane. One day, the aircraft crashed, with Lee dying in the accident. Thecorporation, however, continued to “live.” The shares that formerly belonged toLee passed via inheritance to his wife. His wife proceeded to sue the corporationfor compensation for Lee’s death. Because the wife was acting as a manager of the corporation, she was effectively on the receiving end of the suit. The point of the exercise was to extract compensation from the British social-security system,