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Corporations- incomplete outline for Professor Lipson's class at Temple

- Definition –
o an agent is any person who is authorized to act on behalf of another
(known as the principal)
o Restatement (Second) – agency relationship is a consensual relationship
between a principal and an agent
- developed as part of common law
- Creation (from the Restatement (Second) of Agency §§1, 15
o Principal consents to have the agent act on the principal’s behalf and under
the principal’s control
o The agent consents so to act
o No K required
- Control
o Key element to principal/agent relationship
o For court to recognize P/A relation ship agent needs to have control to act
for principal
o From Basile v. H&R Block – where tax service recommended high
interest rate loan. There was no P/A relationship b/c the D did not have the
control to negotiate or enter the K for the loan.
- Duties
o Agent has a duty of loyalty to the principal
o Agent must act solely for the benefit of the principal in all matters
connected with the agency. Restatement (Second) of Agency §387
o When are agents disloyal?
 When their acts are inconsistent with promoting the best interest of
their employer at a time when they were on its payroll.
 Employee competes directly with her employer either on her own
or as an agent for a rival company
 Misappropriates her employer’s profits, property or business
 Breaches her employer’s confidences
 When you promote the interests of one principal to the detriment
of another principal you have committed the tort of disloyalty.
Food Lion Inc. v. Capital Cities/ABC, Inc.
• you need a requisite intent to act against the interests of
their second employer for the benefit of the main employer
• simply working two jobs and inadequately performing
during the second job b/c you are tired is not a breach of
o ends the day the agency relationship ends
 may compete against the former employer as soon as relationship
is over
- Principals of Attribution
o Principals can be held liable for the tortious actions of their agents
o Can be required to fulfill Ks into which their agents entered
- four sets of rules
o Express
 actual express authority
• Principal has actually said to the agent go and do something
on my behalf
• I tell someone to go buy a car for me
 Implied authority
• Almost always included when an actual authority is given
• Run my business (actual authority)
o Implied
 Can hire/fire people
 Purchase goods on credit
• Can get into problems when the agent is clothed with this
implied authority and goes out and makes Ks w/ 3rd parties.
3rd party believes they are in relationship with principal
• From Castillo v. Case Farms of Ohio where corporation
hired another corporation to recruit migrant farm workers.
Court held that since they had apparent authority to hire
workers they had implied authority to tell them about the
o Apparent Authority
 Communication of some form by principal to 3rd party
• “my agent will contact you”
 If principal is aware that the person is running around telling
people he is my agent I will have acquiesced to forming the P/A
 creation
• manifestation must emanate from the principal (or
purported principal) and must be received by third party
• scope of the agent’s apparent authority depends on the third
person’s reliable interpretation of that manifestation
o Inherent Agency power
 Even if you didn’t have direct communication between P and A or
P did not acquiesced to it
 Create an equity anyway b/c we do not want 3rd party to be harmed
- Respondent Superior
o Employer will be liable for the tort of the employee
 Assuming the tort was committed under the scope of employment

 Shareholder’s of a corporation are generally not responsible for the

acts of the corporation
• Meyer v. Holley where P brought a suit against
shareholders for racial discrimination by the corporation
o Unique only to the employer/employee relationship
o Control
 Principal must be able to understand 3rd parties reliance on what it
is the agent is saying
 To what extent did the principal control the agent’s creating the
 Do not need to control the precise decisions of the employer. Dias
v. Brigham Medical Associates where hospital attempted to escape
liability because they did not control precise treatment decisions of
o Benefit
 Generally speaking principals benefit from agents action
o Manifestation/consent
 To what extent was the principal manifesting consent either
apparent or actual
o Distinguishing between an employee and an independent contractor
 Restatement (Second) of Agency § 220(2) lists ten factors
• Where the work is done
• Whose tools are used
• Who directs the specifics of the work
• How the person is paid
• Fact specific inquiry


Organization and Structure of a Corporation

- Definition
o Corporation is a legal entity with identities separate from the owner
o Incorporation – process by which the corporation is formed
 Most statutes require only one person to form
- American conception of corporate governance traditionally focuses on three roles
o Officer
 In charge of the day to day operations of the corporation
o Director
 Are elected by shareholders to supervise the officers
 Typically have no authority to act as individuals – act as a
collective body known as a board of directors
o Shareholder
 Owners of the corporation
 Possess important control rights
• Elect the board of directors
• Vote on fundamental transactions
• Right to all of the assets after creditor’s have been paid in a
• Have limited liability
- Ownership structure
o Public corporations
 Shares are owned by a large number of investors and are traded in
the public securities market
 Officers, directors, shareholders are typically distinct groups
 Subject to disclosure requirements under securities law
 Subject to take over
o Closely held corporations
 Shares are owned by a small number of shareholders w/o access to
the public securities market
 Overlapping roles of directors, shareholders and officers are the
- Incorporation
o Organizing document that is used to incorporate a company is called either
articles of incorporation or certificate of incorporation. A generic term that
refers to both is called a charter
 Required to include
• DGCL §102
o Name of the corporation
 Must include one of the words: association,
company, corporation, club, foundation,
fund, incorporated, institute, society, union,
syndicate, or limited – DGCL §102(a)(1)
o Number of authorized shares of stock and a par
value DGCL§102(a)(4)
o Name and address of a registered agent in the state
of incorporation
 Street, number, city and county DGCL
o Nature of the business to be conducted DGCL
o Name and mailing address of the incorporator
o If the powers of the incorporator are to terminate
upon the filing of the charter the names and mailing
addresses of the persons who are to serve as
directors until the first annual meeting §102(a)(6)
• Model Business Corporation Act §2.02(a)
o Name (1)
o Number of shares corporation is authorized to issue
o The street address of the corporation’s initial
registered office and the name of its initial
registered agent at that office (3)
o The name and address of each incorporator (4)
 May also include
• DGCL §102 (b)
o Provisions limiting and regulating the powers of the
corporation – any provision that is required or
permitted to be in the bylaws may appear in the
charter (1)
o Preemptive rights to shareholders (3)
o Super majority provision (4)
o Provision limiting the existence of the corporation
o Provision imposing personal liability on
o Indemnification clause (7)
• MBCA §2.02(b)
o Names and addresses of the individuals who are to
serve as the initial directors (1)
o Provisions not inconsistent with laws regarding
 Purpose of corporation
 Managing the business
 limiting the powers
 Par value
 Personal liability on shareholders (2)
o (3) any provision that is required or permitted to be
in the bylaws
o Indemnification provisions for directors (4)
- Organizational Meeting DGCL §108
o Takes place after filing of the charter
o Purposes (a)
 Adopt bylaws
 Elect directors (if the meeting is of the incorporators) to serve until
the first annual meeting of stockholders
 Elect officers if meeting is held by directors named in charter
o Notice (b)
 In writing 2 days prior to meeting stating time place and purpose of
meeting. Notice need not be given to anyone who attends the
meeting or who signs a waiver before of after the meeting
o Any action that could have taken place at the meeting may take place w/o
a meeting if each incorporator sins an instrument which states that the
action was taken (c)
 Grant v. Mitchell where no organization meeting was held. Court
said it was ok for a single incorporator to act on consent
Promoter Contracts
- people would go out and get people to invest in corporations
- not nearly as much fraud today
- if the promoter goes out and incurs debt will the corporation be liable
o can do so contractually or expressly
o can do so by actions
 ex/ idea to write a software system
• to do so you need to lease other software
• you are liable
• you assign the lease to the corporation and the corporation
is now liable
o this does not mean that you are relieved just that the
corporation is now also bound
Capital Structure
- Definition
o Combination of claims sold by the corporation which are generally divided
into two types: equity and debt
 Equity connotes a power to control
 Debt connotes a fixed obligation
- Equity
o Issuance must be authorized in the articles of incorporation
 Must set forth the total number of shares the corporation is authorized
to issue
 If authorized to issue more than one class of shares they must
proscribe the classes and number of shares in each class
o Can have different classes of equity
 Could have different voting rights
 Preference to dividends
o All of the equity interests of a corporation together are called the corporation’s
capital stock
o Individual units of capital stock are called shares
o Price of Capital Stock
 Determined by the board of directors DGCL §152
• Can be issued for cash, any tangible or intangible property or
any benefit to the corporation
• Absent fraud judgment of the directors is conclusive
o Rights and Options Respecting Stock DGCL §157
 Must be approved by the board of directors
 Rights or options must be either in charter or a resolution adopted by
the board of directors
 See Grimes v. Alteon Inc where shareholder had agreement with CEO
to purchase issued shared to keep his 10% ownership – court did not
enforce because not approved by board or in writing.
o Shares
 Issued when they are sold
 Outstanding as long as shareholders have them
 If corporation repurchases them – treasury stock (issued but not
o Common vs. Preferred DGCL §151
 Common stock
• Unlimited voting rights
• Right to residual assets
• Corporation must at all times have at least one share having
each of the rights of common stock
 Preferred
• Has a preference in payment over common stock
- Debt
o Not describe in the charter
o Many corporations issue bonds
 Registered vs. bearer
• Registered corp. makes payment to person registered
• Bearer corp. makes payment to whoever has ticket
 Redemption – corp. may repurchase the debt securities from the
 Priority – says who gets paid first – senior, subordinated, senior
 Conversion – may be able to trade debt for equity
Balance Sheet Income Statement and Cash Flows
- balance sheet
o inventory is listed as an asset
 need a way to figure out how the inventory should be valued
 Business probably do a combo of things
 This is just an accounting rule that allows them to get a rough
estimate of what things are worth
 Whatever method you use for accounting methods to tell investors
is the same method you must use to tell the IRS
o PPE (property, plant and equipment)
 This stuff deprecates in value over time
 Depreciation – arbitrary method to describe the reduction in value
over time
- income statement
o Sales
o - COGS
o - SG&A
o - Depreciation Expense
o After you deduct all this you are left with EBIT
o Subtract interest and you are left with EBT
o Subtract tax and you are left with net income
 Net income tells what a shareholder can take out as a dividend
- cash flow
o a picture of a period of time – only how much cash is generated
o you do not have to take depreciation in to account
o start with cash at beginning of statement
o add net income
o add depreciation
o we have to subtract the cash that is increase in accounts receivable
o we add increase in accounts payable
o not that important to shareholders but more important to lenders
- devaluing an asset over time
- kind use the same amount every year for useful life of asset
- do not mark to market
o try to figure out what the property is worth
o can get the items appraised
o you don’t really use this in an income statement b/c it is expensive
- for tax purposes companies can keep two separate books for depreciation – one for
taxes and one for investors
- if inventory costs different amounts there are two different accounting can be used to
determine the cost of the inventory
- Doesn’t matter which of your inventory was actually sold but could be the difference
of reporting a loss or gain
- Can use any lawful form of reporting inventory to RS but must use same form to
- excess of purchase price paid by the buyer from FMV of seller’s identifiable net
- also can keep two books
o allow 40 years for accounting and 15 for tax
Statement of Cash Flows
- Cash at beginning of year
o Plus net income
o Plus depreciation
o Plus accounts payable
o Minus accounts receivable

Financial Rights of Shareholders

Dividends and Distributions
- a dividend is simply a payment usually in cash from a corporation to a shareholder
- timing and amount of dividends is determined by the board of directors
- corporation can also distribute money to its shareholders by repurchasing its own
o shares that remain outstanding still own 100% of the company
- two types of limits on distributions
o solvency test
 most statutes (Delaware being an exception) impose a solvency
restriction on distributions that would prohibit distributions that would
result in insolvency
o balance sheet tests – measured from the corporation’s financial statements
 impairment of capital test (DGCL §170) – permit distributions out of
surplus [defined in DGCL §154 to mean all capital in excess of
aggregate par value of the issued shares plus any amounts the board
has elected to add to its capital account
 Technical insolvency test – (MBCA §6.40(c)(2) prohibits distributions
that would result in total assets being insufficient to pay the sum of the
corporation’s liabilities and any liquidation preferences that would be
owing if the corporation dissolved at the time of distribution.
- Board of directors has enormous discretion at which well they determine total assets
and total liabilities in deciding whether they redemption or dividends will cause an
impairment of capital provided they use a professional
o Klang v. Smith’s Food and Drug Centers where majority shareholder wanted
to ensure he was paid a certain amount during a LBO
Limited Liability and Piercing the Corporate Veil
- Corporations have limited liability
o Enables shareholders to diversify
o Free transfer of shares in the public market
o Reduces monitoring costs
o Effects of limited liability
 Increases the cost of debt and decreases the cost of equity
 People who have limited liability have an incentive to engage in riskier
- Piercing the corporate veil – in some situations a court will require a shareholder to
pay the full amount even if it is over his investment
o Test for when to pierce are fact specific
o First question is whether corporate formalities have been observed
o Most courts also require a showing of injustice or unfairness
- Courts will often pierce if there was a commingling of the funds
o Soerries v. Dancause where the owner of the bar often paid employees out of
his own accounts

State Regulation of Corporate Governance

- management is divided among three groups
o shareholders, directors and officers
o officers exercise the most practical control over a corporation on a daily basis
but there are few corporate statutes that deal with officers
- Directors
o The statutory power to manage the corporation rests with the board of
o Every public corporation must have a board of directors while closely held
corporations can do away with it
o DGCL §141
 (a) Every corporation must have a board unless otherwise provided in
this act. also says what follows is subject to provisions in the charter
 (b) Board shall consist of 1 or more members each of whom shall be a
natural person. The number of directors will be fixed in the bylaws
unless fixed in the charter. May have requirements in the
bylaws/charter. Any director can resign at any time.
 (d) can divide the directors into classes where terms expire at different
 (e) business judgment rule
 (f) allows board to operate with consent
 (g) allows board to have meetings in other states
 (h) says board can fix compensation for directors
 (i) can telephone into meeting and be considered present
 (k) says directors maybe removed w/ or w/o cause
o DGCL §351
 For close corporations can decide not to have a board of directors
 Stockholders are deemed to be directors to apply provisions of this
 Stockholders are subject to all liabilities of directors
 If this provision exists must be noted on the stock
 Can be inserted in the certification of incorporation by amendment if
all incorporators and subscribers approve
 Only need a majority to get rid of provision
o Model Act §8.01
 Except as provided in §7.32 every corporation must have a board of
directors (a)
 All corporate powers exercised by or under authority of the board of
directors (b)
 For public corporations boards oversight responsibilities include
• Business performance and plans
• Major risks
• Performance and compensation of officers
• Policies to foster compliance with law
• Financial statements
• Effectiveness of internal controls
• Provide adequate and timely information
- Inside directors vs. outside directors
o Inside – people who are employed full time by the corporation as corporate
officers in addition to their roles on the board
o Outside – people who do not work for the corporation other than as members
of the board
 If they have no other financial responsibility they are deemed
- Terms of directors
o All directors are elected by the shareholders at an annual meeting unless their
terms are staggered DGCL §211(b) and MBCA §8.03(c) or a vacancy occurs
o Staggered and classified refer to a board that allows for classes of directors to
be elected for multiple year terms. Always a majority of directors that will
remain on w/o re election
 Acts as a powerful anti takeover device
o Directors may be removed from the board w/ or w/o cause unless the charter
provides that directors may be removed only for cause. MBCA §8.08(a) and
DGCL §141(k)
- Actions of directors
o Traditionally all action must be taken at duly called meetings of the board
o Modern corporation statutes also permit directors to act w/o holding a meeting
through consent
o Can act at regular meetings or special meetings which require a notice of the
date, time and place of the meeting but not purpose
 Although purpose of meeting is not required for directors may run into
a problem if director has dual status as director and shareholder.
Adlerstein v. Wertheimer where 1 of three directors was also leading
shareholder and other two wanted him off board. They did not tell him
purpose of meeting but court used fairness standard here since he had
dual status.
o A majority of the directors being present requires statutory requirements but
charter may change to increase/decrease number of directors required to fulfill
- Each share of common stock carries one vote. DGCL §212(a) and MBCA §7.21
- What shareholders vote on
o Election of directors – DGCL §211(b); MBCA § 8.03, 8.08
 Directors can also add directors to the board. However, the directors
cannot use this power to entrench themselves on the board and not
allow the shareholders to vote. Blasius Industries, Inc. v. Atlas Corp.
 Board could however push back the record date to merely delay the
election or increase of directors. Stahl v. Apple Bancorp where Stahl
wanted to act on consent at the annual meeting to increase board of
directors and current board pushed back annual meeting
o Amending the corporation’s charter – DGCL § 242(b); MBCA §10.03
o Amending the bylaws – DGCL § 109(a); MBCA 10.20(a)
o Approving a merger – DGCL §252; MBCA § 11.03
o Approving the sale of assets not in the ordinary course of business DGCL §
271; MBCA § 12.02
o Approving the dissolution of the company DGCL §275(b); MBCA §14.02
o Ratify conflict of interests transactions DGCL 144(a)(2); MBCA § 7.22(a)
- Can vote either at the meeting or by proxy DGCL §212(b); MBCA §7.22(a)
o A proxy is the authorization given by a shareholder to another person to vote
the shareholder’s shares
o Holder of the proxy is an agent
- Majority vote wins except in director elections when only a plurality is required
DGCL §§216(2), (3); MBCA 7.28 (a)
- Rules
o Voting for directors is generally done by straight voting – vote all your shares
for each director that is up for election
 If one person owns a majority he will elect every director
o Cumulative voting – multiply the number of directors to be elected by shares
you have and can vote all of them for one director
 Ensures minority representation on the board
o Default rule is straight but companies can opt into cumulative
 DGCL §214 MBCA §7.28
- annual meeting
o traditional method by which shareholders act is through voting at the annual
meeting or by proxy
o statutes require corporations to hold annual meetings
 DGCL §211(b)
 MBCA §7.01
- Special meetings – DGCL §211(d) MBCA §7.02
o Replace directors as part of a hostile takeover attempt
- Shareholders can also act w/o meetings through consent as long as charter does not
take away that power
o DGCL § 228, 275(c);
 Consent of number of shareholders that would be necessary to approve
an action at a meeting unless the articles of incorporation take away
power to act on consent
o MBCA §7.04(a)
 Requires unanimous consent
- Notice of meetings
o Process for calling and deciding time and place appears in charter or bylaws
o All shareholders must be given notice of what actions will take place at the
meeting DGCL § 222(a); MBCA §7.05
o If notice is insufficient actions taken at the meeting by shareholders who did
not attend are void able
 Attendance at a meeting constitutes waiver of improper notice
- Record Date – date at which owners of a share of a publicly traded company at the
end of the day will be considered shareholders for purpose of annual meeting whether
or not they actually own the stock at date of meeting
o Date is fixed by board of directors DGCL §213(a) ; MBCA §7.07(a)
o In Delaware cannot be more than 60 days before meetings nor less than 10
days before meeting DGCL § 213(a)
o In MBCA cannot be more than 70 days before MBCA §7.07(a)
- Quorum Requirements
o Unless charter or bylaws provide otherwise shareholders holding a majority of
shares must be present to constitute a quorum (could be present through
 DGCL § 216; MBCA §7.25(a)
Bylaw Proposals
- shareholders can initiate changes to the bylaws
- in Delaware law charter can also give power to directors to initiate changes –
however this does not take power away from shareholders, DGCL §109
- Model Act says that shareholders can amend a bylaw and then directors cannot then
amend repel or reinstate the bylaw. MBCA §10.20(b)(2)
- Different to changes in a charter where it at first has to be initiated by the directors
and then the shareholders can vote on it DGCL § 242(b); MBCA §10.03(a)