Overview of Corporations

Overview of Corporations

In this lesson, you’re expected to learn about:
– the basics of corporate structure
– the formation and termination of a corporation
– shareholders and their rights

In the U.S., corporations are generally incorporated under the state law, which governs that corporation’s internal governance, even if the corporation’s operations take place outside of that state.

Because of the differences between state laws, corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate. Half a million businesses, including more than half of all U.S. publicly-traded companies, have been incorporated in Delaware.

The corporate law expertise of their courts, extensive precedent of corporate case law, and flexibility of corporate statutes are some of the reasons to make Delaware the top state of incorporations in the U.S.

[Optional] Introduction to Company Formation
Watch this 16-minute video that explains how a corporation works:
https://www.youtube.com/watch?v=1UHazHOH4XY
Formation of a Corporation & Relevant Corporate Documents

The creation process of a corporation starts with filing the articles of incorporation with the state government. Once the articles are approved, the corporation’s directors meet to create bylaws that will govern the internal functions of the corporation.

Thus, the articles of incorporation and bylaws are some of the main corporate documents:

1) Articles of Incorporation (or “charter”) 

A public document that grants the corporate existence, i.e. the birth certification of the corporation. Although the corporate charter may contain any provision that is not contrary to law (contractual freedom), modern charters tend to cover the minimum provisions required by law, such as incorporators, corporate name, address, duration, purpose, capital structure, and internal organization.

2) Bylaws

This is like the corporate constitution. It contains specific provisions for the organization and operation of the corporation, such as kinds of stocks, dividends, election and structure of the board of directors, shareholder meetings, etc. It must conform to both the corporation statute and its charter.

NOTE: Generally, the bylaws are more detailed than the articles of incorporation. This is because the charter amendment must be approved by both the state and shareholders; bylaws, in turn, are only approved by directors and may or may not be approved by shareholders.
Termination of a Corporation

Although most corporations have perpetual existence, the laws contemplate both non-judicial and judicial dissolution:

• Non-Judicial Dissolution: it can be voluntarily by the shareholder’s deliberation, due to the expiration of the term stated in the charter or due to an act of the state legislature.

 Judicial Dissolution: it can be petitioned by shareholders, creditors or the state itself.

After dissolution, the board of directors liquidates the corporate assets and distributes the proceeds to creditors, preferred shareholders, and finally to the common shareholders, in this order.
[Optional] The Basics of Corporate Structure
Watch this 3-minute video about corporate structure:
https://www.youtube.com/watch?v=wtMORWO5h9Y
Shareholders, also called stockholders, are individuals or institutions who legally own one or more share(s) of stock in a publicly- or closely-held corporation.

Although the traditional view considers shareholders as the corporations’ owners, recently, a growing number of legal scholars challenge this idea.

Critics frequently denounce the separation of ownership and control in giant corporations and some theories reject the idea that a corporation is something that is capable of being owned.

The main rights of shareholders are:

 Right to vote: the primary right of shareholders is to attend the shareholders’ meeting and to vote, including election of directors, amendment to the corporate charter or for certain fundamental corporate transactions – i.e., mergers, the sale of all or almost all of the corporation’s assets, dissolution.

• Right to sell: shareholders are free to sell their stock – e.g., if they are disappointed with a company’s performance.

• Right to sue: in some circumstances, shareholders may sue the directors for breach of fiduciary duty.

• Right to obtain information: it includes the right to inspect corporate records; to request any information or clarification in relation to the agenda for the shareholder meeting or any publicly available information.

• Appraisal rights: if shareholders object to some corporate action that may diminish the value of their stock holdings, the “dissenter” may demand for appraisal and buy-out, and will receive the “fair value” of their stock from the corporation.

Shareholder Meetings

There are two kinds of shareholder meetings:

1) Annual general meeting: occurs annually for the approval of financial statements, election of the board of directors, and informing the members of previous and future activities. At the annual general meeting, the corporate chairman presides over the meeting and may give an overall status of the business.

2) Special meetings: are called at any time for special purposes. They are often called to permit shareholders to vote on fundamental transactions (mergers, dissolutions etc.).

Previous notice of both annual and special meetings must be given to shareholders of record, that is, the shareholders whose names appear on the share transfer book at the time of the notice. The notice must state the purpose of the meeting. Also, a quorum (usually a majority of outstanding shares) must be present in person or by proxy as a formal condition to install the meeting.

NOTE: Failure to give valid notice will invalidate the meeting unless the shareholders waive their objection by attending the meeting without objection or by signing a written waiver.

Many states permit shareholder action without a meeting, provided that all (in some states, the majority) of the shareholders give their consent, in writing, to the action(s) taken.

Voting in Shareholder Meetings

Most matters are decided by a majority of the votes cast. However, in some situations, it is required for the affirmative voteto have a higher number of shareholders or a unanimous approval.

For example, the approval of a fundamental corporate change or the vote for the amendment of the corporate charter, which will result in drastic changes in the nature of the corporate business, in the value of the stock, or in the voting rights.

Regarding the election of directors, as a rule, each share has one vote for each director. However, the charter may allow a cumulative voting by which each shareholder is entitled to one vote per share multiplied by the number of directors to be elected. As a consequence, the shareholders can “accumulate” their votes and cast all of them in a single nominee, making it easier for minority shareholders to get seats on the board of directors.

It is also possible to create a dual-class voting system to assign more voting rights to one class of stock than the other. Usually, the purpose of those shares with “super-voting powers” is to give key company insiders greater control over the company’s voting rights, and thus its board and corporate actions.

In addition, a shareholder may name a representative to vote his/her shares through a proxy. In this case, several shareholders may join forces aiming at the control of the corporation. The proxies at shareholder meetings are usually the corporate officers unless there is a sharply contested takeover going on.

Finally, some states permit shareholders to transfer their shares to voting trustees for the limited purpose of electing directors and for voting on other matters as specified in the trust.

[Optional] Shareholder Voting Rights
Watch this 2-minute video about shareholder voting rights:
https://www.youtube.com/watch?v=xiCiKLqVXOw
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