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History and Nature of Corporations
Organization and Financial Structure of Corporations
Management of Corporations
Shareholders’ Rights and Liabilities
Securities Regulation
Legal and Professional Responsibilities of Auditors,
Consultants, and Securities Professionals
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
History and Nature of Corporations
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, inIt Takes a Village (1996)
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
v History of corporationsv Classifications of corporationsv Regulation of for-profit corporationsv Regulation of nonprofit corporationsv Regulation of foreign and alien
corporationsv Piercing the corporate veil
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v By the time of the Roman Empire, the corporate form of business had evolved
v Governments allowed the corporate form special privileges and powers believing that the benefit to society outweighed any harm
History
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v England granted corporations monopolies in trade and broad powers of governance
v In 1776, American colonists quickly limited corporations by special charters issued by a state’s legislature:w Limited time, limited purpose, revocable
The American Corporation
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v By the end of the Civil War, corporate charter laws were being amended to give more, rather than limit, corporate powers
v Abraham Lincoln wrote: “…corporations have been enthroned…”
The American Corporation
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v In 1886, the US Supreme Court declared that a private corporation was a "natural person" under the Constitution and should receive the protections under the Bill of Rightsw Santa Clara County vs. Southern Pacific Railroad
v By 1919, corporations employed more than 80% of the workforce
The Corporation As a Person
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v Modern statutes are enabling statutes, giving substantial powers and flexibility
Modern Statutes
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v Corporations share unique characteristics in the way they are created, a legal status as a fictitious “person,” specific authority for operation and management, limited liability for owners, easy transferability of an owner’s interest, and the obligation to pay taxes that results in double taxation of profitw See Fig. 1, page 1009
Principle Characteristics
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v By purpose:w For-profit corporationsw Not-for-profit corporations
v By ownership:w Publicly held (shareholders)w Close (a few shareholders)
wSubchapter S
w Government-owned corporations
Classes of U.S. Corporations
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v By origin – a company is:w Domestic in the state in which the company
incorporatesw Foreign in all other states in which a company
operatesw Alien in all countries other than the country in
which it incorporated
Classes of U.S. Corporations
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v Under the Commerce Clause of the U.S. Constitution, the federal government has the power to regulate interstate commerce wArticle 1, Section 8, Clause 3: “The
Congress shall have Power …To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”
Federal Regulation of Firms
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v A state law that regulates business activities is constitutional (i.e., does not unduly burden interstate commerce) if: 1. It serves a legitimate state interest
2. It is the least burdensome means of promoting that interest,
3. That legitimate state interest outweighs the burden on interstate commerce
Federal Regulation of Firms
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v In the U.S., states regulate how a corporation is created and operatedw Generally follows Model Business Corporation
Act (MBCA) or Model Nonprofit Corporation Act (MNCA)
v A state may require a foreign corporation to qualify to do business within the statew By obtaining a certificate of authorityw But what does “doing business” mean?
State Regulation of Firms
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v MBCA lists several activities that are not doing business within a statew Soliciting orders (by mail or employees)w Selling through independent contractorsw Owning property for investment purposesw Conducting an isolated transaction completed
within 30 daysw Maintaining a bank account for collection
purposes
The Meaning of Doing Business
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v Maintaining an office for intrastate businessv Contracts related to local business or salesv Owning/using real property for business v Maintaining stock for order fulfillmentv Performing service activities
Examples of Doing Business
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v Most states have enacted a long-arm statute that allows the state to exercise jurisdiction over an entity that harms a state interest
v See Jet Wine & Spirits, Inc. v. Bacardi & Co., Ltd.w New Hampshire firm (Jet Wine) sued a Liechtenstein
company (Bacardi & Co.) and made a prima facie case for state jurisdiction over foreign corporation based on a contract assumed by the foreign corporation and agency theory
Long-Arm Statutes
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v In the landmark case of International Shoe, the Supreme Court held that under the Due Process Clause of the Fourteenth Amendment, a state may exercise jurisdiction over a foreign corporation only if the corporation has sufficient minimum contacts with a statew Minimum contacts may be less than “doing
business,” including an isolated event that harms a citizen or state interest
The Due Process Clause
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v Facts:wRyan, a Connecticut resident, hired New York
accounting firm Cerullo & Co. to handle taxeswNew York State claimed Ryan was a NY
resident and attached tax penaltieswRyan sued Cerullo and his firm for malpractice
arguing that Connecticut had jurisdiction since Cerullo had not obtained a Connecticut certificate of authority
Ryan v. Cerullo
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v Connecticut Supreme Court Ruling:wRyan worked and had an apartment in New
York City and the taxes were for New YorkwNeither Cerullo individually nor Cerullo & Co.
were required to qualify to do business in Connecticut despite providing tax services to a Connecticut resident, thus not properly subject to a law suit in a Connecticut court
Ryan v. Cerullo
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v Corporation law provides an imaginary wall – the corporate veil – between a corporation and its shareholders to protect shareholders from personal liability for a corporation’s actions
v However, sometimes a court will pierce the corporate veil to reach individual shareholdersw See Fig. 2, page 1022
Piercing the Corporate Veil
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v Two requirements must exist: wDomination of a corporation by its
shareholderswCorporation is an alter ego of shareholderswCorporation is instrumentality of shareholders
wDomination used for an improper purposewDefrauding creditors, circumventing a statute,
or evading an existing obligation
Piercing the Corporate Veil
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v Signs that corporation is an instrumentality or alter ego of shareholders:w Inadequate capitalization (defrauds creditors)w Transfers of corporate assets for less than fair
market value (looting; defrauds creditors)w Commingling assets between corporate entities
or between shareholders and corporation (defrauds creditors)
w Establishing subsidiary to circumvent or evade statutory or contractual obligation
Piercing the Corporate Veil
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Test Your Knowledge
v True=A, False = Bw Prior to the mid-1800s, U.S. corporations
were limited by law in terms of time and scope of operations.
w A corporation is a fictitious, but legal, person.w Corporations may be classified only in terms
of ownership.w Under the Commerce Clause, states have the
power to regulate commerce within their state.
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Test Your Knowledge
v True=A, False = Bw 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.
w 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.
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Test Your Knowledge
v Multiple Choicew 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
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Test Your Knowledge
v Multiple ChoicewWhich 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 above41 - 27
Thought Questions
v 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?
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