PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN LECTURE 8 PP. 297-340 Business Organizations 2010-2011 Lectures

PARTNERSHIPS,CORPORATIONS

AND THE VARIANTS

PROF. BRUCE MCCANN

LECTURE 8PP. 297-340

Business Organizations2010-2011 Lectures

Overview of Corporate Structure

Lec. 8, pp 297-340 Corps Prof. McCann

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Types of Equity


Common StockPreferred StockConvertible preferred stockWarrants

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Common Stock


Required to be issuedUsually carries voting powerMay or may not have “par” valueFirst in line in terms of control, last in line in

terms of getting paid on liquidation

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Preferred Stock


Preference given as to Dividends Liquidation of the company’s assets May also allow certain rights if the dividends are not

paid (such as electing a number of directors)

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Convertible Preferred Stock


Preferred stock that carries with it right to convert to common stock

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The Corporation’s Foundational Documents


Articles (Charter)By LawsShareholder Agreements Between Themselves

Buy-sell Agreements Aka Cross-purchase Agreements Survivor Purchase Agreement

Corporations Agreements To Repurchase Stock Stock purchase Agreement Aka Redemption Agreement

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Incorporation Process Review


Articles filedBy laws preparedFirst meeting held of shareholders

Elect Directors Make subchapter S election

Directors meeting Adopt pre-existing agreements Appoint officers Authorize issuance of stock Authorize banking relationships

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When You Need Shareholder Agreements


To maintain exemption from securities registration requirements i.e., a restriction that shareholder cannot transfer to a

citizen of another state (triggering interstate sales issue);

To maintain subchapter “S” status i.e., a restriction that you cannot sell to a partnership

or corporation which would exceed limit of 75 shareholders

To maintain professional corporation status i.e., cannot sell to unlicensed person

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When You Need Shareholder Agreements


To Maintain Effectiveness of a Pooling Agreement i.e., if parties pool shares under agreement to keep X

off the board, important no one conveys their shares to X.

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Restrictions


May be absolute: Prohibits transfer altogether (usually unenforceable)

May require others consent Typically requires director or shareholder approval

May limit class of possible transferees Must be family members Must be CPA Must be non-competitor

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Examples of Restrictions


Buy-Out Agreements Whereby anyone desiring to sell must offer to

designated others on same terms, so-called “right of first refusal.”

Whereby someone who may lose control of stock in a divorce is obliged to sell to other shareholders or to the corporation

Whereby the estate of a deceased shareholder must sell to the others

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Mandatory vs Optional


Provision can require corporation or other shareholders buy out the interest Frequently where shareholder dies or is expelled or

retires

Provision may give others the “option” to buy the seller’s interest e.g., right of first refusal

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Pricing the Shares


Three usual approaches: Book Value

What do the accounts show the shares are worth if you divide the number of outstanding shares into the number you get when you subtract the liabilities from the assets?

Liquidation Value What would you get if you closed the doors, sold all the

assets, paid all the debts, and divided the money up? Cash Flow or Earnings

What would an investor be willing to pay today to own a company that generates the profits your company generates?

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Valuation Issues


“Book Value” can mean different things to different people. Denkins v Zinkan

“Fair Value” may not be the same as “fair market value” Discounts for

Lack of control Lack of marketability

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THE PLAYERS, REVISITED


SHAREHOLDERS Elect directors Usually must ratify certain acts of directors

Resolution to dissolve Resolution to merge with another entity Resolution to sell principal assets Resolution to change corporate purpose Resolution to amend by-laws or charter

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THE PLAYERS, REVISITED


DIRECTORS Charged with day-to-day operations of entity Hire and Fire Officers Bear ultimate responsibility for conduct and

misconduct of the corporation

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“Closely Held” vs Statutory Close Corporation


Any corporation can be held by a small number of shareholders. One shareholder is not uncommon.

A “closely held” corporation is a term with no particular legal significance other than to mean: Few shareholders Most of whom participate in management No general market for the stock (because of limitations on

control and liquidity) and Some limitations on transfer of the stock

Courts now widely allow shareholders to control management via controlling director’s powers.

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Recording the Corporate History


All States Require Minutes be MaintainedCalif Corps Code 314

The original or a copy in writing or in any other form capable of being converted into clearly legible tangible form of the bylaws or of the minutes of any incorporators', shareholders', directors', committee or other meeting or of any resolution adopted by the board or a committee thereof, or shareholders, certified to be a true copy by a person purporting to be the secretary or an assistant secretary of the corporation, is prima facie evidence of the adoption of such bylaws or resolution or of the due holding of such meeting and of the matters stated therein.

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By Laws


Must conform to the ArticlesMust conform to the law

e.g., by-law prohibiting any transfer of interest would be unenforceable

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