Chapter 37: Nature of Corporations

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 37:
Nature of Corporations

S-2
Learning Objectives
• Define corporations.
• Explain the procedure for incorporation.
• Discuss piercing the corporate veil.
• Recognize the alter ego theory.
• Describe the promotion of justice theory.
• Describe the powers and duties of partners.
• Explain methods of dissolving a partnership.
• Discern involuntary dissolutions.
• Understand consolidations, mergers,
acquisitions.

S-3
37.0 In the News
Why Amazon’s Whole Foods Deal Is
Terrifying Food Makers
http://bvtlab.com/g96TE/
Amazon announced its intention to acquire Whole
Foods, the upscale supermarket chain that played
a pivotal role in taking organic and natural foods
mainstream.
• Discuss the procedures required for the merger
to take place.

S-4
37.1a Corporation Defined (Slide 1 of 2)
A corporation is an artificial, intangible
person or being, created through a process
provided by state law.
• A legal entity separate and apart from the
persons or entities that had it created
• Rights and duties are separate and apart
from its shareholders.
• Corporation is subject to the doctrine of
respondeat superior.

S-5
37.1a Corporation Defined (Slide 2 of 2)
Corporations may be classified in a
variety of ways:
• Public or private
• For profit or not-for-profit

S-6
37.1a Critical Thinking
CASE: J & J Sports:
Question is whether individual shareholders
should be dismissed from the action if evidence
indicates they had nothing to do with the
appropriation of rights to a pay-per-view fight.
• When can individual shareholders be liable for acts
associated with a corporation?
• Why was this litigation against the individual
shareholders allowed to continue?

S-7
37.2a The Application for a Charter
(Slide 1 of 2)
Articles of incorporation
• Names and addresses of the incorporators
• Name of the proposed corporation
• The object for which it is to be formed
• Proposed duration
• Location of its registered office
• Name of its registered agent
• Details regarding the stock of the
corporation

S-8
37.2a The Application for a Charter
(Slide 2 of 2)
• Each incorporator must sign the charter,
and signed application is forwarded to a
state official.
• Signed by the secretary of state and
returned to incorporators
• Incorporators file it in the proper recording
office.
• Elect a board of directors and approve the
bylaws.

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37.2c Corporate Powers and Purpose
A corporation has only the powers
conferred on it by the state that creates it.
• The charter sets forth the express powers
of the corporation.
• General powers are ordinarily granted to
the corporation by statute.
• Ultra vires acts
– Acts of a corporation that are beyond the
authority, express or implied

S-10
37.2e Domestic & Foreign Corporations
• A corporation organized under a state’s laws is
a domestic corporation in that state.
• A corporation incorporated in one state is a
foreign corporation in all other states.
• State statutes require foreign corporations to
qualify to do business by filing a copy of their
articles of incorporation with the secretary of
state.
• When engaged wholly in interstate commerce
through a state, a license to do business in
that state is not required.

S-11
37.2f Promoters (Slide 1 of 2)
• Promotes the corporation and assists in
bringing it into existence.
• Comply with applicable federal securities
laws and blue-sky laws.
• Liability
– Promoter is liable on pre-incorporation contracts.
• No liability
– Law has used fictions to create an obligation on
the part of the corporation’s novation.

S-12
37.2f Promoters (Slide 2 of 2)
• Theories of corporate liability:
– Offer and acceptance theory
– Consideration theory
– Quasi-contract theory
• Avoidance of Liability
– Promoter may avoid personal liability by
informing other party that he/she does not
intend to be liable and is acting solely on the
credit of a corporation that has yet to be
formed.

S-13
37.2f Critical Thinking
CASE: P.I.M.L., Inc.
Question is whether Defendant’s actions made
them Promoters. They presented themselves as
representing the yet-to-be-formed corporation,
they signed documents on behalf of the entity,
and they discussed business strategies with
plaintiff.
• Why did the court find that the three individual
defendants were promoters?
• What might the promoters have done to eliminate
the possibility that they would be held liable?

S-14
37.3 Disregarding the
Corporate Entity
• Piercing the corporate veil
• Alter ego theory
• Promotion of justice theory

S-15
37.4 Voluntary Dissolutions
• Procedures
– Written consent of all its shareholders or
– Instituted by board of directors and approved by
two-thirds of the shareholders
• Notice to Creditors
• Distributions
– First used to pay debts
– Remainder is distributed to shareholders.

S-16
37.5 Involuntary Dissolutions
• Commenced by the State
– Quo warranto proceedings
• Commenced by Shareholders
– Deadlocks
– Illegal, fraudulent, or oppressive conduct
– Protection of minority shareholders
• Commenced by Creditors

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37.6 Consolidations, Mergers,
and Acquisitions
Consolidations
– Combination of two corporations when the two
entities are dissolved, creating a new corporation.
Merger
– One corporation absorbs the other and the
acquiring corporation continues to exist, but the
target corporation is dissolved.
Acquisition
– Two or more corporations come together
involuntarily, with one remaining in existence.

S-18
37.6b Procedures
Procedures for consolidations and mergers
are statutory.
• Board of directors gives resolution.
• Plan submitted to shareholders for approval.
• Shareholders must approve the plan by a
two-thirds vote of all shares
• Articles of consolidation or merger will be
prepared and filed with the state.
• Certificate of consolidation or a certificate of
merger will be issued.

S-19
37.6c Rights of Dissenting
Shareholders
• Courts will enjoin if a merger has no valid
business purpose other than the elimination of
minority shareholders.
• Dissenting shareholder can serve a written
demand that corporation purchase stock.
• Entitled to be paid the fair value of the stock on
the day preceding the vote.
– Weighted average method.
– Discounted cash flow analysis
– Comparisons with other tender offers

S-20
37.6c Critical Thinking
CASE: Johnson
Dissenting shareholders questioned whether
they received fair value for their shares.
• Why did the court adopt Pommerening’s
approach over that suggested by Mecredy?
• Do you believe the court had sufficient
evidence to make a good decision regarding
value? Why?

S-21
37.6d Liability of Successors
• Changed entity ordinarily remains liable
for prior debts.
• Surviving corporation assumes all the
liabilities and obligations of the absorbed
corporation.
• If one corporation acquires only the
assets of another corporation, the
acquiring corporation is not liable for the
debts and liabilities of the transferor.

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37.6e Antitrust Considerations
Horizontal merger
• Combines two businesses in the same industry
Vertical merger
• Brings together two companies, one being the
customer of the other
Conglomerate merger
• Merging of companies that are unrelated
- Most antitrust activity is aimed at
horizontal mergers.

Chapter 37: Nature of Corporations

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Chapter 37: Nature of Corporations