Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Corporate Formation and Financing
291
accomplish its corporate purpose.
Ultra Vires Act – An act by a corporation that is beyond its express or implied powers is called
an ultra vires act. In the event of an ultra vires act, shareholders can sue for an injunction to
Financing the Corporation: Stock
Corporations finance their operation through equity securities (stocks) or debt securities.
Common Stock – This is an equity security that represents the residual value of the organization.
Preferred Stock – This equity security is given certain preferences and rights over common
stock. Preferred stockholders generally are not given the right to vote for the election of directors
Dividend Preference – Dividend preference preferred stock pays a fixed dividend at set
periods.
participate in the profits along with common stockholders in addition to their fixed
Conversion Right – Convertible preferred stock establishes the terms for converting
some future date.
Authorized, Issued, and Outstanding Shares – The number of shares provided for by the
Articles is the authorized share amount, and may be amended by shareholder vote. The issued
Consideration to Be Paid for Shares – The RMBCA allows shares to be issued in exchange for
Financing the Corporation: Debt Securities
Chapter 36
292
follows:
Debenture – These are long-term unsecured debt instruments.
Bond – These are long-term debts secured by collateral.
Note – These are short-term debt security with a maturity of five years or less, and may
be secured or unsecured.
Business Environment: Delaware Corporation Law
The state of Delaware is the corporate haven of the United States. More than 50 percent of the
publicly traded corporations in America, including 60 percent of the Fortune 500 companies, are
incorporated in Delaware. On the legislative side, Delaware has enacted the Delaware General
Corporation Law. This law is the most advanced corporation law in the country, and the statute is
law to decide disputes.
Dissolution and Termination of Corporations
Critical Legal Thinking – Shopping for corporation law status probably is unethical. While the
state of Delaware’s economy would unravel if the United States had a change of heart on this
management teams.
Dissolution – The methods for dissolving corporations are as follows:
Voluntary Dissolution – Voluntary dissolution can occur by a vote of the majority of the
Administrative Dissolution – The secretary of state can obtain an administrative
dissolution if the corporation fails to file an annual report, fails to maintain a registered
Judicial Dissolution – The attorney general for the state in which it is incorporated can
Winding Up, Liquidation, and Termination
A voluntary dissolved company’s affairs will be wound up and liquidated by the board; if
involuntary, or if the board refuses, the court will appoint receivers to handle the matter.
Corporate Formation and Financing
293
V. Key Terms and Concepts
Administrative dissolution—Involuntary dissolution of a corporation that is ordered by
the secretary of state if the corporation has failed to comply with certain procedures
required by law.
Articles of incorporation—The basic governing documents of a corporation. It must be
filed with the secretary of state of the state of incorporation.
Authorized shares—The number of shares provided for in the articles of incorporation.
Board of directors—A panel of persons who are elected by the shareholders that make
policy decisions concerning the operation of a corporation.
corporation.
C corporation—A corporation with more than 75 shareholders or one that does not elect
to become an S corporation. It is taxed at both the corporate level and dividends
distributed to shareholders are taxed on the personal income tax.
Centralized management—The officers and directors of a corporation.
Certificate of authority—Where a foreign corporation is required to qualify to conduct
able to dispense of many of the formalities required of corporations.
Closely held corporation—A corporation owned by one or a few shareholders.
Common stock—A type of equity security that represents the residual value of a
corporation.
Common stock certificate—A document that represents the common shareholder’s
investment in the corporation.
their shares into common stock.
Corporate management—The directors and the officers form the corporate management.
Corporate officers—Employees of a corporation who are appointed by the board of
Chapter 36
294
of corporations.
Court of chancery—A special court in Delaware.
Cumulative preferred stock—Stock for which any missed dividend payments must be
Debenture—A long-term unsecured debt instrument that is based on the corporation’s
general credit standing.
Dissolution—When a corporation stops doing business and ceases operations, the
corporation may be dissolved.
Dividend preference—The right to receive a fixed dividend at stipulated periods during
the year.
Dividends—In return for their investment, common stockholders receive dividends.
the Internet.
Domestic corporation—A corporation in the state in which it was formed.
Double taxation—C corporations are taxed first at the corporate level and then the profits
distributed by dividend payments are taxed as part of the personal income of the
shareholders.
Equity securities—Representation of ownership rights to a corporation.
periods during the year.
Foreign corporation—A corporation in any state or jurisdiction other than the one in
which it was formed.
Form 2553—An S corporation election is made by filing Form 2553 with the Internal
Revenue Service (IRS).
the separate approval of the legislature.
General-purpose clause—A clause that can be included in the articles of incorporation
that permits the corporation to engage in any activity permitted by law.
Corporate Formation and Financing
295
the terms of a debt security.
Issued shares—Shares that have been sold by the corporation.
Judicial dissolution—Occurs when a corporation is dissolved by a court proceeding
instituted by the state.
Legal entity—A corporation is a separate legal entity (or legal person) for most purposes.
Limited liability—A general rule of corporate law that provides that, generally,
of the corporation.
Limited-purpose clause—A clause that can be included in the articles of incorporation
that stipulates the activities that the corporation can engage in. The corporation can
engage in no other purposes or activities.
Liquidation preference—The right to be paid a stated dollar amount if a corporation is
dissolved and liquidated.
of not-for-profit corporations.
Model Statutory Close Corporation Supplement (Supplement)—It was added to the
RMBCA to permit entrepreneurial corporations to choose to be close corporations under
state law.
Noncumulative preferred stock—With noncumulative preferred stock, there is no right of
accumulation.
Nonparticipating preferred stock—It does not give the holder a right to participate in the
profits of the corporation beyond the fixed dividend rate.
Novation—A three-party agreement in which the corporation agrees to assume the
contract liability of the promoter with the consent of the third party.
Organizational meeting—A meeting that must be held by the initial directors of a
corporation after the articles of incorporation are filed.
corporation, but is separated by a liability shield.
Preferred stock—A type of equity security that is given certain preferences and rights
over common stock.
Preferred stock certificate—A document that represents a shareholder’s investment in
preferred stock in the corporation.
Chapter 36
296
Preferred stockholder—Person who owns preferred stock.
Profit corporation—A corporation created to conduct a business for profit that can
distribute profits to shareholders in the form of dividends.
Promoter—A person who organizes and starts a corporation, finds the initial investors to
finance the corporation, and so on.
Redeemable preferred stock—Stock that permits the corporation to buy back the
preferred stock at some future date.
Registered agent— A person or corporation that is empowered to accept service of
process on behalf of a corporation.
Registered office—The articles of incorporation must identify a registered office with a
designated registered agent in the state.
Shareholders—Owners of a corporation who elect the board of directors and vote on
fundamental changes in the corporation.
Statutory close corporation—A corporation formed by entrepreneurs with few
shareholders who often work for the corporation and manage its day-to-day operations.
Termination—The ending of a corporation that occurs only after the winding up of the
corporation’s affairs, the liquidation of its assets, and the distribution of the proceeds to
the claimants.
Treasury shares—Shares of stock repurchased by the company itself.
Ultra vires act—An act by a corporation that is beyond its express or implied powers.
shares entitled to vote.
Winding up and liquidation—The process by which a dissolved corporation’s assets are
collected, liquidated, and distributed to creditors, shareholders, and other claimants.
