978-0134004006 Chapter 36 Lecture Note Part 2

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Corporate Formation and Financing

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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

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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.

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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

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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.

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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.

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 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.