978-1259638855 Chapter 41

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Chapter 41 – History and Nature of Corporations

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CHAPTER 41

HISTORY AND NATURE OF CORPORATIONS

I. OBJECTIVES

This chapter is intended to introduce students to the nature of corporations. Students should:

A. Understand the history of corporation law.

B. Know the characteristics of corporations.

C. Appreciate how corporations are regulated by the states in which they are incorporated and

the states with which they have contacts.

D. Know when the distinction between a corporation and its shareholders will be recognized by

the law.

E. Learn how to use a parent-subsidiary structure to isolate the liability of risky ventures and to

protect the assets of a business.

II. ANSWER TO INTRODUCTORY PROBLEM

Gifts&Awards.com does not have a physical presence in Arizona, which the Supreme Court

has required for a state to impose its sales tax.

Gifts&Awards.com is on fair notice that it could be sued in Arizona. This answer means that

Gifts&Awards.com is encouraged to have a liberal return policy. Rather than face expensive

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III. SUGGESTIONS FOR LECTURE PREPARATION

Example: Problem #1.

C. Classifications of Corporations. Briefly define the various kinds of corporations. Note that

most corporations are closely held for-profit corporations.

D. Regulation of Domestic Corporations. Note that most corporations are created under state

corporate disputes.

Log On (p. 1073): At the first URL, students can view the Model Business Corporation Act.

At the second URL, students can find the corporation law that applies in states of interest to

them.

Note that nonprofit corporations are also regulated by the states. The nonprofit corporation

essential characteristics of corporations are shared worldwide.

F. Regulation of Foreign and Alien Corporations. States other than the one in which a

foreign corporation.

1. Subjecting foreign and alien corporations to suit

b. You may have your students read the Daimler case in Chapter 2, which is

summarized in this chapter at page 1075.

c. Additional Examples: Problem Cases ## 2 and 3.

2. Taxation of Foreign Corporations. Explain the basis for permitting a state to tax a

foreign corporation: a corporation enjoys the protection of a state’s laws; it should be

a. Road use taxes.

b. Property taxes.

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c. Income, sales, and excise taxes.

mentioned on page 1075.

taxing state.

The main objective of this ethics box is to consider the ethics of a state’s

3) Example: Problem Cases ## 4 and 5.

3. Qualification of Foreign Corporations

a. Define doing business for purposes of qualification. Note that doing business

requires the conduct of intrastate business in the state.

b. Explain the isolated transaction exemption of MBCA Section 15.01(b)(10). Under

The court answered no to both questions.

Points for Discussion: Ask your students why Cerullo & Co. was not doing business

in Connecticut for the purpose of being required to qualify to do business. Cerullo

derived only minimal income from Connecticut residents, did not solicit business in

Connecticut, did not promote itself as a national accounting firm, performed the

qualification. The court didn’t really address that issue very well, or at least didn’t

support it well with facts. Nonetheless, the second requirement for Connecticut

having jurisdiction over Cerullo & Co. was addressed fully: Ryan’s claim did not

arise out of any business conducted by Cerullo & Co. in Connecticut. Why?

returns.

Additional Examples:

1) Problem Cases ## 6 and 7.

2) Would the NCAA’s sanctioning of a national track meet at Drake University (the

Drake Relays) require the NCAA to qualify in Iowa? No. Would a California

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

restaurant franchisor that sells the right to use its trademark to a franchisee in

New York be required to qualify in New York? No. Is qualification required if

the franchisor advises the franchisee how to train its employees and run a

profitable business? No. Is qualification required if the national franchisor

managed the business in New York? Yes.

c. List the penalties for a failure to qualify.

Example: Problem Case # 12. This court refused to hold a corporation’s sole

have carved a niche for themselves.

4. Regulation of Foreign Corporations’ Internal Affairs

significant contacts. It prevents such corporations from shopping around for the

corporation statute that is most lenient.

5. Example: Chapter Introductory Problem (p. 1070): This is a good capstone question on

most of the foreign corporation issues.

G. Piercing the Corporate Veil

1. Note that generally a corporation is an entity separate and distinct from its shareholders.

2. Review the two requirements to pierce the corporate veil: domination and improper use

as well.

3. Discuss the various improper uses of a corporation: defrauding creditors by thinly

capitalizing the corporation or by looting corporate assets; circumventing a statute;

evading an existing obligation.

a. Thin capitalization, looting, and otherwise defrauding creditors

Examples:

4. Using a parent-subsidiary structure

a. Example: Fran divides her toy manufacturing business into three parts and

incorporates each part separately. She is the sole owner and manager of each

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

corporation. Corporation One buys material needed to manufacture toys,

warehouses them, and sells them to Corporation Two at market value. Corporation

Two manufactures the toys from the materials and sells the toys to retailers.

Corporation Three finances retailers’ purchases of toys from Corporation Two. Each

corporation has its own books of account. Each corporation pays its own employees.

If Corporation One fails to pay its creditors, those creditors will not be able to pierce

the veils of the other corporations and make them liable for the debts of Corporation

One. Not only have all the corporations been treated as separate entities, but also

there is no improper purpose.

Any profit maximizer would set up a parent-subsidiary structure like this. It is legal

and it helps to maximize the value of the total business by protecting most of the

enterprises assets when one part of the business fails.

As for the creditor of a subsidiary who is unable to attack the assets of the parent or

tort creditor to check out a defendant before the defendant commits a tort.

c. Additional Example: Problem #10.

5. Supply Chain Assocs., LLC v. ACT Elecs., Inc. (p. 1081). This is a daunting case with

facts that have confusingly similarly named businesses and a long list of factors the court

considers, some discussed with more than minimal detail. The bottom line is that the

defendants were granted summary judgment because the defendant showed that the

that the corporation has consciously decided not to pay dividends. Lots of corporations,

public and nonpublic, don’t pay dividends, and they all have reasons, in fact typically

good reasons, not to do so.

Another less important factor is the insolvency of the corporation at the time of the

for determining when to pierce the veil: 1) domination and 2) use of that domination for

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an improper purpose. Have the students categorize each factor in this case under one of

those two factors. Be sure they understand that factors proving alter ego—such as

confused intermingling of assets, nonobservance of corporate formalities, absence of

corporate records, and non-functioning officers and directors—logically go under

domination. Other factors—such as thin capitalization and promoting fraud go under

improper purpose.

IV. RECOMMENDED REFERENCES

A. Cox & Hazen, The Law of Corporations (3rd ed. 2010). A three-volume treatise on

Brace Janovich.

G. Nader, Green, & Seligman, Taming the Giant Corporation (1976).

H. Stone, Where the Law Ends (1975).

I. The Business Lawyer. The journal of the ABA Section of Business Law.

V. ANSWERS TO PROBLEMS AND PROBLEM CASES

1. The advantage of free transferability of the shares does not exist in this context, because

there are not a large number of investors who are interested in buying into a closely held

limited with this business, as you five controlling owners are not willing to sell so much of

the business that it eliminates your control of the corporation. Separation of ownership and

bank that insists that the five controlling shareholders, if not all the shareholders, personally

guarantee the loan. The corporation having a life separate from its shareholders is less real

2. No with regard to MWLP and yes with regard to MWINC. The court applied the rule of the

International Shoe case, finding that MWLP did not maintain sufficient minimum contacts

jurisdiction. Because the plaintiff introduced no evidence that MWLP had contacts with

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Maryland other than the fact that its corporate managing general partner re-incorporated in

the State, the suing HALP limited partners failed to satisfy the requisite constitutional

requirements of demonstrating MWLP’s minimum contacts with the forum. As for MWING,

while Maryland courts may obtain jurisdiction over it as it became incorporated under the

HALP partners. The court also wrote that while the suing HALP partners assert that MWINC

controls MWLP, the trial court’s judgment against MWINC appeared to be based solely upon

Properties, LP, 895 A. 2d 1006 (Ct. App. Md. 2006).

3. No. 14th Street Photo does not have “certain minimum contacts” with Michigan justifying the

Michigan court’s litigating the merits of the sales transaction. While 14th Street Photo makes

jurisdiction over 14th Street Photo for this transaction, the sale and delivery occurred in New

York. It is not sufficient that the camera ended up in Michigan and was used there. It would

4. No. Note that although this case involved an LLC, the law applied is the same as if the

business were a corporation. The Court concluded that BN Online did not have a substantial

owned by the same parent company for only part of the period in issue. The two companies

clearly shared a common name and brand identity under the “Barnes & Noble” banner, but

companies.

There were some additional facts omitted from the problem case. For example, BN

only one of many sellers, including its competitors, from whom BN Booksellers sourced

items that it did not have in stock, to be shipped to the store or directly to the customer.

2007).

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5. The Supreme Court remanded the case. The Due Process Clause requires a definite link,

some minimum connection, between a state and the person, property, or transaction it seeks

whether the unitary business principle was complied with. Under that principle, a state need

not isolate the intrastate income-producing activities from the rest of the business but may

Corp. v. Ill. Dept. of Rev., 128 S.Ct. 1498 (2008).

6. Yes. The court found that Shrimp, Inc. was required to qualify to do business in Texas

waiting until 20 days after the judgment to raise it. Also, Shrimp did qualify by filing a

7. Yes. The NCAA is clearly doing intrastate business in Texas. It is making many contracts in

transaction exemption, even though one may argue that the event is a single transaction,

8. No. Note that although this case involves an LLC, the law applied is the same as would apply

if the business were a corporation. The court of appeals affirmed the findings of the trial

business operated for approximately two years at a loss and was still, although struggling,

making the rental payments. The Smalls did not treat the LLC as their alter ego, as there was

relevant formalities under the law. Gasstop Two LLC v. Seatwu LLC, 225 P.3d 1072 (S. Ct.

Wyo. 2010).

9. No. The court held that it is permissible for a person to limit his liability by using the

corporate form. It was not enough for Walkovszky to allege that the assets of the corporation

6 (N.Y. Ct. App. 1966).

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

10. REIS, Inc. should form 25 corporations, each of which owns one mall. The corporations will

be wholly owned by REIS. As a holding company, REIS will raise capital for all the

subsidiaries and allocate the capital to each subsidiary as necessary. REIS will be the

employer of many of the employees who work for the subsidiaries, especially those who

each subsidiary, make sure that the subsidiaries deal with each other and REIS at fair prices

in transactions reflected in the books of the corporations involved, ensure that one

11. Yes. The court pierced Elite Moving’s veil after finding that Branscum formed Elite Moving

its ability to pay off its debts; a new business then starts up that is basically a continuation of

12. No. The court found that there was no evidence that corporate formalities were not

business in Maryland, that was not the evasion of a legal obligation that permitted piercing

13. No. While Golino dominates J-Go, she is not engaging in any improper conduct, such as

extremely bright and experienced and someone with whom her mother discusses business

compensation paid to the daughter.