Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 1
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Random International, “Rain Room” (Expo 1: New York, 2013)
Module I – Fundamentals
Chapter 2
Corporation Basics
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Corporations:
A Contemporary Approach
• Corporation as “private constitution”
• Basic corporate vocabulary
–
–
–
–
–
–
–
corporate categories
corporate characteristics
organic documents
corporate actors
corporate securities
fiduciary duties (derivative suit)
corporate law vs. other law
• Corporate powers
– change annual meeting
– equitable limitations
Chapter 2
Corporation Basics
Slide 2
of 23
Why BusOrgs?
Corporations:
A Contemporary Approach
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Chapter 1
Introduction to the Firm
Slide 3
of 25
Corporate hierarchies
Constitution
Shareholders
Corporate statute
(judge-made law)
Board of
Directors
Articles of Incorporation
Corporation
By-laws
(officers)
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 4
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Pop quiz
1.
“Exit, voice and loyalty” in
political organizations are
similar to “liquidity, voting
and fiduciary duties” in the
corporation. True or false?
2.
Public corporations are -a. a type of non-profit
corporation
b. a type of private
corporation
c. a type of close
corporation
d. a corporation regulated
only by federal law
3. Corporations MUST have:
a. Separate identity
b. Perpetual life
c. Limited liability
d. Centralized management
(board of directors)
e. Transferable shares
4. Shareholders have a right to
liquidate their investment and
sell their shares to the
corporation. True or false?
1–T / 2–B / 3–A / 4–F
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 5
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5. Chancellor Bill Allen is just
about the cutest jurist in the
land. True or false?
6. The Model Business Corporate
Act is –
a. uniform statute adopted in
most states
b. ABA draft statute for states
to adopt/revise as they
choose
c. modeled on the Delaware
General Corporation Law
Corporations:
A Contemporary Approach
7. Corporate law is:
a. Primarily judge-made law
(see ALI Principles)
b. A product of each state
under choice of law
principles
c. Primarily concerned with
defining rights of securities
-- stock, debentures,
bonds, preferred shares
8. The articles of incorporation
(choose two):
a. Trump corporate statutes
b. Trump corporate bylaws
c. Name the board of
directors
d. Must be filed with the
secretary of state
Chapter 2
Corporation Basics
1–T / 2–B / 3–B / 4–B, D
Slide 6
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Corporate fiduciary duties …
A corporation during WWII –
with more business than it
know what to do with -- spends
$1 million to sponsor a “variety
hour” radio program. One of
the singers on the program is
wife of the company’s board
chair/ president. A shareholder
claims the directors, in
approving this expenditure,
violated their fiduciary duties.
Please analyze.
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 7
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Corporate Fiduciary Duties
Bayer v. Beran,
(NY Sup. Ct 1944)
Duty of care
Business judgment
rule (BJR)
Duty of loyalty
“[A director] is called
upon to use care, to
exercise judgment, the
degree of care, the kind
of judgment, that one
would give in similar
situations to the conduct
of his own affairs.”
“Questions of policy of
management … are left
solely to their honest and
unselfish decision … and
the exercise of them for
the common and general
interests of the
corporation may not be
questioned.”
“[P]ersonal transactions
of directors with the
corporations … may tend
to produce a conflict
between self-interest and
fiduciary obligation, are
when challenged
examined with the most
scrupulous care.”
Presumption for
Corporations:
A Contemporary Approach
Presumption against
Chapter 2
Corporation Basics
Slide 8
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Enforcement of
fiduciary duties …
(1) Derivative suit
(2) Class action
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 9
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Derivative suit
(enforce duties to corporation)
Shareholder
(lawyer)
“on behalf of
corporation”
Corporation
violation of
corporate duties
(recovery to corporation)
Fiduciaries
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 10
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Class action
Sh rep
(enforce duties to shareholders)
(lawyer)
“on behalf
of class”
Shareholder
class
violation of
direct duties
Insiders
(recovery to shareholders)
Corporation
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 11
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With great power
comes great responsibility …
Setting the shareholders’
meeting date …
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 12
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Schnell v. Chris-Craft Industries, Inc.
(Del. 1971)
Insurgent
 Shareholders
Shareholders
elect new board
Board of
directors
What is a proxy
insurgency?
Corporations:
A Contemporary Approach
Corporation
Chapter 2
Corporation Basics
Slide 13
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Insurgency timeline (1971)
Sep
Oct
Corporations:
A Contemporary Approach
Nov
Chapter 2
Corporation Basics
Dec
Jan
Slide 14
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Power vs. Duty
“… Management has attempted to
use the corporate machinery and the
Delaware Law for the purpose of
perpetuating itself in office … for the
purpose of obstructing the legitimate
efforts of dissident stockholders …
These are inequitable purposes,
contrary to established principles of
corporate democracy.”
Delaware Supreme Court (2009)
Schnell v. Chris-Craft Industries, Inc.
(Del. 1971)
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 15
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Delaware’s “product”
Sep
Oct
Corporations:
A Contemporary Approach
Nov
Chapter 2
Corporation Basics
Dec
Jan
Slide 16
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Stahl v. Apple Bancorporation, Inc.
(Del. Ch. 1990)
Shareholders
(1) buy shares
Hostile bidder
(2) elect new board
What is a
tender offer?
Corporations:
A Contemporary Approach
Board of
directors
Corporation
Chapter 2
Corporation Basics
Slide 17
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Takeover timeline (1986-90)
1986
1989
Corporations:
A Contemporary Approach
1990
Chapter 2
Corporation Basics
1991
Slide 18
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Power vs. Duty
“Fiduciary duties constitute a network of
responsibilities that overlay the exercise of
even undoubted legal power.”
“I cannot conclude that defendants have taken
action for the purpose of impairing or impeding
the effective exercise of the corporate
franchise.”
“Deferring this company’s annual meeting
where no meeting date has yet been set and no
proxies even solicited does not impair or
impede the effective exercise of the franchise.”
Chancellor William Allen
“Plaintiff has no legal right to compel the
holding of the company’s annual meeting or
right in equity to require the board to call a
meeting now.”
Stahl v. Apple Bancorporation, Inc.
(Del. Ch. 1990)
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 19
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Reconcile the cases …
(1) Schnell: board has power -- but it’s
inequitable for board to change meeting
date and impede voting insurgency
(2) Stahl: board has power -- and it’s
equitable for board to not set meeting
date in face of insurgency/tender offer
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 20
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The end
Corporations:
A Contemporary Approach
Chapter 2
Corporation Basics
Slide 21
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