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edu) Corporate law is also called "company" or "corporations" law and is the law of the most dominant kind of business enterprise in the modern world. FIRST CLASS QUESTIONS FOR TODAY
1) What is a corporation?
Common Law System United States Corporation Dispersed share holders X Civil Law System Brazil Sociedade Annima Controle concentrado
Conclusion: judges are important for both systems, but in a common law system cases are precedents. This means judges make decisions and judges that decide after them are bound to the decisions made previously. THE FUNDAMENTAL CONTRACT BETWEEN SHARE HOLDERS Brazil --> articles of association EUA --> Certificate of incorporation Estatuto Statute Board of directors --> has the power to manage the company, appoints officers (they are apted by the directors). Share holders --> they have the power to elect the directors every year, their liability is limited to what they invest in the corporation. Stocks --> make your investment liquid, you can change them in the market (freedom to buy and sell), that is what you call free transferability. Promoters --> people who act in the behalf of the corporation before it is created, they do business for the corporation before it starts to be a corporation (moment when individual liability turns into limited liability). A dispersed system, like the American one, has a big problem: how do you manage accountability? How do you make management accountable? You just can't track the board! CREATION OF A CORPORATION
The board of director ratifies a certificate of incorporation and files it creating the corporation de jure with its limited liability. The bank account of the share holders is separated from the account of the corporation, meaning they are not one in the same. Even thought certificate of incorporation wasn't filled you can protect the share holders, for example, from a lawyer who failed to file the certificate. That is what we call a corporation bystopped. If share holders tried in good faith and have the right to create a corporation you can also protect their right, then we have a de facto corporation. FAMOUS CASE: An important business man owns small taxi companies (small corporations) and each one of them is capitalized with the minimum amount of capital allowed by law, which is not enough to pay for accidents (U$ 10,000.00). He has little assets in every one of his companies so he can maximize his profits by not paying compensations to the victims of accidents.
2) Why do we allow its owners to have limited liability (main characteristic of the corporation)?
Incentives! We can assure people they can safely invest. Investments create value to countries, so everybody wins. Providing liability to its owners we encourage investments. PROBLEMS: people start to take risks. They don't have to be so cautious because they are not liable. The second problem is that when corporations cause damages some victims won't be compensated. PIERCING THE CORPORATE VEIL (desconsiderao da personalidade jurdica) a. If the company is undercapitalized the taxi case b. If it is not a corporation pepper source case (Individuals are not distinct from corporation) In these cases you can go to the assets of the share holders.
So what is a Corporation? - Board of directors must be elected by share holders - Officers must be apted by the directors - Boards must have meetings - Share holders must elect directors at an annual meeting - Bank account of the share holders must be separated from the bank account of the corporation - must have a certificate of incorporation (?) Well, you can be a bystopped corporation or a de facto corporation
FAMOUS CASE: Peppers source vs. Sea Land REVERSED PIERCING THE CORPORATE VEIL We need to check if there are differences between the corporation and the individual
The duty of care in this case was the duty to investigate. GENERAL RULE: Courts will not second guess board's decisions! EXCEPTIONS: unless 1) Board makes a decision no reasonable person would make (waste) 2) Board is so badly informed, ill advised and hasty (in a hush) that it does not have material information (duty of care) 3) Directors are acting in their personal self-interest (breaching the duty of loyalty) 4) Directors are committing fraud (lying to shares holders to deceive them) 5) Directors are knowingly acting against the interest of the company (acting in bad faith) 6) Director's actions are illegal ATTENTION: the fifth test is the most subjective one! The share holders have the burden to prove these things, they have to complaint based on this rules. The court will see if it applies to the case. If you don't pay attention to them you won't have a good case! That is how common law works! FAMOUS CASE: American express THIRD CLASS QUESTIONS FOR TODAY
HIPOTETICAL CASE: breach of the duty of loyalty and interlocking board on family business and in leasing business. [Individual directors often serve on more than one board.
This practice results in an interlocking directorate or board, where a relatively small number of individuals have significant influence over a large number of important entities.] FAMOUS CASE: RFBS vs. CBS phone licenses Attention: directors are only part time employees but CEOs are full time employees that have, therefore, more duties to the company.
FOURTH CLASS We will talk more about private corporations. 1) What is a close corporation? Few investors, expectation of employment, expectation of financial return (dividends and director's fees). However they have a liquidity problem: how can they exit the company? HIPOTETICAL CASE: lesson/ moral of the story: shareholders can make contracts = typical shareholder agreement. Two shareholders can agree to vote for each other to elect to the board of directors. These contracts (shareholders agreement) are always valid and enforceable. What If they agree to vote together as directors? Well that is a problem because the statute doesn't allow it. - Statute is law and contract is private agreement, you can make agreements but you can never go against the statute. However: Eventually, the courts decided that if there is no other objecting shareholders, a contract can be enforced even if is against the statute. Also no credits of the company can be harmed (creditors can't object) and also there must be no public policy objection. Then , they can control who is on the board and what the board decides. This is good because it is a secure way of dealing with small business investments. This way you can control the companys decisions! 2) What are vote pooling agreements and shareholders agreements? Pooling agreements require votes from the shareholders to compose the board and shareholders agreements require the board to do things. 3) What is a buy-sell agreement? A buy-sell agreement is a contract that has the purpose to break the company up and give money and stock to the ones who don't want and still want to be in the company respectively. 4) What should employment contracts say? (?) Skip this one 5) What is a freeze-out? Other shareholders do not allow one to participate in the corporation anymore. Equal treatment is demanded by courts. It is the equal treatment remedy.
6) What is involuntary dissolution? A freeze-out shareholder is allowed to break the company up if he can prove that he is being oppressed by the other shareholders.