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PARTNERSHIPS,CORPORATIONS
AND THE VARIANTS
PROF. BRUCE MCCANN
LECTURE 8PP. 297-340
Business Organizations2010-2011 Lectures
Overview of Corporate Structure
Lec. 8, pp 297-340 Corps Prof. McCann
2
Types of Equity
Lec. 8, pp 297-340 Corps Prof. McCann
Common StockPreferred StockConvertible preferred stockWarrants
3
Common Stock
Lec. 8, pp 297-340 Corps Prof. McCann
Required to be issuedUsually carries voting powerMay or may not have “par” valueFirst in line in terms of control, last in line in
terms of getting paid on liquidation
4
Preferred Stock
Lec. 8, pp 297-340 Corps Prof. McCann
Preference given as to Dividends Liquidation of the company’s assets May also allow certain rights if the dividends are not
paid (such as electing a number of directors)
5
Convertible Preferred Stock
Lec. 8, pp 297-340 Corps Prof. McCann
Preferred stock that carries with it right to convert to common stock
6
The Corporation’s Foundational Documents
Lec. 8, pp 297-340 Corps Prof. McCann
Articles (Charter)By LawsShareholder Agreements Between Themselves
Buy-sell Agreements Aka Cross-purchase Agreements Survivor Purchase Agreement
Corporations Agreements To Repurchase Stock Stock purchase Agreement Aka Redemption Agreement
7
Incorporation Process Review
Lec. 7, pp 255-299 Corps Prof. McCann
Articles filedBy laws preparedFirst meeting held of shareholders
Elect Directors Make subchapter S election
Directors meeting Adopt pre-existing agreements Appoint officers Authorize issuance of stock Authorize banking relationships
8
When You Need Shareholder Agreements
Lec. 8, pp 297-340 Corps Prof. McCann
To maintain exemption from securities registration requirements i.e., a restriction that shareholder cannot transfer to a
citizen of another state (triggering interstate sales issue);
To maintain subchapter “S” status i.e., a restriction that you cannot sell to a partnership
or corporation which would exceed limit of 75 shareholders
To maintain professional corporation status i.e., cannot sell to unlicensed person
9
When You Need Shareholder Agreements
Lec. 8, pp 297-340 Corps Prof. McCann
To Maintain Effectiveness of a Pooling Agreement i.e., if parties pool shares under agreement to keep X
off the board, important no one conveys their shares to X.
10
Restrictions
Lec. 8, pp 297-340 Corps Prof. McCann
May be absolute: Prohibits transfer altogether (usually unenforceable)
May require others consent Typically requires director or shareholder approval
May limit class of possible transferees Must be family members Must be CPA Must be non-competitor
11
Examples of Restrictions
Lec. 8, pp 297-340 Corps Prof. McCann
Buy-Out Agreements Whereby anyone desiring to sell must offer to
designated others on same terms, so-called “right of first refusal.”
Whereby someone who may lose control of stock in a divorce is obliged to sell to other shareholders or to the corporation
Whereby the estate of a deceased shareholder must sell to the others
12
Mandatory vs Optional
Lec. 8, pp 297-340 Corps Prof. McCann
Provision can require corporation or other shareholders buy out the interest Frequently where shareholder dies or is expelled or
retires
Provision may give others the “option” to buy the seller’s interest e.g., right of first refusal
13
Pricing the Shares
Lec. 8, pp 297-340 Corps Prof. McCann
Three usual approaches: Book Value
What do the accounts show the shares are worth if you divide the number of outstanding shares into the number you get when you subtract the liabilities from the assets?
Liquidation Value What would you get if you closed the doors, sold all the
assets, paid all the debts, and divided the money up? Cash Flow or Earnings
What would an investor be willing to pay today to own a company that generates the profits your company generates?
14
Valuation Issues
Lec. 8, pp 297-340 Corps Prof. McCann
“Book Value” can mean different things to different people. Denkins v Zinkan
“Fair Value” may not be the same as “fair market value” Discounts for
Lack of control Lack of marketability
15
THE PLAYERS, REVISITED
Lec. 8, pp 297-340 Corps Prof. McCann
SHAREHOLDERS Elect directors Usually must ratify certain acts of directors
Resolution to dissolve Resolution to merge with another entity Resolution to sell principal assets Resolution to change corporate purpose Resolution to amend by-laws or charter
16
THE PLAYERS, REVISITED
Lec. 8, pp 297-340 Corps Prof. McCann
DIRECTORS Charged with day-to-day operations of entity Hire and Fire Officers Bear ultimate responsibility for conduct and
misconduct of the corporation
17
“Closely Held” vs Statutory Close Corporation
Lec. 8, pp 297-340 Corps Prof. McCann
Any corporation can be held by a small number of shareholders. One shareholder is not uncommon.
A “closely held” corporation is a term with no particular legal significance other than to mean: Few shareholders Most of whom participate in management No general market for the stock (because of limitations on
control and liquidity) and Some limitations on transfer of the stock
Courts now widely allow shareholders to control management via controlling director’s powers.
18
Recording the Corporate History
Lec. 8, pp 297-340 Corps Prof. McCann
All States Require Minutes be MaintainedCalif Corps Code 314
The original or a copy in writing or in any other form capable of being converted into clearly legible tangible form of the bylaws or of the minutes of any incorporators', shareholders', directors', committee or other meeting or of any resolution adopted by the board or a committee thereof, or shareholders, certified to be a true copy by a person purporting to be the secretary or an assistant secretary of the corporation, is prima facie evidence of the adoption of such bylaws or resolution or of the due holding of such meeting and of the matters stated therein.
19
By Laws
Lec. 8, pp 297-340 Corps Prof. McCann
Must conform to the ArticlesMust conform to the law
e.g., by-law prohibiting any transfer of interest would be unenforceable
20