Introduction to the Corporate Form

Introduction: The Legend of the Corporation

Once upon a time, in a land not so far away, there was a great castle, which stood upon the highest peak in the mountains. In this castle dwelled a confederation of the strongest, most powerful, and most influential knights of the kingdom. The people of the kingdom had laid their trust and faith in this great organization of knights, and the knights had sworn to loyally protect the castle and kingdom by exercising their powers carefully, with the good of all in mind. Under these powerful knights was a group of other leaders in the kingdom, and in turn, the many people of the kingdom.

While the land was generally at peace, there were times when other nations challenged its borders, threatening to tear the castle down and carry off its many treasures to their own lands. Over its history, the kingdom itself had expanded its boundaries and acquired other lands, always striving to enrich the lives of its many people.

And so the story goes…

So, what happened to the Corporations class that you were supposed to be taking? What is going on with the Arthurian legend? Is this Corporations or Camelot? The answer, as you will come to see, is that it is both.

The purpose of the story is to provide a metaphor on which to base your understanding of the essential elements of who are the major players within a corporation, and what actions generally need to be taken in the course of governing the corporation. As we will come to see, the nature of a corporation is not unlike a fairy tale; it is a fiction created by the law to ease dealings between people acting collectively to better organize their own business interests and act towards their own economic goals. 

Consider our “Corporate Camelot”:

- The kingdom – the corporation itself. Like the legend of Camelot, it is a fictional place meant only to symbolize a focal point of business activity. 

- The Castle – the physical “house” (think office building) of the corporation; the corporation’s “principal place of business,” a legal term of art that tries to identify where a corporation exists, either by its state of incorporation, its “muscle center” (i.e., where a manufacturing corporation does all its manufacturing) or its “nerve center” (where corporate headquarters are located).

- The Round Table of Knights – the Board of Directors. These are the individuals charged with running the “big picture” affairs of the corporation. It is their job to set the goals and the policies of the corporation and to ensure that the other knights – the officers and employees – are carrying out their jobs appropriately. Each member of the Board owes the company and its shareholders (the people of Camelot) the duties of care and loyalty.

- The other knights – the officers of the corporation and its many employees. Like the directors, they owe duties of care and loyalty to the company and the shareholders. Unlike the directors, they are charged with the details of the day-to-day running of the corporation.

- The Code of Chivalry – the fiduciary duties that both directors and officers owe to the company and the shareholders. These duties, including the duties of care and loyalty, are the rules that the directors and officers must observe or be held liable for violating. Also in the Code are the various securities and tax laws by which the corporation is obligated to abide.

- The people – the shareholders. The many people who have invested money, goods or services in the kingdom are ultimately the ones who control the show. The people of our Corporate Camelot have many means of making their voices heard including voting, shareholder suits and other mechanisms.

- Other kingdoms – the array of other companies that are constantly working for and against the Corporate Camelot. The kingdom expands as the corporation merges with other companies or is itself acquired by others. The fall of the kingdom – by way of bankruptcy – is also an important aspect of the corporate life cycle.

While it may sound a bit basic, this “Corporate Camelot” is an excellent model to return to in the event that you find yourself confused as to who is owed what duty or how the company is supposed to act. Like the King Arthur legends, the Corporate Camelot is an ideal – something that companies should strive for but rarely attain. That said, however, the law applies its many rules with the notion that the corporation and its many constituent pieces, directors, officers and shareholders, need to act with a high level of propriety in their dealings.

Governing Law

The formation, organization and management of a corporation are almost entirely the domain of state laws. While certain aspects of the corporation’s business, such as the issuance of securities or bankruptcy, are based on federal common law and statutes, the daily business of a corporation is governed by the law of the state where the corporation is incorporated.

EXAMPLE: Tom and Jerry decide to form a corporation. Tom lives in California and Jerry lives in New York. They decide to incorporate the company under the laws of Texas and file all necessary paperwork to that end. Tom and Jerry now are the incorporators of a Texas corporation. Their place of residence is immaterial. It is Texas law that will govern the corporation.

Given this situation, you might expect many differences between companies incorporated in Alaska and those incorporated in Alabama. While you would be partially right, there are a couple of factors militating against this conclusion. 

First, many states have adopted so-called “uniform” statues drafted by nationwide groups of attorneys trying to standardize the law. For example, a majority of states’ corporation laws are based on the Revised Model Business Corporation Act (RMBCA). States that have adopted such uniform standards constitute the bulk of U.S. states. These standards are intended to cover 95% of the issues that a corporation is likely to deal with over the course of its existence. One needs to be careful, however, to ensure that the state has not, in some way, modified the uniform standards to fit its own ends. Note that some states have altered or adopted their own version of the RMBCA. Thus, it is important to know the state of incorporation of a company with which you are working and to be on the lookout for states such as California and New York where a lot of companies are incorporated, but whose rules differ in many ways from the uniform standards. In most cases, small, privately owned companies will incorporate in the state where they are located, simply as a matter of convenience.

The second reason that corporate law is somewhat consistent around the country is that many of the major companies operating in the U.S. (and a large number of smaller companies) are incorporated in the state of Delaware. There are a number of arguments advanced by corporate law scholars as to why Delaware became the state of choice for most corporations as their legal state of incorporation. A consensus has grown that Delaware is a great state of incorporation for several reasons:

• Delaware has a set of courts that are specialized in dealing with issues of corporate governance, so companies feel that they are likely to get a judge who is knowledgeable about the issue at hand in the event that they do end up in court.
• The Delaware courts are fast. While it is hard to say that any court in the country is particularly “fast,” Delaware is generally viewed as having some of the most efficient corporate law courts anywhere.
• The Delaware courts are consistent. Like speed, consistency is a relative term, and no court system will always follow all of the precedents set in cases that it has previously heard. That being said, Delaware has a well developed, extensive body of corporate law that the courts are fairly consistent in applying on a regular basis. Companies are exposed to enough inherent risk in their daily business operations and do not want to subject themselves to the risk of judicial proceedings where a judge is given large amounts of leeway in effecting his/her decision. As such, Delaware provides corporate executives with a level of assurance that, in most instances, the court has dealt with the issue before, and that even if it has not, it will be fairly even-handed in its decisions.

EXAMPLE: Harry and Dean decide to take their already incorporated business, which was incorporated in Maine, and move the business’s place of incorporation to Delaware because of Delaware’s speedy courts and consistent use of precedent. After completing all of the necessary paperwork, Harry and Dean now have a Delaware corporation. Such a change in state of incorporation can be made by any company.

The Layout of This Course

Now that we have a basic understanding of the main players in the corporation – by way of our Corporate Camelot – and some background as to the laws that we will be dealing with, a brief overview of how this course will be structured is appropriate. The course is intended to cover the full life cycle of a company – be it a corporation or other business entity – from formation to termination. Additionally, the course will address the roles of all the key actors in the corporate drama. Ultimately, the goal of this course is not to provide you with a complete rundown of every element of business law. Any such attempt would be impossible, given that business law changes constantly in response to politics, economics, and the needs and nature of the business community. Rather, this course will give you a functional dossier of information and tools to help you track down the detailed information that your work in corporate law will require.
The flow of the course will be as follows:

Chapter 1: Introduction – an overview of the nature of the corporation, how it is formed, and how it sets about managing its affairs.

Chapter 2: Other Business Forms – a comparative review of the numerous other business forms that exist apart from the corporation with a comparison of the benefits and detriments of selecting any one particular form.

Chapter 3: Directors & Officers – a look at the Head Office – how the board sets policy and the obligations it owes to the company and shareholders.

Chapter 4: Shareholders – The shareholder is given many rights and responsibilities as the final owner of the business. What are those rights, how are they exercised, and what liability attaches for failing to act in accordance with the law?

Chapter 5: Mergers and Acquisitions – What changes are in store for the company as it grows and expands to purchase or sell its assets and business operations to others? What laws govern this process?

Chapter 6: Securities Laws – There is a seemingly endless supply of laws governing the issuance and ownership of the company. This chapter will provide an easy-to-use method of understanding what these securities are, how they are bought and sold, and what rights and responsibilities that ownership creates.

Chapter 7: Introduction to Bankruptcy - including bankruptcy filings under Chapters 7, 11 and 13 of the Bankruptcy Code – an overview to the bankruptcy process and the three forms of bankruptcy filings.

Chapter 8: Other issues relevant to corporations – The final chapter presents an overview of some of the other issues and problems that face the modern corporation.