Corporations are what kind of entities?
Separate in the legal sense
What makes a corporation a separate legal entity?
#NAME?
What traits about a corporation attracts more capital market for funding?
Limited liability for its owners (shareholders)
Corporate Governance
Involves constraining and controlling managers of corporation so the corporation is governed in the best interest of the shareholders
Who's rights and responsiblities are implemented using corporate goverance?
shareholders, boarding of directors, and managers/officers
Examples of organized securities markets
�New York Stock Exchange
�American Stock Exchange
�NASDAQ
What makes people more willing to buy stock?
#NAME?
What state had the first incorporation law?
Connecticut (1837)
- Most of the states soon followed
What changes made corporations grow in the 1800s?
#NAME?
What were the benefits of the railroad?
- Transportation was cheaper and easier
- Increased the area of a factory could serve
- Lower transportation costs
- Could ship products further
- Larger business -> more capital
What is each corporation organized under?
The general incorporation law of a state, which grants the corporation a charter
What is the filing associated with creating a corporation?
Article of Incorporation
Who files the Article of Incorporation?
A state official
What requirements are needed for a corporation chartered in one state to operate in another state?
#NAME?
Which state governs the internal relations of the firm?
chartering state
Does the headquarters of a corporation have to be in the chartering state?
No
What are corporations governed by?
#NAME?
Bylaws
Rules or private laws that govern the operation of that specific corporation
Can the Articles of Incorporation or the bylaws of a corporation be amended or deleted?
Yes
What do common stock owners have the right to vote for?
#NAME?
Where do shareholders vote?
Shareholder meetings
- Usually held once a year
When a shareholder does not want to attend a shareholder's meeting, what can they send?
Proxy
Proxy
Written authorization by the shareholder on form typically provided by the corporation, designating an agent to vote on behalf of the shareholder at the shareholder's meeting
Under what Act are the rules of proxy solicitation?
Securities Act of 1934
What information must be provided to the shareholders before a shareholder's meeting according to the securities act of 1934?
#NAME?
What kind of people are brought into the corporation decision making process under proxy soliciation?
Outsiders (those not contacted with the existing/incumbent management team)
What does the management team have to send to the shareholder even if a proxy is not provided?
- Notice of the shareholder's meeting
- Agenda of the meeting
What can make a shareholder's proposal be excluded?
Frivolous or repetitious or in the ordinary course of business
Derivative Action
Lawsuit filed by shareholders against someone or something who has financially harmed the corporation when the board of directors has chosen not to file suit
What must shareholder's do before filing the suit themselves on behalf of the corporation?
Demand that the board of directors take action prior
What happens if the derivative action lawsuit is successful?
Damages go to the corporation
When can the state dismiss a derivative suit?
#NAME?
Corporate Governance
Formulating, overseeing, and monitoring the corporate process to shape its strategic direction and performance, define its mission and scope, and assess its interactions with affected groups
What does one common stock account for in ownership/shareholder votes?
1 vote
Who do shareholder's elect?
Board of Directors
What do directors do for the corporation?
#NAME?
Who are most often a part of the internal affairs of the corporation and on the board of directors?
Managers
Why is it helpful to have manager's of the board of directors?
- Intimate knowledge of the corporation's business
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What is the job of the manager?
Have power and authority to engage in all legal actives necessary to conduct the corporation's business
What kind of responsibilities and duties does an agent have to a principcal?
Fiduciary responsibility
Duty of Loyalty
Must act in the best interests of the principal
When acting within scope can bind the principal in contract and tort
What type of business has a major problem with the principal-agent relationship?
Older, publicly owned corporations
Why do older, publicly owned corporations have a problem with the principal-agent relationship?
Due to the separation of ownership and control
What are the goals of corporate executives?
- Max. their expected long-run present discounted value of the after-tax stream of profits earned by the corporation = Max shareholder's stock
Can board members be on multiple boards at once?
Yes
What is one way of addressing the principcal-agent problem in corporate governance but does not eliminate it?
Align the financial interests of the officers and the board members with those of the shareholders
What are a couple of ways of increasing the number and power of outsider directors?
#NAME?
Institutional Investors
Large, professionally managed providers of capital, such as personal funds, insurance companies, or mutual funds
- Large shareholders as whole: small % of outstanding stock but could typically own up to 60% as a whole
Council of Institutional Investors (CII)
- Group of institutional investors that promote accountability of corporate executives
- Monitors to governance of publicly traded corporations to be sure it is set up to promote shareholders' interest
How is a major player of CII?
California Public Employees Retirement System
What type of market are officers more free to rune the company in their own interests?
Non-competitive
- Competitive market = interests of the shareholders
Tender Offer
Acquiring company offers more than face value for stock attempting to purchase a controlling interest in the target company
Friendly Offer
Acquiring company has asked the target
Unfriendly offer
The board of the target company refuses the bid from the acquiring company
Law of fiduciary duties
Defined by common law and specifies the standards of care and loyalty
Why do courts not second guess corporate executives?
Courts recognize that corporate officers and directors are continually forced to make difficult decisions involving large sums of money with imperfect information in a constantly changing business environment
Who does the Business Judgement Rule protect?
Corporate directors or officers
Under what circumstances are corporate directors or officers protected by the Business Judgement Rule?
#NAME?
Under what basis is a decision supported by the Business Judgement Act?
The decision does not necessarily have to be the correct one or even be supported by the weight of available information as long as the decisions made on some rational basis
Which of the agent's duties is the Business Judgment Act under?
Duty of Care
What level of tolerance do courts have for breach of loyalty?
Low tolerance
What are the two types of self-dealing?
#NAME?
Is delf-dealing a breach of duty of loyalty?
Not necessarily
Insider Trading
Where an insider benefits from trading in company stock due to insider information
Which agent's duty is breached if involved in insider trading?
Fiduciary duty
Insider
Any person who has access to confidential corporation information
When was the stock market crash?
1929
Securities Act of 1933
Regulate the INITIAL sale of securities to the public
What must the initial seller of securities do first?
File registration statement with the SEC
What is on the registration statement that the initial seller files?
-Detailed information: terms of the security, audited financial statements of the issuer, short biographies of the corporation's top management team, status of any potential lawsuits, conflicts of interest, and enumeration of the potential risks of the investors
Who is liable if there is a material misrepresentation on a security?
Issuer, underwrites,corporate directors, corporate officer who signed the document, and outside experts
What is the cost of material misrepresentation on a security?
Up to $10,000 fine and/or prison sentence up to 5 years
The Securities Exchange Act of 1934/ Disclosure Act
Regulates the RE-SALE of previously issued securities on secondary markets
- one portion of the law regulates the activities of stock exchange, stock brokers, stock, and other professionals to ensure against fraud, deceptive practices, and unfair practices
- Requires disclosure about the securities themselves
What are instances where an issuer needs to file more than just periodic reports to the SEC?
'Material' item
- Merger offer
- Unexpected changes in earnings
- Significant new contracts
- Key employee/officer changes
- Loss of important customer
What rules under the Securities Exchange Act of 1934 restricts the ability to use inside information?
16(b) and 10(b)
Short-Swing" Profits Rule - Section 16(b)
Capital gain made by buying and selling their own company stock within any 6 month period must be returned to corporate treasury
- This applies to all directors, all officers, and any shareholder owning 10% of companies stock
What kind of reasoning can be used to justify against the "Short-Swing" profits rule?
Actual reason for the purchase is irrelevant, no defense
- The assumption is the use of insider information
What is one way the SEC tries to prevent insider trading?
Registration and disclosure requirments for the insiders
Insider Trading Rule - Section 10(b)
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