Corporate law in the United States

Corporate law in the United States is a collection of over 50 different systems of corporate law, or one law for each state. Two sources of law are, however particularly important: the Model Business Corporation Act (MBCA), drafted by the American Bar Association was influential and adopted by twenty four states;[1] and because companies are free to incorporate in any state under the United States Constitution, regardless of whether they are doing business or are headquartered there, many corporations have found Delaware's laws and specialized courts attractive. More than half of US corporations are incorporated under the Delaware General Corporation Law (DGCL), and Delaware corporate law is particularly influential. The corporate laws of large states such as New York and California are also important.

State laws govern corporations' mechanics, but many federal laws are also applicable. Publicly-traded corporations must comply with federal securities laws, the most important of which are the Securities Act of 1933 (1933 Act) and Securities Exchange Act of 1934 (1934 Act). The Sarbanes-Oxley Act of 2002 (SOXA) imposed many new rules on public corporations. Corporations must also comply with the wide variety of federal laws governing employment, environmental protection, food and drug regulation, intellectual property and other areas.

Contents

History

  • The Charitable Corporation v. Sutton (1742) 26 ER 642
  • Attorney General v. Davy (1741) 2 Atk 212
  • UK company law history
  • New York, Act Relative to Incorporations for Manufacturing Purposes of 1811, allowed for free incorporation with limited liability, but only for manufacturing businesses.
  • M Dodd, 'American Business Association Law a Hundred Years Ago and Today', in 3 Law: A Century of Progress: 1835-1935 (Reppy 1937) 254, 289
  • Liggett v. Lee and regulatory competition
  • AA Berle and GC Means, The Modern Corporation and Private Property (1932)
  • Securities Act of 1933 and Securities and Exchange Act of 1934

Incorporation

Corporate personality

Piercing the veil

  • Berkey v. Third Avenue Railway, Cardozo J decides there was no right to pierce the veil for a personal injury victim
  • Walkovszky v. Carlton 223 N.E.2d 6 (NY 1966) where the New York Court of Appeals refused to pierce the veil merely because a subsidiary was undercapitalised. A corporation was set up for every taxi cab in that was in fact being run by Mr Carlton's company, each with $10,000 of insurance. One of the cab's hit a pedestrian and damages were more than the insurance, but by a majority the court held the veil could not be lifted.
  • Minton v. Cavaney, 56 Cal. 2.d 576 (1961) Justice Roger Traynor pierced a veil so a girl who drowned in a swimming pool would be compensated, saying parent companies or shareholders would be treated as liable "when they provide inadequate capitalization and actively participate in the conduct of corporate affairs."
  • Kinney Shoe Corp. v. Polan 939 F.2d 209 (4th Cir. 1991) the veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalised and was only used to shield a shareholder's other company from debts.
  • Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992) holding that no piercing could take place merely to prevent "unfairness" or "injustice", where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
  • Fletcher v. Atex, Inc 8 F.3d 1451 (2d Cir. 1995)
  • Taylor v. Standard Gas Co. 306 U.S. 307 (1939), insiders who become creditors of a company are subordinated to other creditors when the company goes insolvent. This will happen where it is "equitable", and is known as the "Deep Rock doctrine".

Corporate constitution

Corporate charter

  • DGCL § 102(b) the purpose of a corporation may be anything that is lawful
  • Constituency statute

Director power and accountability

It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a)[2] states,

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.

  • DGCL §§ 211(b) shareholders elect and remove directors through a majority vote.
  • DGCL §141(k) states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it.[3] The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors.

Shareholder rights and duties

  • DGCL §271, shareholders must approve sale of "all or substantially all assets", held in Gimbel (1974) to be those "qualitatively vital to the existence and purprose" of the corporation; which in Katz v. Bregman (1981) was held to include assets under 50% of the company's value
  • Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334 (Del. 1987) a shareholder owning over 50% of shares is a controlling shareholder; but actual control may also be present through other mechanisms
  • Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) non controlling shareholders do not owe duties to minority shareholders and may vote their shares for personal gain without concern
  • In re Cysive, Inc. Shareholders Litigation 836 A.2d 531 (Del. 2003) Nelson Carbonell owned 35% of Cysive, Inc., a publicly traded company. His associates' holdings and options to buy more stock, however, actually meant he controlled around 40% of the votes. Chancellor held that "without having to attract much, if any, support from public stockholders" Carbonell could control the company. This was especially so since "100% turn-out is unlikely even in a contested election" and "40% block is very potent in view of that reality."
  • Kahn v. Lynch Communications Systems, Inc. 638 A.2d 1110 (Del. 1994) Alcatel held 43% of shares in Lynch. One of its nominees on the board told the others, "you must listen to us. We are 43% owner. You have to do what we tell you." The Delaware Supreme Court held that Alcatel did in fact dominate Lynch.

Directors' duties

Duty of care

The business judgment rule is a legal presumption that the directors and officers of the corporation have exercised due care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporation. Unless a plaintiff can give persuasive evidence against at least one of these criteria, corporate directors and officers are insulated from liability for breach of the duty of care.

Self dealing

Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.

  • Weinberger v. UOP, Inc., 457 A.2d 701, 703-04 (Del. 1983) plaintiff must start by alleging the fiduciary stood to gain a material economic benefit. The burden then shifts to the defendant to show the fairness of the transaction. The court considers both the terms, and the process for the bargain, ie both a fair price, and fair dealing. However if the director shows that full disclosure was made to either the disinterested directors or disinterested shareholders, then the burden remains on the plaintiff.
  • DGCL § 144 contains the rule that the burden for proving unfairness remains on plaintiff after disclosure
  • Oberly v. Kirby, 592 A.2d 445, 467 (Del. 1991)
  • Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del. 1995).

Corporate opportunities

  • Meinhard v. Salmon, on the fiduciary duty of partners to inform one another of opportunities which arise

Mergers and acquisitions

Derivative suits

  • Joy v. North
  • Levine v. Smith
  • Zapata v. Maldonado

See also

Notes

  1. ^ L Bebchuk, 'The Case for Increasing Shareholder Power' (2004-5) 118 Harvard Law Review 833, 844
  2. ^ §141(a), Delaware General Corporation Law
  3. ^ See also, SEC 13d-5, dating from times when groups of investors were considered potential cartels, saying any 5% shareholder voting block must register with the Federal financial authority, the Securities and Exchange Commission.

References

Books
  • WA Klein and JC Coffee, Business Organization and Finance (11th edn Foundation Press 2010)
  • JH Choper, JC Coffee and R. J. Gilson, Cases and Materials on Corporations (7th edn Aspen 2009)
Articles
  • LA Bebchuk, 'The Case for Increasing Shareholder Power' (2004-5) 118 Harvard Law Review 833
  • V Brudney, 'Contract and Fiduciary Duty in Corporate Law' (1977) 38 B.C.L. Rev. 595

External links

Based on the MBCA
Other states with own laws

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