parent nodes: agency costs | corporation law | Costello v Fazio | limited liability | piercing the corporate veil | promoters | Walkovszky v Carlton
corporation form
Six core characteristics of corporations
(1) Formal creation
(a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.
DGCL § 101(a)
Every corporation created under this chapter shall have power to:
(5) Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation;
(6) Adopt, amend and repeal bylaws;
(8) Conduct its business, carry on its operations and have offices and exercise its powers within or without this State;
DGCL 122
Formal creation provides information to stockholders about the company's legal status, organization, and purpose. Compare to [partnernship]s, which can be informally created. Note that promoters who hold themselves out as a corporation may be estopped from denying the corporation's de jure existence.
(2) Legal personality (DGCL § 106): the corporation is a "body corporate" which can sue or be sued, etc.
Upon the filing with the Secretary of State of the certificate of incorporation, executed and acknowledged in accordance with § 103 of this title, the incorporator or incorporators who signed the certificate, and such incorporator's or incorporators' successors and assigns, shall, from the date of such filing, be and constitute a body corporate, by the name set forth in the certificate, subject to subsection (d) of § 103 of this title and subject to dissolution or other termination of its existence as provided in this chapter. (8 Del. C. 1953, § 106; 56 Del. Laws, c. 50; 71 Del. Laws, c. 339, § 6.)
DGCL § 106
Every corporation created under this chapter shall have power to:
(2) Sue and be sued in all courts and participate, as a party or otherwise, in any judicial, administrative, arbitrative or other proceeding, in its corporate name;
DGCL § 122(2)
(3) limited liability* (MBCA § 6.22(b): shareholders are not personally liable for acts or debt of the corporation
(4) Separation of ownership and control* (DGCL § 141)
(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. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
DGCL § 141(a)
(5) Transferable shares (DGCL § 122)
Every corporation created under this chapter shall have power to:
(4) Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated;
. . .
(13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of (a) a corporation all of the outstanding stock of which is owned, directly or indirectly, by the contracting corporation, or (b) a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, or (c) a corporation all of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation;
(14) Lend money for its corporate purposes, invest and reinvest its funds, and take, hold and deal with real and personal property as security for the payment of funds so loaned or invested;
DGCL § 122
(6) Infinite duration (DGCL § 122(1))
Every corporation created under this chapter shall have power to:
(1) Have perpetual succession by its corporate name, unless a limited period of duration is stated in its certificate of incorporation;
. . .
(7) Wind up and dissolve itself in the manner provided in this chapter;
(8) Conduct its business, carry on its operations and have offices and exercise its powers within or without this State;
DGCL § 122(1)
Purpose of the corporate form
See purpose of corporations
Internal affairs doctrine
Corporate law gives corporations a great deal of flexibility to set up their firm. Corporations have no minimum capital requirements, and may be incorporated by only one actor (often another corporation).
Benefits of the corporate form
- Reduces need to monitor agents
- enlists creditors in monitoring managers
- reduces need to monitor other shareholders (shareholders don't have to worry about whether other shareholders have enough money to cover the corporation's liability)
- eliminates messy problems of personal liability
- makes shares fungible- reduces entry and exit costs for investors
- this disciplines management by permitting takeovers; other investors could buy up stock and reduce the agency costs and rent-seeking of management, thus increasing the new investors' profit
- limited liability increases the incentive for promoters to take risks
- protects the corporation's assets from the personal liabilities of shareholders
-allows actors contracting with the corporation to know who they're dealing with
Form/substance issues
Note that a corporation can otherwise evade shareholder's legal substantive rights through formal mechanisms. For example, rather than conduct a merger with Corp B that triggers shareholder appraisal rights, Corp A can sell all its assets to Corp B in exchange for Corp B stock, then dissolve and distribute Corp B shares to the former Corp A shareholders, who lack appraisal rights.