In the last chapter we looked at partnerships, which have the peculiar quality of existing independently of the partners themselves. Because of this, a partnership can hold property in its own name, even though the "partnership" is just a concept we kind of made up.

Corporations crank this fiction up further. In addition to holding property, corporations are a business entity type with the following benefits:

• Separate Legal Existence: The law typically treats a corporation as a separate legal entity. It is taxed separately. It can sue or be sued. It can enter contracts in its own name. It can borrow or lend money. It can buy, own, and sell real estate or other property in its own name. This includes buying and owning other corporations.
• Perpetual Existence: Unless the founders decide otherwise, a corporation lives indefinitely. For example, JP Morgan Chase traces its roots back to Manhattan Co., founded in 1799 by Aaron Burr, an early hip hop artist.
• Stock Issuance: Corporations may issue stock (also called shares) to investors. Shareholders invest capital into the corporation by purchasing shares, and in return, they become entitled to a portion of the company’s profits in the form of dividends. Additionally, shareholders generally have voting rights, which allow them to participate in decisions that affect the corporation.
• Limited Liability: Investors’ losses are limited to the amount they invested. That means if you own a share of Google, and Google goes bankrupt, Google’s creditors can’t take your house to pay Google’s debts.
• Investor Lock-In: Unlike partnerships, investors in a corporation cannot disassociate and get paid their share of the business. Once the money is invested, the shareholder receives stock and any other payments are at the discretion of the corporation's managers.
• Centralized Management: Investors typically do not manage the company; they appoint directors who act as a group to set the strategy and make major decisions, like hiring a CEO.
• Transferability of Equity Interests: Investors can typically trade their investment interests without the approval of the other investors. Investment interests are called “stock” or “shares,” and investors can be called “stockholders” or “shareholders.”
• Double Taxation: Because corporations are often treated as separate individuals, corporations are taxed on their profits. The the corporation distributes the remaining profits to the shareholders, the shareholders the profits are taxed again at the shareholder level. 

These are general rules and parties often contract around them. For example, investments in early-stage corporations usually prevent investors from freely trading their stock and industrial joint ventures often form with an end date.

Corporations vary greatly in size, structure and industry. For example, a corporation may be public or private; owned by individuals or by other corporations; or operated in a single town or globally. Review the following terms to familiarize yourself with some of the key distinctions between corporations:

• Public Corporation: A corporation whose shares are listed on a national exchange, like the New York Stock Exchange or the NASDAQ. When a company is listed on a national exchange buyers and sellers who don't know each other can come together to trade shares of the company. We will talk about these exchanges and the stock market later.
• Private Corporation: A corporation whose shares are not listed on a national exchange. Typically, buyers and sellers must know each other to trade shares of the company, which reduces share liquidity and increases the likelihood that a shareholder is intimately familiar with the business.
• Close Corporation: A corporation whose shares are held by just a few people, who often manage the company. The term "close corporation" isn’t well-defined; some use it to refer to any private corporation others to private corporations with only a few shareholders.
• Conglomerate: A corporation that conducts several businesses in seemingly unrelated fields.
• Multinational: A corporation operating in multiple countries.
• Subsidiary: A corporation that is owned by another corporation. The corporation that owns the subsidiary is referred to as the “parent.” If the parent owns the subsidiary's shares, it is a "direct subsidiary." If the the shares are held by one of the parent's subsidiaries, then it is an "indirect subsidiary."
• For-Profit Corporation: A corporation that operates with the primary goal of generating profit and financial returns for its owners or shareholders. 
• Nonprofit Corporation: A corporation that operates with the primary purpose of serving some charitable, educational, religious or community-minded goal. While nonprofits may generate profits (think of a museum gift shop), they cannot distribute those profits to investors. Nonprofits have significant tax advantages that are beyond the scope of this course.
• Benefit Corporation: A corporation that pursues not only financial returns for its shareholders but also specific social or environmental objectives. These corporations, often called B-Corps, are structured to balance profit-making with a commitment to achieving positive societal or environmental impacts. In practice, they operate similarly to a for-profit corporation, but with an annual report on their social purpose.

Although these corporations are vastly different in form and function, they are all properly called a corporation. With the exception of benefit corporations and nonprofits, they generally are all formed and governed by the same rules. Benefit corporations typically have a separate chapter of the state code. Nonprofits sometimes have a separate chapter of code and sometimes are included with the for-profit chapter. Because benefit corporations and nonprofits may follow separate rules, for this book, when we talk about corporations we will refer to for-profit corporations unless we note otherwise.

Just as there are a variety of corporate types, there are a variety of ways in which corporations operate. But nearly all corporations consist of three parties: (1) officers; (2) the board of directors; and (3) shareholders. 

Officers are employees of the corporation appointed by the board of directors to implement the company strategy. Officers make most of a corporation’s day-to-day decisions. There are not clear rules on what makes an officer, but they typically include:

• Chief Executive Officer (CEO): The CEO is in charge of operations, finance and implementing strategy. The CEO typically has broad power over the corporation, subject to the delegations given to the CEO by the board.
• President: The title of "president" is most often combined with the CEO, meaning the lead officer is both the President and the CEO. The role of "president" is not defined, but when it exists as a separate title, it is usually second in authority to the CEO.
• Chief Financial Officer (CFO): The CFO is typically in charge of finance (where can we get money), the treasury (do we have enough money on hand to pay our bills), accounting (do we have a good count of our stuff), auditing (is anyone cheating) and corporate strategy, which typically includes mergers and acquisitions. It is not uncommon for the CFO to also be in charge of internal information technology.
• Chief Operating Officer (COO): The COO is typically in charge of producing the product profitability and with the right quality.
• Chief Human Resources Officer (CHRO): Sometimes called the Chief People Officer, the CHRO is typically in charge of employee performance, retention and compensation.
• Chief Technology Officer (CTO): The CTO may be in charge of internal technology, internal research and development, or the technology in the company's products. Most of these roles are defined by the the corporation.
• General Counsel: The general counsel is sometimes called the chief legal officer, though the term general counsel is often more prestigious. The general counsel provides legal advice to the officers and the board of directors. The general counsel is typically also the secretary of the board of directors, which entails preparing agendas, distributing meeting materials and keeping the minutes at board meetings.

The officers have no authority on their own; they can only act on authority delegated to them by the board of directors. The board of directors, often just called "the board," is the governing body of the corporation. Other than a few items reserved for stockholders, the broad has plenary authority to manage the business and affairs of the corporation, including setting strategy. The next section describes in more detail how the board operations. Directors are typically elected by the stockholders.

Stockholders have the most authority, but the narrowest field of action. Stockholder approval is required for big-ticket items, like shutting down or selling the company, but at the same time stockholders are mostly limited to these big-ticket items. Stockholders can initiate only a few actions on their own, and their governance is typically limited to an up or down vote on a proposal from the board. For example, if they dislike the terms of a merger, they typically can vote only to accept or reject it—they cannot vote to change the price or other terms. We will detail shareholder control in later chapters. Stockholders are also called shareholders—they are synonymous, but Delaware uses "stockholders."

Both the DGCL and the MBCA give wide latitude on how boards operate. This section will describe the mandatory requirements, default rules and standard practices.

Board Composition

Composition: Boards must have a minimum of one director who must be a natural person (that is, they can't be another corporation or some other legal entity). DGCL § 141(a), MBCA § 8.01(a); but see DGCL § 141(a) (noting that these are default rules), MBCA § 7.32(a)(1) (allowing corporations to operate without a board). Boards of small corporations typically have three to five members, but can have as few as one. Boards of public corporations typically have about a dozen members. It is best practice to have an odd number of board members to avoid tie votes. 

Directors typically consist of founders, leaders in the corporation's industry, financial experts and venture capitalists. Boards are often looking for members with expertise in key areas, such as accounting, cyber security, privacy and public policy. Directors typically own some shares of the company, but they are not required to. In recent years, there has been social and legal pressure to expand the gender, racial and sexual orientation diversity on boards. The legal requirements are subject to ongoing litigation.

The board typically elects a chairperson, often called simply the "chair." The chairperson typically takes the lead in setting the agenda and presides at meetings, but usually does not have additional voting rights or authority. In some international jurisdictions the chair has additional rights or the title may carry prestige.

There are several types of directors:

• Insider Directors: Directors that work for the company, like the CEO or CFO. It used to be much more common for the CEO to be on the chairperson of the board of directors, but it is presently discouraged.
• Outside Directors: Directors that do not work for the company.
• Nominee Directors: Directors that are nominated by a specific shareholder. Sometimes when shareholder buys in to a company they negotiate for the right to nominate or appoint directors. We'll discuss how this is done in a later section.
• Independent Directors: Directors with no material relationship with the company. This is broader than the "inside director" category because it can include banking, consulting, legal, accounting, charitable or family relationships. In some jurisdictions, directors that have been on the board for many years are no longer considered independent. The board of each company on the NYSE or NASDAQ is required to make a determination as to whether each of their directors is independent. For more detail, see the NYSE listing requirements, section 303A.02.

Directors can serve on the board of multiple companies. Overboarding is when a director serves on too many boards, and it can often cause shareholders to vote the board member out. Currently, some shareholder advisory services and major institutional investors will recommend shareholders vote against a director serving on more than five boards or, if the director is also a CEO, on more than one board other than the CEO's company board.

Board Authority

MBCA § 8.01(b) states that "all corporate powers shall be exercised by or under the authority of the board of directors, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors." DGCL § 141(a) grants similar power to the board. The exception is if there are limitations placed on the board by the shareholders in the certificate of incorporation (we'll discuss this in the next section, you can think of it as the constitution of the corporation). The officers cannot act unless the board delegates power to them, and with few exceptions the shareholders cannot act unless the board first makes a recommendation to them. As we'll see later, even where shareholders are permitted to act they are not permitted to manage the day-to-day business.

The board's authority is given to the board, not to any individual director; directors have power only when acting as or as delegated by the board. They are not agents or principals of the corporation. And unless the certificate of incorporation says otherwise, all directors have equal authority and power, including the chairperson.

The board can act either by voting to approve a resolution at a meeting or by a unanimous written consent.

Board Meetings

Public company boards typically meet between four and twelve times per year, and private companies will meet as needed, though at least quarterly is a good rule of thumb. Meeting schedules are typically coordinated by the chair or the secretary to the board (who is usually also the general counsel).

Regular meetings are typically scheduled a year in advance and deal with regularly occuring matters, like financial performance or officer performance reviews. Special meetings are out of the ordinary items and may be triggered by anything needing the board's urgent attention, such as a merger offer, an industrial accident, a regulatory investigation or an issue with an officer.

Notice for meetings should include the date, place and time. There are no notice requirements for regular meetings. For special meetings, Delaware corporations have no statutory minimums for how far in advance notice should be provided, but 24 hours notice for a special meeting is typical. For MBCA corporations, notice of special meetings must be given two days before the meeting, though this only the default rule and can be changed in the bylaws.

The agenda for the meetings will be prepared jointly by the chair and the secretary and will typically distributed in advance. Typically the agenda consists of presentations by officers and other employees, presentations by outside experts and executive sessions, which are brief meetings in which independent directors meet without anyone from management. The legal team that assists the board in preparing meetings is called the corporate secretariat.

At the meeting, the board cannot act unless it meets the quorum requirements. A quorum requirement is a rule that requires a certain number of directors to be present before any business is conducted. This is to keep the board process fair by preventing a minority of the board from acting against the wishes of the majority of the board. The default rule under the MBCA and DGCL is that a majority of directors must attend to transact any business. MBCA § 8.24(a); DGCL § 141(b).

Meetings may be held electronically as long as all directors are able to hear each other. MBCA § 8.20(b); DGCL § 141(i). Video is not required. Meetings may also be held outside of the state, and it is common for board meetings at public companies to hold at least one meeting per year at a location that is relevant to the business (factory tour) or at an enjoyable travel destination.

If a quorum is present, then a majority of the directors present can act as the board. This means if the board has nine members, then with five members they have a sufficient quorum to conduct business and three votes are enough to approve a resolution of the board. MBCA § 8.24(c); DGCL § 141(b).

After the board meeting, the corporate secretariat will prepare board minutes. Board minutes record the agenda items discussed in a board meeting and the approved resolutions. Board minutes are primarily a litigation document and should be drafted carefully. Best practice is to document that there was robust discussion, but without creating a record that could be harmful to a plaintiff that is unhappy with the board's decision or process. Because resolutions may be disclosed to different parties for different reasons, it's best to avoid long resolutions with many unrelated topics. This way if you are required to disclose an officer's authority to your bank, you don't also end up revealing your merger plans, your executive compensation or other items in a laundry list resolution.

Action without a meeting: The MBCA and DGCL allow boards to act without a formal meeting by unanimous written consent. MBCA § 8.21(c); DGCL § 141(f). Unlike a board vote, these must be unanimous. In practice, they are typically done by email.

Board Information Access and Reliance

Board members are entitled to unfettered access to the corporation's information. MBCA 16.05(a); DGCL 220(d). But this must be the corporation's information. Not every email or conversation, even those stored on the corporation's servers, belong to the corporation. Emails between directors, officers or employees that are not official corporate business are not the corporation’s records, and Delaware courts have denied access to them.

They are also permitted to rely on information provided to them by certain people. DGCL § 141(e) reads:

A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.

Similarly, MBCA § 8.30(f) reads:

(f) A director is entitled to rely, in accordance with subsection (d) or (e), on:

(1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports or statements provided;

(2) legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the director reasonably believes are matters (i) within the particular person’s professional or expert competence, or (ii) as to which the particular person merits confidence; or

(3) a board committee of which the director is not a member if the director reasonably believes the committee merits confidence.

Board Committees

Corporate boards typically have committees. Listed companies are required to have an audit committee, a compensation committee and a nominating & governance committee. Each of these committees is required to have a written charter. (If you're tasked with drafting one, you can find the requirements in the NYSE Listed Company Manual, Rule 303A. Wachtell, Lipton, Rosen & Katz also have excellent guides that can help you set up and run these committees.)

The audit committee is a board committee that oversees "(1) the integrity of the listed company's financial statements, (2) the listed company's compliance with legal and regulatory requirements, (3) the independent auditor's qualifications and independence, and (4) the performance of the listed company's internal audit function and independent auditors." NYSE Listed Company Manual, Rule 303A.07. This involves meeting at least quarterly to review and recommend the financial statements and related press releases. It also involves discussing concerns found by the external auditors. The auditors of a public company issue a report with their findings, and a good audit committee should help resolve concerns before they grow worse and are publicly disclosed. In most public companies, this is the busiest committee and the hardest to staff because members must be independent and financially literate. NYSE Listed Company Manual, Rule 303A.07 commentary.

The compensation committee is a board committee tasked with setting officer compensation, compensation goals and conducting performance reviews for the CEO and other top officers. It must be comprised solely of independent directors. NYSE Listed Company Manual, Rules 303A.05 and 303A.07; Nasdaq Listing Rules 5605(c)(2)(a) and 5605(d)(2)(a). They typically have the heaviest load in the first quarter, when they evaluate and set new compensation goals, and just after the second quarter, when they review progress. They are commonly assisted by paid consultants that are experts in executive compensation.

The nominating & governance committee is a board committee tasked with identifying potential directors, recommending director nominees to the board, setting corporate governance guidelines, and overseeing the board and management. This committee also runs an annual board evaluation process, which may be done as a survey among board members or may involve external consultants. Some boards do annual internal surveys and use external consulting assistance every three to five years. Members of this committee must be independent directors. This committee will draw on the corporation's legal staff regularly for advice on governance trends, so if you support this committee it is good to keep up with sites like the Harvard Forum on Corporate Governance. 

We'll cover corporate finance in more depth in later chapters. But to get us running here is a high level overview.

Running a company usually requires some money to get started. If you don't have enough money to get started, there are two main ways to get it.

1. Debt
2. Equity

Debt in its most generic form is a promise to pay someone some money in the future. For example, if you're financing your business you might go to a bank and borrow $50,000 in exchange for an agreement to pay them $1,000 per month for the next five years. This is called a term loan. Over the five year period you'll pay the bank $60,000 total. The difference in what you borrowed from what you repaid is called the interest. In a term loan, the interest is calculated as a percent of the amount you are borrowing, in our example it would be about 7%.

In future chapters we'll look at ways parties customize the duration, parties, amounts, repayment schedule and risk to meet their needs. For now, it is sufficient to know that debt financing is when you owe someone a determinable amount of money.

Let's contrast that with equity. The most basic form of equity is share of common stock; we'll explore the broader meaning of equity in later chapters, but this will suffice for now. A share of stock gives you the right to payment when (and only when) the board of directors decides to pay you. Broadly speaking, you get some share of whatever's left over after everyone else has been paid (again, we'll go into more detail on this later; this leaves out a lot of nuance).

Sounds terrible right? So why would someone want stock, which has no fixed claim, rather than debt, which has a fixed claim? Well, it will depend on how large you expect the leftovers to be. If a company is barely scraping by, it will pay the fixed claim on its debt and then have very little leftover for equityholders. If the same company finds the cure to cancer and earns windfall profits, the debtholders will still get the same fixed claim, and the extra value will likely be paid to the stockholders. So if a company is massively profitable, the equityholders may earn more than the debtholders. 

But if payments to common stock holders are optional, why would the directors ever pay them? There are two reasons. First, the directors are elected by the equityholders. If the directors don't keep the equityholders happy, they'll be replaced. Second, the directors owe the shareholders a fiduciary duty. We'll consider these duties in depth later on, but may it suffice for now that these duties support a  belief among directors that their purpose is to serve the shareholders, which includes paying them.

Test your understanding of this material with the following questions:

5.1.5.1.  Margot and Ryan form Movie, Inc., a Delaware corporation, to produce a single film. They appoint a board and a CEO, contribute $1,000 each and issue each of them 100 shares of stock. The film is a bit artsy; a few plot changes would unlock huge commercial potential, but they would rather stay pure to the artistic vision, so they sacrifice the potential profits to tell a deeper story. As a result the film loses money and when they distribute the profits to the shareholders it's less than they each paid in. Is Movie, Inc. a for-profit, nonprofit, or benefit corporation?

5.1.5.2.  Same as above, but Movie, Inc.'s film hits it big in theaters, generating a significant interest in Margot and Ryan's work. They make millions directly from sales to the public. Is Movie, Inc. a public or private corporation?

5.1.5.3  Same as above, but the board of Movie, Inc. decides to capitalize on the success by listing its shares on the New York Stock Exchange. Is Movie, Inc. a public or private corporation?

5.1.5.3. To formalize the business a bit, Margot takes the role of CFO and Ryan takes the role of COO. They hire Leonardo to work as an accountant. Who does Leonardo likely report to? Would your answer change if instead of serving as an accountant Leonardo works as a supply chain management specialist?

5.1.5.4.  Who governs Movie, Inc.? In other words, which "corporate player" is considered the corporation's governing body? Similarly, who makes Movie, Inc.'s day-to-day decisions?

5.1.5.5.  Assume Movie, Inc.'s charter uses general language that allows the corporation to engage in any lawful activity. Brad is one of Movie, Inc.'s three directors, and he believes that instead of producing movies, Movie, Inc. should be designing, manufacturing, and selling film cameras. Brad tells Movie, Inc.'s CEO to implement the strategic shift immediately. What should the CEO do?

5.1.5.6.  Margot and Ryan are tired of making wonderful box office hits, so they use the company email system to plan to skip work on Friday. Brad, a director, hears of their plan. He calls the IT department demanding access to all of Margot and Ryan's company emails. Is he entitled to this information under MBCA 16.05(a)? What about DGCL 220(d)?

5.1.5.7.  Brad is worried about the liability of being a director. He hatches a plan to form a new corporation in which he is the sole officer, director and shareholder. Then Movie, Inc. can appoint his new corporation to the board. Because Brad will act only through the corporation, and because the corporation will have limited liability, Brad supposes he'll have the functional control of a director but without the personal liability. What do you advise Brad?

5.1.5.8.  Brad is tired of the long work on the audit committee. He proposes eliminating the committee. In the alternative he suggests adding the CFO, Margot, to the audit committee. He argues this would save a lot of time because Margot knows everything about the audit work from her role as CFO. What do you advise?

In General

The articles of incorporation (also called the charter) provide high-level rules governing and information related to the corporation. Practitioners typically keep the charter as slimmed down as possible because charters are difficult to amend. You can think of the charter as the constitution of the corporation. 

Contents of the Charter

The articles of incorporation must contain:

• The corporation's name (we will discuss the rules on naming more in a later section)
• The corporation's registered agent for service of legal process and the agent's address
• The corporation's business or purpose, if incorporating in Delaware
• A description of the authorized stock
• The names and addresses of the incorporators and, in Delaware, any interim directors that will serve until the first meeting

DGLC § 102(a); MBCA § 202(a).

The articles may contain just about anything else. For example, it may include special rights for stockholders, which we will cover in more detail in Chapter 7. It may include a limit on lawsuits against the managers, which we will cover in Chapter 10. Though it is uncommon, the charter may limit the powers or duration of the corporation.

Ultra Vires & Corporate Purpose Statements

Historically, corporations would limit themselves by stating a discrete purpose in the charter. For example, you might say "the corporate purpose is to buy and resell bicycles." Shareholders did this as a way of protecting their investments. You wouldn't want to invest in a textile company and then have it scrap textiles and become some kind of financial conglomerate. Corporate acts that went beyond the powers authorized in the charter were deemed ultra vires (literally, "beyond the powers"), and there were a host of doctrines voiding such acts. About a hundred years ago, states grew tired of this nonsense and the ultra vires doctrine has largely been legislated away. Now nearly all corporations include the same corporate purpose: "The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under law." Here's Amazon's generic statement. Contrast it with the now rare purpose statements for Ford (authorizing such things as mining coal) and Coca-Cola (authorizing planting fruit and preparing "all kinds of drugs").

Amending the Charter

The certificate of incorporation can typically be amended only with the approval of the board of directors and the shareholders.

Here's the process at a high-level: (1) the board initiates or recommends the change, (2) the shareholders approve the change, and (3) the amendment is filed with the secretary of state. The voting process by the shareholders has a lot of moving pieces. We will cover the process in detail in Chapter 8, but for now, just know the shareholders typically get to vote on charter amendments.

We say "typically" because some states allow directors to make a few minor, enumerated changes without a shareholder vote. For example, in Nebraska, the board may unilaterally amend the charter: (1) to extend the duration of the corporation if it was incorporated at a time when limited duration was required by law; (2) to delete names and addresses of the initial directors; (3) to delete the name and address of the initial registered agent or registered office; and (4) to change the corporation name to substitute “inc.” or “corp.” or etc. Neb. Rev. Stat. § 21-10,106.

In MBCA states, amending the articles requires more shareholder votes cast in favor than against. MBCA § 10.03(e). In contrast, DGCL § 242(b)(1) states that amendments to the articles must be approved by a majority of the shareholders eligible to vote. So in Delaware, shares that are not voted are counted as voting against, while in MBCA states they just are not counted.

You may see charters referred to as "amended" or "restated" or "amended and restated." "Amended" means it has been amended, which typically means that before the charter you will see another page stapled on that shows changes, for example, "Article IV is replaced with the following text..." These are tricky because you have to flip between the two documents to understand what provisions are active. A charter that's "restated" will instead just reprint the new charter with all the changes incorporated into one document. So rather than having to read the amendment to figure out what's changed in the charter, a restated charter includes all of (and only) the text that's active.

Cautionary Note

Note that the rules for adopting and amending a charter are governed by state law, so be sure to check the law in the state of incorporation when you do this in practice.

While charters typically cover very few items that are not statutorily required, the corporate bylaws cover a wide range of governance issues. Almost anything can be included in the bylaws, and practioners prefer to put governance items in the bylaws, rather than the charter, because the bylaws are easier to amend.

Contents of the Bylaws

Bylaws are typically adopted by the corporation's board of directors at the first meeting after the articles of incorporation are filed. They often include provisions like:

• Notice requirements for board or shareholders meetings
• The date of the annual shareholder meeting
• Quorum requirements for the board to conduct business
• Procedures for elections
• Procedures for removing directors or filling vacancies on the board
• The number and responsibilities of officers
• When the corporation's fiscal year starts and ends
• What committees the board has
• Indemnification provisions
• Procedures for amending the bylaws
• Just about anything else

One common provision is a forum selection bylaw, which typically restricts where shareholders can bring suits against the company or its managers (we'll discuss these suits more in Chapter 11). Forum selection clauses are authorized in MBCA states and in Delaware. Corporations have adopted draconian forum selection clauses that have effectively eliminated some securities claims, making this a hot area of corporate litigation.

Amendments to the Bylaws

In Delaware, the shareholders have authority to amend the bylaws, but they almost always grant the directors the authority to amend the bylaws as well. DGCL § 109(a). In MBCA states the default is that shareholders and the board have authority to amend the bylaws. MBCA § 10.20. This means that both the shareholders and the directors have authority to amend the bylaws, which can create contention if each repeals the bylaws of the other. The MBCA resolves this potential contention by allowing shareholders to adopt a bylaw with language divesting the board of authority to repeal it. MBCA § 10.20(b)(2). Even without this provision, the directors are elected by the shareholders. Angering them by repealing their bylaws is likely to be a career limiting decision.

In addition to articles of incorporation and bylaws, corporations typically have corporate policies. These govern more granular details, like internet use, vacation days and nondiscrimination. Policies are typically set by the board of directors or the officers, and while they may be driven by statutory concerns (e.g., nondiscrimination) they are not as formulaic as the other governance documents. Among governance documents, policies are the easiest to change, are the most granular, and have the least authority.

Policies are often relevant in litigation and compliance cases. You can often find policies collected in a corporate handbook, though not all corporations collect their policies and not all policies may be in the handbook. If you are looking for policies in discovery, you should also check the meeting materials from the board and from the officers' executive committee.

ARTICLES OF INCORPORATION

[Your Corporation Name], Inc.

Article I: Name
The name of this corporation is [Your Corporation Name], Inc.

Article II: Duration
The duration of this corporation shall be perpetual.

Article III: Purpose
The purpose for which this corporation is organized is to engage in any lawful activity within the meaning of the laws and regulations of the state of [Your State], and for any other lawful purpose for which corporations may be incorporated under the laws of [Your State].

Article IV: Principal Office
The principal office of this corporation is located at [Your Address, City, State, Zip Code]. The mailing address for this office is [Mailing Address, City, State, Zip Code].

Article V: Registered Agent and Address
The name and address of the registered agent of this corporation is:

Name: [Registered Agent Name]
Address: [Registered Agent Address, City, State, Zip Code]

Article VI: Capital Stock
This corporation is authorized to issue [Number of Shares] shares of common stock, with a par value of $[Par Value] per share.

Article VII: Board of Directors
The management of this corporation is vested in a board of directors. The number of directors and their qualifications shall be as provided in the corporation's bylaws.

Article VIII: Limitation of Liability
The personal liability of the directors of this corporation is hereby eliminated to the fullest extent permitted by the laws of [Your State].

Article IX: Indemnification
This corporation shall have the power to indemnify and hold harmless any director, officer, employee, or agent to the fullest extent permitted by the laws of [Your State].

Article X: Incorporator
The name and address of the incorporator of this corporation is:

Name: [Incorporator Name]
Address: [Incorporator Address, City, State, Zip Code]

Article XI: Effective Date
These articles of incorporation shall become effective on [Effective Date].

Article XII: Bylaws
The initial bylaws of this corporation shall be adopted by the board of directors.

In witness whereof, the undersigned incorporator has executed these articles of incorporation on [Date].

[Incorporator Name]
[Incorporator Signature]

5.2.8.1. Draft the statement of corporate purpose for a company that manufactures bicycles. In what corporate governance document should this language be included?

5.2.8.2. In what corporate governance document would you most likely find the quorum requirements for a board meeting?

Step 1: Draft Articles of Incorporation: Prepare the articles of incorporation. The MBCA requires that the charter set forth the corporation’s name, duration, registered agent, authorized shares of stock, and other pertinent details. MBCA § 2.02(a). The incorporator(s) may also add a number of other items, which are listed in MBCA § 2.02(b), but these additions are voluntary. As a reminder, it is typically best practice to keep the articles minimal because the articles are hard to amend!

Step 2: File the Articles of Incorporation: Submit the completed Articles of Incorporation to the appropriate state agency responsible for corporate registrations, usually the corporations division within the office of the secretary of state. MBCA § 2.01. Include the necessary filing fee as specified by the state. The individual(s) who submits the articles is known as the “incorporator.” 

Step 3: Draft Corporate Bylaws: Draft the corporate bylaws, which serve as the internal rules and procedures for the corporation's governance. Bylaws outline the roles and responsibilities of directors and officers, meeting procedures, voting rights and other operational details. Public companies are required to disclose their bylaws. Take a brief break and search for the bylaws of a company you're interested in, then skim them to see the major sections.

Step 4: Hold an Organizational Meeting: Conduct an initial organizational meeting with the incorporators or initial directors to adopt the bylaws, appoint officers, approve initial transactions and address any other necessary matters. MBCA § 2.05. Document your actions in the meeting minutes.

Step 1: Draft Certificate of Incorporation: Prepare a Certificate of Incorporation, which must include the corporation's name, registered agent and office, purpose, authorized shares of stock and a few other provisions. DGCL § 102(a). The Certificate of Incorporation may also include other items, which are listed in DGCL § 102(b). This is just like the MBCA! 

Step 2: File Certificate of Incorporation: File a Certificate of Incorporation with the Delaware Secretary of State. DGCL §§ 101; 103; 106. Pay the required filing fee at the time of submission. 

Step 3: Obtain a Registered Agent: Designate a registered agent who will be responsible for receiving legal and official documents on behalf of the corporation. The registered agent must have a physical address in Delaware. DGCL §§ 102; 103.

Step 4: Draft Corporate Bylaws: Develop the corporate bylaws, which serve as the internal rules and procedures for the corporation's governance. DGCL § 109. Bylaws typically outline the roles and responsibilities of directors and officers, meeting procedures, voting rights and other operational details.

Step 5: Hold an Organizational Meeting: Conduct an initial organizational meeting with the incorporators or initial directors to adopt the bylaws, appoint officers, approve initial transactions and address any other necessary matters. Document the actions at the meeting in the minutes. DGCL §§ 107; 108.

The MBCA, the DGCL and most states limit what names can be used for a corporation.

Under both the MBCA and DGCL corporate names must satisfy the following: (1) distinctiveness, meaning the name must be distinguishable from other existing names; (2) the name must (usually) contain a corporate designator (“Corporation”, “Incorporated”, etc. or an abbreviation of one of these); (3) there are certain reserved or restricted words that special permission must be obtained to use, for example, usually you can't use the word "bank" unless you're actually a bank; (4) geographic terms may be restricted; (5) names that infer illegal conduct are generally not allowed; and so on. MBCA § 2.02; DGCL § 102.

While the corporation's legal name will be set in the charter, legal names can be bulky and are not great marketing. You may consider adopting a trade name as well. A trade name, also known as a "doing business as" (DBA) name or a fictitious business name, is a name that a business operates under that is different from its legal name or the name of its owners. It is important to note that using a trade name does not create a separate legal entity. The business is still legally responsible under its legal name, and the trade name is simply a way to conduct business under a different moniker.

There are several reasons why a business might choose to use a trade name; the following are a few examples. For one, as already mentioned, marketing purposes— trade names are often sleeker and more memorable and descriptive. Additionally, trade names allow you to experiment with a new product or service line using a different name so you do not have to set up a new company. This same logic applies to trade names allowing for different lines of one business to operate under different names to prevent confusion. On that note, yet another possible reason is because if multiple businesses have similar legal names, using trade names can help avoid confusion among customers and competitors. Finally, there are privacy considerations. Some business owners may not want their names at the forefront of their business. 

There are dedicated rules to follow when registering and using a trade name, which vary by jurisdiction and often include: (1) filing a trade name registration with the appropriate government agency (often the county or state), (2) paying a registration fee, (3) checking for name availability to ensure it's not already in use by another business, (4) renewing the trade name registration periodically and (5) complying with any additional requirements or regulations related to trade names in your jurisdiction. These local rules can get funky— consider Neb. Rev. Stat. § 87-209, which is provided below. You cannot use a trade name to disparage the dead? So the name “Nixon Can’t Dance Burgers” is literally illegal. It is not clear this is constitutional, but it is amazing. See Matal v. Tam, 582 US 218 (2017) (holding unconstitutional a rule that would prohibit registration of disparaging trademark).

Neb. Rev. Stat. § 87-209

A trade name shall not be registered if it:

(1) Consists of or comprises immoral, deceptive, or scandalous matter;

(2) Consists of or comprises matter which may disparage, bring into contempt or disrepute, or falsely suggest a connection with, persons living or dead, institutions, beliefs, or national symbols;

(3) Consists of, comprises, or simulates the flag or coat of arms or other insignia of the United States, any state or municipality, or any foreign nation;

(4) Consists of or comprises the name, signature, or portrait of any living individual without his or her consent;

(5) (a) Is merely descriptive or misdescriptive, or is primarily geographically descriptive or geographically misdescriptive as applied to the business of the applicant, or (b) is primarily merely a surname, but nothing in this subdivision shall prevent the registration of a trade name which has become distinctive of the applicant's business in this state. The Secretary of State may accept as evidence that a trade name has become distinctive proof of continuous use by the applicant as a trade name in this state or elsewhere for five years preceding the date of the filing of the application for registration;

(6) Consists of or comprises a trade name which so resembles a trade name registered under sections 87-208 to 87-219.01 [these are the sections of code that govern the registration of trade names], registered in this state, or the name of a business entity on file or registered with the Secretary of State pursuant to Nebraska law as to be likely to cause confusion, mistake, or deception of purchasers, except that a name, although similar, may be used if the business entity affected consents in writing and such writing is filed with the Secretary of State. The word incorporated, inc., or corporation shall not be a part of the trade name being registered unless the firm is duly incorporated in the State of Nebraska or some other state; or

(7) Consists of the word geologist or any modification or derivative of such word, and the applicant does not meet the requirements of subsection (6) of section 81-3528.

A promoter is a person that acts on behalf of a corporation that hasn't yet been formed. The promoter finds potential shareholders, suppliers, employees and customers and works to bring the corporation into existence. A promoter may also be the incorporator, and an incorporator may have worked as a promoter, but the two terms are distinct.

In MBCA states, "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under [the MBCA], are jointly and severally liable for all liabilities created while so acting."  MBCA § 2.04. This liability a promoter faces for acting on behalf of a corporation while knowing that the corporation hasn't yet been formed is called promoter liability. This personal liability continues even after the corporation is formed unless the contract is novated or the parties agree to some other limitation on liability.

There are two important carveouts. If the parties expressly agree that the promoter won't be liable, then the promoter won't be liable. Similarly, if the promoter does not intend to be personally liable, and if the counterparty knows that (1) the corporation hasn't been formed and (2) the promoter does not intend to be personally liable, then the promoter isn't personally liable.

As for torts, a corporation is typically not liable for the torts committed by its promoters. The exception is when the corportion takes on those torts by either ratifying the promoter's actions or if it accepts and retains the benefit of the promoter's acts.

In certain situations, estoppel may be invoked to prevent a promoter from avoiding liability by asserting positions inconsistent with their previous representations during the incorporation process. As you can see, estoppel applied in this sense is the same as estoppel applied anywhere else. Recall that the Brown case illustrates that you can invoke estoppel where the promoter would not otherwise be liable. 

A promoter owes a duty of candor, full disclosure and utmost good faith. This prohibits fraud but also prohibts a promoter from taking secret profits that are not disclosed to the corporation. These duties can be enforced by investors or by the corporation once it is formed. 

This may remind you of the principles we learned during the agency chapter, particularly agency relationships with an unidentified principal. While some courts do refer to promoters as agents, keep in mind that there cannot be an agency relationship without a principal, so a promoter cannot be the corporation's agent before the corporation is formed. But if you're before a judge that says otherwise, best to just nod along.

The rules for promoter liability vary widely from state to state. In some states, a promoter isn't liable if the counterparty knew or should have known the corporation wasn't yet formed. Other states exempt the promoter from liability if the promoter had a good faith belief that the corporation had been formed. You'll need to research it in the jurisdiction where you are practicing. 

For a deeper dive on promoter liability, see Fletcher Cyclopedia of Corpoate Law §§ 188.10 through 222.

Test your understanding of corporate formation with the following questions: 

5.3.6.1. Kirk lives in Iowa and while there purchased shares in Federation, Inc., a Delaware corporation that is headquartered and operates exclusively in Nebraska. Kirk believes the directors are voting in ways that harm the company's long term prospects. If he sues, which state's law will control?

5.3.6.2. Suppose instead Kirk is a customer who came to Nebraska and purchased transparent aluminum from Federation, Inc.. It turns out the transparent aluminum isn't transparent, so Kirk sues for fraud. Which state's law will control?

5.3.6.3. Scotty and Pavel are in the process of forming a corporation in an MBCA state. They draft articles of incorporation and bylaws. To complete the formation process, what must Scotty and Pavel do with the articles of incorporation? What about the bylaws? How does your answer change if they are incorporating in Delaware?

5.3.6.4.  Same as above, Scotty and Pavel are in the process of forming a corporation. Scotty thinks that Pavel is filing the articles of incorporation, and Pavel thinks that Scotty is, so no one ever files the articles. The mistake goes undiscovered and, as a result, Scotty and Pavel run the corporation's operations in normal course untill a third-party sues the corporation for breach of contract. Who can the third-party recover against? What additional facts might you be interested in gathering to more accurately answer this question?

5.3.6.5.  Uhura is in the process of forming a corporation, but before she files the charter, she enters into several contracts on behalf of the corporation. The corporation is eventually formed, but it quickly fails and many of the contracts signed before formation are not performed. Can Uhura be held liable for the performance under these contracts?