The Law of Corporations and Other Business Organizations

Lecture Notes

Corporate Capitalization

1. Three main concerns must be addressed regarding
a corporation’s financial structure.
These concerns are the following:
(1) Its ability to raise and maintain the
level of capital necessary to operate
the business
(2) The distribution of earnings and profits
to its shareholders
(3) The division of its assets upon dissolution
2. A corporation’s capital generally includes
all of the corporation’s assets.
3. The amount of capital a corporation
needs will be determined by the board of
directors and corporate management.
Equity Financing
4. Equity financing involves the issuance
of shares of stock of the corporation in
exchange for cash or other consideration
that will become corporate capital.
5. Equity securities must be authorized in
the corporation’s articles of incorporation
and are typically designated as common
stock or preferred stock.
6. Corporate shares, or stock, are the basic
units into which corporate ownership is
divided. The corporation’s articles of incorporation
must set forth the number
and type of shares the corporation is authorized
to issue.
7. Shares of stock that are authorized in the
articles are referred to as authorized
shares. Once consideration has been received
for shares of stock and those
shares have been delivered to the shareholders,
they are considered to be issued
and outstanding shares.
8. The articles of incorporation must authorize
the following:
• One or more classes or series of
shares that together have unlimited
voting rights
• One or more classes or series of
shares (which may be the same class
or classes as those with voting rights)
that together are entitled to receive
the net assets of the corporation upon
dissolution
Common Stock
9. If shares are not designated otherwise, they
are considered shares of common stock.
10. Unless otherwise provided in the articles
of incorporation, owners of common
stock are entitled to the right to participate
in the control of the corporation, a
pro rata share of the corporation’s profits,
and a pro rata share of the corporation’s
assets on dissolution.
11. Preferred Stock: Preferred stock enjoys
certain limited rights and privileges—
usually dividend and liquidation priorities—
over other outstanding stock.
12. The terms of the preferred stock are set
forth in the corporation’s articles of incorporation
and on the face of the preferred
stock certificate.
13. Preferred stock may be issued with redemption
rights or conversion rights.
14. A corporation’s board of directors may
issue preferred stock to attract investors
who are interested in a more secure investment
with a steady income.
Par Value
15. Par value is the nominal value assigned
to shares of stock, which is imprinted on
the face of the stock certificate as a dollar
value. The trend in modern corporate law
is to eliminate the par value requirement.
Consideration for Shares of Stock
16. Generally, any consideration deemed adequate
by the board of directors is acceptable
for the payment of the initial
shares of stock.
Issuance of Stock
17. The initial shares of a corporation’s stock
are typically issued at the organizational
meeting with the execution of stock subscription
agreements and the issuance of
stock certificates.
18. Stock certificates include the name of the
corporation, the state under which the
corporation is organized, the name of the
person to whom the stock is issued, and
the number and class of shares and the
designation of the series, if any, represented
by the certificate.
Redemption of Equity Shares
19. Redemption refers to the repurchase by a
corporation of its own shares of stock. Preferred
stock is often issued with redemption
rights.
Dividends
20. Dividends, which may be paid only out of
the profits of the corporation, are payments
to the stockholders of a corporation as a return
on their investment.
21. Directors are usually under no obligation
to declare a dividend in the corporation
and may decide that it is in the company’s
best interest to reinvest the surplus and
profits in the business. Once a dividend is
declared, it becomes an obligation of the
corporation to the shareholders entitled to
receive the dividend.
Stock Splits
22. Stock splits are used to lower the price of
a corporation’s stock. The effect of a split
is to split the value of each share of stock
into smaller denominations. Stock splits
increase the number of outstanding shares
of a corporation that represent its capital.
The actual amount of capital and surplus
remains unchanged.
Debt Financing
23. Debt financing refers to obtaining capital
through loans to the corporation, which
must be repaid with interest upon the
terms agreed to by contract between the
corporation and the lender. Debt is part of
the permanent capital structure of nearly
all established corporations.
24. The board of directors usually decides
what type of debt to acquire to suit the
corporation’s needs. Types of debt equity
include bank loans, commercial paper,
and bonds.
Secured Financing and the Uniform Commercial
Code (UCC)
25. Lenders will often require a security interest
to provide a loan to a corporation.
A security interest is an interest in property
that secures payment or performance
of an obligation.
26. When a lender assumes a security interest
in the borrower’s collateral, it is a secured
transaction. Secured transactions are subject
to Article 9 of the UCC.
Equity Capital versus Debt Capital
27. The board of directors often works with
corporate management to determine the
optimal capital structure for the corporation—
the best mix of both equity capital
and debt capital.
The Paralegal’s Role
28. Corporate paralegals may be involved in
researching questions concerning requirements
for debt and equity financing,
and for drafting several different types of
documents relating to the corporate financial
structure.
29. Paralegals are often instrumental in closing
large bank loans and debt financing
projects.