A corporation is an organization formed by an individual or group of individuals in order to give structure to an enterprise. Profit making generally comes to mind when we think of corporations, but there are non profit corporations.
People choose to form a corporation primarily for the following reasons:
- The legal and financial liability of the owners or members can be no more than the amount they have contributed to the corporation.
- There are certain tax advantages in the corporate form of ownership.
- The corporation has a separate legal identity from its shareholders, directors and officers.
- Shares of stock of a corporation may be sold or transferred without disrupting the organizational or business operations of the corporation.
- A corporation, unlike other forms of business organizations, will not dissolve or disband upon the death, withdrawal or departure of an owner, director or officer.
PRIMARY ELEMENTS OF A CORPORATION
STOCK AND STOCKHOLDERS (8 Del. C. §§ 151-203)
What is stock?
Shares of stock are units or proportionate shares of ownership in a corporation. The owner of shares of stock in a corporation is known as a stockholder or shareholder; the terms are used interchangeably. "Stock" represents the equitable interest of the shareholder in the property of the corporation while the term "shares" represents the extent of that interest. A share of stock gives the owner an interest or right in the management of the corporation, in its surplus profits and, upon dissolution, in all its assets remaining after the payment of its debts.
Authorized, Issued and Outstanding Shares
The number of shares that the corporation has the authority to issue is set forth in the corporate charter, e.g., articles of incorporation. There is an important distinction between "authorized" shares and "issued" shares. Issued shares are shares that have been authorized by the corporate charter and actually sold to subscribers. Stock of a corporation that has been authorized, issued and in the hands of the general public would be considered issued and outstanding. Conversely, any stock that has been authorized but not yet distributed to subscribers would be considered unissued stock and would not be outstanding. Stock that has been issued and then later reacquired by the corporation is known as treasury stock. 8 Del. C. § 153. It may be held by the corporation, reissued to the public or retired. Treasury stock has no voting or dividend rights.
Voting, Classes and Series of Stock
Anyone owning stock in a corporation is normally entitled to vote for that corporation's Board of Directors. The number of votes a person has is usually equal to the number of shares owned by that individual. However, this is not always necessarily so. Some corporations have different classes and/or series of stock. The primary classification of stock, if there is any, is what is known as common and preferred stock. These can be further subdivided into different classes or series. The corporation has the power to give certain shareholders more voting rights than others or even designate a particular class or series of stock as having no voting rights at all.
Owners of ordinary or "common" stock generally receive the same interest in the corporation. All common stockholders stand on equal ground, and each is entitled to share in the profits of the corporation, whenever they are distributed in the form of dividends, in proportion to the number of shares held by each stockholder. Common shareholders are usually entitled to one vote per share owned. Again, keep in mind that the number of votes per share can vary depending on the class or series of stock.
Preferred stock also provides an individual with an ownership interest in the corporation. As the name implies, preferred stockholders generally have priority over common stockholders when it comes to dividends or dissolution or liquidation of the company and may or may not have voting rights. Some owners of preferred shares can have more rights, vis a vis the corporation, than other preferred shareholders. It would be advisable for an individual contemplating buying preferred stock to review the corporation's charter or subscription agreement to determine his/her rights as a preferred shareholder. The specific rights and privileges of a particular stock are determined by the corporation itself. Smaller corporations generally have only one class of stock with equal rights for each shareholder. Larger corporations, on the other hand, sometimes have one or more classes of stock and one or more series within each class. The stock can have no par value, which means that no dollar amount was placed on the stock by the company, or it can have a par value in an amount determined by the corporation.
GENERAL DUTIES OF DIRECTORS
The responsibilities of a director are governed by 8 Del. C. § 141(a) of Delaware's General Corporation Law. Generally, the statute provides that the directors of a corporation are under a duty to perform those functions necessary to manage the corporation within the ordinary scope of its business.
The "basic management functions of directors" include, but are not limited to:
- Selecting the corporation's chief executive and senior officers;
- Controlling executive compensation, pension and retirement policies;
- Delegating authority for administrative action to the chief executive and subordinate executives;
- Fixing policies as to pricing, labor relations, expansion and new products;
- Determining dividend payments, financing and capital changes;
- Supervision and vigilance for the welfare of the whole enterprise.
While performing their managerial functions, corporate directors are charged with an absolute fiduciary duty to act in the best interests of the corporation and its stockholders. The director's fiduciary duty is composed of the duties of care, loyalty and good faith. This triad of duties requires corporate directors to fully inform themselves prior to making a business decision, to put the corporation's interests and those of its stockholders ahead of personal concerns and to perform their obligations with honesty and sincerity.
The director's actions on behalf of a corporation are protected to some degree by the Delaware courts as well as the Delaware General Corporation Law. The business judgment rule is a court-created presumption that the directors of a corporation "acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the corporation." CEDE v. Technicolor, Inc., Del. Supr., 634 A.2d 345, 360 (1993). The protection of the rule is not absolute, it may be overcome by a showing that the board breached its fiduciary duties.
Specific provisions of Delaware's General Corporation Law limit a director's potential liability for actions taken on the corporation's behalf. 8 Del. C. § 102(b)(7) allows a corporation to limit or eliminate a director's liability to the corporation or its stockholders in certain situations. Director's are also "fully protected" for good faith reliance on corporate reports or records in making business decisions. 8 Del. C. §§ 141(e) and 172. Under 8 Del. C. § 145, a corporation must indemnify a director for the expenses of litigation, including attorney's fees, if the director is vindicated. If the director is unsuccessful, then the corporation may indemnify her.
In essence, the role of a director is to guide and advise a corporation in its business endeavors. Every decision made on the corporation's behalf should turn on whether it is in the best interests of the corporation and its stockholders. In this way a director may perform his duties according to the standards demanded by Delaware's General Corporation Law as well as Delaware's Courts.
FIDUCIARY DUTIES OF DIRECTORS
In discharging their managerial duties, the directors are also "...charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders." CEDE Co. v. Technicolor, Inc., Del. Supr., 634 A.2d 345, 360 (1993). See also, Aronson v. Lewis, Del. Supr., 473 A.2d 805, 811 (1984); Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 872 (1985).
This rule was first enunciated by the Delaware Supreme Court in Guth v. Loft, Inc. when the court stated:
While technically not trustees, [corporate officers and directors] stand in a fiduciary relationship to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation or to deprive it of profit or advantage which his skill and ability might properly bring to it, or enable it to make in the reasonable and lawful exercise of its powers. The rule requires an undivided and unselfish loyalty to the corporation and demands that there shall be no conflict between duty and self interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale. Del. Supr., 5 A.2d 503, 510 (1939).
A director's fiduciary duty encompasses both the duty of loyalty and the duty of care. 1 Ernest L. Folk, Delaware General Corporation Law, § 141.2 (3d ed. Supp. 1993) (citing Van Gorkum, 488 A.2d at 872); See also, CEDE, 634 A.2d at 367. Within the scope of performing these duties, there is a presumption that the director acted in good faith and in the best interests of the company. Aronson, 473 A.2d at 812.
Every corporation is required to have a president, secretary and a treasurer. It is acceptable for one person to hold all three positions.
Generally, two separate officers hold the positions of president and secretary. The reason for this is that most, if not all, corporate documents require the signatures of both the president and secretary and without both signatures the document is not valid. One common oversight that can occur when a person holds both positions is that he/she fails to sign in their capacity as both president and secretary; in which case the act set forth in the document is not an authorized act of the corporation.
For example, if a corporation that has the same person as president and secretary passes a resolution to open a bank account and that person does not sign as president and secretary, that would not technically be a valid corporate action. If that person is unavailable, no action could be taken until that person can properly sign the resolution as president and secretary.