Business Associations Lecture Three: Corporations

In Lecture Three of the Business Associations series, we explored the complex legal framework governing corporations, the most dominant form of business organization today.

We began by defining a corporation as a separate legal entity, distinct from its owners (the shareholders), with the capacity to own property, sue and be sued, and exist indefinitely. Key characteristics include limited liability, centralized management through a board of directors, free transferability of shares (in public corporations), and perpetual existence.

We examined the process of formation, including filing articles of incorporation, adopting bylaws, appointing directors and officers, and issuing stock. We reviewed the different types of corporations, including publicly held corporations, closely held corporations, nonprofit corporations, and S corporations, which pass income directly to shareholders for tax purposes.

We explored limited liability, noting how shareholders are generally protected from personal liability but how courts may pierce the corporate veil when the entity is abused for fraud or injustice, as seen in Walkovszky v. Carlton.

We discussed fiduciary duties owed by directors and officers:

The duty of care, protected under the business judgment rule, requiring informed, rational decisions.

The duty of loyalty, prohibiting self-dealing and conflicts of interest, as highlighted in Guth v. Loft.

Shareholders have rights to vote, inspect records, receive dividends, and bring derivative suits on behalf of the corporation.

We touched on securities regulation, including the Securities Act of 1933, the Securities Exchange Act of 1934, insider trading rules, and key cases like SEC v. Texas Gulf Sulphur Co.

We also considered corporate finance, governance mechanisms, and doctrinal debates over shareholder primacy, stakeholder theory, and reforms promoting environmental, social, and governance (ESG) accountability.

Key Takeaways

Corporations are separate legal entities with perpetual existence.

Shareholders enjoy limited liability but must respect formalities.

Directors and officers owe duties of care and loyalty.

The business judgment rule protects good-faith decisions.

Shareholders have voting, inspection, and derivative rights.

Veil piercing occurs only under exceptional misuse.

Securities laws regulate disclosure and trading in public firms.

Corporate finance balances debt and equity mechanisms.

Governance structures aim to align management and shareholder interests.

Ongoing debates address shareholder versus stakeholder models.