Part I. Company Law (Corporate Law)

Part I. Company Law (Corporate Law)

First review the matters and issues related to types of business organizations that were covered last year.

(АЯЮ стр. 76-85)

Corporations

What kind of business entity is it?

How is it formed?

What are the major traits of a corporation?

Who does a corporation consist of?

Who bears the liability in case of company failure? What does limited liability mean?

 

Corporations (limited companies) Management

АЯЮ стр. 71

Task 1. Activating the chart.

The following texts should be completed with the appropriate words from each box.

 

Shareholders Shareholders own stock (called shares, or ownership interests) in the corporation. Shareholders have the exclusive right to make the following decisions: - elect and remove directors - amend the articles of incorporation and bylaws - approve the sale of all or substantially all of the corporate assets - approve reorganizations, and - dissolve the corporation. Shareholders are paid dividends out of the company’s profits.

Shareholders

Corporation owners are its shareholders. The shareholders own ….., or ……in the corporation. This ownership provides them with the most important right – the right to vote. Shareholders voting typically takes place at an annual meeting, when certain corporate decisions are made. For example, after incorporation at the first meeting they …. the directors who manage the corporation, and …...the bylaws of a corporation. Later, in the process of corporation development, the shareholders can ……. a director by voting at an annual meeting. The shareholders can also ……. the bylaws if some changes are necessary. No decision to sell corporate assets is possible to be made without shareholders. They must ….. such decisions as well as decisions to reorganize or ……… a corporation.

Shareholders are paid dividends out of the company’s profits

 

Directors The board of directors sets policy for the corporation and makes major financial decisions. Function of the Board is to do following: - set corporate philosophy and policy - select and appoint officers and managers to run company. - make major company decisions - pay dividends Among other things, the directors: - authorize the issuance of stock - elect the corporate officers - set officer and key employee salary amounts - decide whether to mortgage, sell, or lease real estate, and - approve loans to or from the corporation

Directors

Corporations are governed by directors who are elected by the ………... The directors form the Board whose primary role is to set the ……. ……… and ………. major business and financial decisions. The corporate policy is a plan of action to guide company operation, management and administration. The directors ………. and ……… officers and managers who …… the company, are responsible for day-to-day operation and report to the directors. To compensate them for their services the directors … …… …… for officers and key employees.

Directors must hold meetings at regular intervals as defined in the corporate bylaws and, in addition, may also call special board meetings when necessary. At board meetings, directors discuss problems affecting the corporation and make ………. to solve the problems.

For example, a company expands and needs big amounts of money for the development. The company has two options: it can either borrow money from a bank or it can issue more shares. Then the Board of Directors should either ……. … ……. to a corporation or …………. … …… … ……….. If a company is going to purchase some land, or sell a factory building, or lease a new office, the directors have to decide whether to buy, sell or lease … ……... Directors also decide if a corporation can ……… some real estate to get a big loan.

When a corporation makes a substantial profit the directors have to make a decision whether to … higher ………. to the shareholders, or to retain the profit for some beneficial projects.

The most important duty owed by a director to a corporation is the duty of care. This duty of care requires directors to diligently …… their obligations.

Duty of care - обязанность блюсти интересы компании

Diligently - старательно

 

Officers are responsible for the routine operation and management of the corporation. Function of officers and managers: - execute corporate philosophy; - be in charge and organize the operations of departments, divisions or groups; - work out strategies; - select employees; The particulars of an officer or manager’s activity depend on the area of responsibility: finance, production, marketing, sales, human resources, research and development. Managing Director appointed by the Board of Directors is responsible for the day-to-day operations of the whole company.

 

Officers

Officers are responsible for the routine operation and management of the corporation. They ……… corporate philosophy.

The roles of top corporate officers - typically the managing director or the corporation's president, vice presidents and chief financial officer - are defined by the corporate bylaws, articles of incorporation, and statutes. The president acts as the primary officer and sometimes is called the chief executive officer or CEO. The vice president is the second in command and makes decisions in the president's absence. The chief financial officer (CFO) is responsible for corporate finance.

The particulars of an officer or manager’s activity depend on … ……... …………: finance, production, marketing, sales, human resources, research and development. Each manager (or director) is … ……. … a certain department where he or she organizes the ………... Managers ……… employees for their department, and their responsibility is to …… …. efficient ………. and set clear ……….. They should ………. their employees, ………… and ……… the operations.

 

Task 2. Practice answering the following questions using the words and phrases from Tasks 1 and 2.

 

1. What does the ownership provide for the shareholders?
2. Where does shareholders’ voting take place?
3. When do the shareholders realize their exclusive right to vote?
4. Can the shareholders make changes in the corporate bylaws?
5. Must the shareholders take part in reorganization of the corporation?
6. What is the primary role of the board of directors?
7. How are annual meetings arranged?
8. Are officers and managers compensated for their work? How?
9. What decision can the board make when the corporation needs a big amount of money?
10. How are real property problems solved?
11. What does duty of care mean?
12. Who are the top corporate officers?
13. What are corporation officers responsible for?
14. What is the manager’s role?

 

Task 3. Make sure you know how to translate the following words and phrases:

право голосовать, ежегодное собрание акционеров, одобрить решение; управлять корпорацией; установить размер заработной платы; обязанность блюсти интересы компании; созвать собрание; проводить собрание; выработать стратегию; уполномочить выпуск акций; недвижимость; выполнить обязательство; арендовать офис; получать ссуду под недвижимость; определить политику корпорации; отстранить от должности директора;

зона ответственности; подбирать работников; поставить цель; должностное лицо с исполнительными функциями, вносить поправки в документ, распустить корпорацию

Task 4. For each part of the text (A, B and C) choose the title that most explicitly reflects the content.

1. The importance of limited liability
2. The necessity to show that the corporation is not a legal entity
3. The reason why it’s necessary to observe the formalities
4. Observation of corporate formalities
5. The director’s responsibilities
6. The formalities that a corporation must observe
7. About those who oversee the routine operations
8. The responsibilities of corporation members

A

A corporation is owned by its shareholders. The shareholders don't have any control over the day-to-day operations of the business directly. The shareholders are responsible for electing directors of the corporation. The directors oversee the operation of the corporation and make major corporate decisions, such as appointing the officers of the corporation. The directors meet at least annually to assess the past performance of the corporation and to plan for the future. The officers of the corporation are responsible for the day-to-day operations of the company.

 

B

Once the directors are elected and the corporate officers are appointed, the corporation can begin to operate. However, it is important that the corporation observe all the formalities of being a corporation. The formalities include, among other things, issuing stock certificates to the shareholders, holding annual meetings, recording the minutes of the meetings in the corporate register, and electing directors or ratifying the status of existing directors.

 

C

Observing all the corporate formalities provides evidence that the corporation is a separate legal entity rather than an extension of the shareholders. The reason it is necessary to enforce the notion that the corporation is a separate legal entity that is to protect the limited liability of the shareholders. If the corporate formalities are not observed, someone suing the corporation may be able to show that the corporation is not a separate entity from its shareholders. The shareholders will then be liable for the corporation's debts.

 

Task 5. Match the words or phrases which are used in the text with the following appropriate definitions.

 

1. meetings held each year	observe formalities
2. present proof	sue a corporation
3. keep up the established rules	provide evidence
4. supervise the activity	ratify the status
5. written record of a meeting	annual meeting
6. estimate the results of corporation activity	assess the performance
7. current activity	separate legal entity
8. accept that the existing directors keep their positions	minutes of the meeting
9. bring out a certificate of ownership to corporation owners	oversee the operations
10. organization distinct from the owners	issue stock certificate
11. bring a lawsuit against a corporation	day-to day operation

 

Task 6. Answer the questions

What are the responsibilities of shareholders?

What are the responsibilities of directors?

What are the formalities a corporation has to observe?

Why is it important to observe these formalities?

Why is it important for a corporation to be considered as a separate legal entity?

What can happen if the corporate formalities are not observed?

 

Internet Research Task

Exercise 1.

Exercise 2.

Exercise 3

Task 8. Create a chart

A corporation should follow proper corporate formalities in order to comply with applicable laws and to maintain its corporate existence. Any failure to follow these formalities might result in the loss of corporate status; loss of limited liability, leaving the owner and shareholders personally responsible for corporate debts; and potential loss of corporate tax benefits.

Besides, a huge part of proper corporate formalities concerns keeping and maintaining necessary documentation.

Distribute the following into 2 columns: Corporate Formalities (activities) and Types of documents.

 

Accounting and bookkeeping records; Holding shareholder and director meetings (annual and special); Bank records; Signing documents as a corporation; Permits and licenses; Stock records;

Keeping corporate records (financial and corporate documents); Contracts; Corporate records; Intellectual property records; Filing documents with the state annually (corporate report, federal and state corporate tax); Correspondence; Business forms; Maintaining bank accounts (separate corporate bank accounts); Employee records; Drawing up financial statements (income and cash flow); Tax records.

 

Corporate formalities	The types of documents to keep for a corporation
Holding shareholder and director meetings (annual and special); Signing documents as a corporation; Keeping corporate records (financial and corporate documents); Filing documents with the state annually (corporate report, federal and state corporate tax); Maintaining bank accounts (separate corporate bank accounts); Drawing up financial statements (income and cash flow);	Accounting and bookkeeping records; Corporate records; Bank records; Permits and licenses; Business forms; Stock records; Contracts; Intellectual property records; Correspondence; Employee records; Tax records;

 

Task 1.

Foundation documents

Provide each document title with the appropriate definition:

 

Articles of Incorporation
Certificate of incorporation
Bylaws
Memorandum of Association
Articles of Association

 

1. - A foundation document that contains the regulations governing the relationships between the shareholders and directors of the company, and are a requirement for the establishment of a company under the law of the United Kingdom and many other countries.

2. - Rules and regulations adopted by an organization, corporation or similar entity for its internal administration and management. For example, by laws often identify the duties of officers, the schedule of meetings, the rules of voting etc.

3. - A legal document that sets out the company's name, where the registered office of the company is situated (in England, Wales or Scotland) and what it will do (its objects). The object of a company may simply be to carry on business as a general commercial company or support community activities in a club or association.

4. - A legal document that must be filed with a state in order to incorporate. Among the things it typically must include is the name and address of the corporation, its general purpose and the number and type of shares of stock to be issued...

5. - A legal document that constitutes the authorized state body’s approval of the foundation documents and that authorizes the legal entity’s operations in a particular state.

Notice - уведомление

Alter - переделывать

Repeal - отменять

Task 3

What Article/Paragraph provides

- how the directors shall be elected?

- the term each director is elected for?

- how often shareholders meetings shall be held?

- how often shall board meetings shall be held?

- how shareholders learn about the meetings?

- information on who can initiate special meetings of shareholders?

- how a special meeting of the Board may be called?

- what major executive officers of the company shall be?

- information on the functions of the President?

- information on the requirements of certificates of stock registration?

- information on the term the executive officers are elected for?

- how the Bylaws may be amended or altered?

- how the officers may resign from the office?

- how the officers shall be compensated for the service?

- how shareholders shall vote?

- how shareholders shall transfer the shares of stock?

Answer Example

- Paragraph 1.3 provides how the directors shall be elected. It is stated that directors shall be elected by written ballot.

 

Memorandum of Association

of

Intertech Trading Limited

 

1. NAME

The name of the company is Intertech Trading Limited.

 

2. REGISTERED OFFICE

The registered office of the Company will be situated at Rickams Bay 1, Road Town, UK

3. REGISTERED AGENT

The registered agent of the Company will be Barton Ltd. or such other person or company being a person or company entitled to act as a registered agent as the directors may from time to time determine.

 

4. GENERAL OBJECTS AND POWERS

The objects for which the Company is established are to engage in any business or businesses whatsoever, or in any acts or activities, which are not prohibited under any law for the time being in force in the UK, including but not limited to:

Carry on without any limitation(s) and anywhere in the world all kinds of legal activities, whether commercial, industrial, financial, investment, cinematographer, broadcasting, advertisement, aerial, real estate, mining, maritime, or agricultural related activities, as well as the acquisition and sale of shares, bonds, securities and any other assets, as well as to engage in any other legal activity which its Board of Directors or, Members may decide.

To do all such other things as are incidental to or the Company may think conductive to the attainment of all or any of its objects.

5. CAPITAL

5.1 AUTHORIZED CAPITAL

The authorized capital of the Company is FIFTY THOUSAND DOLLARS (US$50,000.00), United States of America legal currency, divided into 50,000 shares of ONE DOLLAR (US$1.00), each. The directors shall by resolution determine, at their discretion, and from time to time, how many shares thereof are to be issued as registered shares and how many shares thereof are to be issued as bearer shares.

5.2 CLASSES, RIGHTS, AND QUALIFICATIONS OF SHARES

The shares shall be divided into such number of classes and series as the members shall by resolution from time to time determine and until so divided shall comprise one class and series.

……………………

6. SERVICE OF NOTICE ON BEARER SHARE HOLDERS

7. AMENDMENT OF MEMORANDUM AND ARTICLES OF ASSOCIATION

The Company may amend its Memorandum of Association and Articles of Association by a resolution of members or by a resolution of directors, except for those amendments, which are expressly stated in the Memorandum or Articles of Association or the UK legislation in force, to be reserved exclusively to the Members.

8. DURATION

The duration of the Company's existence shall be perpetual as of the date of its incorporation. Notwithstanding, the dissolution and liquidation of the corporation may be resolved at any time, in accordance with the International Business Companies Ordinance 1984, and any amendment thereof.

 

NAME, ADDRESS AND DESCRIPTION OF SUBSCRIBER:

Articles of Association

 

Regulations for management of a company limited by shares (as prescribed by regulations (805 SI 85) (as amended by 1052 SI 85) made under 8 Companies Act 1985).

 

Interpretation

(1) In these regulations:

 

(i) the Act means the Companies Act 1985 including any statutory modification or re-enactment thereof for the time being in force.

(ii) the Articles means the articles of the company.

………………………

(v) office means the registered office of the company.

(vi) the holder in relation to shares means the member whose name is entered in the register of members as the holder of the shares.

……………….

Share Capital

(2) Under the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine.

…………………………………….

Share Certificates

(6) Every member, upon becoming the holder of any shares, shall be entitled without payment to one certificate for all the shares of each class held by him ………Every certificate shall be sealed with the seal and shall specify the number, class and distinguishing numbers (if any) of the shares to which it relates and the amount or respective amounts paid up thereon.

……………………………………………

Transfer of shares

(23) The instrument of transfer of a share may be in any usual form or in any other form which the directors may approve and shall be executed by or on behalf of the transferor and, unless the share is fully paid, by or on behalf of the transferee.

(24) The directors may refuse to register the transfer of a share which is not fully paid to a person of whom they do not approve and they may refuse to register the transfer of a share on which the company has a lien.

………………………….

Alteration of share capital

(32) The company may by ordinary resolution:

(i) increase its share capital by new shares of such amount as the resolution prescribes;

(ii) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;

(iii)subject to the provisions of the Act sub-divide its shares, or any of them, into shares of smaller amount and the resolution may determine that, as between the shares resulting from the sub-division, any of them may have any preference or advantage as compared with the others; and

(iv) cancel shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the share so cancelled.

………………………………….

General meetings

(36) All general meetings other than annual general meetings shall be called extraordinary general meetings.

Notice of general meetings

(38) An annual general meeting and an extraordinary general meeting called for the passing of a special resolution or a resolution appointing a person as a director shall be called by a least 21 clear days' notice. All other extraordinary general meetings by at least 14 clear days' notice

…………….

The notice shall specify the time and place of the meeting and the general nature of the business to be transacted and, in case of an annual general meeting, shall specify the meeting as such.

……………………

(40) No business shall be transacted at any meeting unless a quorum is present. Two persons entitled to vote upon the business to be transacted, each being a member or a proxy for a member or a duly authorized representative of a corporation, shall be a quorum.

…………………

(44) A director shall, notwithstanding that he is not a member, be entitled to attend and speak at any general meeting and at any separate meeting of the holders of any class of shares in the company.

……………………………..

Votes of members

……………………

Number of directors

(64) Unless otherwise determined by ordinary resolution, the number of directors (other than alternate directors) shall not be subject to any maximum but shall be not less than two.

………………

Powers of directors

(70) Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. ……….

(71) The directors may, by power of attorney or otherwise, appoint any person to be the agent of the company for such purposes and on such conditions as they determine, including authority for the agent to delegate all or any of his powers.

Remuneration of directors

…………………….

Secretary

(99) Under the provisions of the Act, the Secretary shall be appointed by the directors for such term, at such remuneration and upon such conditions as they may think fit; and any Secretary so appointed may be removed by them.

 

Minutes

(100) The directors shall cause minutes to be made in books kept for the purpose:

(i) of all appointments of officers made by the directors; and

(ii) of all proceedings at meetings of the company of the holders of any class of shares in the company, and of directors, and of committees of directors, including the names of the directors present at each such meeting.

The seal

…………

Capitalisation of profits

(110) The directors may with the authority of an ordinary resolution of the company;

(i) subject as hereinafter provided, resolve to capitalise any undivided profits of the company not required for paying any preferential dividend (whether or not they are available for distribution) or any sum standing to the credit of the company's share premium account or capital redemption reserve;

I. Corporate Governance

corporate governance – управление корпорацией

Duty of Care

A typical corporation statute defining a director's Duty of Care provides that a director's duties must be performed, "with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." This Duty of Care is very broad, and requires directors to diligently perform their obligations.

…………………………………………..

Duty of Loyalty

The Duty of Loyalty exists as a result of the fiduciary relationship between directors and the corporation.

…………………………………………………

 

Duty of Care

Duty of Loyalty

- in making business decisions the Board must exercise reasonable care in the decisions that it makes for the company, and - believe that the actions are in the best interest of the company based on a reasonable investigation of the options available; or i.e. - carefully consider the available options within the time and financial constraints presented before they make a decision or take a particular action on behalf of the company.

- be loyal to the company and its shareholders and act in their best interest; - develop a relationship of trust and confidence - not act in their own best interest or engage in self-dealing while making decisions or taking actions on behalf of the company; - give the corporation the first opportunity to take advantage of any business opportunities of which they become aware that are within the scope of the corporation's business

 

Business Judgment Rule

The Business Judgment Rule works in conjunction with the director's Duty of Care. Under this rule, a director will not be held liable for mere negligence if exercising his or her Duty of Care. The rule can be stated as, "A director who exercises reasonable diligence and who, in good faith, makes an honest, unbiased decision will not be held liable for mere mistakes and errors in business judgment." The rule protects directors from decisions that turn out badly for their corporation, even where the directors acted diligently and in good faith in authorizing the decision.

Vocabulary notes

Mere = just only;

Unbiased [ən’baiəsd] – not influenced by any other opinion, free

 

Task 4. Search Internet for information about the corporate governance of existing British, American or other country’s corporate governance. Some addresses are given below but you are free to make your own search.

http://www.microsoft.com/about/companyinformation/corporategovernance/default.mspx

http://investor.motorola.com/governance.cfm

http://www.sony.net/SonyInfo/IR/governance.html

/ search for IBM, FEDEX, Quanta, Philips, Nestle, British Airways, Nokia, Apple, General Electric etc corporate governance policies)

 

Part I. Company Law (Corporate Law)

First review the matters and issues related to types of business organizations that were covered last year.

(АЯЮ стр. 76-85)

Corporations

What kind of business entity is it?

How is it formed?

What are the major traits of a corporation?

Who does a corporation consist of?

Who bears the liability in case of company failure? What does limited liability mean?