Corporate law in the United States
Encyclopedia
Corporate law in the United States is a collection of over 50 different systems of corporate law
, or one law for each state. Two sources of law are, however particularly important: the Model Business Corporation Act
(MBCA), drafted by the American Bar Association
was influential and adopted by twenty four states; and because companies are free to incorporate in any state under the United States Constitution
, regardless of whether they are doing business or are headquartered there, many corporations have found Delaware
's laws and specialized courts attractive. More than half of US corporations are incorporated under the Delaware General Corporation Law (DGCL), and Delaware corporate law is particularly influential. The corporate laws of large states such as New York
and California
are also important.
State laws govern corporations' mechanics, but many federal laws are also applicable. Publicly-traded corporations must comply with federal securities laws, the most important of which are the Securities Act of 1933 (1933 Act) and Securities Exchange Act of 1934 (1934 Act). The Sarbanes-Oxley Act of 2002 (SOXA) imposed many new rules on public corporations. Corporations must also comply with the wide variety of federal laws governing employment, environmental protection, food and drug regulation, intellectual property and other areas.
corporation. Unless a plaintiff can give persuasive evidence against at least one of these criteria, corporate directors and officers are insulated from liability for breach of the duty of care.
Based on the MBCA
Other states with own laws
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
, or one law for each state. Two sources of law are, however particularly important: the Model Business Corporation Act
Model Business Corporation Act
The Model Business Corporation Act is a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states.-History:...
(MBCA), drafted by the American Bar Association
American Bar Association
The American Bar Association , founded August 21, 1878, is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. The ABA's most important stated activities are the setting of academic standards for law schools, and the formulation...
was influential and adopted by twenty four states; and because companies are free to incorporate in any state under the United States Constitution
United States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
, regardless of whether they are doing business or are headquartered there, many corporations have found Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
's laws and specialized courts attractive. More than half of US corporations are incorporated under the Delaware General Corporation Law (DGCL), and Delaware corporate law is particularly influential. The corporate laws of large states such as New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
and California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
are also important.
State laws govern corporations' mechanics, but many federal laws are also applicable. Publicly-traded corporations must comply with federal securities laws, the most important of which are the Securities Act of 1933 (1933 Act) and Securities Exchange Act of 1934 (1934 Act). The Sarbanes-Oxley Act of 2002 (SOXA) imposed many new rules on public corporations. Corporations must also comply with the wide variety of federal laws governing employment, environmental protection, food and drug regulation, intellectual property and other areas.
History
- The Charitable Corporation v. SuttonThe Charitable Corporation v. SuttonThe Charitable Corporation v Sutton 26 ER 642 is an important old English law case which holds in substance that a director of a company owes duties to the company in the same measure and quality as does a trustee to a trust...
(1742) 26 ER 642 - Attorney General v. Davy (1741) 2 Atk 212
- UK company law history
- New York, Act Relative to Incorporations for Manufacturing Purposes of 1811, allowed for free incorporation with limited liability, but only for manufacturing businesses.
- Gibbons v. OgdenGibbons v. OgdenGibbons v. Ogden, 22 U.S. 1 , was a landmark decision in which the Supreme Court of the United States held that the power to regulate interstate commerce was granted to Congress by the Commerce Clause of the United States Constitution. The case was argued by some of America's most admired and...
, 22 US 1 (1824) the right of Congress to regulate interstate trade under the commerce clause.
- M Dodd, 'American Business Association Law a Hundred Years Ago and Today', in 3 Law: A Century of Progress: 1835-1935 (Reppy 1937) 254, 289
- Liggett v. Lee and regulatory competitionRegulatory competitionRegulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction...
- AA Berle and GC Means, The Modern Corporation and Private Property (1932)
- Securities Act of 1933Securities Act of 1933Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
and Securities and Exchange Act of 1934
Corporate personality
- Dartmouth College v. WoodwardDartmouth College v. WoodwardTrustees of Dartmouth College v. Woodward, 17 U.S. 518 , was a landmark United States Supreme Court case dealing with the application of the Contract Clause of the United States Constitution to private corporations...
17 U.S. 518 (1819) - Paul v. VirginiaPaul v. VirginiaPaul v. Virginia, 75 U.S. 168 , was a historic case in corporate law in which the United States Supreme Court held that a corporation is not a citizen within the meaning of the Privileges and Immunities Clause...
, 75 US 168 (1869), a corporation was not a citizen within the meaning of the Privileges and Immunities Clause - Santa Clara County v. Southern Pacific RailroadSanta Clara County v. Southern Pacific RailroadSanta Clara County v. Southern Pacific Railroad Company, was a United States Supreme Court case dealing with taxation of railroad properties...
, 118 U.S. 394 (1886) corporations are entitled to protection of the Fourteenth AmendmentFourteenth Amendment to the United States ConstitutionThe Fourteenth Amendment to the United States Constitution was adopted on July 9, 1868, as one of the Reconstruction Amendments.Its Citizenship Clause provides a broad definition of citizenship that overruled the Dred Scott v... - Entity doctrine
Piercing the veil
- Berkey v. Third Avenue RailwayBerkey v. Third Avenue RailwayBerkey v. Third Avenue Railway Co 244 N.Y. 602 is a classic veil piercing case by Judge Benjamin N. Cardozo in corporation law.-Facts:...
, Cardozo J decides there was no right to pierce the veil for a personal injury victim - Walkovszky v. CarltonWalkovszky v. CarltonWalkovszky v. Carlton, 223 N.E.2d 6 , is a leading decision on the conditions under which Courts may pierce the corporate veil. A cab company had shielded themselves from liability by incorporating each cab as its own corporation...
223 N.E.2d 6 (NY 1966) where the New York Court of Appeals refused to pierce the veil merely because a subsidiary was undercapitalised. A corporation was set up for every taxi cab in that was in fact being run by Mr Carlton's company, each with $10,000 of insurance. One of the cab's hit a pedestrian and damages were more than the insurance, but by a majority the court held the veil could not be lifted. - Minton v. Cavaney, 56 Cal. 2.d 576 (1961) Justice Roger Traynor pierced a veil so a girl who drowned in a swimming pool would be compensated, saying parent companies or shareholders would be treated as liable "when they provide inadequate capitalization and actively participate in the conduct of corporate affairs."
- Kinney Shoe Corp. v. PolanKinney Shoe Corp. v. PolanKinney Shoe Corp. v. Polan 939 F.2d 209 is a US corporate law case, concerning piercing the corporate veil.-Facts:Kinney Shoe Corp sued Mr Lincoln M Polan to pay money outstanding on a sub-lease by the "Industrial Realty Company"...
939 F.2d 209 (4th Cir. 1991) the veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalised and was only used to shield a shareholder's other company from debts. - Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 is a US corporate law case, concerning piercing the corporate veil.-Facts:...
974 F.2d 545 (4th Cir. 1992) holding that no piercing could take place merely to prevent "unfairness" or "injustice", where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc 8 F.3d 1451 (2d Cir. 1995)
- Taylor v. Standard Gas Co. 306 U.S. 307 (1939), insiders who become creditors of a company are subordinated to other creditors when the company goes insolvent. This will happen where it is "equitable", and is known as the "Deep Rock doctrine".
Corporate charter
- Regulatory competitionRegulatory competitionRegulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction...
- By-law#Corporate bylaws
- Liggett v. Lee
- DGCL § 102(b) the purpose of a corporation may be anything that is lawful
- Constituency statute
Director power and accountability
It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a) states,(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.
- DGCL §§ 211(b) shareholders elect and remove directors through a majority vote.
- DGCL §141(k) states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors.
Shareholder rights and duties
- DGCL §271, shareholders must approve sale of "all or substantially all assets", held in Gimbel (1974) to be those "qualitatively vital to the existence and purprose" of the corporation; which in Katz v. Bregman (1981) was held to include assets under 50% of the company's value
- Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334 (Del. 1987) a shareholder owning over 50% of shares is a controlling shareholder; but actual control may also be present through other mechanisms
- Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) non controlling shareholders do not owe duties to minority shareholders and may vote their shares for personal gain without concern
- In re Cysive, Inc. Shareholders Litigation 836 A.2d 531 (Del. 2003) Nelson Carbonell owned 35% of Cysive, Inc., a publicly traded company. His associates' holdings and options to buy more stock, however, actually meant he controlled around 40% of the votes. Chancellor held that "without having to attract much, if any, support from public stockholders" Carbonell could control the company. This was especially so since "100% turn-out is unlikely even in a contested election" and "40% block is very potent in view of that reality."
- Kahn v. Lynch Communications Systems, Inc. 638 A.2d 1110 (Del. 1994) Alcatel held 43% of shares in Lynch. One of its nominees on the board told the others, "you must listen to us. We are 43% owner. You have to do what we tell you." The Delaware Supreme Court held that Alcatel did in fact dominate Lynch.
Directors' duties
- Dodge v. Ford Motor CompanyDodge v. Ford Motor CompanyDodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. , is a case in which the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders of the Ford Motor Company to operate his business to profit his shareholders, rather than the community as a whole or employees...
, on directors' duties to the corporation and the community - Guth v. Loft Inc.Guth v. Loft Inc.Guth v. Loft, Inc., 5 A. 2d 503 is a Delaware corporation law case on corporate opportunities and the duty of loyalty. It deviated from the 200 year old rule laid down in Keech v. Sandford that a fiduciary should leave open no possibility of conflict of interest between his private dealings and...
5 A.2d 503 (Del. 1939) - Shlensky v. Wrigley
Duty of care
The business judgment rule is a legal presumption that the directors and officers of the corporation have exercised due care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of thecorporation. Unless a plaintiff can give persuasive evidence against at least one of these criteria, corporate directors and officers are insulated from liability for breach of the duty of care.
- Barnes v. Andrews, 298 F. 614 (S.D.N.Y. 1924)
- Aronson v Lewis
- Smith v. Van GorkomSmith v. Van GorkomSmith v. Van Gorkom 488 A.2d 858 is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care. It is often called the "Trans Union case".-Facts:...
488 A.2d 858 (Sup Ct Del 1985) - In re Caremark International Inc. Derivative LitigationIn re Caremark International Inc. Derivative LitigationIn re Caremark International Inc. Derivative Litigation, 698 A.2d 959 , is a Delaware Court of Chancery decision setting out an expanded discussion of a director's duty of care in the oversight context. The opinion was written by Chancellor Allen.-Facts:The shareholders of Caremark International, Inc...
Self dealing
Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.- Weinberger v. UOP, Inc., 457 A.2d 701, 703-04 (Del. 1983) plaintiff must start by alleging the fiduciary stood to gain a material economic benefit. The burden then shifts to the defendant to show the fairness of the transaction. The court considers both the terms, and the process for the bargain, ie both a fair price, and fair dealing. However if the director shows that full disclosure was made to either the disinterested directors or disinterested shareholders, then the burden remains on the plaintiff.
- DGCL § 144 contains the rule that the burden for proving unfairness remains on plaintiff after disclosure
- Oberly v. Kirby, 592 A.2d 445, 467 (Del. 1991)
- Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del. 1995).
Corporate opportunities
- Meinhard v. SalmonMeinhard v. SalmonMeinhard v. Salmon, 164 N.E. 545 , is a widely cited case in which the New York Court of Appeals held that partners in a business owe fiduciary duties to one another where a business opportunities arises during the course of the partnership...
, on the fiduciary duty of partners to inform one another of opportunities which arise
Mergers and acquisitions
- Cheff v. MathesCheff v. MathesCheff v. Mathes, 199 A.2d 548 was a case in which the Delaware Supreme Court first addressed the issue of director conflict of interest in a corporate change of control setting. This case is the predecessor to future seminal corporate law cases including: Unocal Corp. v. Mesa Petroleum Co., Revlon...
199 A.2d 548 (Del. 1964) - Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 was a landmark decision of the Delaware Supreme Court on hostile takeovers....
, 506 A.2d 173 (Del. 1985) - Unitrin, Inc. v. American General Corp.Unitrin, Inc. v. American General Corp.Unitrin, Inc. v. American General Corp., 651 A.2d 1361 is the leading case on a board of directors' ability to use defensive measures, such as poison pills or buybacks, to prevent a hostile takeover...
- Unocal Corp. v. Mesa Petroleum Co.Unocal Corp. v. Mesa Petroleum Co.Unocal v. Mesa Petroleum Co., 493 A.2d 946 is a landmark decision of the Delaware Supreme Court on corporate defensive tactics against take-over bids....
493 A.2d 946 (Del. 1985)
Derivative suits
- Joy v. North
- Levine v. Smith
- Zapata v. Maldonado
See also
- UK company law
- Connecticut General Life Insurance Company v. JohnsonConnecticut General Life Insurance Company v. JohnsonConnecticut General Life Insurance Company v. Johnson, 303 U.S. 77 is a case in which the United States Supreme Court dealt with corporate entities. The case involved whether the state of California could levy a tax, on a company licensed to do business in that state, for transactions that...
- Citizens United v. Federal Election CommissionCitizens United v. Federal Election CommissionCitizens United v. Federal Election Commission, , was a landmark decision by the United States Supreme Court holding that the First Amendment prohibits government from censoring political broadcasts in candidate elections when those broadcasts are funded by corporations or unions...
, 558 U.S. 50 (2010), - Dodd-Frank Wall Street Reform and Consumer Protection Act 2010
External links
Based on the MBCA
- Arizona Revised Statutes, Title 10
- Florida Business Corporation Act (FBCA)
- Georgia Business Corporation Code (GBCC)
- Illinois Business Corporation Act (IBCA)
- North Carolina Business Corporation Act (NCBCA)
- South Carolina Business Corporation Act (SCBCA)
- Washington Business Corporation Act (WBCA)
- Wisconsin Business Corporation Law (WBCL)
Other states with own laws
- California Corporations Code (CCC)
- Delaware General Corporation Law (DGCL)
- Nevada Revised Statutes (NRS)
- New Jersey Business Corporation Act (NJBCA)
- New York Business Corporation Law (NYBCL)
- Ohio General Corporation Law (OGCL)
- Pennsylvania Business Corporation Law (PBCL)
- Texas Business Corporation Act (TBCA)