867044.1
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
1
867044.1
GLOSSARY
Annual Meeting of Stockholders. Under Delaware law (as is the case in other U.S. states),
corporations must hold an annual meeting of stockholders for the purpose of the election of
directors. See Section 211 of the Delaware General Corporation Law.
Board of Directors. The individuals elected by the shareholders charged with the overall
management of the company. Directors are elected annually by shareholders and can be
removed only by shareholders. They serve as fiduciaries to the shareholders and owe
shareholders a duty of care and a duty of loyalty. Generally speaking under U.S. corporate law,
directors do not owe duties to institutions or persons that lend the corporations money (creditors)
or to employees or to the communities where they operate.
Capital; Raising Capital. Corporations must have a source of cash to run their business.
Sometimes, once a company becomes profitable and has no extraordinary cash needs, the
corporation can generate all the cash it needs from its profits. But more often, companies that
are growing will need to raise capital. This can be done by borrowing money privately from
banks and big institutions or by borrowing money from the public. It can also be done by selling
equity interests publicly or privately. See Debt and Equity.
The debt and equity "mix" of a company is a good indication of the financial viability of
a corporation. Lenders expect to see a good equity cushion of permanent capital to support and
cushion their lendings. Investors who buy Equity, like common stock, want to be sure the
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
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867044.1
company can repay its debt so that the lenders won't jeopardize the company's future.
Capital Markets. Corporations need infusions of money to grow. Corporate earnings cannot
necessarily provide enough cash to support expansion, such as the construction of a new plant
that will cost more than a corporation's earnings and, also, will not bring in offsetting revenue
until it is completed. Similarly, a corporation that looks to "research and development" for its
success, will expend much money for many years before it develops the new pharmaceutical that
will ultimately make millions. Clearly, new corporations need capital in excess of their earnings,
if any. But even huge, well-established corporations that are profitable, need capital to further
expand geographically or by volume or by product line.
Banks and other creditors provide capital by lending money to corporations. In this case,
the corporation's undertakers to repay the loan with interest to the creditor any time at the
demand of the creditor or on a stipulated date.
Shareholders provide capital by contributing money to a corporation in exchange for an
ownership interest in the corporation. In this case, the corporation undertakes to share its
earnings with the investor. Both creditors and investors provide capital on the
expectation that the corporation will put it to successful use. However, creditors are
conservation by nature. A primary goal is to get the money they lent to the corporation
back when the loan matures. The riskier that likelihood, the higher interest rate they will
charge. If it is too likely that the corporation may be unable to pay the loan because, for
example, the envisioned new product may not be successful, creditors will refuse to lend.
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
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867044.1
What does that mean? An innovative corporation will not be able to innovate.
Investors, in contrast, can be characterized as risk takers. An investor who buys 100
shares of common stock for $10,000 from a corporation in an initial public offering must
be prepared to lose her entire investment. That same investor believes, however, that the
corporation will use the $10,0000 so well that the value of their $10,000 investment will
grow to $15,000 (the value of an Apple or Google investment, for example, went up by
many multiples). The possibility that an investment in the stock of a corporation will be
used cleverly so as to make that corporation a national or global leader in terms of
profitability is the line source of corporate growth and innovation.
Chief Executive Officer or CEO. The most senior member of management. Generally, the
CEO also bears the title "Chairman of XYZ Company" or "President of XYZ Company."
Chief Operating Officer or COO. The member of management responsible for the overall
administration of the company. The COO may also bear the title of President or may be styled a
Senior Executive Vice President.
Debt. A corporation incurs debt when it borrows money and is legally obligated to repay it.
Notes, Debentures and Bonds are all instruments that evidence in writing the borrower's
obligation to repay the money borrowed. They will also set forth briefly or at great length, other
conditions of the borrowing, such as the interest rate to be paid, events of default, etc.
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
4
867044.1
Corporations routinely borrow funds from banks, institutional investors and the public to
support their commercial activities.
Unlike Equity, Debt, in every case, must be repaid, unless the obligation is waived.
Therefore, the corporation has use of the money it borrows only for a limited time. Debt, of
course can be issued by entities other than corporations, such as the U.S. Government and
foreign governments and their agencies.
Delaware Corporate Law. Over time, the State of Delaware has emerged as the dominant force
in laying down the rules governing corporations. The bulk of corporations organized in the
United States are incorporated under the laws of Delaware even though they may not have a
single office in that State.
Delaware has become the leader because:
its corporate code is clear, unambiguous and flexible enough to accommodate
structures suitable for a closely-held family enterprise, as well as a corporation,
such as Walt Disney or Exxon-Mobil that has millions of shareholders and worldwide
operations.
its court is composed of very knowledgeable judges who thoroughly understand
the issues being put to them. Therefore, a rich case law has developed that
delineates the rights of shareholders and the duties of boards of directors and
management.
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
5
867044.1
Equity. Equity, unlike Debt, which represents a loan to a company, represents an ownership
interest in the company. The most common form of Equity is common stock. Under most state
corporation laws, the owners of common stock cannot require a corporation to return the capital
they have given the corporation in return for their ownership interest in the corporation: the
money paid to the corporation is intended to be permanent capital. Rather than looking to a
stated rate of interest and the return of the principal amount of money loaned, holders of
common stock expect to see the corporation use the funds they have contributed to make their
ownership interest increase in value. Holders of common stock also accept the risk that the
corporation will not do well and that their investment will be lost.
Situated in between straight Equity in the form of common stock and Debt are forms of
investment such as preferred stock, that represent a mixture of the features which distinguish
Debt from Equity: preferred stock, like Debt, may be made mandatorily redeemable either after a
period of time or on demand and it may promise a dividend that is the functional equivalent of
interest on Debt. On the other hand, it may share the features of Equity, having for example a
dividend payable only out of corporate profits and not being redeemable. In recognition of the
potential mixed Debt/Equity nature of certain redeemable preferred stock, the Securities and
Exchange Commission will not let publicly-held companies that have outstanding preferred
stock that is mandatorily redeemable or whose redemption is otherwise outside of the control of
the corporation treat the preferred stock as part of its permanent capital on its balance sheet. This
is because, unlike the capital obtained from selling common stock to investors who then become
owners, the corporation will be forced to repay the purchasers of its redeemable preferred stock,
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
6
867044.1
thereby reducing its capital at some time in the future.
Form 10-K. The comprehensive annual report filed with the Securities and Exchange
Commission under the Securities Act of 1934 Act, which serves as a basic source of on-going
company-specific information. Among the important requirements is the production of audited
financial statements that meet Securities and Exchange Commission prescribed standards. You
can review the annual reports of 1934 Act filers by using the Internet to go to the Securities and
Exchange Commission's website at http://www.sec.gov/.
Form 10-Q; 10-Q. A short, quarterly report filed with the Securities and Exchange Commission
under the 1934 Act. The 10-Q must disclose material legal proceedings, material modifications
to the rights of holders of any publicly-held equity Securities, defaults in debt, the results of any
vote of shareholders and unaudited financial statements for the quarter, thus keeping the
marketplace informed about a company on a current basis. These reports are also on the
Securities and Exchange Commission's website.
Going Public. The process by which a privately held company first sells shares to the public.
The process tends to change the character and style of the company as underwriters, potential
investors and the Securities and Exchange Commission subject the company's business past and
business future to close scrutiny and, often, require that a company bring aboard outside directors
and more experienced management personnel. Timing is important. Some companies are too
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
7
867044.1
immature to shoulder the regulatory burdens imposed by going public or the on-going annual and
quarterly disclosure discipline imposed by the 1934 Act. Others will not have the earnings or
other promise of future success in the eyes of the underwriters to warrant sales to the public.
Initial Public Offering ("IPO"). The first occasion on which securities of a corporation are
offered to the public. Prior to the offering, the company is considered to be privately held and
there is virtually no publicly available information about the corporation. Once public, the rules
and regulations adopted pursuant to the Securities and Exchange Act of 1934 mandate extensive
quarterly and annual disclosure of a company's business operations, management and
profitability permitting analysts to make on-going assessments of value and investors to trade the
securities on the basis of this on-going disclosure. The on-going disclosure required by the 1934
Act permits the Secondary Market to trade efficiently, since investors -- or their professional
advisors -- have a common, on-going base of company-specific information on which to base
their assessment of the company's worth.
Investment Bank. A firm that facilitates raising capital by corporations through finding
investors
(a) Early in a corporation's development, it can help find private investors who are
sophisticated and capable of fully understanding the corporation, and its prospects and its
risks;
(b) Most importantly, it helps corporations "go public" in an "initial public offering." That
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
8
867044.1
is, the corporation sells its common stock to a vast number of ordinary investors in a
registered public offering of the stock. The investment bankers act as "gatekeepers."
That means they will not facilitate a public offering unless they think
(1) The management of the corporation is skilled, have integrity;
(2) The corporation's products are viable and likely to become in demand (or the product
is innovative); and
(3) The corporation is economically viable.
(c) Investment banks also facilitate mergers and acquisitions by locating buyers and sellers.
In the U.S. investment bankers are very careful about supporting a corporation's initial public
offering because, under the federal Securities Act of 1933, they can be held liable for the investor
loss if the disclosure made to potential investors in the public offering is materially misleading or
it omits a material fact necessary to make what is disclosed not misleading (Section 11 of the
Securities Act of 1933, also Section 12(a)(2) and Rule 10b-5 under the federal Securities Act of
1934).
Just as important, the reputation of the investment banking firm for excellence and expertise is
invaluable for its existence. It cannot afford to take corporations public if these corporations
frequently fail.
Management. The officers of the corporation who have day-to-day hands-on control of the
corporation. Key senior officers, such as the Chairman, President and executive vice presidents
are appointed by the Board of Directors. More junior officers may be appointed by the senior
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
9
867044.1
management. See discussion of who can hire and fire officers in the Disney case.
Private Placement. An offering of securities made pursuant to the exemption from federal
registration found in §4(2) of the Securities Act of 1933 which, by legislative history, case law
and by the view of the Securities and Exchange Commission, is made only to investors who do
not need the protections of the Act provided by the lengthy disclosure provided in a Registration
Statement.
Prospectus. The actual selling document which investors in a Securities and Exchange
registered public offering must be given. The prospectus, which can be 100 pages in length,
represents the bulk of the Registration Statement filed with the Securities and Exchange
Commission. The rest of the Registration Statement consist of a cover page, a cross reference
sheet, administrative information of interest to the Securities and Exchange Commission and
exhibits, such as copies of a company's certificate of incorporation and material contracts. You
can view Registration Statements and the prospectus which is in each Registration Statement by
using the Internet to go to the Securities and Exchange Commission's website at
http://www.sec.gov/.
Public Offering. An offering made to investors who are not able to obtain information material
to their decision to invest on their own and, thus, need the information provided by a Registration
Statement.
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
10
867044.1
Registration Statement. The formal document filed with, and reviewed by, the Securities and
Exchange Commission that describes the corporation and the securities that is selling to the
public.
Secondary Trading Market. Once Securities are sold by an Issuer, they are subsequently
traded among investors in the secondary trading market. The secondary trading market is very
large.
Securities and Exchange Commission ("SEC"). The federal agency formed in 1934 to police
the sale of securities to the U.S. public by an issuer and to oversee the markets in which those
securities are subsequently traded. Interestingly, the U.S. federal government did not seek to
regulate the sale and trading of securities until 1933. It did so in the wake of a destructive crash
in the U.S. stock market which began in 1929 and impoverished individuals and the entire U.S.
economy. Today, the SEC fills in important gaps not regulated by state corporate law. For
example, it requires that the shareholders of corporations that are publicly traded receive very
thorough annual and quarterly reports describing the corporation's business. It regulates the
information shareholders must receive before a corporation can solicit proxies to vote shares at
shareholder meetings. It establishes "fair play" rules for tender offers. It indirectly impacts on
corporate governance by requiring that stock exchanges require corporations who want their
shares traded on the exchange to have a majority of independent directors and an independent
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
11
867044.1
audit committee. The history of the SEC and reports filed by public issuers are all available via
the Internet by going to the SEC's website at http://www.sec.gov/. Also, you can go to the SEC
Historical website at http://www.sechistorical.org/ for lots of information about the SEC.
Underwriter. The term is defined in Section (2)11 of the 1933 Act and, like the statutory
definition of "Prospectus", it is deliberately broad. In everyday parlance underwriters are,
simply, brokerage firms that, for a price, will distribute the securities of a corporation to the
public, thereby helping that company raise capital. In order to perform this function,
underwriters must have their own stable of investors that they can turn to sell the securities they
are underwriting. Some brokerage houses, such as Merrill Lynch, look to the huge retail
customer base they have built up. Others, such as Morgan Stanley, work primarily with large
institutional clients and "high net worth" investors.
U.S. Stock Markets. A key part of the national economic engine. These include the New York
Stock Exchange, the American Stock Exchange and NASDAQ. The shares of thousands of
corporations are traded on these exchanges very actively on every business day. Professionals
buy and sell throughout the day on behalf of their investor clients.
Investors buy and sell stock through the medium of these exchanges. Given the tremendous
supply and demand, those who want to sell even millions of dollars of a holding should be able
to do so in one day without depressing the market price and an active buyer seeking to
accumulate a large position should be able to do so in one day without increasing the market
U.S. Corporate Law:
Management, Directors and Shareholders
and the Division of Power
Professor Margaret A. Bancroft
Dechert LLP
New York, New York
2008
2008 By Margaret A. Bancroft
12
867044.1
price.
Investors rely on the liquidity of the stock markets, i.e., they count on the fact that they can sell a
position quickly to raise cash without depressing the price. Without a huge, liquid market,
investors will either not invest or they will demand huge premiums for taking the risk that they
cannot easily convert their investment to cash. If investors are discouraged from investing,
corporations will find it harder to raise capital, choking off corporate growth and innovation. Or,
if investors charge a premium because the stock market is not liquid, the cost of capital will be
increased, which can also choke off corporate growth and innovation.
Voting Rights of Stockholders. Under Delaware law (as is the case in other U.S. states), each
stockholder is entitled to one vote for each share of capital stock held by such stockholder. See
Section 212 of the Delaware General Corporate Law. Delaware does provide that stockholders
may have more than one vote per share so long as this fact is stipulated in the corporation's
certificate of incorporation. For example, the certificate of incorporation may provide that
holders of preferred stock have no voting rights or that they have, say, ten votes per share. See
also, Section 151 of the Delaware General Corporate Law.