ÿWPC±  a^Œ&9÷(²ƒÆ.T“\« ײàn‡AW0¯â“«F›Æf}‘d¶|sV»XùpmÍáH½®ÂÖa<%èýù–?ôÕôèñËÀBwm–õ ’Ê©·ýÔx,O|"s¨ÈVblíò!]SXhõIE ¼à¼«œÉ 3gÕcQ…ô‡ðZe5æ©éÏœÈk…­R )c†7šÁBm:/)¹r¯)‹WñTû3nÊúÀ$§»`ŠË^Ž¸‹ú=qÌ(-Ù2Þ”ÛÐYšH¦DÊŠ¤&—ÝÈq¿ÍI6šb^ }Ty¦fÈ KÚ¨>â®ÿÐ1å¡Ð9m¥Hg`/¢Øúƒôêi.,΢ÔŽÄe-‚àŽÜññqÕÊ=8‹ð;É´Ìq•‚î“+3®ÁO¥PïkZc(¾0µÝ¿ò¦û”o±/»R-1`XXÜJè–ÎhÕ<íåö}mž§Òƒb Æ¥A_ÈžÎë N+‰Ê”P~Y…˜Úð; èÂMSÐ!?Zä†xå@C‰)½¦m&¶s€¦Õã–sADóDô^©q04&¸[ö%IÆWuçYÊ6}Âô\9°›º¶ESƒ ®-)ÎŽ2§,TÓ¡íQ#!nUN %Ý 0(ãw@ 4K_n mpb‡LÆ¡ 0Xgg )ÆÎ 0.e” ” ” ù  Æ 0 eÕ f: a< < < < < < < < < < < < < < < < < < BP P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P P 08Dm ˜HP LaserJet 1200 Series PCL 6ÈÈÈÈÈÈ0xÖÃ9 Z‹6Times New Roman RegularX($¡¡ i[j[k[l[m[n[o[p[qer€3s-documentôè‚3|xr1ÿU‹ÿÀÀÀPage ù of &ùa, b, c,Level 1Level 2Level 3Level 4Level 56#)–4Quick a. Úƒ ÚÚ  Ú.à0 àÛ€ Û1, 2, 3,Level 1Level 2Level 3Level 4Level 54#*&2Quick 1.Úƒ ÚÚ  Ú.à0 àÛ€ Û Ñ e ÑA, B,Level 1Level 2Level 3Level 4Level 54#+Ž2Quick A.ÚƒÚÚ  Ú.à0 àÛ€Ûð TABLE A d6ûb$Triangleððà0 àÝ ƒ!ÝÝ  ݛԇô:ÐõXXÔò òÑ€ïWÑÓ-°ØX°‚ÂŒ –X°œX-ÓñqñÑ€ ÑÑ8€ËXXdédé8Ññqñ¢ISENBERGH£:€CORPORATIONS€OUTLINEÐ ° ÐFALL€2002ó óÐ tÄ ÐÓH%° ØX‚XÊ× ƒÂ”ì® X°ØX°‚ÂŒ –XHÓÌÓQ"° ØX°†Âh‚ÂcÚ(#X° ØX‚XÊ× ƒÂ”ì® XQÓI.à r àò òBASIC€CONCEPTSó óÐ ûK Ðà r àA.à 4 àò òHistorical€Perspectiveó óÐ Á Ðà r àà 4 à1.à ö àOrigins€of€self-starting€corpÐ ‡× Ðà0 r àà04r(#r(#àà0ö 4(#4(#àa.à ¸ à19th€Century€corp€formation:€initially,€took€specific€legislative€act€to€create€a€corporationÐ J š Ð(like€the€US€Bank)€¢b/c£€no€laws€existed€for€self-starting€corporations.€€Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#à(1)à ¸ àToday:€all€states€have€self-starting€corp€laws€that€allow€individuals€to€form€corporationÐ Ð  Тw/o£€specific€legislation€authorizing€that€particular€corporation.€€€€Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à2.à ö àCorporate€Choice€of€Law:€law€of€state€of€incorporation€controls€on€issues€relating€toÐ V ¦  Ðcorporation's€"internal€affairs"€-€including€responsibilities€of€directors€to€shareholders,€etc.€Ð ö (#ö (# Ðà r àB.à 4 àò òCorporations€Overview€€ó óÐ Ü ,  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àCorporate€Entity:€Has€the€ò òlegal€identity€of€a€personó ó€(legally,€economically):€can€own€property,Ð ¢ò  Ðenter€contracts,€sue€and€be€sued,€pays€taxes:€but€caveat€„€donððt€treat€anthropomorphically,€reify€Ð ö (#ö (# Ðà r àà 4 àà ö àa.à ¸ àPublic€v€Private€CorporationÐ +{  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àPublicly€held€corporation:€far€flung€stock€traded€on€stock€exchange;€most€lg€corpsÐ î>  Ðare€publicly€held.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àClosely€held€corporation:€owned€by€smaller€group€of€shareholders€(often€family);Ð tÄ  Ðdivision€of€ownership€and€control€less€strongly€marked€than€publicly€held€corp.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àCompare€to€a€tenancy€by€partnership:€tenancy€by€partnership€-€partners€own€property€isÐ úJ Ðjust€a€form€of€co-ownership€by€partners,€whereas€when€corp€owns€it,€its€rights€aren't€anÏaggregation€of€rights€of€co-owners,€it€owns€the€land.Ð ¸ (#¸ (# ÐØ€ ØÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àÝ‚ )–x ÝÚƒ ÚcÚ  Ú.à0 ¸ àÝ  ÝMost€approp€form€when€capital,€labor,€etc.,€come€from€many€different€quarters€andÐ C“ Ðownership€is€dispersed.€Ýƒ )–x · ÝÛ€ یР¸ (#¸ (# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àÝ‚ )–Í ÝÚƒ ÚdÚ  Ú.à0 ¸ àÝ  ÝWhole€vs€Sum€of€It's€Parts€Approach݃ )–Í ÝÛ€ ÛŒÐɸ (#¸ (# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àKlein/¢Coffe£€overview:€Stresses€aggregation€of€constituent€elements,€corporationsÐ ŒÜ Ðstudy€is€unbundling€actions/interests/of€corp€to€get€to€specific€constituent€ingredients.ÏThey€caution€against€redefining€the€corporation€to€the€extent€of€according€it€a€separateÏpersonality,€since€its€identity€reflects€actions/relations€of€groups/constituencies€of€people.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àIsenbergh€Approach:€€Relations€among€the€various€constituencies€(econ€and€legal)Ð ˜è Ðare€not€perfectly€transparent€and€when€they€aren't,€the€separate€operations€of€the€corpÏtake€on€a€life€of€their€own€and€the€corp€tends€to€take€on€a€life€of€its€own,€often€usefulÏsometimes€even€revelatory€to€impute€to€the€corp€a€personality€that€is€something€moreÏthan€(and€sometimes€less)€the€sum€of€all€its€constituency€elements.Ð ¸ (#¸ (# ÐÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àÝ‚ )–ÒÝÚƒ ÚeÚ  Ú.à0 ¸ àÝ  ÝDivision€of€Labor݃ )–ÒÝÛ€ ÛŒÐg·#¸ (#¸ (# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àPeople€who€bring€passive€capital:€the€power€to€consume€or€invest€large€amounts.Ð* z$¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(2)à z àSpecific€operations€carried€out€by€narrowly€focused€managers.Ð í =% Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àHigh€degree€of€separation€and€control€necessary€for€running€a€large€corporationа!&¸ (#¸ (# Ðà r àà 4 à2.à ö àò òComponents€of€Corporationó óÐ s"Ã' Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àMain€Characteristics€of€Corp:€High€degree€of€separation€between€ownership€(economicÐ 9#‰( Ðinterests)€and€control€(running€the€business)Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òLimited€liabilityó ó:€corporation€legally€and€economically€accountable€for€ownÐ ¿$ * Ðassets€and€actions€but€assets/properties€of€owners€and€shareholders€not€implicated.€CfÏpartnership,€where€partners€share€obligations.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òCentralized€€managementó ó:€small€group€of€managers€run€corp€businessÐ  '["- Ðrepresenting€beneficial€economic€interests€of€thousands€of€individuals,€none€of€whom€areÏspecifically€involved€in€daily€corporate€operations.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò ò€Free€transferability€of€ownership€interests:ó ó€transfer€of€ownership€doesn'tÐ W)§$0 Ðrepresent€shift€in€control,€just€represents€transfer€from€one€owner€to€another€-€econÏbenefits€freely€transferred.€Implied€by€(a)€and€(b).€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(4)à0 z àSep€identity€as€ò òtaxpayeró ó:€in€U.S.€Ð£+ó&3z (#z (# Ðà r àà 4 àà ö àà ¸ à(5)à0 z àmay€take€great€variety€of€forms,€from€100%€single€owner€to€greatly€dispersedÐ i,¹'4 Ðownership.Ð z (#z (# Ðœà r àà 4 àà ö àb.à ¸ àò òDistribution€of€risks€and€returns€among€investorsó ó€€Ð sà Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òRule€of€Thumb:€investors€w/most€at€risk€enjoy€highest€degree€of€controló ó.€€Ð9‰¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àò òDebtó ó:€Debt€holders€who€have€no€control€protect€themselves€with€covenants.€ÐÿOz (#z (# Ðà r àà 4 àà ö àà ¸ àà z àii.à < àò òLendersó ó:€Can€get€security€interestÐ Å Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àIn€general€you€could€allocate€risk/return€by€contract€(negotiate€their€%,€identifyÐ ‹Û Ðtheir€capital€contribution€and€return),€but€this€isn't€good€-€subject€to€constant€revision,€Ïdifficult€to€allocate,€etc.€With€corps€various€financial€structures€with€standard€menus€thatÏbring€with€them,€pick€from€range€of€possibilities€that€puts€something€in€place€lastedÏindefinitely.€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àc.à ¸ àò òCorporate€playersó ó€(categories€may€overlap)Ð Z ª  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òLabor€Suppliersó ó:€Those€who€mix€their€labor€with€an€enterprise's€capital€to€theÐ  p  Ðends€of€the€firm€(workers,€employees).Ð ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àÝ‚Pûb®!Ýððà0¸ ö (#ö (#àÝ  ÝSometimes€laborer€is€also€human€capital,€such€as€a€head€software€designer.݃Pûb®!ý!݌Щù ¸ (#¸ (# ÐŒÝ  Ýà r àà 4 àà ö àà ¸ à(2)à z à€ò òCapital€Suppliersó ó:€investors€in€corp€-€debt€and€equity€holders.€Ð l¼  Ðà r àà 4 àà ö àà ¸ àà z ài.à < àò òEquity€holders€ó ó(Shareholders):€Enjoy€corp€control,€Ð 2‚  Ðà r àà 4 àà ö àà ¸ àà z àii.à < àò òDebt€holders€ó ó(Lenders,€such€as€bond€holders):€Ð øH  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àGenerally€have€no€control€unless€corp€goes€bankrupt,€debt€holders€getÐ ¾  Ðcontrol.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àMost€debt€agreements€contain€provisions€or€covenants€limiting€corpÐ D” Ðactions€(form€of€debt€control).€€Sometimes€there€is€a€security€interest.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àò òManagementó ó:€like€laborers,€but€side€w/capital€in€wage€negotiations,€etc.€ÐÊz (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àò òMonitors,€not€producersó ó:€Unlike€regular€workers€or€providers€of€criticalÐ à Ðtalent€the€managers€don't€directly€produce.€Instead,€they€are€monitors€of€operationsÏof€corps€and€coordinate€elements€of€labor/capital€that€make€up€its€underlyingÏinputs€generally.€€Ð z (#z (# Ðà0 r àà 4 àà0ö r(#r(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)ò òà h àCorporate€governanceó ó:€How€much€control€over€corporation€should€beÐ Ÿï Ðexercised€and€how€in€actual€exercise€it€diverges€from€that.€Who€gets€whatÏand€who€bears€what€risk.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àii.à < àò òInterestsó óÐ ë; Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àò òAgents€of€capitaló ó,€they€seek€to€generate€profit€for€the€firm,€seek€bestÐ ± Ðpossible€return€from€specific€investments€made€by€owners.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àò òManager€incentives:ó ó€To€align€managers€w/shareholders€often€giveÐ :Š  Ðmanagers€stock€options€-€then€they€have€financial€incentive€to€maximizeÏshareholder€wealth.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òAgency€Problem:€ó óThe€irreducible€divergence€of€interest€btw€capitalÐ †Ö# Ðand€management€in€corporations.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àiii.à < àò òRelation€to€Shareholders,€Regular€Employeesó óÐ !_% Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àIn€extended€sense€managers€are€agents€of€the€owners€(capital€suppliers)ÐÕ!%&<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àIn€the€technical/legal€sense,€there€is€no€specific€formal€agency€relationÐ ˜"è' Ðbtw€them.€Agency€requires€day-to-day€control€by€principle,€whereas€shs,Ïeven€a€sole€owner,€doesn't€exercise€this€power€over€managers.€Managers€areÏemployees€of€company,€not€the€shs.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àEx.€100%€sh€can't€order€pres€of€company€to€do€something.Ìà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àUnlike€the€rank€and€file,€management€ò òcompensateó ó€themselves,€(thoughÐ g&·!, Ðsome€checks€exist),€though€their€interests€may€diverge€from€owners.ÏManager€compensation:€board€of€directors€set€management€salaries,€butÏdirectors€are€typically€managers€themselves€(of€other€corps)€-€insiders€-€soÏhave€incentives€to€keep€manager€salaries€high.€€High€salaries€maybeÏadverse€to€shareholder€interest.Ð <(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb64Ýððà0 ö àÝ  Ýrecent€events:€subversion€of€compensation€arrangement€ð˜ð€instruments€by€which€managersÐ ü*L&2 Ðenrich€themselves€at€expense€of€owners;€e.g.,€stock€options€can€have€reverse€incentive€„€ÝƒPûb64i4݌п+'3ö (#ö (# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àò òFiduciary€dutiesó ó:€not€traditional€agency€relationship€b/c€shareholders€don'tÐ ° Ðtell€managers€what€to€do.€€Instead,€managers€have€fiduciary€duty€ò òto€act€inÐ vÆ Ðshareholders'€best€interest.€€ó óÐ<Œz (#z (# Ðà r àà 4 àà ö àd.à ¸ àò ò€Form€v€Function€for€Ownership/Management€Relationó óÐ P Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àFormally€corps€are€not€governed€by€their€shareholders€but€by€officers,€board,€etc.ÐƸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àFunctionally,€little€or€no€separation€btw€ownership€if€100%€shareholder€says€jumpÐ ‰Ù Ðto€pres,€pres€says€how€high.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àThe€corp€form€not€only€permits€sep€of€own/control€or€its€practical€obliteration€forÐ  _ Ðdom€owner,€but€allows€all€sorts€of€gradations/permutations€filling€in€the€range.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àEx.€hybrid€pattern:€highly€uneven€distribution€of€control€among€different€ownership€interest.Ï60%-40%€stock€ownership€in€Ford.Ð 4(#4(# ÐÌà r àà0 4 àà r àC.à 4 àAlternatives:€LLC:€Second€form€of€corp,€dev€in€US€in€1990.€Entity€that€is€smaller€often€with€moreÐ Þ .  Ðflexible€rules€of€governance,€an€alt,€esp€for€less€far€flung€enterprises€that€aren't€market€traded.Ð 4(#4(# ÐÌII.à r àò òFORMATION€OF€CORPORATIONSó óÐ 'w  ÐÌà r àA.à 4 àò òStarting€a€Corporationó óÐ °  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àò òChoose€stateó ó€to€incorporate€in€ð˜ð€Commerce€Clause,€no€state€can€hinder€your€ability€to€doÐ vÆ  Ðbusiness€there;€privileges/immunities€Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òRegulated€utilities€exceptionó ó:€Some€states€(CA)€require€residential€ownership€forÐ ÿO Ðutilities€companies.€€Can't€have€CA€utility€incorporated€in€Delaware€or€vice€versa.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òDominance€of€Delawareó ó:€more€than€50%€of€Publicly€Traded€Corps€incorp€in€De.€€StateÐ ˆØ Ðgenerates€20%€of€its€income€from€incorporation€fees€alone.€€Why€so€popular?Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àMain€stream€explanation:€DE€was€first€to€adopt€ò òflexible€corp€lawsó ó,€doing€awayÐ a Ðwith€ultra€vires€(beyond€corp€powers)€limiting€doctrine.€€Therefore€self-perpetuating.Ð ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà0 r àÝ‚PûboAÝððà04r(#r(#àÝ  Ý€Courts€handle€all€the€bread€and€butter€corporate€questions,€developed€well€understood€and€€wellÐ šê Ðhoned€body€of€decided€cases€(and€stat€law)€making€it€easy€to€predict€outcome€of€€various€frictions€andÏsteer€corporate€operations€through€prevailing€legal€regime.݃PûboA–A݌Р4(#4(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbCÝððà0 4 àÝ  ÝV€tried€adopting€DE's€precedents,€but€still€no€significant€success.݃PûbCECÝŒÐã34(#4(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àU€of€Chicago€explanation:€DE€corp€law€is€most€ò òefficientó ó,ò ò€wealth€maximizingó óÐ ¦ö Ðsystem.€€Natural€monopoly€b/c€over€long€run€DE€corps€do€well.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àDark€explanation:€DE€corp€law€ò òfavors€managers/insidersó ó€making€them€betterÐ /  Ðsituated€to€take€advantage€of€far€flung€investors.€€DE€law€shaped€toward€corp€bar.€€Ð ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûb5FÝððà0 4 àÝ  ÝEx.€Acquiescence€of€courts€in€DE€in€various€takeover€defenses€adopted€in€interest€of€€insiders.€ÝƒPûb5F\F݌и"4(#4(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(4)à z àò òIsenberghó ó€ò òexplanationó ó:€DE€more€ò òfavorable€to€wealth€interests€(shareholdersó ó)Ð {Ë# Ðtherefore€more€corps€incorporate€there.€€à Ú àà @Ú àà @Ú àÐA ‘$¸ (#¸ (# ÐÌà r àà 4 à2.à ö àò òForming€the€companyó óÐ Ç!& Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òIncorporatoró ó:€Acts€as€facilitator€-€designated€to€form€corp.€€Incorporator€drafts€and€filesÐ "Ý' Ðarticles€of€incorp€(AOI)€w/sec€of€state€of€the€state.€What€articles€contain:Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(1)à z àSpecifying€ò ònameó ó,€specific€ò ò#€of€sharesó ó.€Ð $f) Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àIdentifies€a€ò òregisteredó ó€ò òagentó ó€who€is€someone€in€the€state€of€incorp€who€willÐ Ü$, * Ðaccept€service€of€process.€You€can€ALWAYS€sue€corp€in€state€of€incorp.€Articles€alsoÏspecify€registered€office€-€corp€address€in€that€state.Ð ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà0 r àÝ‚PûbàKÝððà04r(#r(#àÝ  ÝNOTE:€ò òCorporationó ó€ò òTrustó ó€(CT)€-€business€in€the€incorporation€business.€Tell€CT€where€you€wantÐ ('x"- Ðcorp,€they€send€you€an€incorp€kit€with€set€of€standard€articles,€fill€in€blanks,€check€name.€They€send€forÏcertificate,€when€you€hold€org€meeting,€its€part€of€the€kit,€you€don't€need€real€people€in€the€room,€youÏalone€can€do€an€action€in€writing€in€lieu€of€a€meeting,€elect€directors,€you€can€adopt€initial€bylaws.݃PûbàKL݌Р4(#4(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àReceiveò ò€certificate€of€incorporationó ó€from€secy€of€state€ð˜ð€voila,€it€exists.Ð7*‡%1¸ (#¸ (# Ðà r àà 4 àà ö àc.à ¸ àIncorporator€calls€for€ò òorganization€meeting:ó ó€Ð ý*M&2 Ðà r àà 4 àà ö àà ¸ à(1)à z àInitial€ò òboard€of€directorsó ó€is€named€by€the€incorporator.€Ð Ã+'3 Ðà r àà 4 àà ö àà ¸ à(2)à z àDirectors€name€ò òofficersó ó.€Corp€must€have€at€least€3€directors:Ð ° Ðà r àà 4 àà ö àà ¸ àà z ài.à < àò òPresidentó óÐ vÆ Ðà r àà 4 àà ö àà ¸ àà z àii.à < àò òTreasureró ó€(can€be€same€as€President)Ð <Œ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àiii.à < àò òSecretaryó ó:€Must€be€different€person€than€President€and€Treasurer.€TheÐ R Ðsecretary€verifies€to€world€by€recording€that€all€corp€players€are€who€theyÏsay€they€are.€€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àò òAlternativeó ó:€can€name€directors€and€shares€authorized€for€distribution€in€articlesÐ N ž Ðof€incorp.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àd.à ¸ àCompany€can€ò òsell€stockó ó.€Directors€issue€shares€for€various€capital€contributions.€Ð× '¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àThis€is€when€money€is€brought€into€the€corporation,€after€the€Incorporator€is€out€ofÐ  í  Ðpicture€and€true€parties€of€interest€-€w/capital€emerge.€€ò òSet€up€so€money€into€corp€is€lastÐ ` °  Ðstep€to€ensure€that€incorporator€doesn't€take€money€and€runó ó.Ð& v ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òBylawsó ó€are€€adopted€by€shs€unless€they€find€them€problematic.Ðì < ¸ (#¸ (# ÐÌà r àà 4 à3.à ö àò òStatutes€governing€formation€of€corporationó óÐ uÅ  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àModel€Business€Corporation€Act:€ò òMBCAó ó€ðððð€2.01-€2.06:€address€incorporators€(one€orÐ ;‹  Ðmore€people€incorp€by€delivering€art€of€incorp);€articles€of€incorp€(mandatory€andÏoptional€info€to€include);€effect€of€incorporation€(when€corp€effectively€formed);€liabilityÏfor€preincorp€transaction€(anyone€who€acts€before€corp€exists€jointly/severally€liable);Ïorganization€of€corp€(name€directors€or€provide€for€selection;€organizational€meetingÏrequired);€bylaws€(shall€adopt€bylaws).€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òDel€Gen€ðððð€101,€102,€106-109ó ó:€incorporators€(can€form€DE€corp€for€any€purpose);Ð Ð  Ðcertificate€of€incorp€(mandatory€and€optional€provisions€to€include);€commencement€ofÏcorp€(from€date€of€filing);€powers€of€incorporators€(manage€corp€till€directors€named);Ïorg€meeting€(must€hold€org€€meeting€to€name€directors€unless€named€in€certif€of€incorp);Ïbylaws€(directors/incorp€have€power€to€amend€bylaws€until€stock€issued€then€votingÏshareholders€have€power€to€amend€bylaws).€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à4.à ö àò òFailure€in€corporate€processó ó:€Incorporator€fails€to€file€AOI,€files€the€wrong€ones,€or€theyÐ eµ Ðbounce.€Who€has€liabilities€and€who€is€protected?€€Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òDe€Facto:€ó ó€Corporation€with€a€defect,€but€corporation€is€acknowledged€none€the€less.Ð î> ÐCompany's€operations€have€same€consequences€of€a€de€jure€corporation€includingÏprotection€of€officers€from€personal€liability.€The€obligations€and€benefits€are€preservedÏby€the€judge.€ò òGood€against€the€world.ó óÐ:Š ¸ (#¸ (# Ðà r àÝ‚PûbÿÝÝ  ÝÝ‚PûbT_Ýððà0 4 àÝ  Ýò òRequirementsó ó:݃PûbT_o_ÝŒÐP!4(#4(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûbó_Ýððà0 ö àÝ  Ýò òValid€possibility€of€incorporationó ó,€no€defects€in€corporation€itself.݃Pûbó_&`ÝŒÐÆ"ö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûbâ`Ýððà0 ö àÝ  ÝIncorporation€from€perspective€of€promoter€or€shareholder€was€attempted€in€ò ògood€faithó ó.݃Pûbâ`a݌ЌÜ#ö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚PûbâaÝððà0 ö àÝ  ÝDefect€in€incorporation€must€not€be€known€to€main€actors.݃PûbâabÝŒÐR ¢$ö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb¿bÝððà0 ö àÝ  ÝCorporate€form€must€have€been€used€and€followed.€ÝƒPûb¿bòbÝŒÐ!e%ö (#ö (# ÐŒÝ  Ýà r àà 4 àÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òBy€Estoppeló ó:€€Status€as€corporation€cannot€be€denied€by€party€who€has€dealt€with€it€as€aÐ ›"ë' Ðcorporation.€(equitable€notion).€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òRationaleó ó:€Anyone€who€dealt€w/assoc€as€corp€is€NOT€HURT€by€defect€in€its€corpÐ $$t) Ðform€because€they€didn't€expect€anything€better€than€dealing€with€a€corporation.€€ShouldÏbe€required€to€recognize€corporation€if€court€willing€to€do€so.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òBroaderó ó€then€de€facto€in€that€incorporators€can€be€aware€of€the€defectiveÐ p&À!, Ðincorporation.€Narrower€in€that€it€ò òisn't€good€against€the€world.€ó óÐ6'†"-¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òTrend€in€case€lawó ó:€Tendency€in€case€law€to€recognize€corporation€despite€defects.€Ð ü'L#. ÐÐ ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb%hÝððà0 ö àÝ  Ýòòò òCranson€v€IBMó óóó:€Cranson€purchased€typewriters€from€IBM€in€his€corp€capacity,€unaware€the€Ð …)Õ$0 ÐCertificate€of€Incorporation€hadn't€yet€been€filed.€€IBM€tried€to€hold€P€personally€liable€for€the€€Ïpurchases.€Ct€applied€estoppel€to€IBM€to€deny€the€corp€existence€since€it€dealt€with€P€solely€à Ú à€€€€€€€€€€€in€his€corp€capacity.€Cranson€couldÐ  +\&2 Ðhave€avoided€liabilities€of€corporation€under€either€doctrine,€he€had€a€good€de€facto€andÐ Ï+'3 Ðestoppel€case.݃Pûb%hXh݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚PûbÈjÝððà0 ö àÝ  Ýòòò òSouthern€Gulf€Marineó óóó€(206)€-€Facts:€D€agreed€to€sell€a€boat€to€P.€€The€K€said€P€was€a€TX€corp,€Ð sà Ðand€also€said€that€P€was€a€citizen€of€the€US.€€P€later€informed€D€that€it€was€a€Cayman€IslandsÏcorp.€€D€reneged€on€the€K€and€said€it€wasn't€valid.€Outcome:€Corporation€would€probably€Ïprevail€both€ways.€Court€indicates€that€P€of€Camcraft€is€estopped€to€deny€the€validity€ofÏSouthern€Gulf€Marine€because€P€agreed€to€the€change€of€charter€from€TX€to€Cayman€islands€Ïand€de€facto€doctrine€isn't€even€necessary,€through€court€treats€it€as€de€facto€TX€corp€though€it€Ïis€a€legal€corp݃PûbÈjûj݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbÂmÝððà0 4 àÝ  Ýò òTAKEAWAYó ó:€strong€inclination€of€courts€to€cure€minor€defects݃PûbÂmémÝŒÐÉ 4(#4(# ÐŒÝ  ÝÌà0 r àà04r(#r(#àà r àB.à 4 àò òPre-incorporation€Questionsó ó:€Promoters€ð˜ð€People€who€put€corp€ventures€together.€They€may€stayÐ R ¢  Ðwith€a€corporate€venture€having€gotten€it€started€(more€common€pattern)€or€be€a€business€broker€whoseÏenterprise€is€promoting€businesses€in€corporate€form€and€moving€on.Ð 4(#4(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àò òRoleó ó:€Once€played€an€important€role.€Almost€all€corporations€used€to€be€formed€with€aÐ žî  Ðpromoter.€Now€framed€by€specific€market€processes€and€securities€law€so€their€role€is€muchÏsmaller.€Still€widely€used€for€smaller€corporations.Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à2.à ö àCommonly,€they€conduct€business€of€various€kinds€on€behalf€of€the€corp€to€be€and€theirÐ ê:  Ðagreements/undertakings€with€others€long€before€they€package€every€aspect€of€a€corp€into€placeÐ ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òLiabilityó ó:€Significant€body€of€case€law€regarding€their€liability€when€engaging€in€aÐ pÀ  Ðtransaction€on€their€behalf€once€corp€is€running.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òBlack€Letter€Lawó ó:€Promoters€retain€individual€obligation,€contractual€liability,Ð ùI Ðfor€whatever€the€undertake€unless€they€disclaim€that€obligation€explicitly.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òMBCA€ðð2.04:€ó ócodifies€this€rule€-€all€persons€purporting€to€act€on€behalf€of€corpÐ ‚Ò Ð(knowing€no€corp€yet€exists)€jointly€and€severally€liable€for€all€obligations€created€whileÏdoing€so.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òFiduciary€dutyó ó:€Promoter€has€a€relation€to€a€corp€and€also€to€third€persons€brought€intoÐ Î Ðthe€venture.Ð ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà0 r àÝ‚PûbwÝððà04r(#r(#àÝ  Ýòòò òHow€v€Boss€óóó ó(M3):€Facts:€Boss€signs€an€agreement€(for€set€of€plans€and€architectural€service)€as€anÐ W§ Ðagent€€for€a€corp€to€be€formed,€who€will€become€the€obligor.€Writes€on€signature€line€"my€signature€asÏagent€for€corp€to€be€formedðð€How's€services€went€uncompensated,€sues€Boss.€ò òHoldingó ó:€How€recoversÐ Þ. Ðfrom€Boss.€ò òREASONINGó ó:€The€ostensible€shift€of€Boss's€liability€to€the€Corp€was€insufficient.€CourtÐ ¤ô Ðargues€if€Corp€will€be€the€obligor,€it€isn't€one€yet€and€Boss€is€still€the€obligor€and€that€status€doesn'tÏend€when€corp€is€formed,€because€it€doesn't€say€that€Boss€will€be€the€"sole"€obligor€but€"the"€obligor.Ïò òKeyó ó:€If€you€represent€a€promoter€or€founder€of€corp€you€really€have€to€triple€underscore€question€ofÐ ð@! Ðthe€promoter's€liability€for€transactions€entered€into€on€corp's€behalf,€explicit€statement€that€corp€willÏbe€the€sole€obligor,€ð ðwithout€recourse.ðð݃PûbwCw݌Р4(#4(# ÐŒÝ  ÝÌà r àC.à 4 àò òLimited€Liabilityó óÐ ÿ O% Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àò òRuleó ó:€Corporation's€transactions€implicate€assets€of€corporation,€not€assets€of€shareholders€orÐ Å!& Ðdirectors.€€Regardless€of€how€close€the€unity€b/t€capital€and€control€is€(even€if€corp€has€oneÏshareholder€and€one€director)€ò òcts€won't€pierce€corp€veiló ó€ò òunless€there€is€evidence€of€disregardÐ N#ž( Ðof€corporate€formó ó.€€Rule€is€followed€even€if€corp€set€up€to€systematically€shield€owner's€assets.Ð$d)ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òLegal€Formalismó ó:€If€corp€formalities€rigorously€observed€(no€commingling€of€assets,Ð Ú$* * Ðshareholders€don't€deal€loosely/informally€w/corp)€then€there€is€no€chance€corp€veil€willÏbe€pierced.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òInnoculative€effect:ó ó€if€all€corp€formalities€observed,€can€inoculate€individuals€againstÐ &'v"- Ðliability€for€claims€against€corporation.€€Ð ¸ (#¸ (# ÐÌØ€ ØÝ‚*&ÿÝÝ  Ýà r àà 4 àÝ‚*&s€ÝÚƒ Ú2Ú  Ú.à0 ö àÝ  Ýò òMatrix€of€possibilities݃*&s€¦€ÝÛ€ ÛŒÐr)Â$0ö (#ö (# ÐŒÝ  ÝØ€ ØÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àÝ‚ )–|ÝÚƒ ÚaÚ  Ú.à0 z àÝ  Ýó óMight€classify€claims€as€ò òdebt€claimsó ó€(voluntarily€incurred)€and€ò òtort€claimsó óÐ 8*ˆ%1 Ð(involuntary)݃ )–|ÇÝÛ€ یРz (#z (# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýò òà r àà 4 àà ö àà ¸ àÝ‚ )–Û‚ÝÚƒ ÚbÚ  Ú.à0 z àÝ  Ýó óCorp€entities€against€whom€claims€made:€ò òpublicly€tradedó ó€or€Ýƒ )–Û‚)ƒÝÛ€ ÛŒÐÁ+'3z (#z (# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àÝ‚ )– „ÝÚƒ ÚcÚ  Ú.à0 z àÝ  ÝStrongest€case€for€limited€liability:€ò òdebtó ó€claims,€esp€publicly€traded€corp݃ )– „X„ÝÛ€ یаz (#z (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚PûbI…Ýððà0 < àÝ  Ýinterests€freely€transferrable݃PûbI… …ÝŒÐvÆ<(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚Pûb/†Ýððà0 < àÝ  Ýdefined€risks€for€investors:€wouldnððt€buy€if€faced€liability݃Pûb/†††ÝŒÐ9‰<(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚Pûb6‡Ýððà0 < àÝ  Ýotherwise€ð˜ð€elaborate€insurance€system€to€protect;€detailed€contractualÐ üL Ðarrangements,€etc.݃Pûb6‡‡ÝŒÐ <(#<(# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àÝ‚ )–gˆÝÚƒ ÚdÚ  Ú.à0 z àÝ  Ýò òDebtó ó€claims€in€ò òclosely€heldó ó€corps:€transferability€not€at€stake,€but€still€beneficial€toÐ ‚Ò Ðplanning,€expectations€on€both€sides݃ )–gˆ²ˆÝÛ€ یРz (#z (# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àÝ‚ )–ç‰ÝÚƒ ÚeÚ  Ú.à0 z àÝ  Ýò òTortó ó€claims:€different€ð˜ð€canððt€negotiate€in€advance,€nature€of€accidents;€no€priorÐ  [ Ðcourse€of€dealing:€ideally,€goal€should€be€ð˜ð€allocate€social€cost€on€person/entityÐ Ñ ! Ðbest€able€to€avoid€it€(Yes,€Levmore,€I€understand!)݃ )–ç‰2ŠÝÛ€ یРz (#z (# ÐŒÝ  ÝÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àÝ‚ )–Ú‹ÝÚƒ ÚfÚ  Ú.à0 z àÝ  Ýò òBlackletter€law:€ó ódoesnððt€turn€on€allocative€issues,€but€on€whether€necessaryÐ W §  Ðformalities€observed€by€corp€actors€to€preserve€the€sep€identity€of€corp݃ )–Ú‹%ŒÝÛ€ یРz (#z (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚PûboÝððà0 < àÝ  Ýstep€#1:€where€formalities€observed?€If€not,݃PûboÆÝŒÐà 0 <(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚PûbcŽÝððà0 < àÝ  Ýstep€#2:€high€hurdle€„€must€find€someone€in€control€of€corp€operations€to€soÐ £ó  Ðgreat€an€extent€to€permit€inference€that€itððs€alter€ego€system€ð˜ð€evidentiaryÐ f¶  Ðproblems݃PûbcŽºŽÝŒÐ <(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbóÝððà0 4 àÝ  Ýò òExampleó ó:€òòò òWalkovszky€v.€Carltonó óóó€(211)€ò òFACTSó ó:€ð)ð€run€over€by€cab€owned€by€Corp.€Assets€of€corp€=Ð ì<  Ðthe€cab.€Liability€insurance€of€only€10K.€€€BUT€Corp€owned€ten€corps,€each€=€1€cab.€[D6]€ò òISSUEó ó:€areÐ ²  Ðother€corpsðð€assets€shielded?€Are€single€shareholderððs?€ò òHOLDINGó ó:€He€hadnððt€broken€down€sepÐ xÈ  Ðidentity€between€himself€and€corp,€so€not€personally€liable.€€ÝƒPûbó݌Р4(#4(# ÐŒÝ  ÝÌà r àà 4 à2.à ö àò òScenariosó ó:Ð Ä Ðà r àà 4 àà ö àa.à ¸ àExamplesÐ ŠÚ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àSingle€sh€A€owns€(X).€(X)'s€assets€not€enough€to€pay€creditor,€M,€and€M€tries€toÐ M Ðreach€A's€assets.€In€normal€course€of€events,€ò òA€is€insulatedó ó€assets€personallyÐ ` Ðretained€from€risk€of€enterprise€of€X.€[D1]Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àA,€B,€C,€D€own€(X).€(X)'s€assets€not€enough€to€pay€creditor€M,€M€tries€to€reach€allÐ ™é Ðthe€sh's€assets.€This€situation€is€harder€for€claimant€to€prevail€on€bc€there's€ò òno€oneÐ \¬ Ðperson€to€identify€for€having€beneficial€interest€and€control€over€corpó ó,€processÐ "r Ðof€disregarding€corp€entity€is€logistically€more€difficult.€[D2]Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àSingle€sh€A€owns€(X)€and€(Y).€M€wants€to€reach€A's€assets€(and€consequentlyÐ «û Ð(Y)'s€assets).€[D3]Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(4)à z àSingle€sh€A€owns€(X)€and€owns€60%€of€(Y).€B€owns€40%€of€(Y).€M€may€argueÐ 1  Ð(Y)€was€A's€alter€ego€and€thus€(Y)'s€assets€should€stand€in€satisfaction€of€(X)'sÏliability.€Then€creditor€can€also€reach€B's€assets,€essentially,€since€it€gets€B's€shareÏof€corp.€ò òRarely€succeedsó ó.€[D4]ÐzÊ#z (#z (# ÐÌà r àà 4 àà ö àb.à ¸ àò òParent„subsidiary€liability€ó ó:€€A€is€sole€sh€of€(X)€which€is€sole€sh€of€(Y)€[D5]Ð !S% Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àCorporate€environments€aren't€treated€as€fully€distinct€as€opposed€to€Shareholder€Ð É!& Ðvs€Shareholder's€solely€held€corp.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àIn€taxation,€(X)€and€its€wholly„owned€subsidiary€(Y)€are€taxed€as€a€single€person,Ð O#Ÿ( Ðif€both€incorp€in€same€country.€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àFor€number€of€legal€purposes€and€sp€matters€of€obligation€and€liability,€theseÐ Õ$% * Ðremain€ò òseparate€corporate€environmentsó ó.И%è +z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àCreditors€of€(Y)€can't€reach€(X)€simply€bc€(X)€has€100%€stock€ownership,Ð ^&®!, Ðany€more€than€they€could€reach€person€A€holding€(X).Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àParent-subsidiary€has€consolidated€corp€environment,€but€there€remains€aÐ ä'4#. Ðdegree€of€separateness€even€among€corps€making€up€a€group€-€thoughÏrarely€as€complete€as€it€is€btw€corp€env€and€individual€holder.Ð <(#<(# Ðà r àà 4 à3.à ö àò òRationale€for€limited€liabilityó óÐ -*}%1 Ðà r àà 4 àà ö àa.à ¸ àò òClosely€held€versus€publicly€traded€corporationó óÐ ó*C&2 Ðà r àà 4 àà ö àà ¸ à(1)à z àò òPublicly€traded€corporation:€ó óÐ ¹+ '3 ÐÑïWÑâ âÑe°Ñâ âÑ  Ñà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àTheir€is€a€misallocation€possibility,€but€advantages€of€LL€outweigh€this€bcÐ ° ÐLL€rule€fosters€and€preserves€liquid€capital€markets€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àCouldn't€have€significant€transferability€of€ownership€in€large€classificationÐ 6† Ðof€corps€if€potential€tort€liability€accompanied€in€every€share€acquired€inÏroutine€investment.€People€would€be€scared€to€own€shares€of€chemÏcompanies€that€could€have€big€spill,€etc.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àò òClosely€held€corporationó ó:€Less€clear€justification€b/c€investors€in€these€corps€areÐ B ’ Ðtypically€also€managers.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àInvestors€themselves€still€can€determine€level€of€risk€before€hand€if€theyÐ Ë  Ðchoose,€those€who€lend€to€corp€can€make€corr€adjustmentsÐ <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àLoan€to€corp€is€similar€to€nonrecourse€debt€where€recourse€is€limited€toÐ Q ¡  Ðcorporate€assets.€Lenders€have€greater€risk€of€loss€so€they€demand€moreÏinterest€or€they€can€demand€indiv€guarantee€from€sh's,€which€they€often€dueÏfor€closely€heldÐ <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àiii.à < àLL€of€corps€esp€closely€held€corps€good€for€sh's€bc€it€enables€them€toÐ ]­  Ðinsulate€their€risk€precisely.€€Good€for€lenders€bc€it€defines€the€assets€thatÏare€available€to€satisfy€obligations€and€against€whom€claims€can€be€madeÏleading€to€induce€sharpening€of€terms€and€more€precise€statement€of€terms.Ð <(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûb6ªÝððà0 4 àÝ  Ýò òExampleó ó:€A€owns€100%€of€X€and€100%€of€[D3].€€Lender€(L)€won't€lend€A€money€for€X€corp€b/c€if€noÐ i¹  Ðlimited€liability,€afraid€that€Y's€creditors€will€sap€all€of€A's€assets€and€nothing€left€to€satisfy€A's€debt€onÏbehalf€of€X€to€L.݃Pûb6ª]ªÝŒÐ 4(#4(# ÐŒÝ  Ýà r àÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb..à ¸ àò òDebt€€liability€for€corporation:ó ó€K€claims€generally€arise€from€specific€agreements€orÐ xÈ Ðobligations€bargained€for€on€both€sides.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òKey€benefit€of€LL€for€debtó ó€is€it€permits€participants€in€ventures€who€set€them€upÐ Q Ðas€corporations€to€precisely€determine€their€risk€in€advance€by€deciding€how€much€$€toÏput€into€company€with€not€worrying€someone€will€attack€personal€$.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ àà z ài.à < àMakes€it€easier€to€raise€capital.Ð M Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àEssential€for€publicly€held€for€transferability€of€their€stock,€nobody€will€buyÐ ` Ðstock€if€ownership€brings€with€it€liability€beyond€stock€value.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àò òContractual€allocation€of€riskó ó:€where€limited€liability€is€the€default€rule€creditorsÐ –æ Ðcan€take€this€into€account€and€bargain€with€corp€for€best€loan€terms.€€In€this€wayÏlending€becomes€profitable€b/c€can€charge€higher€premiums€to€compensate€for€riskÏof€default€w/o€being€able€to€reach€borrower's€personal€assets.€€Ð z (#z (# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àò òTort€liability€of€corporationó ó:€Tort€victim€is€involuntary€creditor€-€ex.€someone€run€overÐ h¸# Ðby€MAC€truck€of€X€transportation€corp.€External€costs€inflicted€on€tort€victim€withoutÏcompensation.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àLL€advantage€less€clear€than€debt:€It€becomes€misallocation€when€undercapitalizedÐ ´!& Ðcorps€are€routinely€less€cautious€since€it€won't€cost€them€much.€Yet,€LL€is€stillÏbest.€ò òExampleòò:€Walkovszky€v€Carltonó óóó€(211)€(SEE€SUPRA)Ð:#Š(z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àClosely€held€corps:€Most€difficult€situation€because€of€possibility€of€misallocatedÐ $P) Ð(uncompensated)€loss.€Yet,€courts€make€little€distinction€btw€how€courts€treatÏclosely€held€vs€publicly€held€corps.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àEconomic€implications:€allows€tortfeasing€corp€to€externalize€costs€of€itsÐ I&™!, Ðnegligence€by€shifting€costs€to€victims.€€INEFFICIENT.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(4)à z àEffect:€some€think€(though€empirics€to€some€extent€refute€this)€that€individualÐ Ï'#. Ðmore€likely€to€be€successful€in€piercing€corp€veil€if€arises€in€tort€context.Ð z (#z (# ÐÌà r àà 4 àà ö àd.à ¸ àò òDisregarding€corp€form€tort€v€debt,€one€sh€v€many€shsó ó€Ð *h%1 Ðà r àà0 4 àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àNo€evidence€of€its€being€easier€to€disregard€corp€form€in€tort€cases€than€in€debt.Ð Þ*.&2 ÐSome€studies€suggest€the€opp,€a€lower€%€of€tort€claims€are€successful€in€settingÏaside€corp€form€and€reaching€another€person€than€in€contract€law.Ðd,´'4z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àò òIsenberghó ó€knows€of€no€case€where€indiv€were€held€accountable€for€publiclyÐ ° Ðtraded€corp.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àNo€systematic€difference€in€these€cases€btw€€torts€and€K's,€but€òòò òIn€re€SiliconeÐ 9‰ ÐBreast€Implantó óóó€(230)€suggests€the€opposite.ÐýMz (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àTrial€judge€denies€Bristol€SJ€that€faces€claims€against€its€owned-ownedÐ Á Ðsubsidiary€for€implants.€Judge€cites€disregard€of€corp€formalities€to€some€degreeÏ[no€directors€meetings],€but€this€is€nothing€unusual.€Quite€common€forÏwholly-owned€sub€to€have€officers€and€directors€that€are€officers/directors€ofÏparent€company€as€well.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àIn€addition€to€disregard€of€form€and€injustice,€court€points€to€financialÐ  à  Ðrelationship€btw€P-S,€suggests€that€could€have€misled€people€into€thinking€P'sÏassets€stood€behind€S's€obligations.€Court€points€to€identity€of€interest€btw€p-s€suchÏas€never€taking€a€dividend,€not€charge€by€parent€to€sub€for€beneficial€servicesÏperformed,€etc.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àò òISENBERGHó ó:€Court's€inference€is€wrong€bc€far€from€being€element€ofÐ _¯  Ðundercapitalization,€these€things€actually€helped€maintain€assets€of€subsidiary€byÏnot€taking€dividends,€not€charging€for€services,€etc.€Bristol€maximized€sub's€$.ÏIsenbergh:€"When€breasts€come€into€the€picture€people€lose€their€intellectualÏcomposure."Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àò òAgency€Theoryó ó:€Court€rightly€uses€fact€that€by€allowing€sub€to€promoteÐ 1 Ðwith€it€means€parent€held€itself€as€being€in€some€principle-agent€relationship,Ïgrounds€for€parent€liability€-€that€it€acted€as€not€merely€a€sub€but€as€an€agent.Ð z (#z (# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbÄÝððà0 4 àÝ  ÝThis€is€a€great€hazard€with€almost€all€p-s€structures,€one€thing€that€corp€lawyers€€€must€try€to€contain.Ð }Í ÐKeep€real€and€ostensible€lines€of€authority/authorization€as€distinct€as€possible€to€avoid€global€liability.ÏParent€must€not€take€over€day-to-day€activities€of€subsidiary.݃PûbÄ+Ä݌Р4(#4(# ÐŒÝ  Ýà r àÌà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à4.ò òà ö àDisregard€of€corp€form/Piercing€the€corp€veil:€formalism€is€prevailing€doctrine.ó óЉÙö (#ö (# Ðà r àà 4 àà ö àa.à ¸ àFactors€needed€in€order€to€pierce€corp€veilÐ OŸ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òDisregard€of€formalitiesó ó:€e.g.€no€directors€meetingÐb¸ (#¸ (# Ðà r àà0 4 àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àIf€the€corp€formalities€are€holding,€corp€entity€or€at€least€separate€corpÐ Ø( Ðenvironments€hold€as€well.€Individuals€rarely€made€liable€for€obligationsÏcarried€out€by€the€book.Ð <(#<(# Ðà0 r àà 4 àà0ö r(#r(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àIdea€is€owner€has€allowed€separate€identity€to€break€and€dealt€with€corp€asÐ !q  Ðthough€it€didn't€exist,€the€owner€should€now€have€to€deal€with€others€thatÏway.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àiii.à < àOften€a€problem€with€sole€owners€of€corporations.€(e.g.,€òòò òWalkovszkyó óóó)Ð jº# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òCommingling€of€assetsó ó:€Single€worst€lapse€is€routine€commingling€of€assets€-Ð . ~$ ÐExposes€sh's€to€disregard€of€entity€more€immediately€than€anything€else.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òElement€of€injusticeó ó:€Most€states€require€a€showing€of€an€"element€of€fraud€orÐ ·!& Ðinjustice,ðð€even€if€there€was€an€egregious€disregard€of€corp€form€and€commingling€ofÏassets.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ àà z ài.òòò òà < àSea-Land€Services,€Inc€v€Pepper€Sourceó óóó€(217)Ð $S) Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àExtreme€element€of€disregard€of€corp€formalities:€SH€of€Pepper€SourceÐ Ç$ * Ðnever€held€directors€meeting,€paid€personal€bills€from€corp€accounts,Ïclaimed€corp€tax€deductions€for€household€expenses,€completeÏcomminglingÐ <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àStill€avoids€SJ:€COA€noted€P€ò òneeded€to€show€explicit€element€ofÐ Ó'##. Ðfraud€or€injustice.ó óЙ(é#/<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òKeyó ó:€Even€when€massive€trampling€of€corp€formalities€exists,€mightÐ ])­$0 Ðnot€be€enough€for€outcome€on€those€pleadings.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àòòò òKinney€Shoes€v.€Polanó óóó€(223):€€D€formed€a€separate€corp€solely€to€enter€intoÐ æ*6&2 Ða€sub-lease€with€P,€and€then€put€all€other€assets€in€another€corp.€D€breaksÏsub-lease€and€P€has€no€assets€available€in€a€suit,€seeks€to€pierce€corporateÐ m,½'4 Ðveil.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àCourt€finds€ò òspecific€systematic€undercapitalization€(total€lack€ofÐ sà Ðfunding€for€industrial€realty€corp)€to€be€tantamount€to€fraud€orÏinjusticeó ó.ÐýM<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àMuch€less€persuasive€outcome€then€Sea-Land€since€Kinney€could€haveÐ Ã Ðrun€credit€check,€had€no€sublet€clause,€was€sophisticated,€could€haveÏobtained€personal€guarantees.€Bailed€out€for€its€own€stupidity.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òKeyó ó:€€Polan€would€have€been€inoculated€from€this€outcome€if€he€hadÐ  \ Ðone€SH€meeting€and€put€some€$€into€corporation.€The€min€you€have€to€doÏisn't€much€but€you€have€to€do€it.€Ð <(#<(# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òFending€off€spurious€attempt€to€set€aside€corp€entity:€òòPerpetual€Real€Estate€Services,Ð  k  ÐInc€v€Michaelson€Properties€ó óóó(226):€Ðá 1 ¸ (#¸ (# Ðà r àà0 4 àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àFacts:€Sh's€of€Michealson€Properties€had€specifically€offered€personal€guaranteesÐ ¥õ  Ðto€some€obligations€of€the€corporation.€When€the€underlying€venture€failed€and€assetsÏwere€insufficient,€the€other€venturer€sought€to€recover€beyond€those€specific€personalÏguarantees.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òCourtó ó:€Points€out€that€Michealson€played€by€the€book,€the€fact€that€he€specificallyÐ ±  Ðguaranteed€some€things,€means€the€rest€only€had€corp€assets€available.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òKeyó ó:€Habitual€outcome€is€unless€something€really€jumps€off€the€page€you're€notÐ :Š Ðgoing€to€dissolve€corp.Ð ¸ (#¸ (# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àò òEnterprise€Liability€Theoryó ó:€A€single€enterprise€w/in€corp€environment€that€isІָ (#¸ (# Ðà0 r àdistributed€among€several€different€entities.€This€is€a€form€of€disregard€of€corp€entity€but€not€to€extent€ofÏreaching€outside€corp€env,€treating€a€group€of€corps€engaged€in€same€econ€enterprise€as€being€a€single€entity.ÏTheory€of€liability:€obligations€of€one€corp€are€extended€to€another€corp€under€common€ownership€andÏcontrol€and€engaged€in€similar€enterprise.€[a€kind€of€equitable€imposition€of€joint€venture,€where€there€isÏintermingling€of€operations,€assets,€liabilities,€etc.]]Ð r(#r(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àò òGeneral€rule:ó ó€Separate€identity€of€corporations€in€an€enterprise€holds€up€unless€itÐ k Ðhas€been€disregarded€by€entities€themselves.€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àò òòòWalkovszky€v€Carlton€ó óóó(supra):€Investor€had€separately€incorporated€nine€cabÐ ¤ô Ðcompanies,€with€minimal€liability€insurance€and€few€assets€in€each€corp.€€SoleÏshareholder€of€all€corps.€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àAppears€that€the€formal€barriers€btw€the€separate€entities€were€largelyÐ î>! Ðdisregarded:€disregarded€the€financial€and€day-to-day€managerial€separationÏof€these€corporations,€perhaps€all€10€dispatched€from€same€garage.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àIf€this€is€true,€though€there€were€10€separate€corp€shells,€in€reality€they€wereÐ 7 ‡$ Ðmoving€assets:€payments,€etc€back€and€forth,€interchangeable.€EnterpriseÏTheory€would€apply€to€bring€all€corps€assets€into€the€fray€for€Walkovszky.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àiii.à < àòòò òEnterprise€Theory€only€works€because€all€the€corporations€are€in€theÐ €"Ð' Ðsame€business.ó óóóÐD#”(<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àiv.à < àWouldn't€implicate€Carlton€individually,€just€the€walls€between€brokenÐ $V) Ðdown.Ð <(#<(# ÐØ€ ØÝ‚ )–ÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚ )–èæÝÚƒ ÚvÚ  Ú.à0 < àÝ  Ýòòò òSilicone€Implantó óóó€(supra):€subsidiary„parent€broke€down;€see€notes€SiliconeÐ Œ%Ü + ÐGel€Breast€Implant€ð˜ð€ò òagency€or€direct€liability€theoryó ó:€parent€treatsÐ P& !, Ðsubsidiary€with€total€control,€as€if€subððs€obligations€=€its€ownk,€underwroteÏcosts,€failure€to€take€dividend,€lending€name€to€promo€efforts€of€sub,€etc.€Ýƒ )–èæ?çÝÛ€ یР<(#<(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àò òMain€pointó ó:€when€all€assets€in€same€line€of€business€under€common€control€butÐ œ(ì#/ Ðseparate€corporate€forms,€will€often€use€assets€of€all€corps€to€satisfy€claim€againstÏone.Ð z (#z (# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûb’êÝððà0 4 àÝ  Ý€Does€not€apply€to€environmental€disasters,€e.g.,€Amoco€Cadiz€„€see€notes€ð˜ð€separate€statutory€regimeÐ è*8&2 Ðgoverns€these݃Pûb’ê¹ê݌Р4(#4(# ÐŒÝ  Ýà r àÐ n,¾'4 Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àd.ò òà ¸ àPiercing€Veil€of€Limited€Partnership€with€Corporation€as€General€Partneró óа¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àLimited€liability€partnership:€statutory€form€of€business€org€modeled€on€taxÐ vÆ Ðshelter.€€MUST€HAVE€ONE€PARTNER€WHO€IS€FULLY€LIABLE€from€personalÏassets.€€This€partner€cannot€serve€as€a€director.€€Can€use€corporation€as€liable€generalÏpartner,€and€often€minimal€requirements€for€assets€it€must€have€„€almost€empty€shell..ÏCan€set€corp€up€for€this€exact€purpose.€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(2)à z àò òWhy€use€€a€LL€partnership?ó óÐ E • Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z ài.à < àò òDisadvantagesó ó:€More€cumbersome€than€corp€since€they€don't€have€built€inÐ  [ Ðcentralization€of€management€and€distribution€of€risk€and€return€that€allÏcorps€have€€€€automatically.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà z àii.à < àGeneral€partners€liked€them€bc€a€limited€partner€could€retain€benefit€of€LLÐ W §  Ðonly€by€abstaining€from€bc€actively€involved€with€corp.€Gen€partner€can€useÏthat€to€keep€limited€partners€in€their€place.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àiii.à0 < àLimited€partners€answerable€for€claims€only€up€to€their€commitment€ofÐ  ð  Ðcapital€(like€shareholders€in€corp)€but€have€no€control,€also€likeÏshareholders.€But€if€general€partner€=€corp,€they€can€participate€in€controlÏof€that€corp.Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àiv.à0 < àtaxed€like€partnership,€not€corp€„€not€doubleЬü <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àPiercing€limited€liability€partnership€w/corporation€as€general€partner:€In€this€case,Ð o¿  Ðthe€corporation€itself€has€LL,€give€it€small€assets,€it€would€serve€as€sole€general€partnerÏand€let€limited€partners€reap€benefits.€Can€then€put€all€non-liable€partners€onÏcorporation's€board€of€directors€so€the€partners€really€call€the€shots.€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ àà z ài.à < àò òCreditorsó ó€Ð {Ë Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àCreditors€of€limited€partnership€go€after€the€limited€partners€in€thisÐ A‘ Ðstructure€arguing€in€their€role€as€officers€of€gen€partner€they€have€waivedÏlimited€liability€by€becoming€involved€in€day-to-day€running,€but€theseÏclaims€fail.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àCourts€won't,€however,€pierce€corp€veil€as€long€as€all€their€directingÐ M Ðdone€while€wearing€corporate€hat€and€not€partnership€hat.€€Difference€btwÏthe€actions€of€the€officers€of€the€corp€gen€partner€in€that€capacity€and€theirÏother€status€as€limited€partners.€They€manage€corp€that€in€turn€managesÏpartnership,€they€aren't€directly€managing€partnershipÐ <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àà < à(c)à h àòòò òFrigidaire€Sale€Corp€v€Union€Properties€ó óóó(238)òòò ò:ó óóó€Holds€this€up.Ð l  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#àà0h<(#<(#àà < à€€€€€à0hh(#h(#àò òFactsó ó:€UP€€was€a€limited€partnership,€set€up€€under€a€state€limitedÐ à0! Ðpartnership€law€in€which€partners€can,€if€they€are€accorded€ll€cert€byÏstate,€limit€their€liability€to€their€actual€capital€contribution€to€theÏpartnersà * àer..€Creditor€of€limited€partnership€tried€to€go€after€limitedÐ , |$ Ðpartners'€individual€assets€€alleging€disregard€of€corp€form€b/c€limitedÏpartners,€in€their€capacities€as€directors€of€€the€corp€that€was€the€generalÏpartner,€meddled€in€the€affairs€of€the€limited€partnership.€ò òHOLDINGó ó:Ð u"Å' ÐSuch€meddling€OK€as€long€as€done€in€capacity€as€corp€directors.€€Ïò òRULEó ó:€be€sure€to€wear€the€right€hat€at€the€right€time.Ðþ#N)h(#h(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àStructure€became€extremely€widespread€bc€it€gives€investors€in€a€venture€(aÐ Ä$ * Ðlimited€partnership€here)€advantages€of€lim€liability€without€some€of€the€adverseÏeffects€such€as€greater€tax€costs,€for€corporations.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h à:€Each€(company€and€partners)€is€not€taxed,€only€tax€ò òFiscallyÐ  ']"- Ðtransparentó ó€ed€on€proportionate€share€as€it€arises.à @j àÐÓ'##.<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àò òTax€shelter:€ó óLosses€flow€through€so€they€f()€as€tax€shelters.€Price€youÐ ™(é#/ Ðpay€for€LL€as€a€corp€SH€is€2€levels€of€tax,€yet€in€LL€partnerships€they€get€itÏfor€free.€the€operating€incidence€of€a€corporation€coupled€with€the€taxÏconsequences€of€a€limited€partnership.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òSec€7704€of€IRSó ó:€Passed€in€1988,€€provided€that€any€partnership€orÐ ¨+ø&3 Ðother€entity€in€which€interests€are€publicly€traded€is€taxed€as€though€it€wereÐ n,¾'4 Ðfully€incorporated.€Doesn't€matter€what€form€of€entity€is,€any€entity€withÏpublicly€traded€ownership€is€taxed€like€corp€and€master€partnershipsÏdisappearedÐ <(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûb:Ýððà0 4 àÝ  ÝSubs€almost€always€fiscally€transparent,€consistent€w/7704€since€not€publicly€traded.݃Pûb:aÝŒÐùI4(#4(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(d)ò òà h àRise€of€LLC's:ó ó€Though€limited€partnerships€continued€to€haveÐ ¼  Ðadvantages€for€non-publicly€traded€enterprises,€LLC's€have€become€theÏform€of€choice.€Ð <(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àÝ‚PûbjÝððà0 ¸ àÝ  ÝTax€system€allows€owners€of€LLC's€to€elect€tax€regime€that€they€want€can€choose€to€beÐ  X Ðtaxed€as€a€partnership€or€a€corp,€provided€it€is€closely€held.€Losses€flow€through€to€sh's,€Ïcan€opt€to€be€taxed€separate€-€this€is€rare.݃Pûbj©ÝŒÐ ¸ (#¸ (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àÝ‚PûbÝððà0 ¸ àÝ  ÝNot€true€for€full-blown€corps,€2€levels€of€tax€still€exist.݃PûbDÝŒÐQ ¡ ¸ (#¸ (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àÝ‚PûbðÝððà0 ¸ àÝ  Ýò òPointó ó:€form€of€organization€for€limited€partnership€has€lost€its€niche€-€doesn't€reduceÐ  d  Ðflow-through€tax€for€public,€for€closely€held€LLC€is€more€flexible€-€almost€exactly€like€aÏcorp€where€as€partnerships€are€more€restricted.݃Pûbð/ ݌Р¸ (#¸ (# ÐŒÝ  Ýà r àà 4 àà ö àà ¸ àà z àà < àà h àÌà r àD.à 4 àò òCorporate€Powersó ó€(corp€as€whole)Ð #s  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àò òUltra€viresó ó€and€stated€purpose€of€corporation:€Originally,€corp€granted€charter€from€state€toÐ é9  Ðperform€specific€function.€€Shareholders€could€challenge€corp€when€it€acted€ultra€vires€-€ò òbeyondÐ ¯ÿ  Ðits€stated€powersó ó.€DEL€first€to€abandon€this:€first€state€to€broadly€grant€corp€charter€for€anyÐ uÅ  Ðpurpose.€Today€ð˜ð€ð ðdead€doctrineððÐ;‹ö (#ö (# Ðà r àà 4 à2.à ö àToday€we€ask€whose€interest€corp€should€serve?Ð þN Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òStandard€Accountó ó:€Corporation's€interest€is€in€maximizing€shareholder€wealth.€€ÐÁ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àShould€there€be€departure,€sh€is€in€position€to€realign€actions€of€corp€with€personalÐ ‡× Ðinterests.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(2)à z àIn€publicly€traded€(and€many€closely€held)€there€is€a€different€line€up€forÐ  ] Ðownership€and€control.€Identifying€interest€of€sh's€is€not€self-defining,€conflicts€ofÏinterest€arise.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àThe€business€judgment€rule€-frames€a€range€w/in€which€corps€act€for€the€benefit€ofÐ V¦ Ðthe€shareholder.Ð z (#z (# Ðà r àà 4 àà ö àà ¸ à(4)à0 z àò òIsenberghó ó:€"corporate€norm"€=€corporation€actions€must€be€taken€for€the€benefitÐ Ü, Ðof€all€similarly€placed€shareholders.€€Control€must€be€exercised€for€theÏproportional€benefit€of€all€shareholders.Ð z (#z (# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbÝððà0 4 àÝ  Ýòòò òDodge€v€Ford€Motor€Coó óóó€(286):€Ford€(Maj€sh)€announced€he'd€no€longer€pay€above€min€dividends€€andÐ (x  Ðannounced€expansion€plans€to€increase€the€operations€beyond€making€cars€to€making€the€underlyingÏmetal.€Asserted€corp€should€use€resources€not€to€pay€div€for€sh€but€for€benefit€of€€mankind.€€DodgeÏ(Min€sh)€sued.€ò òHOLDINGó ó:€Appt€Ct:€Refused€to€enjoin€expansion€(business€judgment,€cannot€beÐ rÂ# Ðreviewed€by€court),€but€upheld€huge€distribution€of€cash.€Court€focuses€on€ò òredundant€earningsó ó€-Ð 8 ˆ$ Ðearnings€that€the€€company€does€not€need€to€hang€onto.€At€this€point,€retention€of€funds€by€company€Ïdisproportionately€enhances€Ford,€who€controls€the€$.€For€Dodges,€$€is€only€valuable€out€of€theÏcompany.݃Pûb.݌Р4(#4(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àÝ‚Pûb™Ýððà0 ¸ àÝ  Ý€Today:€Massive€income€tax€prevents€large€dividend€distributions.€Ex.€MS.݃Pûb™ØÝŒÐG#—(¸ (#¸ (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àÝ‚Pûb’Ýððà0 ¸ àÝ  Ýà ö à€€€€€€€à0¸ ¸ (#¸ (#àNote:€Control€of€a€corp€must€be€exercised€for€benefits€of€all€similarly€placed€sh's€can't€beÐ  $Z) Ðused€for€particular€interests€of€controlling€sh€over€non.݃Pûb’Ñ݌Р¸ (#¸ (# ÐŒÝ  Ýà r àà 4 àÌà r àà 4 àà ö àb.à ¸ àò òCharitable€Donations:€test€of€rule€requiring€benefit€to€shareholders€ó óÐ S&£!, Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àNot€looking€at€tax€benefits,€its€always€better€to€give€shs€a€dividend€than€to€donateÐ 'i"- Ðmoney€to€a€charity.€Gift€at€best€can€only€be€as€good€as€disposition€sh€would€haveÏmade€with€the€assets,€but€more€likely€will€be€worse.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àCourts€are€so€forgiving€for€corporate€donations€because€of€favorable€tax€law.Ðb)²$0¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(3)à z àTo€avoid€corps€pouring€money€into€pet€charities,€in€1969,€IRC€passed€statuteÐ %*u%1 Ðlimiting€%€of€corp€income€that€can€go€to€charities€(5%€then,€10%€now).Ð z (#z (# ÐÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûb+Ýððà0 4 àÝ  Ýòòò òA.P.€Smith€Mfg€Co€v€Barlowó óóó€(280):€The€corp,€a€small€manufacturer,€makes€a€small€gift€to€Princeton.€ÝƒPûb+R݌Ы+û&34(#4(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb2Ýððà0 ö àÝ  ÝShareholder€objects.€Court€upheld€the€charitable€gift€by€corp.€ò òREASONING:€ó ófew€standards€forÐ o,¿'4 Ðassessing€corporate€gifts.€Gift€must€be€made€ò òfor€a€corp€purpose€rather€than€the€personalÐ ° Ðends€of€those€in€controló ó€(the€managers)݃Pûb2eÝŒÐvÆö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àÝ‚PûbæÝððà0 4 àÝ  Ýòòò òTheordora€Holding€Corp€v€Hendersonó óóó€(M9):€Corp€makes€large€donation€to€family€foundationÐ <Œ Ðcontrolled€by€dominant€sh.€Minority€sh€(dom's€former€wife)€doesn't€want€to€see€this€company€get€€aÏlarge€part€of€company's€assets€to€a€family€foundation€that€is€the€personal€fiefdom€of€her€formerÏhusband.€P€wants€her€own€pet€charity€favored.݃Pûbæ ݌Р4(#4(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûbß!Ýððà0 ö àÝ  Ýò òrule€of€reasonablenessó ó:€shareholder€absolutely€arithmetically€better€off€if€corp€makes€gift€thanÐ I ™ Ðif€dividend€ð˜ð€shareholder€who€then€contributes,€because€of€taxes€ÝƒPûbß!"݌Р_ö (#ö (# ÐŒÝ  Ýà r àà 4 àÌà r àà 4 àà ö àc.à ¸ àò òMiscellaneousó óÐ • å  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àEconomic€interests:€something€is€in€corporation's€economic€interests€if€itÐ [ «  Ðmaximizes€shareholder€wealth.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àRange€of€interests:€shareholder€econ€interests€can€be€viewed€from€long-termÐ á 1  Ðperspective,€in€immediate€term,€and€often€involve€weighing€of€conflicting€shareholderÏinterests€THEREFORE€courts€typically€follow€the€business€judgment€rule€in€assessingÏwhat€is€in€a€shareholder's€interest.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àUnderstanding€shareholder€interests:€courts€typically€limit€shareholder€interests€toÐ í=  Ðeconomic€interests€so€if€corp€undertakes€a€project€that€shareholder€finds€unethical,€noÏreason€for€court€to€intervene€b/c€BJR€applies.€€Ð ¸ (#¸ (# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à3.à ö àò òBusiness€Judgment€Ruleó ó:€"The€judgment€of€the€directors€of€corporations€enjoy€the€benefit€of€aÐ ùI Ðpresumption€that€it€was€formed€in€good€faith€and€was€designed€to€promote€the€best€interests€ofÏthe€corporation€they€serve."€€€€Ð ö (#ö (# ÐÝ‚PûbÿÝÝ  ÝÝ‚Pûb÷(Ýððà0 r àÝ  Ýòòò òShlensky€v€Wrigleyó óóó€(291):€Sh€wanted€to€order€installation€of€lights€for€night€baseball.€Wrigley€didn't€want€toÐ E• Ðbring€light€and€noise€to€neighborhood€at€night.€Sh€argues€Wrigley€can't€be€guided€by€community€concerns,Ïmust€look€to€profit,€but€this€argument€is€weak€-€other€teams€were€losing€money€too€even€with€night€games.Ïò òHOLDINGó ó:€Director's€decisions€enjoy€the€benefit€of€a€presumption€that€they€were€formed€in€good€faith€and€Ð ß Ðwere€designed€to€promote€the€best€interest€of€the€corporation.€€ò òCourts€shall€accept€such€decisions€as€final€Ð U¥ Ðunless€it€can€be€shown€that€such€decisions€were€tainted€with€fraud€or€some€other€dereliction€of€duty€by€Ïthe€directorsó ó݃Pûb÷()ÝŒÐß/r(#r(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àÝ‚Pûbf,Ýððà0 4 àÝ  Ýò òIsenberghó ó:€In€Wrigley€$€a€fully€defensible€business€purpose,€unlike€in€Ford.€Case€illustrates€weak€Ð £ó Ðposition€of€minority€sh€in€closely€held€corps.݃Pûbf,,݌Р4(#4(# ÐŒÝ  Ýà r àÌIII.à0 r àò òThe€Capital€Structure€of€Corporationsó óÐï?!r(#r(# Ðà r àA.à 4 àò òEquity€and€Debtó ó:€These€are€the€2€flavors€that€claims€against€corps€come€in.Ð µ" Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö àò òEquity:€ó óresidual€claim€against€corpððs€income€and€assets€after€fixed€claims€represented€by€debtÐ {Ë# Ðhave€been€satisfied.Ð ö (#ö (# Ðà0 r àà04r(#r(#àà ö àà0¸ 4(#4(#àà ö àa.à ¸ àIn€relation€to€debt,€equity€holders€have€a€ò òresidual€interestó ó,€right€to€payment€of€ò òdividendsó óÐ !T% Ðbut€not€according€to€any€fixed€schedule€like€debt.€Rather,€only€as€they€are€decided€byÏcorporation's€directors€and€only€if€there€are€earnings€available€from€which€the€dividendsÏcan€be€paid€after€fixed€payment€is€made€to€debt€holders.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òStockholdersó ó:€ò òOwn€corporation's€assetsó ó€because€they€have€residual€rights€in€theÐ $c) Ðincome€and€assets€of€the€corporation€after€all€of€its€debts€are€paid€and€because€they€haveÏa€right€to€share€of€corporation's€assets/income€after€liquidation€and€after€debt€claimsÏsettled.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àð˜ð€sh€claims€aren't€fixed,€aren't€prior,€and€represent€a€different€kind€of€econ€participation€in€the€incomeÐ "'r"- Ðand€fortunes€of€an€enterprise.Ð 4(#4(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ à(1)à z àò òCommon€stock€holdersó ó:€unalloyed€equity€interest.€(but€residual€andÐ ¨(ø#/ Ðdiscretionary)Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àò òRight€to€dividend€distributionó ó:€CS€holders€have€right€to€share€ofÐ 1*%1 Ðcorporation's€assets€after€principle€payments€met.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àNo€limits€on€how€much€can€receive€as€dividend€-€most€risky€investment€butÐ º+ '3 Ðlikely€to€yield€highest€level€of€return.Ð},Í'4z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àMost€residual,€most€equity-like€form€of€stock€because€it€has€distribution€ofÐ ° Ðdividends€when€available€and€declared€and€participates€at€tail€end€of€distributionÏof€assets€in€liquidation.Ð z (#z (# Ðà r àà 4 àà ö àà ¸ àà z àiv.à0 < àò òJunior€to€debt€and€preferred€stockó óÐùI<(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àò òLegal€Status:ó ó€The€owners,€have€voting€rights€typically€and€collectivelyÐ ¿ Ðhave€control.Ð z (#z (# Ðà r àà 4 àà ö àà ¸ à(2)à z àò òPreferred€stock€holdersó ó:€Ð H ˜ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àAlso€is€entitled€to€dividend€and€some€participation€of€assets€in€liquidationÐ  ^ Ðbut€ahead€of€the€common€stock€(and€behind€debt).Ð z (#z (# Ðà r àà 4 àà ö àà ¸ àà z àii.à < àò òDividend€preference:€€ó óÐ ” ä  Ðà r àà 4 àà ö àà ¸ àà z àà < à(a)à h àOften€PS€dividend€is€a€fixed€as€%€of€sh's€investmentÐ Z ª  Ðà r àà 4 àà ö àà ¸ àà z àà < à(b)à h àParticipating€v€Non-participatingÐ  m  ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûbê<Ýððà0 ö àÝ  Ýò òNon-participating€psó ó:€PS€must€get€div€in€fixed€amount€(or€sometimes€particip€as€well)€€€€€€€€Ð à 0  Ðbefore€cs€gets€anything,€but€no€cumulation.݃Pûbê<=݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb)>Ýððà0 ö àÝ  Ýò òParticipating€psó ó:€Cumulative€rights€to€ò òdividend€arrearage€distributionó ó€so€if€corp€doesn't€payÐ i¹  Ðdividend€for€several€years,€must€pay€preferred€shareholder€all€residual€dividends€owed€beforeÏcan€pay€common€shareholder€anything.€And€the€participates€in€common€stock€dividend€as€well.€ÝƒPûb)>\>݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûbý?Ýððà0 ö àÝ  Ýcumulative€or€non„cumulative€(many€states€donððt€allow€non„cumulative€preferred)݃Pûbý?0@݌е ö (#ö (# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òNo€compulsory€returns:ó ó€PS€shs€gets€a€priority€ahead€of€CS,€but€unlikeÐ xÈ  Ðdebt€holder,€PS€sh€doesn't€have€an€absolute€right€due€to€passage€of€time€toÏany€distribution€at€all,€it€just€gets€first€cut€of€dividend€distributed,€if€noÏdividend€is€distributed,€it€gets€nothing.€€Ð <(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb¯BÝððà0 ö àÝ  ÝDoesn't€have€same€temporal€compulsion€and€predictability€that€debt€holders€have€for€eitherÐ ‡× Ðdividends€or€€asset€return€in€liquidation.݃Pûb¯BâB݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚PûbäCÝððà0 ö àÝ  Ýif€company€liquidates€w/o€having€paid€divs,€cps€entitled€to€receive€dividends€in€arrears€fromÐ  ] Ðassets,€then€the€principle€amount€prior€to€cs݃PûbäCD݌Рö (#ö (# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àò òSimilarities€to€debtó ó:€fixed€dividends€(like€debt)€and€priority€on€repaymentÐ “ã Ð(like€debt)€but€CANNOT€force€corporation€into€liquidation€(as€debt€can€do€inÏforeclosure).€€SO€if€corp€chooses€not€to€pay€dividend,€preferred€shareholderÏscrewed.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àGenerally€areò ò€not€voting€sharesó ó:€Corp€managers€generally€do€not€have€toÐ ¢ò Ðlook€out€for€PS€shs€interests.€(Exception:€if€things€are€dicey,€may€be€given€votingÏrights€„€esp€with€long€period€of€no€dividends.)Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)ò òà h àBuilt-in€protectionó ó:€Idea€is€that€their€interest€is€explicitly€protected€inÐ î>! Ðtheir€agreement€though€less€so€then€debt€holder.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àò òExcept€during€bad€times:ó ó€Some€states€corp€law€do€accord€automaticÐ wÇ# Ðvested€voting€rights€in€ps€when€its€position€is€at€risk€and€gives€themÏcomplete€control€over€corp€actions€that€might€threaten€their€interest.€(for€ex,Ïno€div€payments€for€5€years)Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òLiquidationó ó:€Sh's€also€have€residual€rights€or€ownership€of€the€assets€of€aÐ †"Ö' Ðcorporation€when€it€is€liquidated€but€there€too€they€get€the€residue€after€the€prior€claimsÏof€debt€holders€of€various€kinds€have€been€satisfied.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àc.à ¸ àò òMBCAó ó€on€equity/sharesÐ Ò$" * Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àðð6.01€-€articles€of€incorp€describe€classes€of€shares€and€their€respective€rights€ORÐ ˜%è + Ððð6.02€-€board€of€directors€can€determine€classes€of€shares,€their€rights,€and€#€of€sharesÏissued.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àðð6.03€-€shares€outstanding€until€redeemed€or€cancelled€and€reacquisition€ofÐ á'1#. Ðoutstanding€shares€limited.€€Whenever€some€shares€outstanding,€some€must€have€votingÏrts.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àðð6.20€-€preincorporation€subscriptions€-€form€of€contract€b/t€shareholder/purchaserÐ **z%1 Ðand€corporation€and€cannot€be€sold€for€min€of€6€months€unless€otherwise€provided€for.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(4)à z àðð6.21€-€board€of€dir€or€shareholders€can€have€power€to€issue€shares€in€exchangeÐ °+'3 Ðfor€tangible€or€intangible€prop€or€benefit€to€the€corp.€€Bd€decides€what€adequateÐ s,Ã'4 Ðconsideration€is€and€shares€are€purchased€when€consideration€rec'd.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à2.à ö àò òDebtó ó:€fixed€claims€to€corporation's€assets€and€income,€held€by€various€parties€againstÐ sà Ðcorporation€known€as€"bonds"€when€publicly€traded.Ð ö (#ö (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àDebt€is€typically€evidence€of€some€ò òadvance€of€capitaló ó€in€exchange€for€a€fixed€andÐ üL Ðcompulsory€interest€payment€plus€a€return€of€principle€amount€of€the€debt.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àTypically€a€bond€but€can€be€an€account€receivable€of€a€trade€creditor,€etc€à @¦ àÐ…Õ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àIs€a€ò òfixed€payment€of€interest€and€payment€of€some€principle€amount€either€asÐ H ˜ Ðlump€sum,€installment€or€both.ó óÐ ^¸ (#¸ (# Ðà r àà 4 àà ö àb.à ¸ àSecured€v€Unsecured.Ð Ò " Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òFully-Secured€Debtó ó€(first€mortgage):€debt€secured€by€a€piece€of€property€-€backedÐ • å  Ðup€by€enforceable,€foreclosable,€security€interest€in€valuable€asset.€€First€claims€atÏliquidation€go€to€mortgages,€includes€most€bonds.€Most€senior€debt.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òUnsecured€debtó ó:€can€force€borrower€into€insolvency€but€won't€collect€until€allÐ á 1  Ðsecured€debt€repaid.€€Many€other€gradÐ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òSecond€mortgage:ó ó€more€risky€(higher€interest€compensates)€type€of€debt€-€securedÐ jº  Ðby€same€property,€though€often€the€value€of€the€property€is€less€than€total€debt€it€secures.€ÏRepaid€at€liquidation€AFTER€first€mortgage€paid€back.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àò òSubordinated€debtó ó:€Debt€that€has€lower€priority€than€other€in€regards€to€payment€ofÐ ¶  Ðinterest€and€principleÐ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àUnlike€PS,€if€corp's€funds€are€insufficient€to€meet€subordinated€debt,€it€can€bringÐ ? Ðimmediate€foreclosure€proceedings€in€default.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àMay€prefer€to€wait€and€see€if€corp€turns€itself€around€rather€than€dissolve€theÐ Å Ðcompany,€since€senior€debt€is€still€ahead€of€it.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àd.à ¸ àThis€spectrum€of€claims€against€corp€ranging€from€sr€to€jr€includes€various€hybrids€orÐ K› Ðdebt€that€has€a€tinge€or€flavor€of€equity€since€you€can€graft€almost€any€schedule€or€charÏon€these€assets€that€you€want.€Range€of€risks€and€uncertainties.€Ex.€Subordinated€incomeÏdebentureÐ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z à"sub"€=€higher€ranking€debt€with€prior€claim€for€fixed€payment€of€interest€ÐW§¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z à"income€debt"€payment€of€interest€is€compulsory€if€there€is€income,€but€limited€byÐ j Ðamount€of€income.à * àÐÝ-¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àUnlike€a€fixed-interest€debenture€its€due€to€extent€of€interest€available€(similar€toÐ  ð Ðstock),€difference€btw€it€and€ps,€if€there€is€income€the€income€debenture€MUST€get€it€asÏan€interest€payment,€but€its€still€qualified€by€income€so€it€has€some€of€the€quality€of€aÏdividend..€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àe.à ¸ àò òLegal€Status:€ó óÐ ¬ü" Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òLenderó ó,€not€a€holder/owner€like€shs.€The€insiders€(corp€managers€in€control)€haveÐ rÂ# Ðno€obligation€to€themÐ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òNo€voting€rights:ó ó€Unlike€PS€shs€who€may€get€voting€rights€when€things€getÐ û K% Ðrough,€this€generally€doesn't€extend€to€debt€even€when€it€is€seriously€jeopardized,€even€ifÏcorp€action€is€threatening€integrity€of€assets.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òEmerging€Doctrineó ó:€€When€corps€are€very€near€insolvency€and€insolvency€isÐ G#—( Ðnearly€unavoidable,€few€recent€cases€suggestion€that€corp€managers€haveò ò€fiduciaryÐ  $]) Ðobligation€to€debt€holderó ó,€idea€is€if€insolvency€is€inevitable,€debt€holders€are€on€verge€ofÐ Ó$# * Ðbecoming€equity€holders,€so€all€obligations€of€insiders€go€in€their€favor.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(4)à z àBecome€equity€holders€after€bankruptcy.Ð \&¬!, Ðà r àà 4 à3.à ö àò òDifferences€between€debt€and€equityó óÐ 'o"- Ðà r àà 4 àà ö àa.à ¸ àò òTaxationó ó:€in€some€cases€there€are€diff€tax€attributes€to€debt€and€equity.Ð å'5#. Ðà r àà 4 àà ö àà ¸ à(1)à0 z àò òDividendsó ó:€taxed€as€corp€income€and€then€again€as€income€to€shareholdersЫ(û#/z (#z (# Ðà r àà 4 àà ö àà ¸ à(2)à0 z àò òInterestó ó:€paid€to€debtholders:€typically€tax€deduction€to€corpÐq)Á$0z (#z (# Ðà r àà 4 àà ö àb.à ¸ àò òFiduciary€v€arms€length:ó ó€Ð 7*‡%1 Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òFiduciaryó ó:€shareholders€appoint€directors€therefore€directors€are€fiduciaries€toÐ ý*M&2 Ðshareholders.€€This€gives€shareholders€modicum€of€control€that€debt€holders€don't€have.€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(2)à z àò òArms€lengthó ó:€debt€holders€negotiate€with€corp€at€arms€length.€€Ð †,Ö'4 Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àò òInterestsó ó:€interests€of€shareholders€and€debt€holders€may€differ.€€They€participateÐ ° Ðdifferently€in€rights€of€return€of€the€corp.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àd.à ¸ àò òRisk€taking:ó ó€debt€holders€not€protected€against€corporation€taking€risks€to€increase€itsÐ 9‰ Ðprofits€which€only€have€down€side€for€debt€holders.€€To€ensure€they€don't€get€wiped€out,Ïinclude€contractual€provisions€against€some€types€of€risk€taking.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òIsenberghó ó€wager€hypo:€corp€faced€w/wager€opp€-€either€double€corp€assets€orÐ …Õ Ðwipe€them€out.€€This€is€in€shareholders€best€interests€because€stand€to€make€huge€profit.€ÏBondholders€benefit€nothing€from€the€risk€b/c€their€rights€to€corp€assets€are€fixed,€soÏdon't€care€if€corp€increases€its€assets.€€Managers€have€duty€to€act€in€shareholders'€bestÏinterests€so€should€take€wager€unless€contractual€provision€w/lenders€prohibits€it.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òContractual€protections€for€lenders:ó ó€(1)€mortgages€which€secure€loan€withÐ W §  Ðproperty;€(2)€bond€indenture€-€trustee€named€to€guard€against€risky€corp€ventures.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òHigh€risk€venture€ó ó(dotcoms):€hard€to€find€lenders€to€take€these€risks,€only€haveÐ à 0  ÐequityÐ ¸ (#¸ (# Ðà r àà 4 à4.à ö àò òRelationship€b/t€managers€and€different€classes€of€equity€holdersó óÐ i¹  Ðà r àà 4 àà ö àa.à ¸ àò òCommon€Stockó ó:€highest€level€risk€stock.€ð˜ð€have€voteÐ /  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àPreferred€Stock:€more€rights€(defined€by€their€stock€class)€and€less€control.€€Protection€ofÐ õE  Ðtheir€interests€is€built€into€their€type€of€equity.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àJeopardizing€PS€rights:€when€corp€puts€rights€of€PS€at€risk,€they€tend€to€get€limitedÐ {Ë  Ðvoting€rights€to€guard€their€interests€(ie,€when€no€dividend€declared,€etc).€€ILLUSORY.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àInherent€allocation€of€risk€and€return:€control€typically€comes€with€risk.€€CommonÐ Q Ðshareholders€don't€have€fixed€rights€to€corp€assets€so€they€(a)€get€to€vote€and€(b)€are€owedÏhighest€degree€of€loyalty€by€mgmt€who€work€to€maximize€their€wealth€(no€need€to€workÏto€max€PS€wealth€b/c€their€right€to€corp€assets€are€fixed).€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òMain€point:ó ó€fiduciary€oblig€of€managers€runs€in€favor€of€shareholders€(not€debtÐ  ] Ðholders)€and€among€shareholders€obligations€primarily€run€in€favor€of€voting/commonÏshareholders.€€Inverse€relationship€bt€degree€obligation€and€level€of€risk€of€assets.€€MakesÏsense,€common€(voting)€shareholders€elect€directors.€€Ð ¸ (#¸ (# ÐÌò òà r àB.à 4 àContributions,€Dividends€and€Other€Distributionsó óÐ ß/ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à1.à ö à€ò òLeveraged€capital€structure:ó ó€Debt€magnifies€the€gains€and€loses€of€shareholders€compared€toÐ £ó Ðoutcome€of€corp€that€is€capitalized€with€little€or€no€debt.€€Ð ö (#ö (# Ðà r àð˜ð€Called€leverage€bc€has€magnifying€effect€on€range€of€outcomesÐ ,|  Ðà0 r àð˜ð€If€you€add€leverage€to€a€company€though,€the€default€risks€increase€and€default€is€transactionally€veryÐ ï?! Ðcostly,€major€burden,€when€corp€does€become€insolvent,€rare€that€it€can€smoothly€be€reorganized.Ð r(#r(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àExample:€Xcorp€invests€in€asset€costing€$200€and€expecting€to€return€on€averageÐ uÅ# Ð$30/year€(a€15%ò ò€average€return€or€discount€rateó ó).€[D7]Ð8 ˆ$¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àSuppose€corp€is€set€up€with€all€stocks.€Average:€Corp€profits€are€$30,€sh€gets€30%Ð þ N% Ðreturn,€discount€rate€15%.Ð ¸ (#¸ (# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àSuppose€corp€is€set€up€with€stock€and€debt€in€equal€amounts€(one€investor€puts€inÐ G#—( Ð$100€and€takes€equity,€the€other€puts€in€$100€and€takes€debt€w/fixed€return€10%).€€DebtÏin€capital€structure€of€corp€magnifies€the€gain€and€loss€of€shs,€it€adds€risk.€Presence€ofÏdebt€in€capital€structure€of€corp€is€called€"leverage"€[D8]Ð ¸ (#¸ (# ÐÌà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#ài.à z àò òAverageó ó:€Corp€profits€are€$30.€€Debt€holders€gets€$10€(10%€of€$100€loan€at€fixedÐ 'f"- Ðrate).€€Shs€get€residual€$20€earnings.€€Sh€return€20%,€total€return€15%,€discount€rate€forÏsh€20%€because€investment€is€riskier.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àii.à z àCorp€profits€shrink€to€$20,€debt€holders€get€$10€and€shs€get€residual€$10.€€ShÐ b)²$0 Ðreturn€10%,€total€return€10%.[D9]Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àiii.à z àCorp€profits€shrink€to€$15,€€debt€holders€get€$10€and€shs€get€$5.€Sh€return€is€5%,Ð è*8&2 Ðtotal€return€is€7.5%€[D10]Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àiv.à z àCorp€profits€shrink€to€$10,€debt€holders€get€$10,€shs€$0.€Total€return€5%.€[D11]Ðn,¾'4¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.ò òà ¸ àMogdiliani-Miller€Hypothesisó ó:€can't€increase€wealth€by€changing€capital€structure€-Ð ° ÐILLUSION.€€No€change€in€capital€structure€will€have€an€effect€on€the€value€of€theÏunderlying€firm.€€Therefore€the€capital€structure€is€a€matter€of€indifference.€€BUT€diffÏcapital€structures€attract€diff€types€of€investors€w/particular€risk€preferences.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òCorollary€of€Mogdiliani-Miller:ó ó€Even€if€every€corporate€structure€solelyÐ ¿ Ðincluded€equity€interests,€individual€shareholders€may€borrow€money€to€purchase€equity.€ÏThis€puts€them€in€same€place€in€relation€to€their€creditors€as€if€the€corp€structureÏcombined€debt€and€equity.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àð˜ð€Ex.€A€who€owns€it€all.€A€gets€30/yr€avg.€Suppose€B€wants€more€stable€return€rather€have€not€a€15%Ð Î  Ðreturn€but€a€10%€stable€return.€No€problem,€B€can€lend€$100€to€A€at€10%€and€A's€obligation€can€beÏsecured€by€A's€stock€interest€in€X€corp,€this€reconstitutes€the€50-50€split.Ð 4(#4(# Ðà r àà 4 àà ö àà ¸ à(2)à z àProblems€with€MM:€Currents€and€countercurrents.Ð  g  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àDoesn't€take€into€account€the€tax€structure,€which€favors€debt.ÐÚ * z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àApplies€in€imaginary€frictionless€env€with€no€costs€for€default.€Fails€to€takeÐ í  Ðinto€account€that€adding€leverage€increases€default€rate€and€default€has€a€highÏtransaction€cost.€Junk€bonds€ex.€Capital€structure€are€not€matter€of€indifference,Ïeven€in€tax-free€env,€when€you€account€for€high€costs€for€default,€reorganization,Ïetc.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àc.à ¸ àò òWhy€do€corps€issue€wide€and€varied€types€of€securities€and€claims?ó ó€Ðl¼ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òConvenienceó ó:€less€risk€prone€investors€prefer€readily€available€debt€conversely€theÐ 2‚ Ðplungers€prefer€equity,€to€satisfy€both,€corp€may€issue€range€of€financial€claims€withinÏtheir€capital€structure.€Even€though€derivatives€can€be€used,€there€are€some€transactionalÏconvenience,€easier€for€small€investors€just€to€select€type€of€securities€they€want€a€la€cart.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òTax€structureó ó:€MM€postulate€applies€robustly€in€an€imaginary€tax-freeÐ A‘ Ðenvironment€where€transactions€are€cost-free.€When€you€add€tax,€corp€structure€changes.Ï2-level€system€of€corp€taxation,€stock€and€debt€have€different€tax€treatment€when€theyÏoccur€in€corp's€environment.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àò òCorp€debt€not€taxedó ó:€Interest€on€debt€for€corporation,€unlike€distributionÐ P  Ðof€earnings€to€SH€is€a€ò òdeductible€expenseó ó,€so€interest€payments€by€corporationsÐ f Ðare€deductible.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àò òExampleó ó:€if€corp€w/$200€assets€has€only€equity€in€corp€structure,€then€itsÐ Ÿï Ð$30€profits€are€fully€taxable€(at€say€50%)€and€this€leaves€corporation€w/$15€toÏdistribute€as€dividend.€€This€$15€is€further€taxed€at€individual€level€(7.5%)€so€inÏhand€there€is€only€$7.5€for€shareholder.€€BUT€if€corp€financed€$100€equity€$100Ïdebt€and€has€$30€profits,€its€first€distribution,€tax€free,€is€$10€to€debt€holder€taxedÏat€50%€so€has€$5€in€hand.€€Remaining€$20€taxed€at€50%€so€$10€distributed€toÏshareholder.€€Shareholder€pays€tax€and€has€$5€in€hand.€€Together,€debt€andÏshareholder€reflect€$10€distribution€as€opposed€to€$7.5€in€all€equity€structure.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àò òJunk€Bonds:€ó ó€debt€obligations€of€corporation€that€are€usually€subordinate€to€otherÐ º! & Ðdebt€(comparable€to€second/third€mortgage)€and€which€bear€a€high€level€of€risk€and€aÏhigh€interest€rate.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àSuppose€$200€asset,€$199.9€debt€at€14.5%€($29/yr)€leaving€0.01€equity.Ð $V) ÐThis€gives€$1/yr€subject€to€corporate-level€tax.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àMany€corporations€in€1980s€reorganized€their€capital€structure€so€theyÐ Œ%Ü + Ðlargely€had€debt€and€little€to€no€equity.€€This€increased€their€wealth€b/c€of€taxÏadvantages.€BUT:€At€first€whiff€of€inflation/downturn,€these€companies€wereÏinsolvent,€because€a€highly€leveraged€capital€structure€not€stable.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àIn€many€cases€the€yields€on€the€bonds€were€chosen€to€match€avg€return€onÐ ˜(è#/ Ðequity€for€companies€of€this€type€over€previous€period€so€for€their€financial€char,Ïthe€high-yield€debt€mimicked€equity€in€its€risk€and€return.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àò òMoraló ó:€ò òWhen€you€add€debt€in€large€amounts€to€capital€structure€even€ifÐ á*1&2 Ðyou€start€with€low-risk€companies€at€some€point€the€risks€become€unbearableÏand€debt€becomes€unmarketably€risky.ó óÐk,»'4z (#z (# Ðà r àà 4 àà ö àd.à ¸ àò òToday's€tax€environmentó óÐ ° Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àThe€tax€adv€of€debt€remains€but€it€is€less€salient.€35%€is€max€corp,€40%€max€indiv,Ð vÆ Ðbut€indiv€who€can€capture€gains€from€stocks€as€long-term€capital€gains€pay€only€20%Ïcapital€gains€(as€opposed€to€dividend€payout).Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àMore€important,€there€are€large€#€of€low-bracket€and€exempt€tax€payers€wanting€toÐ ¿ Ðown€assets€in€corps.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àA€low-tax€risk-adverse€tax-payer€(say,€U€of€C)€is€likely€to€gain€fromÐ E • Ðholding€bonds€of€corps€that€pay€relatively€low€dividend.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àHigh-tax€investors€with€capacity€for€risk€prefer€stock€in€corp€with€policy€ofÐ Ë  Ðaccumulating€earnings€rather€than€making€dividend€payment.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àe.à ¸ àCapital€structure€not€only€allocates€risk/return€but€it€can€also€confer€uncompensatedÐ Q ¡  Ðadv/disadv€on€certain€types€of€claimants.Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àXcorp€suppose€it€has€assets€of€$200,€capitalized€with€$100€debt€(held€solely€by€B),Ð × '  Ð$100€in€a€capital€stock€account€(held€solely€by€A).€A€is€also€president,€board,€chair€ofÏXcorp.€A€represents€as€corp€management€and€is€a€SH.€Suppose€A€encounters€someoneÏwalking€down€road€who€stops€A€and€says€can€I€interest€you€in:€I'll€offer€Xcorp€a€wager€ofÏ$200€on€the€toss€of€a€coin.€You€win€toss,€I€pay€$200€to€Xcorp,€I€win,€Xcorp€pays€meÏ$200.€50-50€double€or€nothing.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(2)à z àA€would€have€a€fiduciary€obligation€to€take€this€bet.€Ð i¹  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àSuppose€Xcorp€wins.€Assets€=€$400,€and€stock€of€corp€is€enhanced€by€$200Ð ,| Ðadditional€dollars€of€E.S.€now€has€$200€more,€€$300€=€SH€equity,€debt€still€worthÏ$100.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àIf€Xcorp€loses,€assets€=€$0.€Corp€still€has€$100€debt,€$100€of€c.s.,€butÐ uÅ Ðcumulated€earnings€(E.S.)€are€[200].€Stock€is€worth€0,€debt€is€worth€0,€both€wipedÏout.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àAvg€return€on€coin€toss€to€SH€is€+$50.€50%€of€time€worth€$300,€50%€ofÐ ¾ Ðtime€worth€$0.€Avg€return€to€debt€holder€is€€-$50.€50%€of€time€it€gets€nothing€andÏdebt€is€worth€$100,€50%€debt€is€worth€$0.€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiv.à < àDistribution€of€risk€and€return€between€debt€and€stock€makes€thisÐ W Ðeconomically€pointless€transaction€extremely€desirable€to€SH,€brings€high€avgÏreturn,€fatal€to€debt€holder€who€has€only€the€downside,€at€best€she€preserves€valueÏat€worst€loses€everything.€So€A€would€say€yes,€its€acting€in€interest€of€SH,€okayÏunder€corp€law€bc€they€are€allowed€to€take€high€risk€if€they€are€supported€by€goodÏreturn€falls€w/in€business€judgment€rule.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àv.à < àò òDebt€protection:ó ó€Protection€for€debt€would€likely€be€through€mortgagesÐ ™é" Ðthat€don't€allow€A€to€bet.€ò òOne€provision€in€typical€debt€covenant€is€corp€cannotÐ _¯# Ðcommit€more€than€5%€of€total€assets€in€any€one€transaction€w/o€indenturedÏtrustee's€permission€(bond€trustee)ó ó.Ðé 9%z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àWhen€none€of€these€possibilities€are€viable€(nothing€for€first€mortgage,Ð ¯!ÿ& Ðno€way€to€constrain€through€covenants),€then€typically€corporations€can'tÏborrow€because€nobody€will€lend€them€$.€Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àPets.com:€Sock€Puppet€selling€pet€food.€The€only€other€thing€the€sockÐ ø#H) Ðpuppet€did€is€lose€$.€Nobody€would€take€an€account€payable€from€the€SockÏPuppet,€the€Puppet€had€to€raise€all€of€its€cash€from€VC€and€use€cash€until€itÏran€out€at€which€point€it€went€to€the€Dot.com€pound€in€cyberspace.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òEnronó ó:€Covertly€put€debt€in€to€capital€structure€to€jeopardize€theÐ 'T"- Ðclaims€of€debt€holders€and€shareholder's.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà 4 à2.à ö àò òProportionally€Held€Debt:ó ó€€Debt€held€by€shareholders€in€same€proportion€as€they€own€stock.€Ð (Ý#/ ÐTheir€claims€as€debt€holders€precede€their€claims€as€stockholders,€but€merely€shifts€money€fromÏone€pocket€to€another.€€Ð ö (#ö (# Ðà r àà 4 àà ö àa.à ¸ àò òNot€really€debtó ó€Ð Ù*)&2 Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àUnder€MM,€not€different€then€all-stock€corp.€Different€pieces€of€paper€represent€inÐ Ÿ+ï&3 Ðtotality€the€entire€risk€and€return€of€corp€all€held€by€A.Ðb,²'4¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àIn€financial€essence,€prop€held€debt€doesn't€have€character€of€real€debt,€doesn't€repÐ ° Ða€sharp€and€specific€allocation€of€a€return€to€one€person,€basically€a€bookkeepingÏmechanismÐ ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àò òWhy€do€sole€owners€of€corporations€nonetheless€create€highly€articulated€capitalÐ ùI Ðstructures€with€both€debt€and€equity?ó óп¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ à(1)à z àò òTaxesó óÐ ƒÓ Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àAmounts€paid€as€interest€escape€1€layer€of€tax€whereas€dividends€hit€2Ð I ™ Ðlayers.€By€adding€debt,€50%€corp,€50%€indiv€tax,€A€can€inc€after-tax€stream€fromÏ7.5€to€10€by€removing€some€part€of€the€income€stream€of€corp€from€corp-level€tax.ÏSince€debt/equity€in€this€situation€don't€have€any€effect€on€risk€and€return€inÏaggregate€for€A,€why€wouldn't€A€put€$199€into€debt€at€15%€leaving€$1€for€c.s.€soÏA€could€extract€avg€income€of€$30/yr€almost€entirely€free€of€corp€tax?Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àò òRestrictionó ó:€Proportionally€held€debt€must€be€issued€and€enforced€on€turnsÐ Û +  Ðthat€an€unrelated€lender€may€have€entered€into€at€arms€length.€In€situation€withÏ$100€debt€at€10%,€$100€stock,€A€can€easily€defend€this,€$10€is€substantiallyÏcovered€by€avg€income€stream.€Other€capital€structure€of€$199€is€not€debt€that€anyÏ3rd€party€lender€would€enter.€Draw€line€in€between.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àEffect€of€debt€in€corp/capital€struc€in€creditor's€race€if€corp€goes€under.€Ð­ý ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àCorp€goes€bankrupt€and€reorganization,€holders€of€debt€have€prior€claimÐ pÀ  Ðthan€equity€holders.€Sole€owner€of€corp€can€attempt€to€gain€a€better€positionÏvis--vis€other€claimants€in€the€race€in€insolvency€by€holding€in€addition€to€equityÏsome€debt€which€would€put€the€debt€holder€or€owner€of€entity€in€cap€of€debtÏholder€in€a€better€position€in€all€equity€claims.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àHowever,€when€debt€held€by€sole€sh,€debt€is€only€so€in€form,€not€inÐ ? Ðfinancial€essence€true€debt,€as€in€tax€setting€it€can€be€attack€ed€if€sh€of€corp€createÏdebt€running€in€their€favor€overreach.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àòòò òStandard€Gas€v€Tayloróó€ó ó(M18)ò ò€ó ó("deep€rock")€ò òFactsó ó:€Standard€made€"advances"Ð ˆØ Ð(loans)€to€DR,€its€100%€subsidiary,€called€them€loans€and€hence€had€debt€claims€againstÏDR.€DR€goes€bankrupt.€Character€of€so-called€debt€of€Standard€was€challenged€byÏpreferred€sh's€of€DR.€As€preferred,€they€were€ahead€of€Standard€to€extent€that€StandardÏheld€common€stock,€but€if€Standard's€advances€to€DR€were€bona€fide€loans,€to€that€extentÏStandard€moved€itself€ahead€of€preferred€shareholder's.€ò òHOLDING:€ó óDR€pref€sh€prevails,Ð Zª Ðostensible€debt€claim€of€standard€were€demoted€to€stock€-€recast€as€equity€-€which€also€isÏwhat€happens€in€tax€case€if€revenue€service€attacks€debt.€2€demotions.€ò òIssueó ó:€"Is€this€debtÐ ã3! Ðthat€would€have€been€entered€into€on€same€terms€by€3rd€party€at€arms€length"?€ò òNO.ó óÐ ©ù" ÐCourt€found€debt€was€covert.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àò òNoteó ó:€Preferred€shs€historically€oppressed,€nobody€watches€out€for€them,€faded€over€theÐ 2 ‚$ Ðyears.€Ð ¸ (#¸ (# Ðà r àð˜ð€What€matters€most€in€creditor€race€is€question€of€formality:Ð »! & ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb¶ÃÝððà0 ö àÝ  ÝDid€shareholders€and€corp€to€which€ostensibly€lending€money€dot€the€Iððs€and€cross€the€Tððs,€i.e.,Ð ~"Î' Ðproduce€well€documented€loans?݃Pûb¶ÃéÃ݌Рö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚PûbëÄÝððà0 ö àÝ  ÝWere€those€loans€visible€to€other€lenders?݃PûbëÄÅÝŒÐ$T)ö (#ö (# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àÝ‚Pûb¹ÅÝððà0 ö àÝ  ÝDid€they€act€like€Creditors€before€foreclosure?݃Pûb¹ÅìÅÝŒÐÇ$ *ö (#ö (# ÐŒÝ  Ýà r àà 4 àÌà r àà 4 à3.à ö àò òDividend€Distribution€and€Policyó óÐ M&!, Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àa.à ¸ àò òMBCA€ðð6.40:ó ó€dividend€distributions€set€by€Bd€of€directors;€sometimes€there€is€set€dateÐ 'c"- Ðfor€distribution€in€articles€of€incorp;€BUT€no€distribution€if€doing€so€puts€corp's€assetsÏbelow€its€liabilities.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àb.à ¸ àDividends€as€bottom€line€return€on€equity€investment:€from€stockholder's€perspective,Ð _)¯$0 Ðdividends€are€the€tangible€return€on€their€investment.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òTwo€types€of€investors:ó ó€(1)€those€who€view€investment€in€equity€as€savings€andÐ å*5&2 Ðdon't€want€dividend€distribution€b/c€of€tax€consequences;€(2)€those€who€invest€in€order€toÏconsume,€want€to€use€investment€to€buy€things€-€can€always€borrow€and€spend€againstÐ n,¾'4 Ðvalue€of€investment.€€Ð ¸ (#¸ (# Ðà r àà 4 àà ö àc.à ¸ àTo€what€extent€does€corporation's€dividend€distribution€policy€matter?Ð sà Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àAbstract,€tax€free€environment€(Mogdiliani€Miller€Hypothesis):€Corporation'sÐ 6† Ðdividend€policy€won't€affect€value€of€shares€in€a€frictionless€environment€because€a€corpÏor€its€sh's€can€adapt€to€their€purposes€to€whatever€dividend€policy€their€sh's€or€they€crave.€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àShs€who€want€to€spend€the€value€of€their€shares€can€borrow€using€shares€asÐ Ï Ðcollateral.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < à€If€corp€has€rewarding€investment€possibilities€still€it€need€not€retain€all€itsÐ  U Ðearnings€it€can€distribute€them€and€then€corp€can€borrow€to€pursue€its€investment.ÏThis€is€equiv€to€adding€debt€to€capital€structure€of€corp,€so€this€is€a€corollary€ofÏwhat€we€talked€about€before.Ð z (#z (# Ðà r àð˜ð€Combo€of€div€distribution€and€borrowing€=€adding€debt.€Ð  a  Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òTax€environmentó ó:€in€real€world€there€are€tax€implications€from€dividendÐ Ô $  Ðdistribution,€ò òmost€shareholders€for€tax€reasons€prefer€no€distribution€or€lowÐ šê  Ðdistribution.ó óÐ`° ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àEarnings€retained€are€exposed€to€corp€tax€but€no€personal€tax.Ð$t z (#z (# ÐÝ‚PûbÿÝÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ àà z àà < àÝ‚PûbLÒÝððà0hz (#z (#àÝ  ÝRetained€values€represent€a€larger€cash€amount€to€be€distributed€later,Ð ç7  Ðfully€discounted€more€valuable€if€they€represent€a€larger€value.݃PûbLÒçÒ݌Рh(#h(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ àà z àà < àÝ‚PûbôÓÝððà0hz (#z (#àÝ  ÝFor€this€to€be€true,€need€liquid€markets€and€confidence€that€although€aÐ m½  Ðretained€earnings€strategy€may€be€for€a€while,€eventually€there€will€be€aÏdistribution.݃PûbôÓÔ݌Рh(#h(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà ¸ àð˜ð€Ex.€Dodge€didn't€have€either,€so€shares€weren't€worth€much.жz (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àò òEarnings€distributed€have€2€taxes.ó ó€A€sh€that€wants€to€own€corp€shares€asÐ yÉ Ða€saving€vehicle€doesn't€want€to€save€with€dollars€that€have€been€reduced€by€aÏsecond€layer€of€tax.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àiii.à < àYet,€markets€often€value€distributed€values€more€highly€than€retainedÐ Å Ðearnings.€Not€intuitive,€but€rests€probably€on€different€aspect€of€div€policy€and€ofÏfundamental€corp€governance.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(3)à z àWhy€do€shares€that€never€make€distribution€retain€their€value?€Shares€retain€valueÐ ^ Ðb/c€the€longer€no€dividend€distributed€the€more€corp's€accumulated€earnings€increase€andÏthe€more€the€shares€are€worth€when€their€eventually€is€a€distribution.€€UNLESS€there€is€aÏpolicy€forbidding€distribution€ever,€there€is€no€reason€for€shares€that€don't€makeÏdistributions€to€lose€value.Ð ¸ (#¸ (# Ðà r àà 4 àà ö àà ¸ àà z ài.à < àNeed€liquid€market:€Ex.€Dodges€had€no€place€to€sell.Ð Ý-! Ðà r àà 4 àà ö àà ¸ àà z àii.à < àExpectation€of€return€some€day.€€Ð  ð" Ðà r àà 4 àà ö àà ¸ à(4)à z àò òSignaling€effectsó óÐ c³# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.ò òà < àPositive€signalingó ó:€despite€tax€consequences,€most€investors€prefer€slightÐ ) y$ Ðdividend€distribution€b/c€signals€to€market€mgmt€confidence€that€corp€is€goodÏfinancial€shape.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àò òConfidence€in€management:ó ó€when€no€distribution€often€signÐ u"Å' Ðshareholders€confident€managers€acting€in€their€best€interest,€(ie,Ïshareholder€wealth€maximization).Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àò òExampleó ó:€Microsoft€-€never€made€a€distribution€but€is€on€Isenberg'sÐ Á$ * Ðside.Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àò òNegative€inference€signalingó ó:€the€more€mgmt€distributes€profits€asÐ J&š!, Ðdividends,€the€less€chance€mgmt€can€use€investments€against€shareholders'Ïinterests.€€Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)à h àò òAgency€costsó ó:€there€are€costs/risks€to€allowing€someone€else€to€manageÐ –(æ#/ Ðyour€capital€and€dividend€distribution€assures€you€that€there€is€noÏabuse/waste€of€your€money.€€Ð <(#<(# Ðà r àà 4 àà ö àà ¸ àà z àiii.à < àFalse€signaling:€what€is€to€prevent€false€signaling?Ð â*2&2 Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(a)ò òà h àExampleó ó:€PA€Central€Railway€went€bankrupt€but€it€was€makingÐ ¥+õ&3 Ðdividend€distributions€up€to€the€day€it€went€bankrupt.€€Borrowed€heavily€toÐ k,»'4 Ðbe€able€to€make€the€distributions.€€What€prevents€this?Ð <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(b)à h àò òSafety€checksó ó:€ÐsÃ<(#<(# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àà < àà h àÝ‚PûbkåÝððà0 * àÝ  Ýinvestors€can€check€on€what€management€is€doing€if€too€manyÐ 9‰ Ðdistributions;݃PûbkåÚå݌Р*(#*(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àà < àà h àÝ‚Pûb¡æÝððà0 * àÝ  Ý€(b)€laws€governing€corporations€forbid€distributions€in€excess€ofÐ ¿ Ðassets€(see€MBCA€ðð€6.40)€b/c€directors€under€whose€care€aÏdividend€distribution€is€made€that€violates€law€(ie,€when€noÏsurplus)€is€jointly€and€severally€liable.€€THIS€HAS€BITE.€€ÝƒPûb¡æç݌Р*(#*(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àà0<z (#z (#à(c)à h àò òConclusionó ó:€signaling€is€largely€intact€and€effective€mechanism.ÐË <(#<(# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà ö àd.à ¸ àò òLegal€capitaló ó:€capital€initially€on€corporation's€books,€what€investors€pay€intoÐ ‘ á  Ðcorporation.€€Touchstone€against€which€profit€and€gain€measured.€€Ð ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(1)à z àò òPurposes€of€legal€capitaló ó:Ð j ¸ (#¸ (# ÐÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚Pûb%ëÝððà0 < àÝ  Ýprevent€watered€down€stock;€ÝƒPûb%ë|ëÝŒÐà 0 <(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚Pûb ìÝððà0 < àÝ  Ýprotect€creditors€by€assuring€that€corp€has€at€least€as€much€as€it€started€withÐ £ó  Ð(which€is€what€they€measured€their€loan€prospects€on).€€If€can€distributeÏaway€legal€capital,€lenders€will€demand€greater€security€for€loans.€ÝƒPûb ì`ì݌Р<(#<(# ÐŒÝ  ÝÝ‚PûbÿÝÝ  Ýà r àà 4 àà ö àà ¸ àà z àÝ‚Pûb»íÝððà0 < àÝ  Ýprevent€speculation€-€today€this€restraint€doesn't€exist€b/c€corp€can€be€set€upÐ ì<  Ðwith€capital€in€form€of€future€services€and€this€is€ok€(except€in€NY).€€ÝƒPûb»íî݌Р<(#<(# ÐŒÝ  Ýà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#à(2)à z àò òPar€value:ó ó€initially,€stock€issued€at€par€value€(amt€orig€paid€by€investors).Ðr ¸ (#¸ (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#ài.à < àò òPurpose€of€par€valueó ó:€the€amt€of€par€value€was€the€amt€directors€couldn'tÐ 8ˆ Ðpay€as€dividend€distribution.Ð z (#z (# Ðà0 r àà04r(#r(#àà0ö 4(#4(#àà0¸ ö (#ö (#àà0z ¸ (#¸ (#àii.à < àò òEvading€par€valueó ó:€corporate€promoters€developed€low€par€as€a€trick€soÐ Á Ðcould€set€par€amount€below€what€was€actually€paid€in€(in€other€words,€a€way€toÏpa