[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 521
Governance : A corporation is owned by its stockholders, each of whom holds a certain number of shares representing equity ownership in the company. Management, however, is vested in a board of directors. In Delaware, a corporation may have any number of directors. The directors are not required to be United States citizens or residents. These directors owe important fiduciary duties to the corporation and its stockholders (and to creditors in an insolvency setting) and establish corporate by-laws to regulate corporate decision making. Typically, the directors will delegate many of the day-to-day management activities to the officers of the corporation, subject to their oversight. Most corporations have at least three officers: a President (often also called the Chief Executive Officer), a Treasurer, and a Secretary, but many other officers are also often named by the Board. One person can serve in multiple roles as an officer, and a person may be both a director and officer. Officers also owe fiduciary duties and also need not be United States citizens or residents. The fiduciary duties owed by directors and officers consist primarily of the duty of care and the duty of loyalty. The duty of care requires that the responsibilities of office be discharged in an informed and considered manner. The duty of loyalty requires that the relevant decision makers act on an independent and disinterested basis, in good faith, and in a manner that they honestly believe to be in the best interests of the corporation and its stockholders. Unless successfully rebutted by evidence of breaches of fiduciary duties, the business judgment rule will normally apply, and a Delaware court will not substitute its judgment for that of the board of directors or officers. Stockholders are entitled to vote to elect the board of directors, to approve changes to the
corporation’s “charter” or certificate of incorporation (the terms are used interchangeably), and to vote on major corporate events including a merger, a sale of all or substantially all of the corporation’s assets, or the dissolution of the corporation. Controlling stockholders owe fiduciary duties to minority stockholders. In a close corporation (a statutorily defined type of corporation whose charter contains certain restrictions on the transfer and ownership of its shares), Delaware law allows direct management by the stockholders, so long as the corporation meets the statutory requirements for close corporation status. With the advent of the LLC (discussed later), which more readily permits management by members, close corporations are pretty rare today. Capitalization : A corporation will generally issue shares of common stock to its founders upon formation. Either common or preferred stock, described more fully below, may be issued to investors to raise capital. A private corporation may pay out dividends to attract stockholders, since there is no readily available market for its shares; although under Delaware law the amount of the dividend must be less than the difference between the net assets of the corporation and the aggregate par value of its outstanding stock. It may also make “capital calls” (if permitted under its organizational documents or under a stockholder agreement) or issue additional shares (but not more than the number authorized in its charter) to raise capital. Public corporations can raise large amounts of capital via an IPO or additional public securities offerings. Dividends become less important to attract investors, because stockholders can freely trade their shares in the markets where they are listed. Corporations may, if authorized in their certificate of incorporation, issue additional
ILN Corporate Group – Establishing a Business Entity Series
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