Posted: September 13th, 2017

Buffalo Creek Disaster

Buffalo Creek Disaster

Order Description

Business law and ethies in “The Buffalo Creek Disaster” , and must provide an analysis of concepts in the handout,

Law and Business Associations I (Kubasek pp. 127-135)
-Different forms of business organizations:
-Sole Proprietorship:  an unincorporated business owned and run by one individual with no distinction between the business and the owner (so the owner is entitled to all of the business’s profits and liable for all of its debts and losses). Profits are taxed as the owner’s income. The sole proprietor has unlimited liability.
Advantages
-only one individual is involved
-total control belongs to that individual and s/he may dissolve the business at any time
-Subject to less government regulation
Disadvantages
-Unlimited personal liability
-the individual pays all taxes on business profit
-ownership cannot be transferred
-General Partnership: a voluntary association of two or more people formed to carry on a business as co-owners for profit. Like a sole proprietorship, profits are taxed as the partners’ income. The partners are entitled to their shares of the partnership’s profits (equal shares, unless their partnership agreement specifies otherwise), and are liable for all of the partnership’s debts and losses. The partners in a general partnership have unlimited liability.
-Limited Partnership: aka Limited Liability Partnership, abbreviated LP or LLP. A business organization that has at least one general partner and at least one limited partner. The general partner operates like an owner of a general partnership – unlimited liability, but also entitled to unlimited profits from the business. The general partner (or partners) operate and manage the business and have control over it. The limited partner, on the other hand, has limited liability (meaning liability is limited to his/her capital investment), and is entitled to a return on that investment. The limited partner is an investor and cannot operate or manage the business on a day to day basis. If the limited partner becomes too involved, s/he could become a general partner against his/her will (for example, if the limited partnership got sued and the plaintiff – or a general partner – wanted to argue that the limited partner was involved in running the business and, therefore, should not be entitled to limited liability).
-Public Corporation: a corporation whose stock is publicly traded on a national securities exchange (or multiple national securities exchanges). There are typically numerous shareholders who are simply investors with little control over the operation of the corporation. Control over operation of the public corporation rests with the corporate officers and managers (who may own stock in the corporation but not a controlling amount), and broad policy decisions are set by the board of directors. Liability for shareholders is limited to the amount of their investment (so limited liability). Earnings are typically taxed twice: once as corporate profits, and then dividend payments to shareholders are taxed as those shareholders’ income.
-Closely Held Corporation: A private corporation whose stock is not traded on any of the national securities exchanges. Instead, the stock is usually held by a small group of people (often, but not always, family members or close friends) who serve as directors as well as officers and active managers of the corporation. It is common for these owners/shareholders to enter into an agreement to restrict the sale of stock only to those initial shareholders, thus retaining control of the corporation. Limited liability and profits are taxed twice, just like with a public corporation.
-Subchapter S Corporation: a type of closely held corporation that is often described as a combination of a corporation and a partnership. Liability is limited, as with a corporation, but profits are only taxed once as income, like a partnership. There are restrictions as to who can own an S corp though. S corps are limited to no more than 35 shareholders, can only offer one class of stock, the shareholders must be US citizens or resident aliens, and shareholders may not be members of an affiliated group of corporations.
-Limited Liability Company: LLC, another hybrid form of business organization that allows small business owners to have the same degree of control as partners in a general partnership (total control) but also have the limited liability protection of corporate shareholders. An LLC’s profits are taxed once as income, like a partnership. Differs from a Subchapter S Corporation in that other corporations, partnerships, and foreign investors can be members. These are typically organizations with a small number of owners.
-Limited Liability Limited Partnership: similar to a limited partnership, except both the general partners and the limited partners have limited liability. LLLPs are not allowed in all states, and are subject to additional government regulation in exchange for the additional liability protection.
Factors Influencing a Business Manager’s Choice of Organizational Form
-Tax ramifications (profits taxed once or twice?)
-Control considerations (do you want to run the business or merely make an investment?)
-Potential liability of the owner (limited or unlimited personal liability?)
-Ease & expense of form & operation
-Transferability of ownership interests
-Projected life of the organization
-NOTE: the table on pages 127-128 is very helpful in analyzing these considerations. Please review it and be prepared to discuss it.
Relationships among Partners
-Partners in a partnership have specific rights and duties
Duties
-Fiduciary Duties: duties of loyalty, good faith, fairness, not to appropriate partnership opportunities, not to have conflicts of interest, and not to reveal confidential information of the partnership
-Duty of Obedience: obey the partnership agreement
-Duty of Care: manage the affairs of the partnership without gross negligence, recklessness, or intentional misconduct
Rights
-Partnership property: the right to possess & use property for partnership purposes
-Right to share in the profits and losses of the partnership
-The right to manage the partnership (usually equal among partners, unless the partnership agreement says differently)
Specialized Forms of Business Associations
-Joint Stock Company: a partnership agreement in which the partners own stock and have the unlimited liability of a typical partnership.
-Syndicate: an investment group that joins together for the purpose of a single purchase (such as a sports team) which the individual members (partnerships, corporations, or individuals) could not afford alone.
-Joint Venture: when individuals, partnerships, or corporations agree to finance, produce, and sell goods, securities, or commodities for a limited purpose or a limited time.
-Franchising: an agreement between a franchisor (who owns a trade name or trademark) and a franchisee (who sells or distributes goods using the franchisor’s trade name or trademark).
Law and Business Associations II (Kubasek pp. 136-150)
-A corporation is a legal entity formed and authorized according to state law to act as a single person that raises capital by issuing stock to investors, who own the corporation.
-Corporations are the most dominant business form in the world today (mainly because of size and overall wealth).
-Note: partnerships are the most common business form today (due to their small size & ease of creation & operation).
-Stock: the capital that a corporation raises through the sale of shares that entitle shareholders to certain rights of ownership.
-Public corporations, closely held corporations, and Subchapter S corporations were covered in the previous section
-Multinational or Transnational Corporations: a new type of public corporation that now dominates the world economy due to massive size. A public corporation that does not restrict production or distribution to one nation, and is typically traded on the securities exchanges in multiple nations.
-ROBS Corporation: Rollover Business Startup corporation – a corporation started with funds from an individual’s 401(k) retirement plan. Funds in a 401(k) normally cannot be withdrawn from the 401(k) early (before retirement) without paying significant taxes and penalties on those funds. However, those funds can be withdrawn to be used to start a corporation (a ROBS corporation) without paying those additional taxes and penalties.
-Professional Corporation: a corporation for professionals (typically doctors, lawyers, dentists, and accountants). Like a normal corporation except there is no liability shield. Why? These kinds of professionals are often subject to malpractice lawsuits, and so public policy militates against allowing them to shield themselves from liability. So a PC (professional corporation) allows them to incorporate to enjoy certain benefits of incorporation (specifically tax benefits for health and pension plans) yet not shield themselves from liability.
-Nonprofit Corporation: allows groups to make transactions and hold property for nonprofit purposes without the individuals involved being subject to personal liability (often used by charities, hospitals, etc.).

Creation of Corporations
-Corporations are creatures of state law, not federal law
-Each state (along with Washington DC, Puerto Rico, and Guam) has an incorporation statute that sets forth the articles of incorporation to be used in that state (or district, or territory).
-Articles of Incorporation:
-Must be filed with the Secretary of State to incorporate
-Specify the name of the corporation, its registered address, its resident agent, the general purpose of business, the classes of stock offered & their face value, and the names and addresses of the incorporators
-Once filed, the Secretary of State will issue a certificate of incorporation
-The corporation then must elect a board of directors and enact bylaws (governing regulations of the corporation, which are often used should litigation arise between shareholders and/or officers and managers and/or the board of directors).
-The Delaware Supreme Court is extremely influential because more corporations are incorporated in Delaware than any other state. Why? Delaware has very favorable tax laws for corporations. So anyone who merges with, sues, or manages a corporation that is incorporated in Delaware is potentially subject to Delaware law, which means that the Delaware Supreme Court is an extremely influential court in the area of corporate law.
Financing of Corporations
-Financing: acquiring funds or capital to operate or expand a corporation
-2 main kinds of financing: debt financing (taking out loans) and equity financing (selling ownership interests – aka shares – in the corporation)
Debt Financing
-A corporation can issue three main kinds of debt instruments:
1. Notes: short term loans
2. Bonds: long term secured loans (usually secured by a lien or mortgage on the corporate assets)
3. Debentures: unsecured long term loans
-With all three kinds of debt instruments, the corporation must make interest payments to its creditors. These interest payments are tax deductible. On the other hand, dividend payments (made to shareholders in equity financing) are not tax deductible for the corporation. Therefore, corporations often rely heavily on debt financing rather than equity financing.
Equity Financing
-Capital is acquired through the sale of stock (equity securities)
-Shareholders (people who purchase stock) acquire the following rights:
1. Vote to elects the board of directors and broadly determine corporate conduct
2. Receive income through dividend payments
3. Share the net assets of the corporation should the corporation dissolve (upon dissolution, the corporate assets would be liquidated and divided on a pro rata basis – meaning each shareholder would be entitled to a % of the assets according to the % of the corporation they owned)
Classes of Stock
-Most states allow corporations to issue different classes of stock (with different rights of ownership and, therefore, different value attached to the different classes)
-The difference in classes of stock must be specified in the Articles of Incorporation
-The two most common classifications are common stock and preferred stock
-Common Stock: carries the right to vote, collect dividends, and collect one’s share of net assets upon dissolution
-Preferred Stock: generally collect more in dividends than common stock and are paid first before common stock
-Several common kinds of preferred stock:
-Cumulative Preferred: does not lose the right to collect dividends in a year when dividends are not paid. So if the corporation does not pay dividends in 2014 but does in 2015, a cumulative preferred stockholder would collect dividends for both years, whereas a common stockholder would only collect for 2015.
-Participating Preferred: receive dividend payments before common stockholders, and at a higher rate.
-Liquidation Preferred: receive a set amount of money upon dissolution of the corporation and liquidation of the corporate assets, and receives this payment before the common stockholders receive their pro rata share.
-Convertible: may be exchanged for common stock at a set ratio.
-NOTE: with liquidation preferred stock and convertible stock, the right to collect a set amount of money or exchange the stock at a set ratio is important, because it provides the holder of these kinds of stock with some protection from the fluctuations of the market.

Some additional terminology
-Captial Structure: the % of each type of capital (debt, preferred stock, and common stock) used by the corporation
-Stock Warrant: a document authorizing its holder to purchase a stated number of shares of stock at a stated price, usually for a stated period of time. Stock warrants may be freely traded.
-NOTE: like liquidation preferred stock and convertible stock, a stock warrant is valuable because is allows a certain amount of stock to be purchased at a set price (the set price providing the holder of the stock warrant with some insulation from the fluctuations of the market).
Operation of Corporations
-Three groups have a voice in the operation of a corporation: shareholders, board of directors, and officers/managers
-Shareholders:
-Owners, but not direct control over operations (not agents of the corporation)
-They exert some control by voting at shareholders meetings (usually held annually) to elect the board of directors and enact (or not enact) resolutions
-Shareholders meetings are usually annual (designated by corporate bylaws)
-Voting occurs in person or by proxy
-Proxy = a written delegation to cast someone’s vote for them
-As a practical matter, corporate shareholders live all over the world, so most vote by proxy instead of traveling to the annual shareholders meetings
-A proxy committee of corporate executives (officers and managers) prepares the proxy ballots, sends them out, collects them, and promises to vote the way the shareholders indicate on their ballots
-Because the proxy committee creates the ballots, it decides who and what appears on the ballots. Therefore, this is a huge amount of power: if someone wishes to be on the board of directors, s/he must be on the proxy ballots to have a realistic chance of winning
-This is somewhat controversial because many feel that it allows the officers & managers (on the proxy committee) to effectively decide who gets to run for board of directors (when, in theory, the board of directors are supposed to be in charge of the officers and managers)
-NOTE: politically active shareholders can also get the proxy committee to add resolutions to the proxy ballots, such as resolutions to invest in green technology or not invest in countries whose governments engage in oppressive tactics (remember the role of corporate shareholders in the sweatshop cases we read about earlier).
-Board of Directors:
-Not managers, more like overseers & broad policy makers
-Five major duties performed by the board of directors:
1. Authorize/approve payments of dividends & changes in financing
2. Select, approve, & supervise (and remove if necessary) officers & managers
3. Determine executive compensation & pension plans
4. Adopt/amend/repeal corporate bylaws
5. Establish broader corporate policies re. products, services, labor relations, etc.
-Officers and Managers:
-Responsible for the day-to-day operations of the corporation
-Technically they are hired/fired/supervised by the board but, because they control the proxy committees, in some ways the reality can be sort of the opposite
-Officers and managers have fiduciary duties to shareholders
-Essentially a fiduciary duty is the duty to treat someone else’s property as your own
-Fiduciary duties require corporate managers & officers to operate the corporation & manage its assets in a way that is:
1. In good faith
2. With the care that an ordinarily prudent person would exercise
3. Reasonably believed to be in the best interests of the corporation
Issues related to fiduciary duties
-Corporate Opportunity Doctrine: officers/managers & directors cannot take personal advantage of an opportunity that fairly should have belonged to the corporation
-Conflict of Interest; an officer/manager or director cannot enter into a transaction with the corporation in which s/he has a personal interest
-Business Judgment Rule: officers/managers and directors are not liable for honest mistakes of business judgment