Corporations 101 – A Quick Look at Upperclassmen Courses

Before you graduate law school, it is important to know what kind of law you want to practice. However, it can be difficult to figure out the type of law you want to devote yourself to when you’re practicing. There are numerous kinds of law, countless claims, and an endless array of clientele. Once you are finished learning the basics of the law in your 1L year, you have the chance to get your feet wet in other specific types of law. In your upperclassmen years, you get to choose electives that fit your interests so that you can learn about a type of law that you may want to practice. One of my electives in my 2L year was Corporations. Here is a quick overview of this course so you have a general understanding of Corporations before you take it.

Corporations in General

A corporations course can vary depending on what other courses your law school offers. Some focus less on mergers and acquisitions because there is another class that deals directly with this topic. Sometimes there is more time dedicated to the structure of corporations and how they operate. Other courses focus on the law of business organizations in general and not just corporations alone. It is important to understand what topics your professor plans on teaching and the different laws and regulations that apply. There are new main divisions of law in corporations law, the Delaware General Corporation Law (DGCL) and the Model Act. Corporations is a great course to take to understand corporate law and to figure out the difference between a shareholder and the CEO of a company. Also, corporations typically is a topic on the bar exam in some form.

The Law of Agency and Fiduciary Duties

Innate in all corporation/business law are agency relationships and fiduciary duties. An agency relationship is a consensual, but not necessarily contractual, relationship between two people, in which one person is authorized/obligated to act on behalf of the other. So basically when one (agent) acts on behalf of another (principal) with their authorization. Although agency relationships can be very beneficial, they also have consequences. The outward-looking consequences relate to the relationship among the principal, agent, and 3rd parties and is governed by various principles of attribution. The inward-looking consequences relate to the relationship between the principal and agent and is largely governed by contracts between the parties and the law of fiduciary duties. There are two main types of fiduciary duties that are typically at the center of corporations-related issues. One is the duty of loyalty, an obligation to exercise all power of loyalty in a good-faith effort to advance purposes of relationship and not perform any transactions that involve conflict or self-dealing. The other is the duty of care which means to discharge your duties with the care that a person in an alike position would reasonably believe appropriate. In the corporations context specifically, it means the duty to make lawful decisions in a well-informed, careful manner by having appropriate information and conducting proper investigations when making decisions.

Corporate Structure

There are two types of corporations – publicly-traded and closely-held. In a public corporation, shares are owned by a large number of investors and traded in public securities markets and are characterized by separation of ownership and control. Closely-held corporations are corporations in which shares are owned by small numbers of shareholders without access to public securities markets. In these types of corporations, shareholders are often also officers and the divisions between ownership and control are crossed. In every corporation there are three roles: shareholder, director, and officer. Shareholders are the “owners” of the corporation and possess the most important control rights. Their main features and responsibilities are the right to elect directors and vote on fundamental transactions, the right to all the assets after creditors have been paid, and the absence of personal liability. Directors are the individuals that are elected by the shareholders to supervise the officers. Basically they are the shareholders’ representation in the corporation and do not have authority to act as individuals but instead act as a collective body called the Board of Directors on the shareholder’s behalf. Officers are the officials that are in charge of the day to day aspects of the business. These are the most senior employees of the corporation and are typically the CEO, President, CFO and other high-ranking positions.

Friendly Mergers and Hostile Takeovers

When a company or corporation wants to buy another company/corporation out, a merger occurs. Mergers have been described as the procedure under which one company is entirely subsumed by another through the operation of law. There are two types of mergers: friendly and hostile takeovers. Friendly mergers occur when one company acquires another “target” company when both boards of directors approve the transaction. Most mergers are friendly, however, there is a possibility that the board of directors are too friendly to a merger. Thus, friendly mergers are typically subjected to an “entire fairness review” or the board of directors must show it used a self-interest cleansing device. Hostile takeovers occur when one company is taken over despite resistance of the target company’s board of directors. Basically, the difference between a friendly and a hostile merger is whether or not the board of directors approve of the transaction. The main issue that arises with mergers is the board of director’s breach of fiduciary duties – if their defense mechanisms for a hostile takeover were reasonable.

Overview

This is a quick overview of corporations, so some professors or universities may organize the course differently. However, this snapshot should give you a general understanding on what to expect from a Corporations class. Armed with this knowledge, you should be able to get started with this upperclassmen course.