United States Corporate Law

Sources of Corporate Law

United States corporate law is principally a matter of state law, with the Delaware General Corporation Law (DGCL) serving as the dominant jurisdiction for publicly traded corporations. Over 60% of Fortune 500 companies are incorporated in Delaware, attributable to its specialised Court of Chancery, a sophisticated judiciary with expertise in corporate matters, and a well-developed body of case law. The Model Business Corporation Act (MBCA), promulgated by the American Bar Association, has been adopted in whole or substantial part by approximately 30 states and provides an alternative statutory framework. Federal securities laws, principally the Securities Act of 1933 and the Securities Exchange Act of 1934, impose mandatory disclosure requirements and regulate trading activity, proxy solicitation, tender offers, and insider trading. The Securities and Exchange Commission (SEC) administers these statutes and promulgates implementing regulations.

Formation of Corporations

A corporation is created by filing a document with the appropriate state authority. In Delaware, the certificate of incorporation is filed with the Division of Corporations and must state the corporation’s name, registered agent, authorised shares, and the name and address of each incorporator. Under DGCL § 102, the certificate may include any provision for the management of the business and the regulation of the corporation’s affairs. The bylaws constitute the internal governance rules of the corporation and may be adopted by the incorporators or the board of directors. Every corporation must maintain a registered agent in the state of incorporation to accept service of process.

The common law recognises the doctrines of de jure incorporation, de facto incorporation, and corporation by estoppel. A de jure corporation results from substantial compliance with all mandatory statutory requirements. Where there has been a colourable attempt to incorporate and a purported exercise of corporate powers, a de facto corporation may be recognised despite technical defects in formation, provided no third party has been prejudiced. Corporation by estoppel prevents persons who have dealt with an entity as if it were a corporation from denying its corporate existence. Many states have abolished these doctrines by statute, providing that the filing of the certificate of incorporation is conclusive evidence of proper formation.

Corporate Governance Structure

The board of directors manages the business and affairs of the corporation. Directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. The duty of care requires directors to act on an informed basis, in good faith, and with the care that an ordinarily prudent person would exercise in similar circumstances. The business judgment rule, as articulated in Smith v Van Gorkom, 488 A.2d 858 (Del. 1985), creates a presumption that directors acted on an informed basis, in good faith, and in the honest belief that their actions were in the best interests of the corporation. That case held directors liable for gross negligence in approving a merger without adequate information, establishing that directors must inform themselves of all material reasonably available information before making a business decision.

The duty of loyalty requires directors to act in the best interests of the corporation rather than in their personal interests. Conflict of interest transactions are governed by DGCL § 144, which provides that such transactions are not voidable if approved by a majority of disinterested directors, approved by the shareholders, or shown to be entirely fair. The duty of good faith was clarified in Stone v Ritter, 911 A.2d 362 (Del. 2006), which held that good faith is a component of the duty of loyalty. A failure to act in good faith may give rise to liability where directors consciously disregard their responsibilities. The Caremark duty, derived from In re Caremark International Inc Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), imposes an obligation on directors to ensure that adequate information and reporting systems exist to monitor corporate compliance with law.

Shareholders have the right to vote on specified matters, including the election of directors and fundamental transactions. DGCL § 220 grants shareholders the right to inspect books and records for a proper purpose. The proxy system, regulated under Section 14 of the Exchange Act, governs the solicitation of shareholder votes. Rule 14a-8 permits shareholders to include proposals in the company’s proxy materials subject to procedural and substantive eligibility requirements. Shareholders may bring derivative suits to enforce corporate claims against directors and officers, subject to the demand requirement and the special litigation committee procedure.

Capital Structure

The certificate of incorporation authorises a specified number of shares. Authorised shares that have been issued are outstanding shares; shares that have been repurchased are treasury shares. Common stock typically carries voting rights and the right to participate in residual earnings. Preferred stock carries preferences as to dividends or liquidation and may be issued in series with varying rights. Par value is a nominal amount fixed in the certificate, and the consideration received in excess of par value constitutes capital surplus. Dividends and distributions are governed by statutory solvency tests, requiring surplus or compliance with the equity insolvency test under the MBCA.

Fundamental Transactions

Mergers and consolidations are governed by DGCL § 251, requiring board approval and a majority vote of outstanding shares. The sale of all or substantially all assets requires shareholder approval under DGCL § 271. Dissenting shareholders in certain fundamental transactions are entitled to appraisal rights, entitling them to judicial determination of the fair value of their shares. In freeze-out mergers, where a controlling shareholder seeks to eliminate minority shareholders, the entire fairness standard applies. Weinberger v UOP, Inc., 457 A.2d 701 (Del. 1985), held that the entire fairness standard requires both fair dealing and fair price, and that the measure of fair value is not limited to the market price but may include all relevant factors.

Dissolution and Winding Up

Voluntary dissolution requires board approval and a shareholder vote. Under DGCL § 278, the corporation continues after dissolution for the purpose of winding up its affairs, including prosecuting and defending suits and distributing assets to shareholders. Involuntary dissolution may be ordered by the Court of Chancery where directors are deadlocked, the corporation is insolvent, or the corporation has failed to comply with filing requirements.

Federal Securities Regulation

The Securities Act of 1933 requires registration of securities offered to the public unless an exemption applies. Section 5 prohibits the offer or sale of unregistered securities. Regulation D under Rule 506 provides a safe harbour for private placements, permitting offerings to accredited investors without registration. Rule 144A facilitates resales of restricted securities to qualified institutional buyers. The Exchange Act of 1934 established the SEC and imposes ongoing reporting obligations on publicly traded companies under Section 13. The proxy rules under Section 14 regulate the solicitation of proxies. The Williams Act, enacted in 1968, regulates tender offers by requiring disclosure and imposing procedural requirements. Rule 10b-5, promulgated under Section 10(b) of the Exchange Act, prohibits fraudulent conduct in connection with the purchase or sale of securities. The Supreme Court in Ernst & Ernst v Hochfelder, 425 U.S. 185 (1976), held that an implied private right of action exists under Rule 10b-5, but requires scienter. The Insider Trading and Securities Fraud Enforcement Act of 1988 enhanced penalties for insider trading and authorised the SEC to pay bounties to informants.