The traditional path to a college degree isn't for everyone. Many individuals find themselves seeking education and personal development opportunities outside the confines of a formal degree program. Non-degree college courses have become increasingly popular for those who want to acquire new skills, explore their interests, and enhance their professional prospects without committing to a full degree. In this article, we will explore the world of non-degree college courses, shedding light on their benefits, types, and how to make the most of them. What Are Non-Degree College Courses? Non-degree college courses, often referred to as continuing education or adult education, encompass a wide array of learning opportunities offered by colleges and universities. These courses do not lead to a degree but instead provide a more flexible, accessible, and targeted approach to learning. Non-degree courses are designed for individuals of all backgrounds and ages who wish to gain specific know
Sole Proprietorship
Many of you may currently be perusing this chapter on a laptop or desktop meticulously crafted by Apple Inc. Perhaps you possess a sleek Apple phone or a compact music device from the same innovative company. Apple's renowned prowess in innovation, product development, marketing finesse that pioneers novel markets, and its capacity to generously reward stakeholders are well-established. While you may relish Apple products as a consumer, have you ever contemplated Apple from a corporate perspective?
Situated in Cupertino, California, the corporate headquarters of Apple which can be seen from the picture above, serves as the tangible manifestation of this enigmatic entity we commonly refer to as a corporation. But what exactly does that entail? It might be enlightening to discover that this building, or more accurately, the legal concept of the entity it houses, shares more commonalities with you than you might imagine. Similar to you, this corporate entity can own property, engage in contractual agreements for buying and selling goods, hire and terminate employees, open bank accounts, partake in intricate financial transactions, initiate legal actions, and be subject to legal proceedings. Astonishingly, this entity is even endowed with constitutional rights, akin to those bestowed upon individuals. However, it is crucial to note that, unlike humans, this corporate entity neither breathes nor bleeds; it might, in fact, be considered immortal. Moreover, in stark contrast to individuals, this entity lacks an autonomous judgment, a moral compass, or a conscience to distinguish between right and wrong.
Throughout this chapter, we will delve into the intricacies of corporate entities, using Apple Inc. as a prominent example. Our exploration will extend to the reasons why humans opt to organize into corporate entities and why the legal framework recognizes these entities for the sake of public policy. The journey will commence by scrutinizing the factors influencing the decision-making process regarding entity choice, followed by a comprehensive examination of the available choices.
Recall the core purpose of any business: fundamentally, it exists to generate profit for its proprietors. In a capitalist, market-driven economy, a business unable to turn a profit inevitably faces extinction, overshadowed by creditors and rivals. The imperative to yield profit serves as an undeniable truth uniting all businesses, yet beyond this commonality, drawing broad generalizations about business operations becomes a complex task. The realm of business mirrors the vast tapestry of human experience itself, encompassing endeavors as diverse as neighborhood kids providing snow-shoveling services in winter and peddling lemonade in summer, local pizzerias, small tool-and-die factories crafting machine tools on the town's outskirts, and multinational corporations with a sprawling workforce scattered across the globe.
Businesses assume various roles: some engage in manufacturing, creating products in factories; others function as retailers or franchisees, selling items produced by other businesses. Certain enterprises exist to enhance the efficiency of both producers and sellers, acting as business consultants. Some enterprises exclusively provide services—consider accounting or law firms, house painting companies, or hotels—or thrive by lending money at a higher interest rate than they borrow.
Given this vast spectrum of business types, it's evident that there's no one-size-fits-all approach to selecting a business organization. When professionals embark on the journey of determining the most suitable form of entity, they must weigh several critical factors. Initially, they evaluate the cost and complexity of creating the entity, considering the ease or difficulty of its establishment and the ongoing maintenance it necessitates. Subsequently, they contemplate the business's sustainability in the face of the founder's demise, retirement, or pursuit of new ventures. Further considerations encompass the ease of securing funds for business growth, the desired level of managerial control, the willingness to relinquish control to external parties, the potential expansion of ownership to the public, and strategic tax planning to minimize financial obligations.
Above all, a pivotal consideration revolves around shielding personal assets from claims—a crucial aspect known as limited liability. In essence, the choice of a business organization involves a meticulous analysis of these multifaceted factors to tailor the structure to the unique needs and aspirations of the business professionals involved.
It's crucial to differentiate between choosing a business organization and defining the nature of the business itself. For instance, some enterprises operate as franchises, functioning under a license agreement that binds them to adhere to specific standards set by the franchisor, procure goods exclusively from the franchisor, and potentially share a royalty fee or a percentage of profits. While franchises, particularly prevalent in the food and services industries, come in various forms, such as sole proprietorships, limited liability companies (LLCs), or corporations, there is no standardized business structure for a franchise.
Similarly, we categorize "nonprofit organizations," like universities or charities, as distinct legal entities. Despite being nonprofit, these entities can be substantial, with intricate operations spanning international borders—illustrated by organizations like the Red Cross or Doctors Without Borders. From a tax standpoint, nonprofits, designated as "501(c)(3)" organizations based on the relevant section of the Internal Revenue Code, are exempt from taxes, provided they meet stringent IRS qualifications. Legally, however, these entities can adopt diverse forms, ranging from sole proprietorships to corporations.
When embarking on a new business venture, the primary focus often revolves around revenue growth and cost reduction to maximize profits. Initially, entity choice might not be a top priority amid the myriad considerations vying for attention. Nonetheless, once an entity choice is established, it becomes challenging (though not impossible) to transition to a different selection. Given that entity choice significantly influences various aspects of the business, it becomes imperative to acquire a fundamental understanding of the available options. This knowledge empowers business professionals to concentrate on core business fundamentals, relegating legal and accounting intricacies to a secondary role.
Forms of Business Ownership
Take a look at this video, it describes different types of businesses and how they are created and shows the advantages or disadvantages of different types of businesses.
11.1.1 Sole Proprietorships
Mary, currently a college sophomore on summer break, finds herself without part-time employment opportunities in a challenging economic climate. In a proactive move to assist her parents, she undertakes the task of revitalizing their overgrown garden. Surprisingly, Mary discovers both a genuine enjoyment for the work and a proficiency in it. Her efforts don't go unnoticed, as neighbors, witnessing the transformation, approach her to extend her services to their gardens. In a matter of days, Mary's schedule is filled with appointments and tasks throughout the neighborhood. Utilizing her earnings, she invests in additional landscaping equipment and materials from a local retailer. As demand grows, Mary soon recruits workers to handle routine tasks like mulching and lawn mowing.
Drawing on insights gained from her business classes, Mary applies her knowledge to establish her own business, naming it "Mary’s Landscaping." Embracing various marketing tools, including a Facebook fan page, local store flyers, business cards, and a YouTube video showcasing her projects, Mary successfully promotes her burgeoning enterprise. By the summer's end, she not only reaps a healthy profit but also accumulates valuable business acumen.
Legally speaking, Mary operates as a sole proprietor, the predominant form of business in the United States. In the eyes of the law, there is no distinction between Mary and Mary’s Landscaping—they are interchangeable entities. Any profits earned by Mary’s Landscaping belong exclusively to Mary, and if financial obligations arise, Mary is personally responsible. Contracts entered into by Mary’s Landscaping are, in fact, agreements made by Mary herself. Whether opening a bank account, entering into contracts, or applying for a "doing business as" (d.b.a.) filing under the fictitious name "Mary’s Landscaping," Mary remains legally inseparable from her business. It's noteworthy that any fictitious name cannot suggest a separate entity, such as "Corp." or "Inc.," as legally Mary’s Landscaping retains its fundamental identity as an extension of Mary herself.
The merits of operating as a sole proprietorship are numerous, contributing to its widespread popularity. First and foremost, the simplicity of establishing a sole proprietorship is a notable advantage. Essentially, there are no associated creation costs or time constraints, as the business commences when the entrepreneur begins providing goods or services, charging money for them. While some sole proprietors may need permits or licenses, such as a food service license for a pizza restaurant or a liquor license for a bar, these governmental approvals should not be confused with legal recognition of a distinct business entity. In a sole proprietorship, these licenses are granted to the individual owner.
Autonomy stands out as another key benefit of sole proprietorships. As the sole owner, Mary possesses the freedom to make independent decisions regarding Mary’s Landscaping. This autonomy extends to setting her own working hours, determining the pace of business growth, venturing into new lines of business, taking vacations, or even winding down the business, all according to her personal preferences. Furthermore, this autonomy translates into complete ownership of the business's finances. Regardless of whether the funds are held in a separate bank account, all income generated by Mary’s Landscaping belongs to Mary, affording her the flexibility to allocate and utilize the money as she sees fit.
However, these advantages must be carefully considered in light of some significant drawbacks. Firstly, due to the singular ownership structure of a sole proprietorship, collaboration with others in the business is impossible. Mary cannot, for instance, bring in her college roommate as a business partner for web design services. Additionally, the inherent identity between the business and the owner renders it impossible to pass on the business to successors. In the unfortunate event of Mary's demise, the business ceases to exist with her. While she has the option to sell or transfer the business assets, including equipment, inventory, customer lists, and goodwill, the continuity of the business beyond Mary's involvement is not feasible within the sole proprietorship framework.
Securing working capital poses a notable challenge for sole proprietors, especially those in the nascent stages of their entrepreneurial journey. While many ventures brim with innovative ideas, the critical element for their flourishing and evolution often lies in obtaining the necessary capital. In cases where the entrepreneur lacks personal wealth, alternative sources must be sought.
For instance, if Mary envisions expanding Mary’s Landscaping and seeks financial support from her affluent uncle, the limitations of sole proprietorship become apparent. Although her uncle can extend a loan or engage in a profit-sharing agreement, he cannot become a partial owner of Mary’s Landscaping. This inherent constraint impedes the possibility of external investors participating as profit-sharing stakeholders in the business.
Traditionally, banks emerge as a primary funding avenue for most sole proprietors. In these scenarios, banks treat the loans akin to personal loans, akin to an individual seeking financing for a car or a mortgage. However, the stringent requirements of banks may include substantial down payments, and personal collateral is often mandated to secure the loan, despite the intended use for business growth. Facing such challenges, many sole proprietors resort to leveraging their personal credit cards, either maxing out limits or shuffling balances between cards, particularly during the initial phases of their business endeavors. This strategy, though common, underscores the financial hurdles that sole proprietors often confront as they navigate the terrain of working capital acquisition.
In certain industries, entrepreneurs have the potential to secure financing through venture capital—a dynamic avenue where venture capital firms pool funds from institutional investors and high-net-worth individuals, often referred to as angel investors. This collective capital is then strategically invested in promising startup's through private placement offerings, supporting these ventures until they reach a commercially viable stage. At that juncture, the venture capital firm typically seeks an exit strategy, commonly manifested in the form of a public offering, known as an initial public offering (IPO), facilitating the sale of the business to the public.
The realm of tax planning introduces a distinct set of challenges for the sole proprietor. Given the absence of legal delineation between the owner and the business, all income generated by the business is treated as ordinary personal income for the owner. The intricate structure of the United States' income tax system, with varying rates depending on the type of income, often subjects ordinary personal income to the highest tax rate. Effectively strategizing to capitalize on lower income tax rates becomes a formidable task for the sole proprietor.
Lastly, one significant drawback faced by sole proprietors is the specter of unlimited liability. In the absence of a distinction between the owner and the business, the owner bears personal responsibility for all the business's debts and obligations. Consider, for instance, a scenario where Mary’s Landscaping encounters financial adversity, failing to meet planned revenue due to unforeseen weather challenges. Creditors of the business, encompassing landscaping suppliers, employees, and external contractors, hold Mary personally liable for settling these obligations. Failure to do so may result in legal action for breach of contract. Despite the potential for substantial profits, sole proprietors grapple with the inherent risk of unlimited liability. This means that all personal assets of the sole proprietor—homes, automobiles, bank accounts, retirement funds—are vulnerable to creditors. The gravity of unlimited liability is underscored by the fact that a single successful personal injury lawsuit, exceeding insurance coverage or falling outside its purview, could erode years of dedicated effort by an individual business owner.
Despite being the prevailing method of conducting business in the United States, sole proprietorships are, in many respects, fraught with challenges that render them less appealing. Fortunately, contemporary business law provides tangible and practical alternatives for sole proprietors, a topic we will explore shortly.
11.2.2 Partnerships
Let's envision that after successfully navigating her inaugural summer running Mary’s Landscaping, Mary recognizes the opportune moment to elevate her business to new heights. Despite acquiring significant expertise in operational aspects, such as coordinating with suppliers and managing project schedules, Mary acknowledges her limitations in marketing and accounting. Recognizing the pivotal role these aspects play in fostering growth, she decides to bring someone on board to bolster these crucial facets of her business. Enter her good friend Adam, a double major in accounting and marketing. Following insightful discussions, Mary and Adam make the strategic decision to join forces and run Mary’s Landscaping together.
In doing so, Mary and Adam formally establish a general partnership. The moment they agree to jointly manage Mary’s Landscaping and mutually share in the business's profits and losses, the partnership comes into existence. While Mary and Adam formed their partnership verbally, typical general partnerships are often established more formally, with partners documenting their agreement in a specialized contract known as the articles of partnership. These articles can comprehensively outline various aspects of how the partnership will operate. Although general partners usually enjoy equal managerial authority by default, the partners, through the flexibility afforded by the contractual nature of a partnership, can customize these arrangements according to their preferences. Similar to a sole proprietorship, the creation of a general partnership does not involve state intervention, as there is no legal separation between the business and its partners—they are, in essence, one and the same in the eyes of the law.
General partnerships possess a dissolution process as straightforward as their formation. Given that the fundamental essence of a general partnership lies in the agreement to share profits and losses, the partnership ceases to exist when this agreement concludes. In the context of a general partnership with more than two individuals, the remaining partners hold the option to reestablish the partnership without the departing partner.
A common challenge arising during dissolution is the valuation of the withdrawing partner's share of the business. To address this concern, articles of partnership typically incorporate a buy/sell agreement. This agreement outlines the partners' consensus on the methodology for assessing the value of a departing partner's share, which the remaining partners subsequently commit to remunerate to the withdrawing partner, or in the event of a partner's demise, to their spouse or heir. The inclusion of such provisions in the articles of partnership streamlines the dissolution process and mitigates potential conflicts that may arise during the withdrawal of a partner from the general partnership.
A general partnership mirrors a sole proprietorship in its tax treatment. Considered a disregarded entity for tax purposes, the partnership experiences income "flowing through" to the partners. Consequently, partners are individually responsible for paying ordinary income tax on the business income. Although the partnership may file an information return detailing total income, losses, and the allocation of profits and losses among general partners, akin to sole proprietors, general partners encounter limited tax planning opportunities.
Unlimited liability is another shared characteristic between general partnerships and sole proprietorships. Each partner in a general partnership is collectively and individually liable for the partnership's debts and obligations, a feature that is often deemed unattractive. This means that even an innocent partner can be held liable for the malpractice or misdeeds of another partner.
Now, assuming that the general partnership formed by Mary and Adam thrives and becomes profitable, and they wish to bring in Mary's wealthy uncle as a partner, concerns about maintaining limited liability arise. In many states, the solution lies in the formation of a limited partnership. This type of partnership incorporates both general partners and limited partners. Mary and Adam, as the founders, continue as general partners, while the uncle assumes the role of a limited partner, thereby enjoying limited liability. As a limited partner, his potential loss is confined to the amount he invested in the business—nothing more. Limited partnerships must adhere to state laws in their formation, and limited partners are typically restricted from participating in the day-to-day management of the business. This structured approach allows for the growth and expansion of the business while safeguarding the limited partners from undue personal liability.
11.3.3 Corporations
Throughout this chapter, we've delved into the realms of sole proprietorships and partnerships—common and relatively straightforward structures for individuals to conduct business operations. However, these forms of business organization come burdened with notable disadvantages, particularly in the realm of liability. The prospect of personal assets being jeopardized by business debts and obligations understandably instills fear in most individuals. Consequently, businesses seek a form of organization that not only affords owners limited liability but is also adaptable and easy to manage. Enter the modern corporation.
Consider the journey of tech entrepreneur and Apple co-founder Steve Jobs seen above. As a college dropout with limited proficiency in computer engineering, Jobs faced a stark reality: if operating as a sole proprietor were his only option, the existence of Apple, as we know it today, might have been an implausible dream. However, serendipity intervened, and Jobs crossed paths with the talented computer engineer Steve Wozniak. Recognizing the synergies in their skills, they decided to amalgamate their talents and establish Apple Computer in 1976. A year later, the company underwent incorporation, paving the way for an initial public offering (IPO) in 1980.
Incorporation offered Jobs a level of operational flexibility that far surpassed what a mere sole proprietorship could provide. It empowered him to bring in individuals with diverse skills and capabilities, secure early-stage funding by offering shares in the new company, and ultimately amass substantial wealth by selling stock or securities in the corporation. This transformational shift highlights the pivotal role played by the modern corporation in affording entrepreneurs the freedom to expand and flourish beyond the constraints of sole proprietorships.
In stark contrast to a sole proprietorship or general partnership, a corporation stands as a distinct legal entity, entirely separate from its owners. It possesses the flexibility to exist for a limited duration or, if desired, in perpetuity. The critical distinction lies in its separate legal identity, ensuring the corporation's continuity independent of changes in ownership. Notably, many contemporary companies were founded by entrepreneurs who have long since passed away, yet their corporate legacies thrive. Similarly, in publicly traded companies, shareholder identities can undergo frequent changes throughout the day, but the corporation, as a distinct entity, remains unaffected by these dynamic shifts, steadfast in its ongoing business operations.
Given their separate legal existence and the array of legal and constitutional rights they hold, corporations must adhere to the requirements of corporate law during their formation. Corporate law, inherently a matter of state jurisdiction, dictates the incorporation process, and it's crucial to note that there is no such entity as a "U.S. corporation." Corporations typically incorporate in the state where their principal place of business is situated, but exceptions exist. Notably, numerous companies opt to incorporate in Delaware, a seemingly inconspicuous state where they may lack any physical presence. The rationale behind this choice is grounded in Delaware's renowned chancery courts, acknowledged for their fair and swift application of a well-developed body of corporate law. These courts operate without juries, fostering predictability and transparency in dispute resolution, with well-articulated opinions elucidating the judicial reasoning behind their decisions.
Initiating a corporation involves filing the articles of incorporation with the state agency responsible for overseeing business entities. Although the specifics of these articles may vary between states, they commonly address key elements. The founders, in the articles, first declare the company's name, specifying whether it is a for-profit or nonprofit entity. The chosen name must be distinctive and unique, often containing terms like "Incorporated," "Company," "Corporation," or "Limited." The founders also identify themselves, articulate the desired duration of the company, and outline its purpose. In the past, under common law, shareholders could sue if a company exceeded the scope outlined in its articles (known as ultra vires actions). However, modern statutes often permit corporations to declare that they can engage in "any lawful actions," rendering ultra vires lawsuits obsolete in the United States.
Crucially, the founders specify the initial number of shares the corporation will issue and their par value. This, however, does not preclude the company from issuing additional shares in the future or repurchasing shares from shareholders.
In contrast to sole proprietorships, corporations are more intricate to manage, often necessitating the involvement of attorneys and accountants to maintain accurate corporate records. Beyond the foundational requirements, ongoing annual maintenance is a prerequisite in corporate law. This entails not only filing fees during incorporation but also recurring expenses like annual license fees, franchise fees, taxes, attorney fees, and costs related to maintaining minute books, corporate seals, stock certificates, registries, and out-of-state registration. While a domestic corporation is entitled to operate in its state of incorporation, it must register as a foreign corporation to conduct business outside its home state. The prospect of registering as a foreign corporation in all fifty states underscores the potential financial burden and complexity associated with the ongoing maintenance of corporations.
Video Clip: Monstrous Obligations
Video Clip: The Pathology of Commerce
Individuals who possess ownership stakes in companies are referred to as shareholders. The number of shareholders in a corporation can range from as few as one to millions, and each shareholder can hold anywhere from a single share to millions of shares. In closely held corporations, the shareholder count tends to be modest, while publicly traded corporations often boast a large and diverse body of shareholders. In the case of publicly traded corporations, the value of a share is determined by market dynamics, guided by the laws of supply and demand. Various markets or exchanges provide platforms for the buying and selling of shares.
It's crucial to recognize that while shareholders own shares or stocks in the company, they possess no legal entitlement to the company's assets. As a distinct legal entity, the corporation retains ownership of its property.
Shareholders in a corporation benefit from limited liability. Their potential loss is capped at the amount of their investment—the sum they paid for their shares. In situations where a company faces financial distress and is unable to meet its debts or obligations, it may seek protection in bankruptcy court. In such cases, shareholders bear the loss in the value of their stock. Importantly, creditors cannot lay claim to shareholders' personal assets, such as their homes or bank accounts, safeguarding these assets from the reach of creditors.
Shareholders in a corporation can encompass both individuals and other corporate entities, such as partnerships or corporations. When one corporation holds all the stock of another, the owning entity is termed the parent company, while the entity being owned is referred to as a wholly owned subsidiary. If a parent company doesn't own all the stock of another entity, it might be called an affiliate rather than a subsidiary. Large corporations often establish subsidiaries for specific purposes, allowing the parent company to benefit from limited liability or favorable tax treatment. For instance, subsidiaries may be formed to hold real property, limiting premises liability to that subsidiary alone and shielding the parent company and its assets from tort lawsuits. Companies heavily involved in intellectual property may create subsidiaries to hold those assets, which are then licensed back to the parent company, enabling the deduction of royalty payments from taxes. This sophisticated liability and tax planning makes the corporate form highly appealing for larger businesses in the United States.
U.S. corporate law offers considerable flexibility, fostering creative solutions to business challenges. Consider the case of General Motors Corporation, a prominent American company that, in 2009, faced a severe threat due to a collapsing auto market and a recession. Unable to meet financial obligations, the U.S. government injected funds into the company but mandated a simultaneous restructuring of its balance sheet. The solution involved the formation of a new entity, General Motors Company (the "new GM"). The old GM underwent bankruptcy proceedings, where a judge sanctioned the cancellation of numerous contracts, rendering stock in the old GM worthless. All of GM's key assets, including brands like Cadillac, Chevrolet, Buick, and GMC, as well as associated plants and assets, were transferred to the new GM. The old GM, subsequently renamed Motors Liquidation Company, retained unwanted liabilities, including obsolete assets and outstanding claims from creditors. The U.S. federal government became the majority shareholder of General Motors Company, potentially recovering its investment when shares of the new GM are eventually sold to the public. While there may be little perceptible difference to the public between the old and new GM, from a legal perspective, they are entirely separate and distinct entities.
An exception to the principle of limited liability can arise in specific cases, primarily involving closely held corporations. Many sole proprietors choose to incorporate their businesses to benefit from limited liability but might overlook the fact that they are creating a distinct legal entity that demands proper recognition. If sole proprietors fail to treat the legal corporation as a separate entity, creditors may petition a court to pierce the corporate veil. If the court concurs, limited liability is nullified, enabling creditors to access the shareholder's personal assets. Essentially, creditors contend that the corporate structure is a facade established solely for limited liability, asserting that the shareholder and the corporation are indistinguishable, much like a sole proprietorship. For instance, if a business owner incorporates their business and opens a bank account in the business name, the funds in that account must be strictly used for business purposes. If the business owner consistently taps into the account for personal expenses, a case for piercing the corporate veil can be easily established.
Not all shareholders in a corporation are necessarily equal. U.S. corporate law permits the creation of different types or classes of shareholders. Shareholders in distinct classes may receive preferential treatment in corporate actions, such as paying dividends or participating in shareholder meetings. For instance, founders of a corporation may reserve a special class of stock for themselves, endowed with preemptive rights. These rights grant shareholders the first refusal if the company intends to issue additional stock, ensuring that they maintain the same percentage ownership and preventing dilution of their stock.
A notable illustration of different classes of shareholders can be found in Ford Motor Company stock. Although the global automaker boasts hundreds of thousands of shareholders, it issues two types of stock: Class A for the public and Class B for the Ford family. While Class B stock is significantly outnumbered by Class A stock, constituting less than 10 percent of the total issued stock, it is endowed with 40 percent voting rights at any shareholder meeting. This provision effectively empowers Class B stockholders, primarily the Ford family, to obstruct any shareholder resolution requiring two-thirds approval to pass. In essence, the creation of two classes of shareholders enables the Ford family to maintain a substantial and decisive influence on the company's future direction despite being publicly traded.
Shareholder rights are typically delineated in a company's articles of incorporation or bylaws. These rights may encompass the entitlement to receive dividends, contingent on the board of directors' approval. Shareholders may also have the right to vote in shareholder meetings, typically conducted annually. In large companies with numerous shareholders, it is common for shareholders to forego attending these meetings and instead cast their votes on resolutions through the use of a proxy.
Video Clip: Activist Shareholders at Walmart
In most state laws, including Delaware's business laws, shareholders are granted a distinctive right to file a lawsuit against a third party on behalf of the corporation, known as a shareholder derivative lawsuit. This term denotes that the shareholder is suing on behalf of the corporation, having "derived" that right by virtue of being a shareholder. Essentially, in a derivative lawsuit, a shareholder contends that the individuals typically entrusted with acting in the corporation's best interests (the officers and directors) are failing to do so. Consequently, the shareholder steps in to safeguard the corporation's interests. These lawsuits are often contentious as they are typically litigated by plaintiffs' lawyers on a contingency fee basis, proving to be financially burdensome for the corporation. Executives also view them unfavorably, as shareholders may sue corporate officers or directors themselves for allegedly neglecting the company's best interests.
One of the pivotal roles for shareholders is the election of the board of directors for a corporation. Shareholders exclusively elect directors; there is no alternative pathway to becoming a director. The board holds the responsibility for crucial decisions affecting the corporation, such as declaring and distributing corporate dividends to shareholders, authorizing significant initiatives like a new plant or entry into a foreign market, appointing and removing corporate officers, determining employee compensation—especially bonus and incentive plans—and issuing new shares and corporate bonds. Since the board doesn't convene frequently, it can delegate these tasks to committees, which subsequently report to the board during its meetings.
Shareholders have the authority to elect individuals to the board of directors, within the limits specified in the corporate documents regarding the authorized number of board members. In many large corporations, the board comprises both internal and external members. External board members may come from other private companies (though not competitors), former government officials, or academia. While it was once common for the CEO to also serve as the chair of the board of directors, there has been a recent trend toward appointing different individuals to these roles. Shareholders increasingly vie for board seats to represent their interests, and some corporations with sizable labor forces reserve a board seat for a union representative.
Board members possess considerable autonomy to make business decisions they deem in the company's best interest. Governed by the business judgment rule, board members are generally protected from hindsight critique of their decisions as long as they act in good faith and in the corporation's best interests. Board members owe a fiduciary duty to the corporation and its shareholders, presumed to exercise their best business judgment in decision-making.
However, shareholders in derivative litigation can challenge the business judgment rule. The aftermath of recent corporate scandals has led to increased scrutiny of board members, holding them accountable for effective corporate management. In cases such as WorldCom's bankruptcy due to excessive spending by its CEO, board members were accused of negligence in permitting the CEO to misuse corporate funds. While corporations typically provide insurance for board members (known as D&O insurance, for directors and officers), there are situations where D&O insurance doesn't apply, leaving board members personally responsible for legal costs. For instance, in 2005, ten former outside directors of WorldCom agreed to pay $18 million out of their own pockets to settle shareholder lawsuits.
Boards of directors play a crucial role in appointing corporate officers, also known as "C-level" executives, who typically hold titles such as chief executive officer, chief operating officer, chief of staff, chief marketing officer, and others. These officers are actively involved in day-to-day decision-making for the company, translating the board's strategy into actionable plans. Possessing legal authority, officers can sign contracts on behalf of the corporation, thereby binding it to legal obligations. Officers, though full-time employees of the company, can be removed by the board, often without specific cause.
While corporations offer certain advantages, such as limited liability for shareholders, they come with a significant drawback: double taxation. Taxing authorities treat corporations as distinct taxable entities, akin to individuals. Although a corporation lacks a Social Security number, it has an Employer Identification Number (EIN) that serves the same purpose of identifying the company to tax authorities. As a separate legal entity, corporations are required to pay federal, state, and local taxes on net income. Despite the top income tax rate being 35 percent, the effective tax rate for most U.S. corporations is considerably lower. Furthermore, when profits are distributed to shareholders as dividends, they are subject to taxation once again in the form of dividend tax.
Closely held corporations, particularly small family-run businesses, have a means to circumvent the challenge of double taxation by opting for S corporation status. Named after the corresponding subsection of the tax law, an S corporation has the option to be taxed similarly to a partnership or sole proprietorship. Unlike traditional corporations, S corporations face taxation only at the shareholder level when dividends are declared, avoiding corporate-level taxation. Subsequently, shareholders pay personal income tax upon receiving their portion of corporate profits. Functioning like any other corporation in terms of formation and limited liability, the differentiating factor lies in its tax treatment. S corporations combine the advantages of limited liability inherent in corporations with the single-level taxation benefits characteristic of sole proprietorships, eliminating corporate taxes. However, S corporations are subject to specific constraints, including a cap of one hundred shareholders, all of whom must be U.S. citizens or resident aliens, a restriction to a single class of stock, and exclusion from membership in an affiliated group of companies. These limitations are designed to reserve the "S" tax treatment for small businesses exclusively.
11.4.4 Limited Liability Entities
At this point, you should grasp the simplicity yet risks associated with operating as a sole proprietor and understand why corporations are often preferred for larger businesses. Despite the corporation's flexibility, it may prove unwieldy and costly for smaller enterprises due to requirements like annual meetings, the need for directors and officers, and less favorable tax features.
A more fitting solution for a broad spectrum of businesses is the limited liability company (LLC), striking a balance between the ease of sole proprietorships and the limited liability of corporations. LLCs represent a hybrid form of business organization, offering the liability protection of corporations and the tax advantages of partnerships. Individuals who own LLCs are referred to as members, and akin to sole proprietorships, an LLC can be established with only one member. Members may be actual individuals or other entities like LLCs, corporations, or partnerships. Unlike limited partnerships, members of an LLC can actively participate in the day-to-day management of the business. In contrast to S corporations, there are no restrictions on the number of LLC members, and they can be residents of other countries.
The tax structure for LLCs is highly adaptable. Each tax year, an LLC can decide how it prefers to be taxed. For instance, it may opt for corporate taxation, subjecting net income to corporate income tax. Alternatively, it can choose to have income "flow through" the corporate structure to the member-shareholders, who then pay personal income tax, mirroring the taxation approach of a partnership. The flexibility of LLC taxation enables sophisticated tax planning strategies, allowing for variations in tax treatment from year to year.
LLCs are established by submitting the articles of organization to the relevant state agency responsible for chartering business entities, usually the Secretary of State. Forming an LLC is often more straightforward than establishing a corporation. Indeed, the process of starting an LLC may surprise you with its simplicity. Typical LLC statutes only require the name of the LLC and the contact details for the LLC's legal agent (in case of legal actions against the LLC). In most states, forming an LLC can be undertaken by any competent business professional without legal assistance, incurring minimal time and costs. Unlike corporations, LLCs are not obligated to issue stock certificates, maintain annual filings, elect a board of directors, hold shareholder meetings, appoint officers, or engage in regular entity maintenance. Most states mandate that LLCs include the letters "LLC" or the words "Limited Liability Company" in their official business names. However, LLCs can also file "doing business as" (d.b.a.) registrations to operate under an alternative name.
While the articles of organization are the only requirements to initiate an LLC, it is advisable for LLC members to craft a written LLC operating agreement. This agreement typically outlines how the business will be managed and operated, potentially including a buy/sell agreement akin to a partnership agreement. While the operating agreement affords members the flexibility to run their LLCs as they see fit, it can also serve as a safeguard. Given that LLC law is relatively recent compared to corporation law, the absence of an operating agreement can make resolving disputes among members challenging.
LLCs, while advantageous, come with their own set of drawbacks. As a separate legal entity from its members, it is crucial for members to maintain an arm's-length relationship with LLCs, as there is a risk of piercing the veil, similar to the risk associated with corporations. Fundraising for an LLC can be challenging, akin to the difficulties faced by sole proprietorships, particularly in the early stages of an LLC's business operations. Many lenders require LLC members to personally guarantee any loans taken out by the LLC. Additionally, LLCs are not the ideal structure for companies aiming to go public and sell stock. Fortunately, it is relatively straightforward to convert an LLC into a corporation, leading many startups to initially opt for LLC status and later convert to corporations before their initial public offering (IPO).
A closely related entity to the LLC is the limited liability partnership, or LLP. It is important not to conflate limited liability partnerships with limited partnerships. LLPs share similarities with LLCs but are specifically designed for professionals who conduct business as partners. They offer the advantage of passing through income for tax purposes while maintaining limited liability for all partners. LLPs are particularly favored among professionals such as doctors, architects, accountants, and lawyers. In fact, many major accounting firms have transitioned their corporate structures into LLPs.
47.1.1 Corporate Expansion
In common parlance, the term "merger" is frequently used to describe any form of expansion in which one corporation obtains a portion or the entirety of another corporation. However, from a legal perspective, a merger represents just one of four strategies for achieving growth, distinct from internal expansion.
The realm of antitrust law plays a pivotal role in corporate expansion, and a detailed exploration of this facet is reserved for Chapter 48, titled "Antitrust Law." In that chapter, as we delve into the study of Section 7 of the Clayton Act, the potential antitrust implications associated with merging or consolidating with a competing corporation will be thoroughly examined.
Purchase of Assets
An effective method of corporate expansion involves the acquisition of another corporation's assets. In this scenario, ABC Corporation, seeking growth, finds the assets of XYZ Corporation particularly appealing. ABC proceeds to acquire these assets, facilitating its expansion. Following the purchase, XYZ may either retain its corporate identity or cease to exist, contingent on the extent of assets acquired by ABC.
Asset purchases offer several advantages, most notably the flexibility for the acquiring corporation to selectively choose which assets and liabilities it wishes to assume (subject to certain constraints elaborated further in this section). Additionally, specific transactions may bypass the need for a shareholder vote. If the selling corporation retains a significant portion of its assets, shareholder approval may not be required.
To illustrate, consider BCT Bookstore, Inc., a corporation established by Bob, Carol, and Ted, which has successfully operated three branch stores. As the company faces escalating transportation costs, it discovers that the Flying Truckman Co., Inc. is open to selling its business due to recent financial challenges. Recognizing an opportunity to optimize shipping logistics and generate additional profits from other business lines, BCT explores the acquisition of Flying Truckman's operations.
Given the circumstances, the most straightforward and secure approach to acquire Flying Truckman is through the purchase of its assets. This strategy allows BCT to gain ownership of the trucks and selected routes without inheriting the potential negative associations or liabilities. BCT could even choose to rebrand, discarding the Flying Truckman name if desired.
In many states, approval from the boards of directors of both the selling and acquiring corporations is essential for a smooth transfer of assets. Additionally, the shareholders of the selling corporation must provide their majority consent through a vote. Notably, shareholders of the acquiring company do not need to be consulted in this process, providing a means to navigate any opposition, such as Ted's, effectively (refer to Figure 47.1 "Purchase of Assets"). In cases involving the bulk sale of inventory, compliance with laws governing bulk transfers is also necessary (see Chapter 18 "Title and Risk of Loss"). By acquiring the assets, encompassing trucks, routes, and the trademark Flying Truckman (to prevent unauthorized use), the acquiring corporation can seamlessly integrate the functions of the acquired company without directly continuing its business as such. For further insights on asset purchases, refer to the case of Airborne Health v. Squid Soap, 984 A.2d 126 (Del. 2010).
Successor Liability
Given the circumstances, the most straightforward and secure approach to acquire Flying Truckman is through the purchase of its assets. This strategy allows BCT to gain ownership of the trucks and selected routes without inheriting the potential negative associations or liabilities. BCT could even choose to rebrand, discarding the Flying Truckman name if desired.
In many states, approval from the boards of directors of both the selling and acquiring corporations is essential for a smooth transfer of assets. Additionally, the shareholders of the selling corporation must provide their majority consent through a vote. Notably, shareholders of the acquiring company do not need to be consulted in this process, providing a means to navigate any opposition, such as Ted's, effectively refer to the chart above. In cases involving the bulk sale of inventory, compliance with laws governing bulk transfers is also necessary (see Chapter 18 "Title and Risk of Loss"). By acquiring the assets, encompassing trucks, routes, and the trademark Flying Truckman (to prevent unauthorized use), the acquiring corporation can seamlessly integrate the functions of the acquired company without directly continuing its business as such. For further insights on asset purchases, refer to the case of Airborne Health v. Squid Soap, 984 A.2d 126 (Del. 2010).
Merger
When a company's assets are purchased, the selling company may or may not cease to exist. In contrast, a merger involves the acquired company being assimilated into the acquiring company, resulting in the acquired entity's cessation. The acquiring company gains possession of all assets, encompassing physical and intangible properties like contracts and goodwill, along with assuming all the debts of the acquired company.
The initiation of a merger involves negotiations between two or more corporations, leading to an agreement specifying key details, such as which corporation will survive and the identities of the management personnel. Two primary types of mergers exist: cash mergers and noncash mergers. In a cash merger, shareholders of the disappearing corporation exchange their shares for cash, relinquishing any interest in the surviving corporation—they are essentially bought out. This is often referred to as a freeze-out merger, as the disappearing corporation's shareholders are excluded from holding an interest in the surviving corporation.
Conversely, in a non cash merger, shareholders of the disappearing corporation retain an interest in the surviving corporation. Through this arrangement, the disappearing corporation's shareholders exchange their shares for shares in the surviving corporation, maintaining an ongoing interest in the latter.
For a merger to proceed, unless the articles of incorporation specify otherwise, it requires majority approval from both boards of directors and both sets of shareholders. The shareholder majority is based on the total shares eligible to vote, not just the shares represented at the special meeting convened to decide whether to proceed with the merger.
Consolidation
Consolidation is essentially equivalent to a merger, but in this case, the resulting entity is an entirely new corporation. To illustrate, BCT and Flying Truckman could consolidate to create a new corporation. Similar to mergers, both the boards and shareholders must give majority approval for the consolidation. The new corporation comes into effect upon the issuance of a certificate of merger or incorporation by the secretary of state.
Purchase of Stock
Takeovers
The fourth method of expansion, the purchase of a company's stock, is a more intricate process compared to other methods. Takeovers have gained popularity for gaining control as they don't necessitate an affirmative vote from the target company's board of directors. In a takeover, the acquiring company directly approaches the target's shareholders, proposing either cash or alternative securities, often at a premium over market value, in exchange for their shares. It's not always essential for the acquiring company to buy 100 percent of the shares. In fact, control can be attained by acquiring less than half of the outstanding stock, especially when the shares are numerous and widely dispersed. In our example, if Flying Truckman has shareholders, BCT would directly offer those shareholders a proposal to acquire their shares.
Tender Offers
In the case of closely held corporations, a company set on a takeover can negotiate with each stockholder individually, making a direct offer to purchase their shares. However, in the case of large publicly held companies, it is impractical and/or too expensive to reach each individual shareholder. To reach all shareholders, the acquiring company must make a tender offer, which is a public invitation to purchase shares. Technically, the tender offer is not an offer in the usual sense; rather, it invites shareholders to sell their shares at a specified price. The tender offer may outline the price in cash or in shares of the acquiring company. Typically, the offeror aims to purchase a controlling interest, limiting the tender to a specified number of shares and reserving the right not to purchase any shares beyond that number. The tender offer is also conditioned on receiving a minimum number of shares, ensuring that the offeror need not buy any if stockholders do not offer the required threshold number of shares.
Leveraged Buyouts
A tender offer or another form of asset purchase can be structured as a leveraged buyout (LBO), a transaction financed by debt. In a common LBO scenario, investors—comprising members of the target corporation and/or external parties—seek to acquire or maintain a controlling interest in the target. These buyers use the assets of the target corporation, such as real estate or a manufacturing plant, as collateral to secure a loan for the acquisition. Additionally, other forms of debt, such as bond issuance or loans, may be utilized to facilitate the LBO.
For further insights into tender offers and mergers, refer to Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del. 1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985). The Wall Street Journal offers comprehensive coverage of tender offers, mergers, and LBOs.
State versus Federal Regulation of Takeovers
Under the federal Williams Act, when initiating a tender offer for over 5 percent of a target company's stock, the offeror is required to file a statement with the Securities and Exchange Commission (SEC). This statement must disclose the source of funds for the purchase, the purpose of the acquisition, and the extent of the offeror's holdings in the target company. Even in the absence of a tender offer, the Williams Act mandates that any person acquiring more than 5 percent ownership in a corporation must file a statement with the SEC within ten days. The Williams Act, amending the Securities Exchange Act of 1934, can be accessed at http://taft.law.uc.edu/CCL/34Act/.
In the regulation of foreign corporations, the US Constitution's Commerce Clause (Article I, Section 8) grants Congress the authority to regulate commerce among states. The constitutionality of takeover laws enacted by states in the early 1970s, which aimed to delay tender offers, was challenged. These laws often granted target company management the right to a hearing and prolonged the process, providing time to build a defense against a takeover. One such law in Illinois required a 20-day notice to the secretary of state and the target corporation before a tender offer, during which the offeror couldn't disseminate information. The secretary of state could further delay or even deny the tender offer through a hearing. In 1982, the Supreme Court, in Edgar v. Mite Corp., invalidated the Illinois law, deeming it a violation of the Commerce Clause and preempted by the Williams Act. (Edgar v. Mite Corp., 457 U.S. 624, 1982).
After the Mite decision, states introduced a second generation of takeover laws. In 1987, the Supreme Court, in CTS Corporation v. Dynamics Corporation of America, upheld an Indiana second-generation statute. This law prohibited an offeror who acquired 20 percent or more of a target's stock from voting unless other shareholders (excluding management) approved. The approval vote could be postponed for up to fifty days from the offeror's statement reporting the acquisition. The Court determined that the Commerce Clause and the Williams Act were not violated by the Indiana law. Unlike the Illinois law in Mite, the Indiana law was deemed consistent with the Williams Act as it safeguarded shareholders, didn't unreasonably delay the tender offer, and didn't discriminate against interstate commerce (CTS Corporation v. Dynamics Corporation of America, 481 U.S. 69, 1987).
Encouraged by the CTS decision, nearly half of the states enacted a third-generation law. This law mandates a waiting period of several years before a bidder can merge with the target company unless the target's board agrees in advance to the merger. Since, in many cases, a merger is the objective of the bid, these laws carry significant influence. In 1989, the Seventh Circuit Court of Appeals upheld Wisconsin's third-generation law, stating that it didn't violate the Commerce Clause and wasn't preempted by the Williams Act. The Supreme Court chose not to review the decision (Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 7th Cir. 1989).
Short-Form Mergers
If a company acquires 90 percent or more of the stock of another company, it can facilitate a short-form merger. In this scenario, only the board of directors of the acquiring (parent) company needs to approve the merger, rendering the consent of the shareholders of either company unnecessary.
Appraisal Rights
If a shareholder possesses the right to vote on a corporate plan involving a merger, consolidation, or the sale of all or substantially all of its assets, that shareholder also has the right to dissent and trigger appraisal rights. Using the BCT example once more, if Bob and Carol, as shareholders, are eager to acquire Flying Truckman, but Ted is uncertain about the wisdom of such a move, Ted could exercise his appraisal rights to dissent from the expansion involving Flying Truckman.
The law mandates that the shareholder must submit a notice of intention to demand the fair value of their shares to the corporation before the vote. If the plan is approved and the shareholder does not vote in favor, the corporation must send a notice specifying procedures for obtaining payment, and the shareholder must demand payment within the time set in the notice, which cannot be less than thirty days. Fair value, in this context, refers to the value of shares immediately before the effective date of the corporate action to which the shareholder has objected. Changes in value in anticipation of the action are excluded, unless the exclusion is deemed unfair.
If an agreement on fair value cannot be reached between the shareholder and the company, the shareholder must file a petition requesting a court to determine the fair value. The method of determining fair value depends on the circumstances, with the price quoted on the exchange being a common benchmark when there is a public market for stock traded on an exchange. In certain situations, other factors, especially net asset value and investment value, may assume greater importance.
For further discussion of appraisal rights and when they may be invoked, refer to Hariton v. Arco Electronics, Inc. (40 Del. Ch. 326; 182 A.2d 22, Del. 1962) and M.P.M. Enterprises, Inc. v. Gilbert (731 A.2d 790, Del. 1999).
Bankruptcy of Business: The Unraveling of Public Companies
When public companies face financial distress and are unable to meet their financial obligations, the specter of bankruptcy looms large. Bankruptcy is a legal process that offers a structured approach to address financial challenges, providing a framework for the company to reorganize its debts or, in some cases, liquidate its assets. In the context of public companies, bankruptcy involves complex procedures and has far-reaching implications for various stakeholders.
Initiating the Bankruptcy Process:
Public companies usually file for bankruptcy under either Chapter 7 or Chapter 11 of the United States Bankruptcy Code. Chapter 7 involves the liquidation of assets to repay creditors, while Chapter 11 is a form of reorganization that allows the company to continue operations while developing a plan to repay debts.
Chapter 11 Reorganization:
For public companies, Chapter 11 bankruptcy is a strategic tool for financial rehabilitation. The company retains control of its operations and attempts to negotiate with creditors to restructure its debts. During this period, the company may continue its normal business activities, and a bankruptcy court oversees the process. This stage often involves developing a plan of reorganization, which outlines how the company will repay creditors and regain financial stability.
Implications for Shareholders:
Shareholders of a public company in bankruptcy face significant uncertainties. The value of their investments may decline, and there is a possibility of total loss. In Chapter 11, existing shareholders may see their ownership stake diminished or eliminated entirely as part of the debt restructuring process.
Debt Restructuring and Negotiations:
During the bankruptcy process, the company engages in negotiations with creditors to restructure its debts. This could involve reducing the total amount owed, extending repayment periods, or converting debt into equity. These negotiations are critical in determining the company's future financial health.
The Role of the Bankruptcy Court:
The bankruptcy court plays a pivotal role in overseeing the entire process. It ensures that the bankruptcy proceedings are fair to all parties involved and approves the final reorganization plan. The court's involvement provides a level of legal protection to the company and its creditors.
Emergence from Bankruptcy:
If successful, the public company emerges from bankruptcy with a restructured financial foundation. This may involve changes to its capital structure, business operations, and overall financial management. The company aims to resume normal business activities with a more sustainable financial outlook.
Potential Liquidation – Chapter 7:
In some cases, Chapter 7 bankruptcy may be inevitable. This involves the liquidation of the company's assets to repay creditors. Shareholders are typically left with little or no value, as the priority is to settle outstanding debts.
The bankruptcy process for public companies is a complex journey with significant implications for shareholders, creditors, and the company itself. It represents a critical juncture where financial strategies, negotiations, and legal oversight intersect. Whether through successful reorganization or liquidation, the outcome shapes the company's future and determines the fate of its stakeholders.
What Will Happen to My Stock or Bond?
Even after a company files for bankruptcy under Chapter 11, its securities may continue trading. Typically, companies in Chapter 11 struggle to meet listing standards on major exchanges like Nasdaq or the New York Stock Exchange, leading to delisting. However, delisted shares can still be traded on the OTCBB or Pink Sheets, as there's no federal law prohibiting the trading of bankrupt companies' securities.
Investors should exercise caution when considering common stock of Chapter 11 companies, as it poses significant risk and often results in financial losses. In bankruptcy, existing equity shares are often canceled in the company's reorganization plan, with creditors and bondholders becoming the new shareholders. Shareholders who do participate in the plan may face substantial dilution.
If a company successfully emerges from bankruptcy, it may have two types of common stock with different ticker symbols. The old common stock (pre-bankruptcy) traded on the OTCBB or Pink Sheets will end with "Q," indicating its bankruptcy involvement. The new common stock, issued during the reorganization, will not end with "Q." Sometimes, authorized but not yet issued stock may trade "when issued," denoted by a "V" at the end of the ticker symbol. Once issued, the "V" is removed. Investors must be aware of these distinctions, as old shares may be worthless if the company issues new common stock after emerging from bankruptcy.
Throughout a bankruptcy process, bondholders cease to receive interest and principal payments, while stockholders no longer receive dividends. Bondholders may undergo a restructuring that involves receiving new stock, new bonds, or a combination of both. Similarly, stockholders may be requested by the trustee to exchange their old stock for new shares in the reorganized company, though the new shares may be fewer in quantity and potentially less valuable than their previous holdings. The details of these arrangements, along with the investors' rights and anticipated outcomes, are outlined in the reorganization plan.
In cases where the bankruptcy court determines the debtor is insolvent—where the company's liabilities surpass its assets—stockholders may find their shares rendered worthless. It's crucial for investors to understand their rights and potential outcomes as outlined in the reorganization plan. If the value of a company's liabilities exceeds its assets, rendering stock worthless, individuals can contact their local Internal Revenue Service (IRS) office or call 1-800-829-1040 to learn how to report these worthless securities as a loss on their income tax return.
If unsure about the value of their stock and unable to find relevant pricing information in newspapers, investors can seek clarification from their broker or directly contact the company for the necessary details.
How Does Chapter 11 Work?
The U.S. Trustee, operating under the Justice Department's bankruptcy jurisdiction, plays a pivotal role in the restructuring process by appointing committees to advocate for the interests of both creditors and stockholders. These committees collaborate with the company to formulate a reorganization plan aimed at alleviating the debt burden. Approval of the plan necessitates consensus from creditors, bondholders, and stockholders, with final confirmation granted by the court. Remarkably, the court retains the authority to override rejections by creditors or stockholders if it deems the plan equitable in its treatment of all parties involved.
Following plan confirmation, a more comprehensive report, mandated by the Securities and Exchange Commission (SEC) on Form 8-K, must be submitted. This report provides a succinct summary of the reorganization plan, occasionally including the complete plan for thorough disclosure.
Securities Regulation
I recommend viewing this insightful lecture that delves into the intricacies of securities law, administered by the United States federal government. The comprehensive discussion not only highlights the federal dimension but also sheds light on how securities regulation operates concurrently at the state level within the unique federal structure of the United States.
Place special emphasis on the segment addressing the definition of a security, a fundamental concept in the realm of securities law. Equally crucial is the exploration of the requirements that companies must meet when offering securities for public sale in the United States. This lecture promises valuable insights into the legal frameworks governing public offerings and the nuances associated with securities regulations in both federal and state contexts.
State Securities Regulation in the United States
I recommend viewing this video, which provides a comprehensive exploration of the pivotal role that states have historically played and continue to play in the regulation of securities in the United States. It highlights the initial era when states took the lead in securities regulation and examines their enduring significance in this domain.
Give special consideration to the discussion on how states approach securities registration, a critical aspect of their regulatory framework. Additionally, focus on the role of uniform acts, which aim to promote coordination among states and the federal government in the realm of securities regulation. This video promises valuable insights into the historical evolution and contemporary dynamics of state involvement in the regulation of securities, offering a nuanced perspective on the intricate relationship between state and federal regulatory frameworks.
Sarbanes-Oxley
I recommend watching this video that delves into the adoption and intricacies of the Sarbanes-Oxley Act (SOX). This significant legislation, often abbreviated as SOX, emerged in response to a series of scandals involving major public corporations in the United States. Pay close attention to the roles played by key stakeholders, including corporate executives, accountants, auditors, and legal counsel, as the video likely explores their involvement in the development and implementation of SOX.
Take note of the problems that SOX aimed to address in the aftermath of corporate scandals and financial irregularities. The video is likely to provide insights into the specific changes mandated by SOX to tackle these issues, offering a nuanced understanding of how the legislation sought to enhance corporate governance, financial transparency, and accountability in the corporate sector.
48.1.1 History and Basic Framework of Antitrust Laws in the United States
This chapter delves into the inception of federal antitrust laws, elucidating the fundamental regulations surrounding restraints of trade, as outlined in the Sherman Act, Section 1, and the Clayton Act, Section 3. Furthermore, we examine the dynamics of market power concentrations, exploring the realms of monopoly, acquisitions, and mergers, governed by Sherman Act, Section 2, and Clayton Act, Section 7.
In Chapter 49, titled "Unfair Trade Practices and the Federal Trade Commission," we extend our exploration to encompass the domain of deceptive acts and unfair trade practices. This encompasses a comprehensive understanding of both the enforcement mechanisms orchestrated by the Federal Trade Commission (FTC) and the regulatory aspects delineated in common law. This dual perspective allows for a nuanced examination of the legal landscape governing deceptive acts and unfair trade practices at both the federal regulatory level and within the broader context of common law principles.
The antitrust laws are designed to uphold competition as the driving force of the U.S. economy, with the term "antitrust" signaling a stance against the burgeoning giant trusts that emerged post the Civil War. Prior to this period, the economy predominantly operated at a local scale, characterized by small manufacturers, distributors, and retailers. However, the Civil War showcased the efficacy of large-scale enterprises in meeting formidable military production demands, prompting business owners to recognize the strategic advantages of size in attracting capital. This era marked the first instances where substantial fortunes could be amassed in the industrial sector, attracting enterprising individuals in an age that celebrated the acquisitive spirit.
The initial wave of significant business consolidations was witnessed in the railroad industry. Faced with the imperative to avert ruinous price wars, railroad owners engaged in private agreements known as "pools," effectively dividing markets and extending discounts to favored shippers who committed to utilizing specific lines for shipping goods. These pools, however, fostered discrimination against certain shippers and geographic regions, leading to growing public resentment.
Farmers were among the first to feel the adverse effects of these practices and, in response, organized politically to voice their opposition. Consequently, many state legislatures passed laws regulating railroads. In the landmark case of Munn v. Illinois (94 U.S. 113, 1877), the Supreme Court rejected a constitutional challenge to a state law regulating the transportation and warehousing of grain. The Court asserted that the "police powers" of states allowed the regulation of property used for public purposes. Yet, over time, several state railroad laws were invalidated as they interfered with interstate commerce, a domain constitutionally reserved for Congress to regulate. This led to the enactment of federal legislation—the Interstate Commerce Act of 1887—which established the inaugural federal administrative agency, the Interstate Commerce Commission. This historical development marked a significant step in the evolution of antitrust laws in the United States.
Meanwhile, the railroads discovered that their pooling arrangements lacked sufficient enforcement power. Those who ostensibly agreed to adhere to the pooling agreements often found ways to cheat the system. Although the corporate form of business enterprise allowed for the potential accumulation of immense capital under the control of a small number of managers, during the 1870s and 1880s, it had not yet solidified as the predominant legal operational structure. In response to these challenges, the astute legal minds behind John D. Rockefeller organized Standard Oil of Ohio as a common-law trust. Trustees were issued corporate stock certificates from various companies, enabling them to consolidate multiple corporations within the trust and effectively manage and control entire industries. Within a decade, various trusts, including the Cotton Trust, Lead Trust, Sugar Trust, Whiskey Trust, and others in oil, telephone, steel, and tobacco, either became or were in the process of becoming monopolies.
Consumer outcry against these monopolistic practices intensified. Recognizing the public sentiment, both Republicans and Democrats incorporated antitrust planks into their platforms in the 1888 elections. In 1889, the newly elected President, Republican Benjamin Harrison, condemned monopolies as "dangerous conspiracies" and urged legislation to counter the monopolistic tendency that threatened to "crush out" competition.
This call to action culminated in the Sherman Antitrust Act of 1890, championed by Senator John Sherman of Ohio. The act's pivotal sections prohibited combinations in restraint of trade and monopolizing. Senator Sherman and other sponsors asserted that the act derived from a common-law policy disapproving of monopolies, but it added a crucial element for the future of business and the U.S. economy—the federal government's power to enforce a national policy against monopoly and restraints of trade. Despite its passage, the Sherman Act initially faced challenges in enforcement. It took fifteen years before a national administration, led by President Theodore Roosevelt, commonly known as "the Trustbuster," initiated vigorous enforcement. Roosevelt's administration targeted the Northern Securities Corporation, a transportation holding company, marking a pivotal moment in the application of the Sherman Act.
During its seven-year tenure, the Roosevelt administration launched fifty-four antitrust suits, a pace that accelerated under the subsequent Taft administration, filing ninety suits in just four years. The call for further reform persisted, particularly following the 1911 Standard Oil case (Standard Oil Co. of New Jersey v. United States, 221 U.S. 1), where the Supreme Court clarified that the Sherman Act prohibits only "unreasonable" restraints of trade. A congressional investigation into the US Steel Corporation revealed practices unchecked by the Sherman Act and ignited a crucial debate on national economic policy. The question at the heart of the debate, with echoes in contemporary discussions, was whether the focus should be on enforcing competition or regulating business in a collaborative partnership with the government.
While big business advocated for regulation, Congress, in a policy that endures to the present day, opted for competition enforced by the government as the primary driver of the economy. Consequently, in 1914, at the behest of President Woodrow Wilson, Congress passed two additional antitrust laws—the Clayton Act and the Federal Trade Commission Act. The Clayton Act prohibited price discrimination, exclusive dealing, tying contracts, acquisition of a company's competitors, and interlocking directorates. Simultaneously, the FTC Act outlawed "unfair methods" of competition, established the Federal Trade Commission (FTC) as an independent administrative agency, and granted it the authority to enforce antitrust laws alongside the Department of Justice.
The Sherman, Clayton, and FTC Acts persist as the fundamental pillars of antitrust law. Numerous states have also enacted their antitrust laws, primarily modeled on federal statutes, governing intrastate competition. However, the details of state antitrust laws are beyond the scope of this textbook.
Over the next third of a century, two significant federal statutes were introduced as amendments to the Clayton Act. Amidst the Great Depression in 1936, the Robinson-Patman Act was enacted, specifically targeting various forms of price discrimination. Following this, in 1950, the Celler-Kefauver Act was passed, reinforcing the Clayton Act's restrictions on the acquisition of competing companies. This legislative move was prompted by concerns about an apparent surge in corporate mergers and acquisitions. In the subsequent sections, we will closely examine the provisions and implications of these laws.
The Sherman Act
Section 1 of the Sherman Act unequivocally states, "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal." The broad language of this provision hinges on the interpretation of the phrase "restraint of trade or commerce." While seemingly all-encompassing, a closer examination reveals that this assertion is not absolute. In 1911, the Supreme Court narrowed the scope of Section 1, confining its application to unreasonable restraints of trade.
The term "restraint of trade" itself lacks a fixed definition, with the Sherman Act's framers drawing inspiration from common-law principles against monopolies and anti-competitive practices. However, common law in this context was only rudimentarily developed, and the interpretation of these terms ultimately lies within the purview of the courts. In essence, the antitrust laws, particularly the Sherman Act, empower the courts to shape a federal "common law" of competition.
On the other hand, Section 2 of the Sherman Act addresses monopolization, stating, "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a misdemeanor." In 1976, Congress elevated the severity of Sherman Act violations, classifying them as felonies. Unlike Section 1, Section 2 does not necessitate a collaboration between multiple entities; a single company acting independently can be held accountable for monopolization or attempted monopolization.
The Clayton Act
The Clayton Act, enacted in 1914, aimed to address perceived loopholes in the Sherman Act, highlighting its close association with the passage of the FTC Act. Diverging from the Sherman Act, the Clayton Act operates as a civil statute, designating specific practices as unlawful and authorizing government entities or private litigants to seek injunctions against these practices. In contrast to the FTC Act, the Clayton Act explicitly enumerates four undesirable practices. While Sherman Act violations necessitate a demonstrated adverse impact on competition, Clayton Act violations require only a probable adverse impact. Consequently, the enforcement of the Clayton Act involves assessing the likelihood of an adverse impact, a prediction that the defendant must counter to avoid an unfavorable judgment.
The four prohibited behaviors under the Clayton Act are as follows:
Discrimination in prices charged to different purchasers of the same commodities.
Conditioning the sale of one commodity on the purchaser refraining from using or dealing in commodities offered by the seller's competitors (Clayton Act, Section 3).
Acquiring the stock of a competing corporation (Clayton Act, Section 7). Recognizing that the original language did not cover various types of acquisitions and mergers prevalent in modern corporate law and finance, Congress amended this section in 1950 through the Celler-Kefauver Act, broadening its prohibition to encompass a wide array of acquisitions and mergers.
Membership by a single person on more than one corporate board of directors if the companies are or were competitors (Clayton Act, Section 8).
The Federal Trade Commission Act
Similar to the Clayton Act, the FTC Act operates as a civil statute and does not entail criminal penalties. However, in contrast to the Clayton Act, the prohibitions outlined in the FTC Act are broadly articulated. The focal point of the FTC Act is Section 5, which expressly prohibits "unfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce." A detailed examination of Section 5 is undertaken in Chapter 49, titled "Unfair Trade Practices and the Federal Trade Commission."
Enforcement of Antitrust Laws
General Enforcement
Enforcement of antitrust laws in the United States operates through four distinct mechanisms.
Firstly, the US Department of Justice has the authority to initiate civil actions to restrain violations of the Sherman and Clayton Acts. Additionally, it can pursue criminal prosecutions for Sherman Act violations. These legal actions are brought forth by the offices of the US attorney in the relevant federal district under the guidance of the US attorney general. The practical oversight of antitrust matters is channeled through the Antitrust Division based in Washington, led by an assistant attorney general. Despite having several hundred legal professionals, economists, and other experts, the Antitrust Division files a relatively modest number of cases annually—typically less than one hundred civil and criminal actions combined. Notably, the trend indicates a higher frequency of criminal cases compared to civil cases, with the caseload varying in different years.
While the numerical count of cases is a factor, the true significance lies in the intricacy and scale of individual cases. For instance, legal battles such as U.S. v. American Telephone & Telegraph and U.S. v. IBM, both exceedingly complex, spanned several years, demanding substantial staff hours and tens of millions of dollars in government and defense expenditures.
Secondly, the Federal Trade Commission (FTC) adjudicates cases under the Administrative Procedure Act, detailed in Chapter 5 "Administrative Law." Decisions made by the commission can be challenged through appeals in the US courts of appeals. The FTC also possesses the authority to establish "trade regulation rules" that delineate fair practices within specific industries. Although the agency boasts around five hundred lawyers in Washington and a dozen field offices, only approximately half of these legal professionals are directly engaged in antitrust enforcement. Notably, high-profile cases like the government's legal action against Microsoft mirrored the complexity and resource-intensive nature seen in earlier cases involving AT&T and IBM.
Third, as established by the Antitrust Improvements Act of 1976, Congress granted state attorneys general the authority to initiate antitrust lawsuits in federal court, seeking damages on behalf of their constituents. Such legal actions, known as parens patriae claims, enable state officials to represent citizens who may have suffered harm due to the defendant's actions. Any individual in the state who has been adversely affected by the defendant's conduct retains the option to opt out of the collective suit and pursue a separate private action. It's noteworthy that states have traditionally held the power to file antitrust lawsuits seeking injunctive relief for the benefit of their residents.
Fourth, private individuals and companies have the right to file lawsuits seeking damages or injunctions if they can demonstrate direct harm resulting from a violation of the Sherman or Clayton Act. However, it's important to note that private entities cannot bring suits under the FTC Act, regardless of the perceived unfair or deceptive conduct; this prerogative is exclusive to the FTC. In the 1980s, the federal courts witnessed a surge in private antitrust suits, with over 1,500 filed annually, a stark contrast to the fewer than 100 suits initiated by the Department of Justice. Although the number of private antitrust suits declined from 2006 to 2009, dropping to 770, the trend underwent a noticeable shift in the first half of 2010. Concurrently, the Department of Justice pursued 40 or fewer criminal antitrust cases from 2006 to 2008; however, the pace escalated during the Obama administration, reaching 72 cases in 2009.
Enforcement in International Trade
The jurisdiction of the Sherman and Clayton Acts extends to instances where a company's operations impact US commerce. Consequently, these statutes are applicable to US-based enterprises engaged in practices such as colluding to set prices for goods destined for international shipment and to the activities of US subsidiaries of foreign corporations. Notably, these laws empower the prosecution of non-US citizens and business entities for antitrust violations, even if they have not physically entered the United States. The crucial criterion is whether their anticompetitive actions target the US market.
Illustratively, a case in point occurred in November 2010 when a federal grand jury in San Francisco handed down an indictment against three former executives in Taiwan. Seung-Kyu “Simon” Lee, Yeong-Ug “Albert” Yang, and Jae-Sik “J. S.” Kim were charged with conspiring, along with unnamed counterparts, to stifle competition by manipulating prices, curtailing production, and dividing market shares for color display tubes (CDTs), a category of cathode-ray tubes used in specialized applications including computer monitors.
The indictment alleged that Lee, Yang, and Kim engaged in this conspiracy between at least January 2000 and as late as March 2006. Notably, the conspirators convened in locations such as Taiwan, Korea, Malaysia, and China, yet conspicuously avoided meeting in the United States. These gatherings were purportedly convened to exchange crucial information on CDT sales, production, market share, and pricing, with the explicit goal of implementing, monitoring, and enforcing their collusive agreements. Despite the absence of physical meetings on US soil, the far-reaching effects intended for the United States rendered the actions subject to the application of US antitrust laws.
Criminal Sanctions
Prior to 1976, infractions of the Sherman Act were classified as misdemeanors, attracting a maximum fine of $50,000 for each count on which the defendant was found guilty (initially set at $5,000 until 1955), coupled with a maximum jail term of one year. However, in the recent case involving color display tubes (CDTs), each of the three conspirators faced charges of violating the Sherman Act, which now carries significantly more severe penalties.
Under the current provisions, individuals convicted of Sherman Act violations can be subjected to a maximum penalty of ten years in prison and a fine of up to $1 million. Furthermore, the maximum fine can be elevated to twice the financial gain derived from the criminal activity or twice the losses suffered by the victims, should either of these amounts surpass the statutory maximum fine of $1 million. This substantial increase in potential penalties underscores the heightened gravity and consequences associated with Sherman Act violations, reflecting a more stringent approach towards antitrust offenses.
Forfeitures
A less frequently employed provision within the Sherman Act empowers the government to seize any property in transit, whether in interstate or foreign commerce, if said property was involved in a contract, combination, or conspiracy prohibited under Section 1 of the Act.
Injunctions and Consent Decrees
The Department of Justice holds the authority to address violations of the Sherman and Clayton Acts through the pursuit of injunctions in federal district court. These injunctions are intricate directives, delineating specific practices that the defendant must abstain from and outlining the manner in which the business is to be conducted thereafter. Once an injunction is issued, affirmed on appeal, or the appeal period has lapsed, it grants the court ongoing jurisdiction to entertain complaints from those asserting that the defendant is violating its terms.
In certain cases, the injunction or a consent decree effectively serves as the foundational "statute" governing an industry. An illustrative example is the 1956 decree against American Telephone & Telegraph Company (AT&T), which precluded the company from entering the computer business for a quarter-century until the resolution of the government's monopoly suit in 1983, leading to the issuance of a new decree. Federal courts also possess the authority to dismantle a company found guilty of monopolization or to mandate divestiture in cases involving unlawful mergers and acquisitions.
Simultaneously, the Federal Trade Commission (FTC) has the ability to issue cease and desist orders against practices condemned under Section 5 of the FTC Act, encompassing violations of the Sherman and Clayton Acts. Importantly, these orders are subject to appeal in the courts, ensuring a mechanism for the review of FTC actions.
Rather than undergoing a full legal proceeding, defendants may opt for consent decrees, wherein, without admitting culpability, they commit to refraining from the contested activity. Companies found in violation of injunctions, cease and desist orders, or consent decrees can incur a fine of $10,000 per day for each day the violation persists. The inclination towards entering into consent decrees extends beyond a desire to avoid the expense and complexities of a trial.
Under Section 5 of the Clayton Act, when a federal government antitrust case concludes with a final judgment, that judgment can be employed as prima facie evidence in subsequent private suits involving the same facts. This provision significantly facilitates private plaintiffs' cases, as they are only required to demonstrate that the violation indeed caused them harm, without the need to establish that the defendant committed specific acts constituting antitrust violations. Given this favorable condition for private plaintiffs, defendants in government-initiated suits are often incentivized to opt for consent decrees since they are not deemed as judgments.
Furthermore, a guilty plea in a criminal case serves as prima facie evidence of the defendant's liability in later private civil suits, except in cases of a plea of nolo contendere, which avoids this consequence. Section 5 has played a pivotal role in stimulating a substantial portion of private antitrust suits. For instance, the government's price-fixing case against the electric equipment industry in the 1950s, resulting in the imprisonment of certain General Electric executives, led to over 2,200 subsequent private suits.
Treble Damages
At the heart of a private antitrust suit lies its distinctive damage award structure: a victorious plaintiff is granted the right to collect three times the actual damages incurred—commonly referred to as treble damages. Additionally, the prevailing party is entitled to recover the costs incurred for legal representation, often resulting in substantial attorney fees. In some instances, defendants have been compelled to disburse millions of dollars exclusively for attorneys' fees in individual cases.
The rationale behind the concept of treble damages is rooted in the idea that such an enhanced financial incentive serves as a catalyst for private entities to actively monitor and expose antitrust violations within industries. This, in turn, alleviates the federal government of the considerable financial burden associated with maintaining an extensive staff for antitrust oversight. Essentially, the prospect of treble damages aims to foster a collaborative effort between private parties and the legal system in identifying and penalizing anticompetitive practices, thereby reducing the need for extensive governmental resources in enforcing antitrust laws.
Class Actions
A pivotal evolution in antitrust law during the 1970s was the emergence of the class action. With the relaxation of federal procedure rules, a solitary plaintiff gained the ability to litigate on behalf of an entire class of individuals harmed by an antitrust transgression. This mechanism facilitates the initiation of numerous suits that might never have been contemplated otherwise. An individual who, for instance, overpaid by just a dollar due to a lack of competition is unlikely to pursue legal action independently. However, in the context of a class action encompassing ten million similarly affected consumers, the individual can collectively seek $30 million (trebled to $10 million), in addition to attorneys' fees.
Critics argue that class actions primarily serve the interests of lawyers in the antitrust arena, providing a substantial incentive for attorneys to identify a few plaintiffs willing to lend their names to a lawsuit largely orchestrated by legal professionals. Despite this contention, it remains undeniable that the class action serves as a crucial tool for addressing antitrust violations that might otherwise go unchallenged by private parties. Throughout the 1970s, the class action became a vehicle for addressing large-scale antitrust issues, with notable cases involving drug companies and the wallboard manufacturing industry.
Interpreting the Laws
Vagueness
The antitrust laws, particularly Section 1 of the Sherman Act, are characterized by a high degree of ambiguity. Chief Justice Charles Evans Hughes aptly articulated this characteristic, stating, "The Sherman Act, as a charter of freedom, has a generality and adaptability comparable to that found to be desirable in constitutional provisions" (Appalachian Coals v. United States, 288 U.S. 344, 359, 1933). This broad yet imprecise language was intentionally crafted to imbue the antitrust laws with the flexibility necessary to evolve with changing circumstances. The open-ended nature of the statutes allows courts to adjust the law in response to dynamic economic and business landscapes.
However, the inherent vagueness of the antitrust laws gives rise to challenges, leading to uncertainties and inconsistencies in their application. While the expansive language has prevented the laws from becoming quickly obsolete, it has also contributed to a level of unpredictability in their enforcement, creating a need for judicial interpretation and adaptation to address specific cases and scenarios.
The “Rule of Reason”
Section 1 of the Sherman Act unequivocally declares that "every" restraint of trade is illegal. However, a literal interpretation faces a fundamental challenge, as recognized by Justice Louis Brandeis in 1918, who asserted that "Every agreement concerning trade, every regulation of trade restrains. To bind, to restrain, is of their very essence" (Chicago Board of Trade v. United States, 246 U.S. 231, 1918). Applying the Sherman Act in such a sweeping manner, for instance, to a routine contract for a manufacturing company to purchase raw materials, would lead to absurd outcomes. Common sense dictates that the term "every" cannot be taken literally in this context.
Over the course of the century, the courts have grappled with this interpretative challenge. With the benefit of hindsight from numerous cases, a clear understanding of the answer has emerged. Initiated by the landmark case Standard Oil Co. of New Jersey v. United States, the Supreme Court has consistently held that only unreasonable restraints of trade are unlawful (Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 1911).
Often referred to as the "rule of reason," the interpretation outlined in Standard Oil itself can be construed in two ways, causing some confusion over the years. The rule of reason could imply that a restraint is permissible only if it is ancillary to a legitimate business purpose. For instance, a covenant not to compete in the context of a business acquisition is considered lawful if it serves to protect the value of the purchase rather than entirely preventing the individual from engaging in business. The rule of reason, therefore, stipulates that such restraints, aligned with a valid business objective, are not considered unlawful.
An alternative interpretation of the rule of reason adopts a broader perspective, asserting that agreements with the potential to directly impede competition are not inherently unlawful unless the specific impairment itself is deemed unreasonable. For instance, consider a scenario where several retailers of computer software are concerned about an escalating price war that might drive prices to levels where they cannot provide adequate customer service. To mitigate this "cutthroat competition," these retailers collectively agree to establish a reasonable price floor. Chief Justice Edward White, who authored the Standard Oil opinion, might view such an agreement as reasonable, given its purposes, finding it not excessively restrictive and not unduly restraining trade.
However, this expansive view is not legally binding. In practice, almost any business agreement could augment the market power of one or more parties, consequently restraining trade. As elucidated by Justice Brandeis in 1918 in Chicago Board of Trade, the true test of legality is whether the imposed restraint merely regulates and possibly promotes competition or if it has the potential to suppress or even obliterate competition (Chicago Board of Trade v. United States, 246 U.S. 231, 1918). Section 1 violations assessed under the rule of reason consider various factors, including the purpose of the agreement, the parties' ability to execute the agreement to achieve that purpose, and the actual or potential impact of the agreement on competition. If the parties could have pursued less restrictive means to achieve their objectives, the court is more likely to perceive the agreement as unreasonable (Chicago Board of Trade v. United States, 246 U.S. 231, 1918).
“Per Se” Rules
The rule of reason doesn't apply to every act or commercial practice; certain actions are considered intrinsically or inherently damaging to competition. In such cases, no further analysis is necessary if the plaintiff can demonstrate that the defendant engaged in, attempted, or conspired to carry out these acts. An illustrative example is price-fixing, which is deemed per se illegal under the Sherman Act—meaning it is inherently unlawful on its face. In a case involving alleged price-fixing, the central question is not whether the price set was reasonable or how it affected competition; rather, the focus is solely on whether two sellers in a specific market segment actually fixed the price. This singular question constitutes the crux of the matter.
Under the Clayton Act
The Sherman Act is subject to both the rule of reason and per se rules. In contrast, the Clayton Act introduces a distinct standard, articulating concerns about acts that may substantially tend to lessen competition. The interpretation of these terms by the courts is pivotal, and in the subsequent sections, we will delve into how these constructions have evolved.
Administrative Law
Please view this video that explores the interplay between administrative law and business in the United States. Administrative agencies are typically empowered to establish rules that carry the weight of law. Essentially, a legislative body delegates a portion of its authority to these agencies, allowing them to enact laws. Be attentive to the rationale behind this delegation and take note of the various roles played by several U.S. government agencies in overseeing and regulating businesses within their operating environments.
Unit 6 Discussion
A Discussion Question should be answered in 2 to 3 paragraphs. and then respond to two of your peers with meaningful responses.
Do you think it’s ethical for a general partnership to fire a partner by dissolving the partnership and then re-forming without the dismissed partner? Why or why not?
With this it depends on a couple things if the partner maliciously dissolves the partnership it can become unethical but if the partnership is mutually dissolved it can be ethical. You can choose to dissolve it for a vary of reasons such as partner negligence or bankruptcy or change in business practice. An unethical use of dissolving partnership would be if the partner is leaving dissolving the partnership and taking trade secrets or business secrets then plans to make a partnership with someone else. In a case like that if it is discovered and can be proven the party could seek a means of obtaining a remedy in court or redress. And in the case if the individual used a non disclosure agreement and something is leaked outside of the business that would put them liable as well. So partnerships can only be dissolved properly if there's a right reason.
Unit 6 Essay
Through your readings under Unit 6 write an essay on a subject of interest. This would be something that was thought-provoking that you wanted to know more.
Unit 6 Essay
The topic which I thought I would cover for this week is related to securities for law. And considering we have crypto currency which has been making an effect I thought I would dive into some information because the US Securities and Exchange Commission has been trying to work on the regulation of these new technologies and crypto assets as a priority this year. The SEC has been trying to figure out which companies meet the proper standards of care to be considered actual investments.
Before I go over some of the details of that though I wanted to explain the difference between two important things NFT (Non-Fungible-Tokens) and Crypto and what the difference between both of these are since a lot of people don’t know the difference. NFT’s are supposed to be items created on a block chain that can’t be recreated and are verified by the blockchain.
NFT tokens are
coins that have yet to be printed into these items. Although there’s a lot of
murkiness that goes along with different NFT projects like for example
companies making the coins then not actually using them in the trading /
selling process such as what happened to one that was quite popular called
ECOMI. They created those NFT coins and told the investors that they could use
the coins on the market place to buy and sell the NFT’s and then never
implemented that to the way that coins could be used. And there’s really no way
to know whether the coins in the market are even being used to print those NFT’s
because they never registered the actual amount of coins in circulations so all
the numbers are more or less just speculation. The VEVE project they sell
models for still use cash and gems which are purchased with cash in order to
make sales.
The difference with crypto currency coins is that there’s a set number of them in the market. They register a market cap on them and they are used in that network as currency for companies to make their own NFT’s or buy services or something along those lines. There’s also a limit to them so the market cap will never grow outside of the limitations that the coin has. There’s also different kinds Bitcoin is actually a mining type which takes computers doing decrypting to make that process work. Solana and Cardano are some examples of staking coins that work similar to people letting others borrow coins in order to get bank fees as rewards and are more environmentally friendly.
With that out of the way we can see the difference the coins that are NFT’s are harder to list as something which can be considered a SEC asset since often they aren’t actually coins and they don’t really have a monetary value they are often more or less a model or a picture with a digital serial and often have initial coin offerings allowing people to purchase these coins at a price in order to kick off the offering of the coins. The problem with many of these projects is they aren’t decentralized.
The problem with crypto that aren’t decentralized is when they do these coin offerings often the people who invest the most to these coins and the developers have total control over everything about the coin they can increase / decrease the cost of fee’s and decide features and have full control. Some crypto currencies are decentralized such as Bitcoin that no one person controls the decryption process and the cost is all tied up by the computers in the network no one can change any of those things or dictate any of it. Technically Bitcoin could be considered a coin that the SEC could regulate and any coins willing to meet those requirements that make those changes could then be considered securities.
Such as Cardano which
pretty soon will be making an update move that will cause the cryptocurrency to be fully decentralized as was promised when the coin originally was issued.
Though it’s still a question whether coins that were not originally
decentralized would be added to the list as future securities since crypto
currencies really work against the whole fiat currency system that the US has.
Most likely they will work to pivot away from crypto.
Quiz Chapter 6
Sole Proprietorship
a business owned by one person
Advantages of a Sole Proprietorship
easy to start, run company without needing approval from someone else, keep all profits, income taxes usually lower than a corporation's
Disadvantages of a Sole Proprietorship
unlimited liability, hard to get bank loans, many fail, may not have a skills necessary to succeed
Partnership
a business owned by 2 or more people
Advantages of a Partnership
easy to start, easier to get bank loans, each partner gives money to start business, only taxed once, each partner brings different skills
Disadvantages of a Partnership
all partners share business risk, problems occur if partners don't get along or if one leaves, unlimited liability
Corporation
a company that is registered by a state and operates apart from its owners
Advantages of a Corporation
limited liability, raise money through stock, does not end if owner dies
Disadvantages of a Corporation
taxed twice, government regulates more, difficult and costly to start
Cooperative
an organization that is owned and operated by its remember
Nonprofit organization
a type of organization that focuses on providing a service, but not to make a profit
Franchise
a contractual agreement to use the name and sell the products or services of a company in a designated geographic area
Entrepreneur
Someone who takes a risk starting a business to earn a profit
Entrepreneurship
The process of starting, organizing, managing, and assuming the responsibility for a business.
Venture Capital
Money provided by large investors to finance new products and new businesses that have a good chance to be very profitable.
Innovation
An invention or creation that is brand new.
Improvement
A designed change that increases the usefulness of a product, service, or process.
Small Business
An independent business with fewer than 500 employees.
Small Business Administration (SBA)
A government agency that helps small business owners develop business plans and obtain financing and other support for their companies.
the 3 types of businesses
sole proprietorship, partnership, corporation
a sole proprietorship is owned by __________ person
one
about ____ of all businesses in the us are a sole proprietorship
72%
About __ of the revenue comes from a sole proprietorships
5%
an advantage of a sole proprietorship is that proprietors keep all the _______
profits
an advantage of a sole proprietorship is that __________ are lower than corporations
taxes
an advantage of a sole proprietorship is that it's ______ to start
easy
an advantage of a sole proprietorship is that proprietors are in _______
charge
a disadvantage of a sole proprietorship the owner has ________liability and is responsible for the company's __________.
unlimited; debts
a disadvantage of a sole proprietorship is that there is a limited access of
credit
a disadvantage of a sole proprietorship is that the company may run out of _______
money and supplies
a disadvantage of a sole proprietorship is that the owner may not have the necessary __________
skills
a disadvantage of a sole proprietorship is that the business ______ when the owner dies
ends
owned by two or people people who share the risk
partnership
a partnership is owned by ____ or more people show share the ________
2; risk and rewards
partnerships need a
partnership agreement
an advantage of a partnership is that it's _____ to start
easy
an advantage of a partnership is that it's easier to obtain________
capital and credit
an advantage of a partnership is that it's not dependent on a _______ person
sole
an advantage of a partnership is that it's only taxed
once
an advantage of a partnership is that there is ___________ in skills
diversity
a disadvantage of a partnership is that business ______ is shared
risk
a disadvantage of a partnership is that __________ legal and financial liability is shared
unlimited
a disadvantage of a partnership if one partner makes a mistake all partners are
responsible
a company that is registered by a state and operates apart from its owners
corporation
A corporation is a company that is ________ by a state and _________ apart from its owners
registered; operates
Where must the company obtain the charter
state where the main office is located
to form a __________________ the owners mus get a corporate charter from the state where their main office is located
corporation
Which of the ones stated above isn't processed?
organic vegetables
an advantage of a corporation is that there is _______ liability
limited
an advantage of a corporation is hat owners are responsible for no more than the ______ that they have invested in it
capital
an advantage of a corporation is that there is ability to raise money by selling
stocks
money made off of stock
dividend
an advantage of a corporation is that the business __________- when the owner dies
doesn't end
a disadvantage of a corporation is that there is _______ taxation
double
a disadvantage of a corporation is that ________ is taxed
income
a disadvantage of a corporation is that stockholders pay taxes on _______ issued to them
profits
a disadvantage of a corporation is that there are many
regulations
a disadvantage of a corporation is that it's _____ to start
difficult and costly
A cooperative is an organization that is ________ by its members
owned and operated
an organization owned and operated by its members
cooperative
Purpose of cooperative
to save money on the purchase of certain goods and services; makes the marketing of goods and services more efficient and profitable
A nonprofit organization focuses on providing a __________, but not making a profit
service
focuses on providing a service, but not making a profit
non profit organization
nonprofit organizations don't pay ______ bc they're not making a profit
taxes
nonprofit organizations must ______ with the government
register
most common type of business
sole proprietorship
A franchise is a contractual agreement to use the _________and ____________ the products or services of a company in a designated geographic area
name; sell
contractual agreement to use the name and sell products of a company in a designated geographic area
franchise
to run a franchise you have to _________ money and pay ___________ or share the profits
invest; franchise fees
a business that gathers raw goods
producers
agriculture,mining, fishing, or forestry
producers
business that changes raw materials into more finished products
processors
turn crude oil into gasoline
processor
a business that makes finished products out of processed goods
manufacturers
cars and computers
manufacturer's
a business that moves goods from one business to another
intermediary
an intermediary ______ goods, ______ them, and then _____them
stores; sells, resells
business that distributes goods
wholesaler
another name for wholesaler
distributor
a business that purchases goods from a wholesaler and sells them to consumers
retailer
convenience store
retailer
perform tasks rather than provide goods
service businesses
service business employ about ___________ of the workforce and are rapidly increasing in numbers.
three-quarters
companies benefit when the five business functions
work together
manufacturers
finished goods
franchise offers well known
product
the process of creating, expanding, manufacturing or improving goods and services
production
buying and reselling of goods and services that have already been produced
procurement
the process of planning, promoting, pricing, promotion, selling, and distributing ideas, goods and services
marketing
Marketing involves getting consumers to _______ something
buy
advertising is used to _______- consumers to buy one product or service over another
influence
process of achieving company goals of planning, organizing, directing, controlling, and evaluating the effective use of resources
management
business or art of money management
Finance
analyzing financial statements to make future decisions
finance
maintaining and checking records, handling, and preparing financial reports for businesses.
accounting
requires attention to detail and accuracy
accounting
raw materials
producers
changes raw materials
processors'
the functional areas of a business ______- on each other
depend
the functional area of a business can ________ with each other
conflict
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