Ch. 16: Introduction to Share Structures

• Introduction

Definition: Corporation – A fictitious legal entity authorized by statute, created by the filing of Articles of Incorporation with the relevant jurisdiction, and capitalized by issuing shares of stock. A corporation can provide protection to the shareholders against the liabilities created by the corporation in excess of the corporation’s capital.

Definition: Poison Pill – A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by accumulating stock, additional stock is issued so that all shares are diluted, thus increasing the costs of the hostile party’s acquisition.

Definition: Golden Parachute – A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by changing the corporation’s officers, the officers are given large severance benefits, thus increasing the costs to the hostile party.

• Containment of Liabilities

Synopsis: Discussion of the limited liability advantages of corporations.

• Respecting the Corporate Shell

Synopsis: Discusses minimal requirements for treating a corporation as a separate entity so that a court would respect it as such.

Definition: Corporate Shell (a/k/a Corporate Veil) – Slang for the liability limiting advantage of a corporation, which limits the liability of shareholders to the equity they have contributed.

• Veil-Piercing

Synopsis: Discusses the corporate veil and circumstances where it might be set aside, and the alternative of debt financing.

Definition: Piercing the Corporate Veil – Where a court disregards the legal fiction of the corporation and imposes liability against the shareholders.

A collection of opinions involving so-called "reverse alter ego" is found at http://www.assetprotectionbook.com/reverse_alter-ego.htm

• Directors’ and Officers’ Liability

Synopsis: Discusses the directors’ and officers’ liability and the use of holding companies and complex attribution arrangements to insulate the client from such liabilities.

Definition: Directors’ and Officers’ Liability (a/k/a D&O Liability) – The direct, personal liability of directors’ and officers’ of corporations for their acts that adversely affect the corporation (and thus giving rise to a shareholders’ derivative action) and for the corporation’s acts which adversely affect others (as in the case of employment discrimination claims).

• Advantages of Debt Financing

Synopsis: Discusses the advantages of debt financing of corporations over equity financing, and discusses some methods of debt financing such as convertible bonds.

Definition: Debt Financing – The financing of an entity by borrowing or by issuing bonds or promissory notes, etc. From an asset protection standpoint, the advantage of debt financing to equity financing is that in the event of a bankruptcy the debtholders should have priority over general creditors of the entity in the distribution of the entity’s assets.

• Corporate Stock Options

  Synopsis: Discusses the potential uses of corporate stock options in corporate debtor-creditor planning.