Ch7. Corporate Law — How a Company Is Born and Governed

What Is a Company?

A company is a legal entity established for the purpose of conducting commercial activities. A legal entity is a separate subject of rights and obligations distinct from a natural person (a human being).

Core Effects of Legal Personality:

Limited Liability: shareholders are liable only up to the amount of their investment
Legal Personhood: the company can enter contracts, sue and be sued, and hold property in its own name
Perpetual Existence: the company continues to exist regardless of shareholder death or change

Types of Companies

Type	Characteristics	Liability
General Partnership	2+ partners, all with unlimited liability	Unlimited
Limited Partnership	Mix of unlimited and limited partners	Mixed
Limited Liability Company	LLC-type	Limited
Corporation (Stock Company)	Most common type	Limited
Private Company (Ltd.)	Small, closely held	Limited

Corporate Structure

Formation

Corporate Formation Process:

Incorporators assemble (1 or more) → Draft articles of incorporation → Subscribe for shares
→ Pay in capital and make in-kind contributions → Organizational meeting (if public offering) → Register

Mandatory Provisions of the Articles of Incorporation:

Absolute requirements: purpose, trade name, capital, total number of authorized shares, principal office location
Relative requirements: matters with no legal effect if omitted (in-kind contributions, asset acquisitions, etc.)

Capital and Shares

Capital = Total issued shares × Par value

Three Principles of Capital:
1. Capital Certainty: capital must be fixed in the articles of incorporation
2. Capital Adequacy: actual assets must be maintained at the level of capital
3. Capital Immutability: capital may not be reduced without following statutory procedures

Shareholder Rights and Obligations

Shareholder Rights

Proprietary Rights (personal benefit):
- Right to dividends
- Right to residual assets on liquidation
- Preemptive rights (right to subscribe for new shares)

Administrative Rights (participation in company governance):
- Voting rights (one share, one vote)
- Right to call a general meeting (holders of 3%+)
- Derivative suit right (holders of 1%+ for 6 months)
- Right to demand removal of a director (holders of 3%+)

Limited Liability of Shareholders

Shareholders are liable only up to the amount of their investment. No personal liability for the company’s debts.

Piercing the Corporate Veil (exception):
Limited liability may be set aside when a shareholder abuses the corporate form.

Requirements: de facto identity of company and shareholder + unlawful purpose
Effect: shareholder may be held directly liable

General Meeting of Shareholders

The supreme decision-making body where shareholders convene to resolve important matters.

Voting Requirements

Ordinary Resolution (general matters):
Majority of votes of shareholders present + at least 1/4 of total issued shares

Special Resolution (important matters):
At least 2/3 of votes of shareholders present + at least 1/3 of total issued shares

Super-majority Resolution:
Requires unanimous consent of all shareholders (for certain matters)

General Meeting Authority

Resolution Type	Matters
Ordinary Resolution	Election of directors and auditors, approval of financial statements, dividend distributions
Special Resolution	Amendment of articles, merger/split, business transfer, dissolution

Directors and the Board of Directors

The Director’s Position

Directors are elected by the general meeting of shareholders and are trustees who manage the company. Term of office is 3 years (renewable).

Directors’ Duties

Duty of care: perform duties with the care of a good manager
Duty of loyalty: perform duties faithfully in the interests of the company
Confidentiality duty: prohibits disclosure of trade secrets
Non-competition duty: prohibits competing with the company for personal gain
Self-dealing restriction: self-dealing without board approval is prohibited

Directors’ Liability

Liability to the company: compensation for damage caused by breach of duty
Liability to third parties: liability when willful misconduct or gross negligence causes harm to a third party

Derivative Suit: shareholder sues directors on behalf of the company
→ Shareholders who have held shares for 6+ months with 1%+ of total issued shares

The Board of Directors

The decision-making body for business execution, composed of all directors.

Exclusive Board Powers:
- Appointment and removal of the CEO/representative director
- Acquisition and disposal of important assets
- Large-scale borrowing decisions
- Appointment and removal of general managers
- Approval of director self-dealing

Auditors and the Audit Committee

The auditor is an organ that audits the execution of duties by directors. Has an independent position unlike directors.

Auditor's Powers:
- Audit directors' execution of duties
- Examine the company's financial statements
- Attend board meetings and state opinions
- Demand directors halt unlawful acts

Large listed companies are required to establish an audit committee.

Capital Changes

Capital Increase (Issuance of New Shares)

Paid-in capital increase: issue new shares to shareholders or public to raise actual funds
No-par capital increase: transfer from surplus reserves to stated capital; no actual cash inflow
Preemptive rights: existing shareholders may claim preferential allocation proportional to their stake

Paid-in capital reduction: cancel shares and pay consideration to shareholders (real reduction)
No-consideration capital reduction: cancel shares without paying shareholders (to cover losses)

Capital Reduction Procedure: board resolution → special resolution at general meeting → creditor protection process → registration

Mergers and Splits

Merger:
Absorption Merger: Company A absorbs Company B (B is dissolved)
Consolidation Merger: Companies A + B combine to form new Company C (both A and B dissolved)

Split:
Simple Split: divide one company into multiple companies
Split-Merger: split and then merge with another company

Merger Requirements: special resolution at general meeting + creditor protection process

Key Takeaways

General Meeting (supreme decision-making) → Board of Directors (business execution) → CEO (external representation) Ordinary resolution: majority of those present / Special resolution: 2/3 of those present Directors’ duties: duty of care + duty of loyalty + non-competition + self-dealing restriction Three Capital Principles: certainty + adequacy + immutability

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