Mergers, Acquisitions, and Corporate Restructurings, 7th Edition

CHAPTER THIRTEENCorporate Governance

STRUCTURE OF CORPORATIONS AND THEIR GOVERNANCE

Corporations are one of three general forms of business organizations: sole proprietorships, partnerships, and corporations. Corporations trace their roots back many centuries as a business form that was designed to encourage the investment of capital into potentially risky ventures, such as oceangoing trade, that were subject to major risks (e.g., bad weather or theft from pirates). Some of the earliest corporate charters were the Muscovy Company in 1555, the Spanish Company in 1577, and the Dutch East India Company in 1601.¹

Corporations provide an incentive for shareholders to invest by limiting their exposure to their investment in the entity. Normally the personal assets are shielded from exposure to litigation. This is different from sole proprietorships and partnerships, where the owners' personal assets are at risk. However, in recent years alternatives to simple partnerships have been formed that limit the exposure and liability of partners. The most common form of business is the corporate form, and this percentage accounts for the vast majority of the dollar value of businesses.

While limited liability is a benefit, shareholders in corporations face the problem that they have to select others to represent their interests. This is usually done by an election of a board of directors by shareholders. These directors in turn select managers who run the company on a day-to-day basis ...