Corporations are business entities defined according to the laws in their state of incorporation. Generally, corporations are considered separate legal entities that can sue and be sued. They are operated by a board of directors and are owned by the shareholders of the corporation. The board of directors may be made up of shareholders, but it need not be.
The rules that govern the formation, operation and termination of corporations differ from state to state. More than half of the states use some form of the Model Business Corporation Act, or the MBCA. At its core, the MBCA is the template that many states use when compiling their own statutes that govern corporations.
What would later become the Model Business Corporations Act began in 1928 as a document titled the "Uniform Business Corporation Act." This act was adopted only by three states and partially adopted by a fourth. As to why only a small number of states embraced the act is a matter of speculation, but experts in this field think that the act could have been too advanced for its time and most state legislatures did not see a need for a uniform corporations code.
It would not be until 1950 that the American Bar Association would set forth its version of a uniform business code. The American Bar Association called its code the "Model Business Corporation Act." This act would be constantly reviewed and revised, and has now been adopted in some form or another by more than 24 states.
The Model Business Corporation Act functions to provide uniformity of the laws governing corporations from state to state. The act operates as a template for other states to use when deciding what the law should be with regard to corporations.
Model acts like the MBCA are beneficial because they generally produce similar in the way the law is applied to corporations in different states. This similarity between interpreting the law helps to build a body of law that can be interpreted the same way over and over again when similar facts and circumstances present themselves. This in turn means that the law becomes well settled and less apt to different results on the same facts and circumstances.
Contents of the Model Business Corporation Act
The laws governing every aspect of a corporation exist within the Model Business Corporation Act. The law lays out in detail the steps required to form a corporation and the reasons for which a corporation may be formed. In addition, the MBCA describes various voting procedures for making decisions and provides insight on the rights of shareholders and directors. The code provides for the rules that govern mergers and acquisitions as well as the sale and issuance of stock. The act itself has 17 chapters and covers almost 200 pages.
Legal Effect of the Model Business Corporation Act
The Model Business Corporation Act by itself is not legally binding upon any corporation. The act must first be adopted by a state legislature before it has any legal effect. By itself, without having been adopted by a state legislature, the MBCA is only the American Bar Association's offer of what a corporation act should include. States that adopt the MBCA do not necessarily adopt each and every provision of the MBCA. Instead, the state legislature debates on what is needed and uses the MBCA itself as a guide when deciding whether to adopt the MBCA.
Delaware General Corporation Law: Main Competitor to the Model Business Corporation Act
While more than half of the states use some version of the Model Business Corporation Act, many states also use some form of the Delaware General Corporation Law. In essence, the Delaware General Corporation Law could be seen as the major "competitor" to the MBCA. The two different sets of corporate laws differ significantly on matters of what proof is necessary to prove various aspects of corporate law and the rules governing such issues as voting trusts and agreements.
While the two versions of the law may differ at this time, because the MBCA is a model code and is designed to follow trends and create uniformity among the states, should versions of the Delaware General Corporation Law become widely accepted principles of law, the drafters of the MBCA could take that into consideration and revise the code to incorporate these changes. Since the law is always changing, it is not unlikely that at some point there will be only one law governing corporations in the United States.
- Business Structures, 2d Edition, David G. Epstein et al., 2007.
- Model Business Corporations Act