Chapter 22 - Corporations Flashcards
What is a Promoter?
Someone who organizes a corporation
What is a Novation?
A new contract (created with the corporation alone)
What is the liability of a promoter?
The promoter is personally liable for any contract signed as the corporation before the formation of the corporation.
How can a corporation be liable for a contract signed before its formation?
The corporation is not liable unless it adopts the contract after incorporation. At this point both the corporation and the promoter are liable for the contract.
How can a promoter end his liability for a contact?
After a corporation adopts a contract, the other party agrees to a novation.
What is adoption?
Means either that the board of directors approves the contract or the corporation accepts the benefits under the contract. The business is then liable under the contract as well.
What are the mechanics of incorporation?
- Download form
- Complete form
- mail or fax it to the Secretary of State in your state.
What does the corporate charter define?
The corporation, including everything from the company’s name to the number of shares it will issue.
What are the different terms for a corporate charter?
- Articles of Incorporation
- Articles of Organization
- Others say certificate instead of articles.
Under what law does a company incorporate?
There is no federal corporation code, so a company can only incorporate under state law.
What influences the decision of where a company incorporates?
- Their home state
- States which have favorable laws for corporations
- State they do the most business in.
They don’t have to incorporate in a state they do business in so.
What came about to encourage similarity among state corporation statutes.
The American Bar Association drafted the Model Business Corporation Act as a guide. (Delaware doesn’t use it)
Why is Delaware such in an important state when it comes to business organization laws?
It has a disproportionate influence on corporate law. More than half of all public companies have incorporated their, including 60% of Fortune 500 companies.
What is a domestic corporation?
What a company is called in the state where it incorporates
What is a foreign corporation?
What a company is called outside of the state it incorporates in.
Where must corporations pay filing fees and franchise taxes?
- Their state of incorporation
- Any state in which they do business.
What might a corporation do to avoid paying multiple state filing fees and franchise taxes?
A business that will be operating primarily in one state would probably select that state for incorporation rather than Delaware.
What are the advantages of incorporating in Delaware that may lead a company doing business in multiple states to incorporate there? 3
- Laws that favor management -For example, if the shareholders want to take a vote in writing instead of holding a meeting, many other states require the vote to be unanimous; Delaware requires only a majority to agree.
- An efficient court system - Delaware has a special court (called “Chancery Court”) that hears nothing but business cases and has judges that are experts in corporate law.
- An established body of precedent - Because so many businesses incorporate in this state, its court hear a vast number of corporate cases, creating a large body of precedent. This precedent makes the outcome of litigation more predictable.
What are the steps in the incorporation process?
- Deciding where to incorporate
- The Charter
What is a corporate charter’s required provisions? 5
- Name of corporation
- Address and Registered Agent
- Incorporator
- Purpose - Can be a broad statement, such as “to conduct lawful business”
- Stock
What is an Incorporator?
Person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter)
What must be laid out about stock in the corporate charter?
-Whether the stock is:
-Authorized and unissued
-Authorized and issued or
outstanding
-Treasury stock (been issued,
then bought back by the
company
-Par value - Minimum Issue Price (Doesn’t relate to market value, usually some nominal figure or even no par value for stock)
-Classes and series (And quantities of each):
-Owners of preferred stock
have preference on
dividends and liquidation
-Common stock is last in line
for any corporate payouts,
including dividends and
liquidation
What two requirements does the Model Act in selection a corporate name?
1st - All corporations must use one of the following words in their name:
-corporation
-incorporated
-company
-limited
(Delaware accepts
association or institute)
2nd - (Also a Delaware law) a new corporate name must be different from that of any corporation, limited liability company, or limited partnership that already exists in that state.
(names can be too similar if they share a last name)
What is the address requirement in a corporate charter? Why?
- Company must have an official address in the state it is incorporated
- so that the Secretary of State knows where to contract it and so anyone who wants to sue the corporation can serve the complaint in state
What might a company have in place of in office in their state of incorporation? Why?
- A registered agent
- To serve as the company’s official presence in the state.
What discourages a company from issuing an unnecessarily large number of shares in the corporate charter?
The more shares they issue, the higher the filing fee.
How does a company add authorized shares after it has already incorporated?
Amend its charter and paying the additional fee.
Under the Model Act, what is its requirement regarding directors? What are the two exceptions?
-Have at least one director
Exceptions:
-All the shareholders sign an agreement that eliminates the board, or
-The corporation has 50 or fewer shareholders.
How might a corporation elect directors?
- The shareholders may hold a meeting, or
- In the more typical case for a small company, they elect directors by written consent.
What is a Minute Book?
A book that contains the written consents and a record of a firm’s official meetings. It is the official record of the corporation.
What are Bylaws? What might housekeeping details might they lay out? 5
A document that specifies the organizational rules of a corporation such as:
- the date of the annual meeting
- the required number of directors.
- define what a quorum is
- give titles to officers
- establish the fiscal year of the corporation
What is a Quorum?
The percentage of a stock that must be represented for a meeting to count by shareholders in attendance, either in person or by proxy
What does it mean to Pierce the Corporate Veil?
A court holds shareholders personally liable for the debts of the corporation.
What is Duty of Loyalty?
The obligation of a manager to act without a conflict of interest.
What is Duty of Care?
The requirement that a manager act with care and in the best interests of a corporation.
- With the care that an ordinary prudent person would take in a similar situation, and
- In a manner they reasonably believe to be in the best interests of the corporation.
What is Plurality Voting?
To be elected, a candidate only needs to receive more votes then her opponent, not a majority of the votes cast.
Who do the directors elect?
They elect the officers of the corporation. They can use a consent form if they wish. The Model Act requires a corporation to have whatever officers are described in the bylaws. The same person can hold more than one office.
What are the two general ways a corporation dies?
- Voluntarily - the shareholders elect to terminate the corporation)
- Forced (by court order)
Generally, what are the fours circumstances in which a court will pierce the corporate veil?
- Failure to observe formalities - If an organization does not act like a corporation, it will not be treated like one.
- Commingling of assets - Using corporate funds to pay personal debts, etc.)
- Inadequate capitalization - the corporation should obtain insurance against liability for torts
- Fraud - Injured party may recover from the guilty party, even if the action was the corporation’s)
How should officers sign all corporate documents? What does that look like?
With corporate titles, not as an individual
O’Connor Investments, Inc.
By: Leo O’Connor
Leo O’Connor, President
