Corporate Formation

Question 1

What are promoters?

Answer 1

Persons acting on behalf of a corporation not yet formed.

Question 2

When does a corporation become liable on a promoter’s pre-incorporation contract?

Answer 2

When the corporation adopts the contract by either: (1) express board resolution; or (2) knowledge of the contract and acceptance of its benefits (ratification)

Question 3

Is the promoter liable on pre-incorporation contracts? If so, when does it end?

Answer 3

Yes. The promoter remains liable until there has been a novation (an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter on the contract).

Question 4

Who is liable if the promoter enters a contract and the corporation is never formed?

Answer 4

The promoter alone.

Question 5

Promoters are fiduciaries of the corporations and therefore they are prohibited from:

Answer 5

Making a secret profit on their dealing with the corporation (e.g. selling own property to corporation for profit without disclosure).

Question 6

If a promoter acquires property BEFORE becoming a promoter and sells to the corp. at a profit, is the profit recoverable?

Answer 6

Only if sold for more than FMV

Question 7

If the promoter acquires property AFTER becoming a promoter and sells to the corp. at a profit, is the profit recoverable?

Answer 7

Yes, even if selling at FMV.

Question 8

What are subscribers?

Answer 8

Persons or entities who make written offers to buy stock from a corporation not yet formerd

Question 9

Are pre-corporation offers revokable?

Answer 9

No. They are irrevocable for six months.

Question 10

What are the ABSOLUTE formation requirements?

Answer 10

1) Sign and file Articles of Incorporation with the State Corp. Commission 2) Adopt by-laws (can be amended by Board, unless this power is delegated to SH).

Question 11

What MUST the Articles of Incorporation (AoI) include?

Answer 11

1) The number of authorized shares (the maximum # of shares the corporation is authorized to issue - subject to amendment) 2) The preferences and rights assigned to each kind of stock; 3) Name / address of registered agent (official legal representative) 4) The name of the corporation

Question 12

What MUST the name of the corporation include?

Answer 12

Some indicia of corporate status (Corp., Inc., etc).

Question 13

What is the legal significance of formation?

Answer 13

1) It is illegal to do business as a corporation unless properly formed. 2) A corp. is a separate legal person. 3) SHs are liable only for the price of their stock (not for debts of corporation).

Question 14

• When will the court pierce the corp. veil?
• Examples?
• Are court more willing to pierce the veil for a tort or a contract claim?

Answer 14

• To avoid fraud or unfairness by rendering a SH liable on a third-party contract/tort claim.
• Examples**: **
  
  • The Alter Ego: a controlling SH fails to observe sufficient corporate formalities
  • Undercapitalization: the corp. has insufficient capital to cover foreseeable liabilities
• Tort claim.

Question 15

• What is a foreign corporation?
• When are foreign corporations transacting business in VA?
• What must foreign corporations do if they are transacting business in VA?

Answer 15

• One incorporated outside VA
• When they engage in intrastate activity in VA
• Qualify.

Question 16

How do foreign corporations qualify?

Answer 16

By getting a certificate of authority from the State Corp. Commission that includes the SAME information required for AoI

Question 17

What are the consequence of not qualifying?

Answer 17

• Fine (modest)
• Can’t initiate a lawsuit in VA state courts