Corporate Formation

Question 1

What is a promoter?

Answer 1

A person acting on behalf of a corporation not yet formed.

Question 2

Corporation’s liability on a promoter’s pre-incorporation contract

Answer 2

• The corporation becomes liable on a promoter’s pre-incorporation contract when:
  
  • The corporation is formed and adopts the contract by either:
    
    • express board of directors resolution, or
    • implied adoption through knowledge of the contract, plus acceptance of its benefits.

Question 3

Novation Definition and Rule

Answer 3

• Definition: An agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter with the other contracting party.
• Rule: The promoter remains liable on pre-incorporation contracts until there has been a novation.

Question 4

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

Answer 4

The promoter alone is liable personally.

Question 5

Who is liable if the promoter enters a pre-incorporation contraction, and the corporation merely adopts the contract?

Answer 5

Both the corporation and the promoter are liable at the election of the third party.

Question 6

Promoter fiduciary status

Answer 6

Promoters are fiduciaries of each other and the corporation.

Promoters cannot make a secret profit on their dealings with the corporation.

(i.e. sale to corporation of promoter’s own property for profit without disclosure to the corporation)

Question 7

Promoter Sale of Property to Corporation Rules

Answer 7

• If a promoter acquires property before becoming a promoter and sells the property to the corporation at a profit
  
  • profit is recoverable by the corporation only if it is sold for more than fair market value.
• If a promoter acquires property after becoming a promoter and sells the property to the corporation at a profit
  
  • all profit is recoverable by the corporation even if the resale price is less than fair market value.

Question 8

Who is a subscriber?

Answer 8

A person or entity who makes a written offer to buy stock from a corporation not yet formed.

Question 9

A pre-incorporation offer to buy stock is irrevocable for…

Answer 9

6 months.

Question 10

flexibility of absolute formation requirements

Answer 10

There is no flexibility.

You MUST form a corporation this way.

Question 11

The articles of incorporation MUST include:

Answer 11

1. Authorized shares
2. Preferences
3. Agent
4. Incorporators
5. Name of Corporation

(APAIN)

Question 12

What are authorized shares?

Answer 12

The maximum number of shares the corp is authorized to issue.

A corporation can always issue or sell less shares. But they must not issue or sell more than the authorized number of shares without amending the articles.

Question 13

Preferences Definition and Rule

Answer 13

Definition:

• The rights and priorities assigned to each kind of stock.

Rule:

• The articles of incorporation must describe the preferences.

Question 14

What is a registered agent?

Answer 14

The corporation’s official legal representative.

i.e. the person you send lawsuit complaint to. Articles must also include agent’s address.

Question 15

Who are the incorporators?

Answer 15

Persons who sign and file the articles of incorporation with the VA state corporation commission.

Question 16

Corporation name requirement

Answer 16

The name must contain some indication of corporate status.

e.g. [Name] corporation, incorporated, inc. or corp., etc…

Question 17

Can I form a corporation with the name Bubba’s Bountiful Biscuits?

Answer 17

No, name must contain some indication of corporate status.

Question 18

Bylaws Rules

Answer 18

Bylaws do need not need to be in the articles.

But, the corporation must adopt them.

Question 19

Adoption and amendment of the bylaws

Answer 19

• The board has the power to adopt and amend the bylaws
  
  • unless the articles give the power to the shareholders.

Question 20

Doing business with an improperly formed corporation

Answer 20

It is illegal to do business as a corporation unless properly formed

Question 21

Legal status of a corporation

Answer 21

A corporation is a separate legal person.

Question 22

What is the principle of limited liability?

Answer 22

Generally, shareholders are not personally liable for debts/obligations/contracts/torts of a corporation.

The shareholder is liable only for the price of her stock.

Question 23

The cardinal rule is limited liability of stockholders.

The exception to the cardinal rule is called…

Answer 23

Piercing the corproate veil

Question 24

The court will, in equity, pierce the corporate veil in order to:

Answer 24

• Avoid fraud or unfairness, and
• to render a shareholder liable to a third-party victim of a tort or contract breach.

Question 25

When will a Virgnia court allow for veil piercing?

Answer 25

1. Alter ego
2. Undercapitalization

Question 26

What is the definition of “alter ego”?

Answer 26

A controlling shareholder will fail to observe sufficient corporate formalities

i.e. treat the corp as its alter ego.

Question 27

What is undercapitalization?

Answer 27

• The corporation fails to maintain sufficient capital to satisfy foreseeable liabilities
• Not enough money to capitalize foreseeable liabilities
  
  • Keep in mind the corporation’s insurance, minimal capital, and dangerous nature of the business

Question 28

Types of claims where corporate veil is more likely to be pierced

Answer 28

Courts are generally more willing to pierce the corporate veil for a tort claim than for a contract claim.

Question 29

What is a foreign corporation?

Answer 29

A corporation incorporated outside of Virginia.

Question 30

Foreign business qualification rule

Answer 30

• Foreign corporations transacting business in Virgnia must “qualify”
  
  • Definition of “transacting business”
    
    • The regular course of intrastate (not interstate) business activity.
  • How a foreign business qualifies
    
    • By getting a certificate of authority from the state corporationc ommission that requires the corporation to provide the same information required in a domestic corporation’s articles of incorporation.

Question 31

What happens if a foreign corporation transacts business without qualifying?

Answer 31

1. The corporation could get a modest fine
2. The corporation is not allowed to initiate a lawsuit in Virginia state court.
   
   1. However, they can still be sued and file a counterclaim.