Corporate Formation Flashcards
What is a promoter?
A person acting on behalf of a corporation not yet formed.
Corporation’s liability on a promoter’s pre-incorporation contract
- 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.
- The corporation is formed and adopts the contract by either:
Novation Definition and Rule
- 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.
Who is liable if the promoter enters into a contract, and the corporation is never formed?
The promoter alone is liable personally.
Who is liable if the promoter enters a pre-incorporation contraction, and the corporation merely adopts the contract?
Both the corporation and the promoter are liable at the election of the third party.
Promoter fiduciary status
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)
Promoter Sale of Property to Corporation Rules
- 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.
Who is a subscriber?
A person or entity who makes a written offer to buy stock from a corporation not yet formed.
A pre-incorporation offer to buy stock is irrevocable for…
6 months.
flexibility of absolute formation requirements
There is no flexibility.
You MUST form a corporation this way.
The articles of incorporation MUST include:
- Authorized shares
- Preferences
- Agent
- Incorporators
- Name of Corporation
(APAIN)
What are authorized shares?
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.
Preferences Definition and Rule
Definition:
- The rights and priorities assigned to each kind of stock.
Rule:
- The articles of incorporation must describe the preferences.
What is a registered agent?
The corporation’s official legal representative.
i.e. the person you send lawsuit complaint to. Articles must also include agent’s address.
Who are the incorporators?
Persons who sign and file the articles of incorporation with the VA state corporation commission.
Corporation name requirement
The name must contain some indication of corporate status.
e.g. [Name] corporation, incorporated, inc. or corp., etc…
Can I form a corporation with the name Bubba’s Bountiful Biscuits?
No, name must contain some indication of corporate status.
Bylaws Rules
Bylaws do need not need to be in the articles.
But, the corporation must adopt them.
Adoption and amendment of the bylaws
- The board has the power to adopt and amend the bylaws
- unless the articles give the power to the shareholders.
Doing business with an improperly formed corporation
It is illegal to do business as a corporation unless properly formed
Legal status of a corporation
A corporation is a separate legal person.
What is the principle of limited liability?
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.
The cardinal rule is limited liability of stockholders.
The exception to the cardinal rule is called…
Piercing the corproate veil
The court will, in equity, pierce the corporate veil in order to:
- Avoid fraud or unfairness, and
- to render a shareholder liable to a third-party victim of a tort or contract breach.
When will a Virgnia court allow for veil piercing?
- Alter ego
- Undercapitalization
What is the definition of “alter ego”?
A controlling shareholder will fail to observe sufficient corporate formalities
i.e. treat the corp as its alter ego.
What is undercapitalization?
- 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
Types of claims where corporate veil is more likely to be pierced
Courts are generally more willing to pierce the corporate veil for a tort claim than for a contract claim.
What is a foreign corporation?
A corporation incorporated outside of Virginia.
Foreign business qualification rule
- 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.
- Definition of “transacting business”
What happens if a foreign corporation transacts business without qualifying?
- The corporation could get a modest fine
- The corporation is not allowed to initiate a lawsuit in Virginia state court.
- However, they can still be sued and file a counterclaim.
