Corporation Terms Flashcards
Promoter
The promoter or incorporator is the person acting on behalf of the corporation not yet formed
Promoter Contract Liability
Corporation is NOT liable for pre-incorporation contracts between promoter and third parties unless the corporation adopts those contracts later
Types of Adoption
Express:
The BOD passes a resolution
Implied Adoption:
Knowledge of the contract between the promoter and the third party,
Corporation accepts the benefits of the contract
Novation
Promoter is liable for pre-incorporation contracts until novation
Novation is an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract
Without BOTH novation AND adoption, the promoter remains liable
De Jure Corporation
If the contract is not formed de jure by law after the contract formation, that cannot be adopted
- If the corporation is not formed, then it cannot adopt, and this the promoter alone is liable
Acceptance v. Novation
Upon acceptance of a contract made prior to a corporate formation (by the promoter) where they accept the benefits of the contract
the corporation AND promoter are liable until novation
acceptance alone is not enough to rid the promoter of liability
Secret Profit Rule
promoters cannot make secret profits on dealings with the corporation
if you disclose making a profit and the corporation is ok paying more- that is fine
Secret Profit Rule (Promoter Property Acquired Before and After)
if the property was acquired by the promoter BEFORE becoming a promoter and then that is sold to the corporation, now the promoter has to give back anything received form the corporation over the FMV
promoter property acquired AFTER coming a promoter and then sell to the corporation, promoter has to give back anything over cost
Subscribers
persons or entities who make written offers to buy stock from a corporation that was not yet formed
Subscription Offers
(1) Written offers to buy stock from the corporation
(2) Before the issuance, you subscribe to buy their stock
(3) Pre-incorp are irrevocable for 6 months unless agreed otherwise
Post-incorp subscription offers can be revoked up until acceptance
Formation Requirements
People, Paper, Act
* note bylaws are NOT required
People Requirement
person or a personal entity signing and filing the articles of incorporation with the secretary of state
*** The modern trend is that you need just one
Paper Requirements
Articles MUST include
(1) max shares corp is authorized to issue
(2) purpose of the corp
- general
- specific
(3) name and address of at least 3 registered agents
(4) name of the corporation
Act Requirement
Act of filing the articles with the secretary of state
General Purpose of the Corporation
‘to engage in all lawful activities’ is just a general purpose presumed in the absence of a specific clause
Specific Purpose of the Corporation
specific purpose can be stated but if they aren’t stated then anything other than that purpose would be an ultra vires act
Ultra Vires Acts
Ultra Vires deals are valid but shareholders can get an injunction
directors who participate in ultra vires activities are liable to the corporation for any losses caused by the ultra vires activity
- directors and officers are unauthorized agents here and are liable as such
- if you go against the specific purpose description and the agency principals, you are an unauthorized agent because the unauthorized deals will could against the corporation but you are liable
Legal Significance of Corporate Formation
(1) corporation becomes a separate legal person
(2) internal affairs are governed by the state in which they are incorporated
(3) limited liability meaning the shield is only available for the price of the stock UNLESS you pierce the corporate veil
De Facto Corporation/Doctrine
if, for whatever reasoning, the corporation fails to meet de jure requirements, it will still be treated as if the corporation exists IF the organizers/promoters have made a good faith, colorable attempt to comply with the corporate formation formalities
*** if that is the case, apply the De Facto Corporation Doctrine meaning even though it wasn’t technically formed as a corporate entity, in the case of third party claims, you act as if the corporation was in fact created by law
—- many states require the organizers/promoters have no knowledge of their lack of formal corporation status
Corporation by Estoppel
rule of thumb that third parties having acknowledged the existence of the corporation by signing a contract with a corporation that in fact does not exist may not later deny it to gain an advantage
What must a corporation receive when they issue stock?
Consideration
Valid Forms of Consideration
Money, property, services already performed
Invalid Forms of Consideration
any FUTURE services or promissory notes
Par Value
There’s a minimum issuance price for stock