Corporations Flashcards
Limited Liability for Owners, Directors, and Officers
The shareholders generally are not personally liable for the obligations of the corporation; neither are the corporation’s directors or officers. Generally, only the corporation itself can be held liable for corporate obligations. The owners risk only the investment that they make in the business to purchase their ownership interests (“shares”).
Corporation management
Centralized Management Generally, the right to manage a corporation is not spread out among the shareholders, but rather is centralized in a board of directors, who usually delegate day-to-day management duties to officers
Free Transferability of Ownership
Generally, ownership of a corporation is freely transferable— that is, generally, shareholders are free to sell their shares to others unless it is provided otherwise
Formation of a De Jure Corporation
need a person, a paper, and an act:
- Person: To form a corporation, we need one or more persons who undertake to form it, who are known as the incorporators. The incorporators must comply with all applicable statutory requirements to form the corporation. Basically, they must execute and deliver the articles of incorporation to the secretary of state. Incorporators may be a person or an entity. They do not need to be a citizen of the state of incorporation
- Paper: Articles of Incorporation: The articles of incorporation must include: (1) The name of the corporation. The name must include one of the following words or an abbreviation: “corporation,” “company,” “incorporated,” or “limited,” (2) The name and address of each incorporator, (3) A registered agent and the street address of the registered office. The registered office must be in the state. (4) Information regarding the corporation’s stock - the maximum number of shares the corporation can sell. (5) Optional: business purpose
- Act: Corporate Existence Begins on Filing - To complete formation of the corporation, the incorporators will have notarized articles delivered to the secretary of state and pay any required fees.
Organizational Meeting
The purpose of the meeting is to “complete the organization of the corporation,” which means (1) adopt initial bylaws and (2) appoint officers.
If the initial directors were named in the articles, the board of directors hold the organizational meeting. If they were not named in the articles, the incorporators hold the organizational meeting.
Bylaws
Bylaws are an internal document. You can think of them as the corporation’s operating manual; the bylaws might include things like setting record dates (for determining who may vote at shareholder meetings) and methods of giving notice. Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law.
Board or shareholders can amend and repeal bylaws or adopt new ones
Internal Affairs Doctrine
Under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation
Entity Status
Upon formation, a corporation has entity status, meaning it’s a legal person. The corporation can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities, and so on
DEFECTIVE INCORPORATION
One of the main reasons to incorporate is to avoid personal liability for obligations that the corporation incurs. If the incorporators thought they formed a corporation, but they failed to do so, they’d be personally liable for business debts. (Basically, the would-be incorporators have formed a partnership instead, and partners are liable for business debts.) But two doctrines may still allow the incorporators to escape liability: (1) de facto corporation and (2) corporation by estoppel. In other words, the veil of protection may be applied where a de jure corporation has not been formed
These doctrines are abolished in many states
De Facto Corporation
For a de facto corporation to exist, we must meet the following requirements:
- There must be a relevant incorporation statute. (On the exam, you can address this requirement quickly— it will always be met, because there’s an incorporation statute in every state.)
- The parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corporation; and
- There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.
If the de facto corporation doctrine applies, the business is treated as a corporation for all purposes except in an action by the state (called a “quo warranto” action).
Corporation by Estoppel
Under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence. The doctrine applies in contract to prevent the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts. Correspondingly, it will prevent the improperly formed “corporation” from avoiding liability by saying it was not properly formed. Note well that corporation by estoppel applies only in contract cases. It does not apply to tort victims.
PRE-INCORPORATION CONTRACTS (WE KNEW THERE WAS NOT A CORPORATION)
A promoter is a person acting on behalf of a corporation not yet formed. Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation
Promoters’ Relationship with Third Parties— Preincorporation Agreements
A promoter may enter into contracts on behalf of a corporation not yet formed
- Corporation’s Liability: Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation. The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract
- Promoter’s Liability: Under the MBCA, anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred. Thus, if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract. The promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it. The promoter will be released from liability only if there is an express or implied novation
FOREIGN CORPORATIONS
Foreign corporations transacting business in a state must register (qualify) and pay fees.
Transacting business means the regular course of intrastate (not interstate) business activity. So, it doesn’t include occasional or sporadic activity in this state, nor does it include simply owning property in this state
Issuance of Stock: Generally
To start and operate a corporation, we need money (capital). The corporation can either borrow the money or raise it by selling stock (or both). Either way, the corporation will issue a security to the investor. Security is a fancy word for investment
Debt Securities
When the corporation borrows money, it issues a debt security, which is usually called a bond. The bond is a promise that the corporation will repay the loan with interest. If the loan is unsecured by corporate assets, it may be called a debenture. Importantly, the holder of debt securities is a creditor, but not an owner, of the corporation
Equity Securities
When the investor buys an ownership interest in the corporation, it issues equity securities, which is stock (the investor holds shares of stock). Importantly, the money invested does not create a debt. The shareholder is an owner, but not a creditor, of the corporation
Authorized Shares
shares described in the corporation’s articles of incorporation
Issued and Outstanding Shares
shares that have been sold
authorized but unissued shares
Shares that have been reacquired by the corporation through repurchase or redemption
Common shares
Shares when corporation chooses to issue only one type of share, giving each shareholder an equal ownership right
Share Options
A corporation may issue share options. An option is the right to purchase shares in the future under terms predetermined by the board of directors. Options may be offered in exchange for any type of consideration, including future services.
Issuance Definition
An issuance of stock is when a corporation sells its own stock.
SUBSCRIPTIONS
Subscriptions are written offers to buy stock from a corporation.