Corporations Flashcards
Corporate Entity
A corporation is established to raise capital and to protect investors from liability.
A corporation is a legal entity that exists separately from its owners, thus shielding the owners and managers from liability.
Definition of “Promoter” and Pre-incorporation Promoter Liability
A Promoter is a person who works to establish a corporation prior to formal inception. They are personally liable for pre-incorporation contracts unless post-formation novation (replacing an old contract with a new one) relieves the promoter of that obligation.
(E.g., look for a person that forms a corporation, then seeks to pass bills and other liabilities to the corporation after formation. These liabilities can be accepted upon vote of the Board).
Corporation Formation
A corporation is formed when its Articles of Incorporation are filed with the Secretary of State.
(E.g., look for this where typically some attorney will fail to file, someobody will know about it, and then somebody will treat the organization as if it were a corporation).
Articles of Incorporation (AoI)
The AoI must contain:
1) the name of the corporation;
2) the number of shares the corporation will issue;
3) the address of the corporation’s initial office;
4) the name of its initial agent; and
5) the name and address of each incorporator.
Election of Directors
Shareholders elect directors, and may remove them for any reason, upon vote.
The Board of Directors acts to assign the officers of the corporation, as well as the terms of their employment.
Quorum
In order for the Board to act, they must have a quorum to vote on matters.
A quorum requires that a majority of the Board Members are present to vote.
De Jure Corporation (DJC)
A DJC is a legally formed corporation.
A DJC enjoys the protections and benefits of the Corporate Entity, including protection of the personal assets of shareholders.
(E.g., look for the filing of the AoI to be filed with the Secretary of State. Failure to file is often the reason you will not have a properly formed DJC).
De Facto Corporation (DFC)
A DFC is a corporation that failed to be properly established.
Persons or companies conducting business with a DFC and that know that the DFC is improperly formed will be unable to later make claims as if the DFC were a proper corporation/DJC. (E.g., a bank loaning money at a high interest rate to a DFC, knowing that they were not properly formed, may not later make claims against the personal assets of a shareholder when the loan is not repaid).
Anyone dealing with a DFC that does NOT know the corp was properly formed WILL be able to treat the corporation as a DJC.
Corporation by Estoppel
If a person treats a business as if it were a corporation, they are unable to later claim taht was not a corporation.
(E.g., look for an improperly formed corporation and a third party seeking to sue the individual owners. If you treat the entity like a corporation to earn some benefit, you can’t later sue and say the corporation didn’t exist).
Ultra Vires Acts (UVA)
When a corporation’s activities are outside the scope of their AoI, such activities are deemed UVAs.
(E.g., look for a company that begins doing business in an area outside of their core competency, such as Ford Motor Car getting into the Self-Help Seminar business).
Piercing the Vail
The corporate entity provides that shareholders and directors are typically not personally liable for the debts and liabilities of the corporation. However, certain actions by the company officers may warrant “piercing of the corporate veil.” This allows creditors to attach shareholders’ assets when:
1) the shareholder, director, or officer uses the corporation as their alter ego (e.g., look for a director taking company assets home);
2) when they fail to follow corporate formalities (e.g., look for the company failing to have annual board meetings);
3) if the corporation was inadequately capitalized at formation (e.g. at the point of formation only, if they took investor money to build a factory, but now don’t have the capital to commence operations); or
4) to prevent fraud.
Business Judgment Rule (BJR)
The BJR is a rebuttable presumption that a director is acting in good faith and that they reasonably believed their actions were in the best interest of the corporation.
Provides comfort to Directors and Officers of a corporation that they will not have their personal assets attacked as long as their actions were reasonably shown to be in the best interests of the corporation.
Duty of Care
Directors have a duty to act in good faith and in the best interests of the corporation, and with the care of a similarly situated person.
They are required to be reasonably informed.
Duty of Loyalty
A director must not engage in a conflict of interest. This duty is established to prevent a director from entering a conflicting transaction, usurping a corporate opportunity for their own benefit, or competing with the corporation.
Duty of Loyalty Avoidance
When a director is faced with a conflicting transaction, the director is not in violation of this duty if they fully disclose the details of the transaction to the Board, if it was approved by a majority of disinterested directors OR if the director can show that the business transaction was fair to the corporation.
