Corporations Flashcards
Comparing the Partnership and the
Corporation
- Formal creation
- Harder to dissolve
- Centralized management
- Limited Liability
- Transferability
- Tax Status
1. C Corporations are double taxed
2. S Corporations are not double taxed if you can qualify for status
Why a company would be formed in Delaware
- Default rules
- Predictable and established case law
- Judges who specialize in corporate law
- Management friendly
- What all the cool companies are doing
Why it matters where a company is formed
State of organization controls the law of the internal affairs of the company or the
“family law” of the company
State of incorporation
Chief Executive Office/Headquarters
- No foreign business registration
- Address for service of process
- Fees
Key Players in a Corporation
Shareholders/Stockholders
Owners;
they hold the equity
Charter is also called
Articles of incorperation
In the charter, you cannot take someone elses
name
Key Players in a Corporation
Board of Directors
are selected by
the Shareholders to manage the
Corporation’s big decisions and
policies
Key Players in a Corporation
Officers
are selected by the Board
of Directors to run the day-to-day
operations of the Corporation
* Also referred to as executives or
c-suite
Key Players in a Corporation
Employees
the civil servents of the corporation
Charter
- Required document. Can be amended as needed by the Board of Directors AND the
Shareholders - Public
Charter can be amended as needed by
the board of directors and shareholders
Need in a charter
-can be barebones
- name of corporation
- name and address of incorperators
- registered agent name and address
- some states like delaware require corperate purposem and list amount of stock to sale, par value
Name of corporation
- Has to have an indication of the corporate form: corporation, incorporated,
limited, company or an abbreviation - Can’t take a name someone is already using
Amending the charter takes a
vote
Bylaws
lay out ground rules for hoe corp is run
Unless it has to be in charter, it can be in
bylaws
What has to be in the charter if you want it
- Limitation or elimination of personal liability of directors/officers for breaches of fiduciary duties, subject to limitations (model act only allows for directors, not officers)
- cumulative voting
- allowing the board of directors to amend bylaws (default for the model act)
- Preemptive rights for the model act
Signing the charter
- State filings have to be signed (DGCL §103)
- Conformed signature vs Electronic
corporations
Meeting of Initial Directors
- Initial Directors or Incorporators who will elect Initial Directors (MBCA)
- Approve/Adopt
1. Charter
2. Corporate administrative items
3. reimburse incorperators and adopt contracts
4. bylaws
Bylaw examples
- Rules for calling and conducting meetings (of shareholders and directors)
- Written Consents
- Number of directors
- Method of electing and removing directors
- Manner in which board vacancies are filled
- Committees
- Indemnification and Expense
Advancement - D&O Insurance
- Duties, appointment and removal of officers
- Share certificates
- Mechanisms for amendment (but see DE charter)
Initial Meeting of Shareholders
- Shareholders will have a meeting to elect their
choice of actual directors. - Shareholders will have regular annual meetings on a
go forward basis.
Corporations
Directors
- Need at least 1 by statute
- Has to be a living, breathing person
- Number of directors determined in manner set forth in
charter or bylaws
When corp’s make money from stock
when they sell and issue the stock
Common Stock
- Basic ownership interest
for every corporation - Charter sets out amount,
rights and obligations - Amount is arbitrary
- Company only makes
money if it issues stock
Perferred Stock
- has options
- you have some kind of prefrence to common stock
- company must pay perferred amount before paying other stock holders
Liquidation and stock holders
Allows perferred stock holder to be getting money back before stock holder, if multiples (2x, 3x) get that x amount of their money back
Perferred Stock- Prefrences
- paid first, liquidation, voting
- dont need to have all 3
perferred stock owner voting prefrences
- depends - none, same, better
- choose a director
- veto rights on certain actions
Peferred Stock- Inceptions
Multiple tiers of perferred stock
Preferred Stock - Participation
- Participation = getting
seconds - Getting back in line
with the common
stockholders
Preferred Stock - Conversion
- Convertible
- Preferred way or trade in for common stock
- Mandatory vs. optional
- Conversion ratio
Preferred Stock – Preemptive Rights
Right of existing
stockholders to
purchase newly issued
stock before it is
offered to outsiders.
Ex. Liquidation
MBCA on Preemptive Rights
- Don’t have it unless the charter says so.
- Unless specified otherwise, shareholders can waive their
preemptive rights - Unless specified otherwise, shares issued as compensation
don’t count.
Promoters and agency
Not agency becuase no principal
Who is a promoter?
- A promoter is someone who helps to found and
organize a corporation. - Enter into contracts for goods or services to be
provided to the corporation once it is formed
A person who makes a deal with a promoter will still be responsible for that deal even if a corperation takes it over, unless
a new deal (novation) is made
When does a pre-incorporation contract become an obligation of the corporation?
a. Expressly or impliedly adopts it
b. Implied if corporation accepts the benefits with knowledge of the contract
.In addition to the corporation adopting a pre-incorporation contract, what has
to happen to release the promoter from liability?
a. Novation = replacing obligations of the promoter with the obligation of the corporation
b. Creditor (Stern) has to consent to the substitution
When is consent to the substitution by the creditor inferred?
a. Acceptance of part performance by the new obligor IF performance is made with the
understanding that a complete novation is proposed
DIfference between Ratification and Adoption
- Adoption: from moment on, does not time travel
- Corps can only adopt not ratify to before didnt exist
Are promoters agents of a corporation?
Promoters are not agents because they don’t have a principal that exists.
Are corporations liable for pre-incorporation torts of the promoter?
The corporation is not liable for pre-incorporation torts of the promoters
because the promoter is not an agent.
Is the corporation liable for pre-incorporation contracts?
Only if it adopts the contract. It implicitly adopts the contract if it accepts the
benefits with knowledge of the contract
If the promoter signs in the name of the to be formed corporation and the 3rd party knows that the corporation didn’t exist when it entered into the contract, is the promoter still liable?
- courts are split
- Model Act: persons acting for “corporation,” knowing that incorporation hasn’t happened, are jointly and severally liable for liabilities
If the corporation adopts the contract, does the promoter remain liable?
Yes, unless there is also a novation. The outside party/creditor has to agree to substitute the corporation for the promoter. Agreement can be implied by acceptance of part performance by the new obligor IF performance is made with the understanding that a complete novation is proposed.
Can a corporation ratify pre-incorporation contracts?
No, a corporation can only adopt pre-incorporation contracts. They can’t ratify them because they didn’t exist when the contract was made.
Ways to protect promoters
- Instead of a contract, get
an offer the corporation
can accept once formed - look to the corperation for indemnification
effective date of teh charter
Unless you specify otherwise, filing will be the effective date
DE: Filing =
- prima facie evidence of full existence.
- Have to get it right to fully exist
MBCA: Filing =
conclusive proof the corporation exists.
De Jure vs De Facto
- De Jure is legal, fully formed
- De Facto is treated as a corporation even though it wasn’t formed properly
De Facto Corporation Elements
- (1) statute that permits incorporation
- (2) bona fide or good faith attempt to incorporate and
- (3) actual use or exercise of corporate privilege
No corporation of this State and no person sued by any such
corporation shall be permitted to assert
the want of legal
organization as a defense to any claim
Difference
between De Facto
Corporation and
Corporation by
Estoppel
Attempt to incorperate v. conscious decsion of the 3rd party
Promoters can be liable in
contract
A defacto corperation exists if
a good-faith effort to organize the corperation is made and there is an actual exercise of corperate powers
Preferred Stock - Relative
Goes first before common stock
6 points on Preferred Stock
- Relative
- Prefrences
- Convertible
- Multiple Series
- Presumptive Rights
Defacto Corperation Elements under Common Law
- Statute that permits incorperation
- bona fide or good faith attempt to incorperate and
- actual use or exercise of corperate privledge
Corperation by Estoppel (3 theroies/Prongs) under common law
