Corporations Flashcards
Promoter Liability
A promoter is personally liable for acting on behalf of a corporation before incorporation, and is jointly and severally liable for all liabilities created while so acting, even after the corporation comes into existence, unless a subsequent novation releases the promoter from liability.
A corporation is not liable for pre-incorporation transactions entered into by a promoter. The fact that the promoter entered into a transaction to benefit a future corporation is not sufficient to hold the corporation liable. For the corporation to be liable it must adopt a contract. Adoption of a contract can be express or implied. Adoption takes place when the corporation accepts the benefits of the transaction or gives an express acceptance of liability for the debt, such as through board resolution after incorporation.
Novation is a special agreement between a promoter, corporation, and a third party that shifts liability from the promoter to the corporation.
Incorporators
Incorporators must sign and file the articles of incorporation and pay the filing fee. They are not liable for contracts performed by promoters.
Filing Articles of Incorporation
A de jure corporation is formed when the articles of incorporation are properly filed with the Secretary of State and the filing fee is accepted. The articles of incorporation must include (1) name (2) name and address of registered agent (3) duration (4) purpose, and (5) the maximum number of shares of each class of stock that the corporation is authorized to issue.
Amending Articles of Incorporation
Articles of incorporation can be amended by filing articles of amendment with the state after the board of directors agrees to amend. If stock has been issued, the board of directors must (1) adopt the amendment to the articles of incorporation and (2) must submit the amendment to the shareholders for their approval by majority vote.
Bylaws
Bylaws contain lawful provisions for the management of the corporation’s business or the regulation of its affairs that is not inconsistent with the articles of incorporation.
Board of directors adopts the initial bylaws. A majority vote by either the
directors or the shareholders can adopt, amend, or repeal a bylaw.
Ultra Vires
When a corporation that has stated a narrow business purpose in its articles subsequently engages in activities outside that stated purpose, the corporation has engaged in an ultra vires act. When a third party enters into a transaction with the corporation that constitutes an ultra vires act, the third party generally cannot assert that the corporation acted outside those powers in order to escape liability.
A shareholder can sue to enjoin an ultra vires action. The state can initiate proceedings to enjoin such actions. The corporation’s ultra vires acts will be held unenforceable.
Modernly, most corporations are allowed to engage in any legitimate business purpose and are not able to void contracts on the mere claim that they are ultra vires. This protects the other contracting party from being abandoned if the corporation determines that the contract would not be profitable and then cites
its articles of incorporation, which the other contracting party probably had no
notice of, as a reason to evade contractual obligations.
De Facto Incorporation
A corporation that is not properly formed will still be treated as a corporation with limited liability if the organizers (1) made a good faith effort to comply with the incorporation process and (2) have no actual knowledge of a defect in the corporate status.
Corporation by Estoppel
A person who deals with an entity as if it were a corporation is estopped from denying its existence and cannot seek the personal liability of the business owner. This doctrine is limited to contractual agreements. Business owner must have made a good faith effort to comply with incorporation requirements and must lack knowledge that the requirements were not met (just like de facto).
