Corporations (Formation) Flashcards
Corporations (Formation)
Factors
- Legal Entity
- Separate and Distinct from its owners
- Formed/Incorporated under State Law
- Owned by stockholders/shareholders
Corporations (Formation)
Benefits of Legal Personhood
- Continuity of Existence
-
Legal Capacity, including the right to:
a. Hold assets in the name of the corporation
b. Enter into contracts
c. Sue or be sued
Corporations (Formation)
Formation
A corporation is formed by filing a Certificate/Articles of Incorporation with the state
Corporations (Formation)
Governing Law
The law of the state of incorporation:
1. Dictates Formation Requirements
2. Governs Internal Affairs
Corporations (Formation)
Governing Law:
Supremacy of Corporate Control
- US Constitution
- Federal Regulations
- State of Incorporation’s Corporations Code
- Corporation’s Charter of Articlers of Incorporation
- Corporation’s Bylaws
- The **Authority **of the
a. Board of Directors
b. Officers
c. Employees
Corporations (Formation)
Governing Law:
Internal Affairs Doctrine
The internal affairs of a corporation are governed by the laws of the state of incorporation
Corporations (Formation)
Governing Law:
Corporate Powers/Ultra Vires Doctrine
Corporate powers are granted by the state of incorporation.
Any acts exceeding or beyond the corporate purpose and corporate powers are not granted by the state
Corporations (Formation)
Promoters
Take Preliminary Steps (Plan and Organize) to establish their business
Viewed as Joint Venturers or Partners for the purpose of forming the corporation
Corporations (Formation)
Promoters:
Duties & Obligations
- Duty of Care
- Duty of Loyalty
- Obligations of Good Faith and Fair Dealing
Corporations (Formation)
Pre-Incorporation Contract Liability:
Promoters
Promoters are personally liable on pre-incorporation contracts and remain liable on those contracts even after the corporation is formed, unless novation occurs
If Promoter Signs in their Own Name –> Personally Liable
If Promoter Signs in the Name of a Nonexistent Corporation AND the Third Party is UNAWARE –> Personally Liable
If Promoter Signs in the Name of a Nonexistent Corporation AND the Third Party is AWARE –> Not Personally Liable, but presumption towards Third Party
Corporations (Formation)
Pre-Incorporation Contract Liability:
Corporation
Corporations are not liable for pre-incorporation contracts, unless one of the following occurs:
1. Adoption
2. Novation
3. Ratification (in some jurisdictions)
Corporations (Formation)
Pre-Incorporation Contract Liability:
Adoption
A Corporation may adopt a pre-incorporation contract by manifesting an assent to be bound, either expressly or impliedly
Corporations (Formation)
Pre-Incorporation Contract Liability:
Novation
A Promoter may assign the pre-incorporation contract to the Corporation, transferring both the benefits and burdens
A contract can be assigned without novation –> burdens remain
Corporations (Formation)
Pre-Incorporation Contract Liability:
Ratification
A Corporation may ratify a pre-incorporation contract, either expressly or impliedly, transferring both the benefits and burdens
Ratification relates back to the date the contract was entered into
Corporations (Formation)
Articles of Incorporation
sThe state of incorporation’s corporations code specified what must be included in the articles of incorporation
Articles of incorporation tend to be bare bones because they are public and may be costly to amend
Corporations (Formation)
Articles of Incorporation:
Required Provisions
- Name and Address (registered office/address)
- Agent for Service of Process
- Corporate Purposes (corporate purpose clause)
- Description of Stock
a. Number of authorized shares
b. Share classes (common, preferred, class a, etc)
c. Rights associated with shares
d. Par value - Incorporators - name and address of each incorporator
Other Elements as Required by State Law
Required If Applicable
- Shareholder preemptive rights
- Altering default liability rules for certain breaches of fiduciary duty
Corporations (Formation)
Articles of Incorporation:
Naming Requirements
Must reflect corporate status
Cannot be misleading
Some states allow names to be reserved or registered
Corporations (Formation)
Articles of Incorporation:
Corporate Purpose Clause
Refers to the business the corporation intends to conduct
Corporations (Formation)
Articles of Incorporation:
Shareholder Preemptive Rights
The shareholder’s right to maintain their historic ownership percentage when new stocks are issued.
Corporations (Formation)
Articles of Incorporation:
Defects
Despite defects in incorporation documents, some corporations may still be considered legal corporations under the de jure or de facto corporations doctrines
Corporations (Formation)
De Jure Corporation
A corporation “of right”
A Corporation that has substantially or strictly complied with the appropriate state statutes for incorporation
Its existence and validity cannot be attacked or challenged by any party, including the state of incorporation
Corporations (Formation)
De Facto Corporation
A corporation “in fact”
A corporation that has:
- Made a good faith attempt to comply with the appropriate state statutes for incorporation,
-
Conducted business of the corporation in good faith as if the corporation existed,
AND - Exists in a state that recognizes the De Facto Doctrine
Its existence and validity cannot be attacked or challenged by any Third Party, but the state of incorporation may bring an action to declare the corporation invalid
Corporations (Formation)
Neither De Jure nor De Facto
A corporation’s existence and validity may be attacked when it has NOT:
- Substantially or strictly complied with the appropriate state statutes with regard to incorporation,
- Made a good faith attempt to comply with the appropriate state statutes with regard to incorporation, or
- Conducted its business in good faith as if it existed
A third party may recover from individual would-be shareholders (unlimited personal liability)
Corporations (Formation)
Post-Incorporation Organizational Meeting:
Required Matters
- Election of Initial Directors
- Appointment of Officers
- Adoption or Ratification of Pre-Incorporation Contracts
- Adoption of Bylaws
- Issuance of Stock
- Other Necessary Approvals and Actions
Corporations (Formation)
Post-Incorporation Organizational Meeting:
Election of Initial Directors
The initial board of directors serves until the first meeting of shareholders, where their successors will be elected
-
Directors named in articles
–> directors take over from incorporators -
Directors not named in articles
–> Incorporators elect at meeting, then directors take over -
Dummy board named in articles
–> dummy directors resign and are replaced
Corporations (Formation)
Post-Incorporation Organizational Meeting:
Pre-Incorporation Contracts
The initial directors will formally consider whether to ratify or adopt, with or without novation, any pre-incorporation contracts
Corporations (Formation)
Post-Incorporation Organizational Meeting:
Bylaws
The initial directors (or incorporators) will be presented the bylaws for adoption
Typical Contents:
(1) Directors
(2) Officers
(3) Shareholders
(4) Annual & Special Meetings
(5) Voting Procedures
(6) Financial Matters
Corporations (Formation)
Post-Incorporation Organizational Meeting:
Issuance of Stock
The initial directors should:
- Fix the stock price
- Authorize officers to begin issuing stock
