Corporations: Formation

Question 1

Step-By-Step Outline

Answer 1

(1) Select the state of incorporation

(2) Reserve the desired corporate name by application to the secretary of state or other designated state office

(3) Arrange for a registered office and registered agent

(4) Draft, execute, and file the COI with the relevant state law agency, according to the requirements of state law
● Under MBCA § 2.02(a): must set forth:
○ Name of corporation
○ Number of shares it’s authorized to issue
○ Name and address of each incorporator, and
○ Name and address of corporation’s registered office & agent
● Under MBCA § 2.02(b): may set forth:
○ Names and addresses of the individuals who are to serve as initial directors
○ Provision eliminating or limiting liability of a director
○ Provision permitting or making obligatory indemnification of a director for liability…

(5) Organizational meeting of the incorporators for shares to elect the directors, if not named in the certificate (DGCL § 108). Also:
● Appoint officers
● Adopted bylaws (DGCL § 109) (MBCA § 2.05)
● Adopt pre-incorporation promoters’ contracts
● Authorize issuance of shares, stock certificates, corporate seal, corporate account, etc.

(6) Prepare board meeting minutes, open corporate books and records, issue shares, qualify to do business in states where business will be conducted, obtain any needed permits, taxpayer ID numbers, etc.

(7) Plan for shareholder meeting as required

Question 2

Key Corporate Documents

Answer 2

Certificate/Articles of Incorporation
Must include: Name, # of shares, address, incorporators

May include: Initial directors, management, limits on rights, liability on a shareholder

Bylaws
- Not filed with the state
- Set out the governing details of the corporation
- May include “Provision for managing the business and regulating the affairs of the corporation.”

Question 3

Promoter Liability v. Incorporators

Answer 3

Promoter: a person who directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer
● E.g., find investors, arrange for space/facilities, hire employee for the entity, enter into contracts

Incorporator: has the limited, mechanical task of preparing the incorporation documents and filing them with the state
■ Incorporators are typically not liable for their pre incorporation acts

Question 4

Pre-Incorporation Liability

Answer 4

Promoters are liable for contracts entered into on behalf of a future corporation, absent a contrary intent
■ Contrary intent generally requires showing more than just signing “for a corporation to be formed”
■ Evidence of the parties’ intentions must be found in the contract or in the surrounding circumstances – for example, that the parties intended the promoter to be a non-recourse agent or a “best efforts” agent

Question 5

Post-Incorporation Liability

Answer 5

Corporation is liable on the contract only if the corporation adopted it
■ Can be express (e.g., formal board resolution) or implied (e.g., if directors or officers knew of and acquiesced in the contract)

Promoter remains liable unless:
■ Corporation is formed;
■ Corporation adopted the pre-incorporation contract; and
■ The parties agreed to release the promoter from liability (either in the initial contract or through subsequent novation)

It’s possible for the corporation and the promoter to both be liable on the contract

Question 6

Promoter Fiduciary Duties

Answer 6

Promoters of a yet-to-be-formed corporation have some fiduciary duties to the entity, the other promoters and investors:

(1) Promoters must deal with the entity in good faith which requires promoters to act fairly in transactions they enter into with the corporation

(2) Promoters must disclose relevant information, like opportunities and conflicts vis-a-vis the entity, to other relevant parties (e.g., no secret profits)

Question 7

Limited Liability with Defective Formation

Answer 7

De Facto Corporation: Treat improperly-incorporated entity as a corporation if the organizers:
● Tried to incorporate in good faith,
● Had a legal right to do so, and
● Acted as if a corporation

Incorporation by Estoppel: treat as proper corporation if person dealing with the firm
● Thought the firm was a corporation, and
● A windfall if allowed to argue that firm was not a corporation

Question 8

Subscription Agreements

Answer 8

An offer to purchase shares from a corporation.

Subscriptions can be made for existing corporations or corporations to be formed.

A subscription does not become a contract until accepted by the corporation. There are concerns about the enforceability of subscription agreements entered into before incorporation;

DGCL § 165 provides the default that they are irrevocable by the subscriber for 6 months from the date of subscription, unless otherwise provided.