Corporations - Other Formation Issues Flashcards
De Facto Corporation
CONTEXT
One of the main reasons to incorporate is to avoid personal liability. If the incorporators thought they formed a corp, but failed to do so, they’d be personally liable for business debts.
These doctrines still allow incorporators to avoid liability as a general partnership by arguing that they tried to make a corp and so they basically are a corp.
De Facto Corporation. to exist, must meet following reqs:
- Must be a relevant incorporation statute (always met)
- Parties made a good faith, colorable attempt to comply with the statute, meaning they tried to comply and came close
- There’s been exercise of corporate privileges, meaning the parties thought there was a corp
If the de facto corp doctrine applies, the business is treated as a corp for all purposes except in an action by the state (called a quo warranto action).
De facto corp can be raised as a defense to personal liability ONLY by a person UNAWARE there was no valid incorporation.
Corporation by Estoppel
Applies in K cases only, not torts.
Under this doctrine, persons who have dealt with the entity as if it were a corp will be estopped from denying the corp’s existence.
The doctrine applies in K to prevent the “corporate” entity from backing out of their Ks.
Application of De Facto Corporation and Corporation by Estoppel
Abolished in many states (mention that as a limit on use of them).
If a de facto corporation is found, it’s treated like any other corporation for all purposes, except that the state may seek dissolution in a quo warranto proceeding.
BUT estoppel only applies on a case by case basis.
Bylaws
These are the internal document that governs the corporation’s daily operations. Corps aren’t required to have bylaws but almost always do for internal governance purposes.
Bylaws may contain any provision for managing the corp that is NOT INCONSISTENT with the articles or the law. In other words, the articles of incorporation and mandatory state laws overpower bylaws. If there’s a conflict, the articles of incorporation control because they’re a K with the state.
Pre-Incorporation Contract: Corporation’s Liability
A K entered into on behalf of a corp but before the corp is formed. Who’s liable? The corp or the promoter who formed the K?
Liability of Corp: It’s not liable. The corp wasn’t even born yet.
–» Exception: …unless the corp adopts the K. So if the corp adopts it, then it’s liable.
—»> Adoption: either express adoption (board takes an action to adopt) or implied adoption (corp accepts the benefits of the K, so we assume you adopted it because it would be unfair to give you benefits without burdens)
Pre-Incorporation Contracts: Promoter’s Liability
Promoter is personally liable on a K entered into on behalf of an unformed corp. This continues after the corp is formed even if the corp adopts the K and benefits from it.
Exception 1: promoter will be released from liability only if there is an express or implied novation (agreement among all 3 parties to release the promoter).
Exception 2: If the agreement (supposed K) expressly relieves the promoter of liability, there is no K at all. This would be construed as a revocable offer to the proposed corp and the promoter has no rights or liabilities under the agreement.
Foreign Corporations
Foreign corps gotta register and pay fees with a state to do business there.
Transacting business: this means doing the regular course of intrastate business.
Must “qualify”/register with the state to do business there - this means getting a certificate of authority from the secretary of state. If you don’t do this, the corp could get civil fine and be unable to assert a claim in the state.
