FACT PATTERN ONE— ORGANIZATION OF A CORPORATION Flashcards
FORMING A CORPORATION
2.1 CREATED UNDER STATUTE
- Corps are created by complying w/ state corporate law, which in a majority of states is based on the Revised Model Business Corporation Act (“MBCA”).
FORMATION TERMINOLOGY
- Corp formed in accordance w/ law is a de jure corp.
- If all corporate laws have not been followed, a de facto corp might result/corp might be recognized through estoppel.
PERSON, PAPER, ACT
- To create a de jure corp, we need a person, a paper,
& an act. PPA
Person–Incorporators
- To form a corpo, we need one/more persons to form it, who are called the incorporators.
- Incorporators must comply w/ all applicable statutory requirements to form corp
- Basically, they must execute & deliver articles of incorporation to secretary of state.
- Incorporators may be a person/entity.
- They do not need to be a citizen of the state of incorporation.
,
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Paper—Articles of Incorporation
- To form a corp, we also need a particular paper articles of incorporation.
Required Contents
The articles of incorporation must include:
(1) Name of corp.
- Name must include one of the following words/ abbreviation: “corporation,” “company,” “incorporated,” or “limited.
- Name & address of each incorporator
(2) Registered agent & street address of registered office.
- Registered office must be in state.
- Registered agent is company’s legal rep, meaning they could, for ex, receive SOP for corp.
(3) Info regarding corp’s stock.
- Articles must give details about corp’s authorized stock, which is max number of shares corp can sell.
- If company has different classes of stock/series w/in a class of stock, many states require that articles state number of shares per class; provide a distinguishing designation for each class (ex. “Class A preferred,” “Class B preferred,” & so on); & describe voting rights,
preferences, & limitations of each class of stock.
Optional Contents
- Articles may also include any other provision regarding operation of corp that’s not inconsistent w/ law.
- Ex. articles might include names & addresses of initial directors.
- Articles may also require that any internal corporate claims be brought exclusively at a ct w/in the corp’s state of incorporation.
Business Purposes
- Traditionally, corps have included a statement of business purposes in their articles.
- Absent such a statement, MBCA presumes that a corp is formed to conduct any lawful business & is allowed to undertake any act that is necessary/ convenient for carrying on their business purpose, including making charitable donations & lending money to employees, officers, & directors.
Tip
Under modern corp statutes, a corp is given power to do all things necessary/convenient to effect its purposes. Most modern statutes also provide that a corp may be formed for any lawful purpose. Combined, these provisions provide authority for a corp to do almost anything that is rationally related to a business purpose. Thus, unless an exam question restricts a corp’s purposes, you should usually find corporate acts to be w/in corp’s powers.
Ultra Vires Acts
- If a corp includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving stated business purpose.
- Activities beyond scope of stated business purposes are said to be “ultra vires.”
- Under common law, ultra vires acts were void
- Under MBCA, ultra vires acts generally are enforceable, & ultra vires nature of an act can be raised in only 3 situations:
(1) Shareholder may sue corp to enjoin a proposed ultra vires act;
(2) Corp may sue officer/director for damages for approving an ultra vires act; and
(3) State may bring an action to dissolve a corp for committing an ultra vires act.
Tip
Keep in mind that under modern statutes, the ultra vires defense is very limited. Therefore, you should not allow a corp to get out of a K merely b/c K is outside scope of corp’s stated purposes.
Act—Corporate Existence Begins on Filing
- To complete formation of corp, incorporators will have notarized articles delivered to secretary of state & pay any required fees
- In other words, corporate existence begins upon this filing by the state.
- The filing is conclusive proof of corporate existence
OTHER STEPS TO ORGANIZE THE
CORPORATION
2.4.1 Organizational Meeting
- If initial directors were named in articles, board of directors hold the organizational meeting.
- If they were not named in articles, incorporators hold the organizational meeting.
- Purpose of meeting is to “complete org of corp,” which means
(1) adopt initial bylaws and
(2) appoint officers.
Bylaws
- Bylaws are an internal doc.
- You can think of them as corp’s operating manual; bylaws might include things like setting record dates (for determining who may vote at shareholder meetings) & methods of giving notice.
- Bylaws may contain any provision for managing corp that is not inconsistent w/ article/law
