Formation Flashcards
Who is a promoter?
Prior to the frooamtion of a corporation, a promoter engages in activities, such as procuring capital and entering into contracts, to bring the corporation into existence as a business entity.
Not a principal-agent relationship!
What is a promoter liable for with regards to pre-incorporation agreements?
Until when are they no longer liable?
A promoter is personally liable for knowingly acting on behalf of a corporation (C) before incorporation,
AND remains liable after C comes into existence UNLESS
-> there is a subsequent novation releasing the promoter from liability
-> the third party looks only to C for performance
OR
-> the promoter had no actual knowledge that the corporation’s charter has not yet been issued
Does C owe fiduciary duties to C?
Yes and can be liable if the promoter breaches those duties.
How does compensation work between a promoter and a C?
A promoter may seek compensation/reimbursement for related expenses, BUT cannot compel C to pay because the acts were not undertaken at C’s direction.
What is the general rule regarding C’s liability for pre-incorporation transactions?
Is there an exception to this?
C is not liable for pre-incorporation transactions, even those for the benefit of C (there is no principal-agent relationship between C and promoter).
C is liable if it expressly or impliedly adopts a contract by accepting the benefits of the transaction, OR gives an express acceptance of liability for the debt.
What is a MUST with regards to the articles of incorporation?
What is a MAY regarding them?
Articles of incorporation MUST
-> include the corporate name and be filed with the state
Articles of incorporation MAY
-> enumerate powers that C possesses, or limit its duration
-> include statement of C’s legal purpose
When does the corporation exist?
The corporation exists when the articles of incorporation are filed, UNLESS the articles establish a later date.
What are ultra vires actions?
Can a third party use C’s ultra vires actions as a way to escape liability?
When a C that has stated a narrow business purpose in its articles subsequently engages in activities outside that stated purpose.
A third party generally cannot escape liability for a transaction that is an ultra vires corporate act.
What are the different types of challenges to ultra vires acts under the RMBCA?
A shareholder can file suit to enjoin the C’s ultra vires action
-> aka place an injunction on C from committing the action
C can take action against a director (D), officer (O), or employee who engaged in the action.
The state can inmate proceedings against the C, D, O, or employee regarding the ultra vires actions.
What is a “De cure” C?
It’s when all statutory requirements for incorporation are satisfied, C is liable for C activities.
How can an incorporation be defective? Who bares the liability?
Be defective due to lack of good faith
-> a person who conducts business as a C without complying with the incorporation requirements is personally liable for the nonexistent C’s obligations
How can a person escape liability if the incorporation is defective?
Good faith effort is the way to escape personal liability.
It comes in two ways
-> de facto C - the owner must make a good-faith effort to comply with the incorporation requirements and operate C without knowing the requirements were not met
-> corporation by estoppel - a person dealing with an entity is a contractual agreement as it were a C is estopped from denying its existence and seeking personal liability
