Formation Flashcards
What is the primary role of promoters in corporate formation?
Promoters take the necessary preliminary steps for creating a corporation, often involving contracts for the benefit of the not-yet-formed corporation.
Promoters are not agents of the contemplated corporation.
True or False: Promoters can bind a not-yet-formed corporation to contracts.
False
The corporation is not yet in existence, so it cannot be a principal in any agency relationship with a promoter.
What is the relationship among multiple promoters?
Mutual agency or partnership-type relationship.
Contracts entered into within the scope of promotion bind each promoter, making them jointly and severally liable.
What is the general liability of promoters on contracts for a not-yet-formed corporation?
Promoters are personally liable on the contracts they enter into for the benefit of a not-yet-formed corporation.
They are not liable if the contract specifically disclaims personal liability or if circumstances show the other party agreed to look only to the corporation.
What must occur for a corporation to be liable on a pre-incorporation contract?
The corporation must assume liability through adoption or novation.
Promoters do not have the power to bind the corporation to contracts they enter into.
What happens if a corporation adopts a promoter’s contract?
The promoter remains liable to the third party but is entitled to indemnification from the corporation.
Adoption can be express or implied.
Define novation in the context of corporate contracts.
Novation occurs when three parties—the promoter, the second party to the original contract, and the corporation—agree to substitute the corporation as a party to the contract in place of the promoter.
Promoters are released from all personal liability on the pre-incorporation contract upon novation.
What is required for valid incorporation?
Proper execution and filing of articles of incorporation.
Articles must include details such as the name of incorporators, registered office address, and number of shares authorized.
What is the effective date of incorporation?
The date of filing unless a delayed effective date is specified.
Corporate existence begins at the moment of incorporation.
What are the main actions required to properly organize a corporation after incorporation?
Naming or electing directors, appointing officers, and adopting by-laws.
Failure to properly organize may expose shareholders to personal liability.
What is the purpose of by-laws in a corporation?
By-laws are internal rules and regulations governing actions and relations among shareholders, directors, and officers.
They may specify meeting times, quorum requirements, and voting percentages.
What constitutes a de facto corporation?
A good-faith, colorable attempt to comply with the incorporation statute, with principals acting as if they were a corporation.
De facto status insulates directors and shareholders from liability.
What is the doctrine of corporation by estoppel?
It prevents a third party from alleging a corporation is defectively incorporated if it would unjustly expose corporate principals to liability.
It can also prevent a business entity from claiming it is not a corporation if that would unjustly deprive a third party of relief.
True or False: The corporation by estoppel doctrine is a defense against tort claims.
False
It is generally not applicable to tort claims but may be relevant in contract claims.
