Formation

Question 1

Pre-incorporation transactions

Answer 1

1. Promoter liability
   • Pre-incorporation agreements—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 (i) there is a subsequent novation releasing the promoter from liability, (ii) the third party looks only to C for performance, or (iii) the promoter had no actual knowledge that the corporation’s charter has not yet been issued
   • Fiduciary duty—a promoter can be liable to C for violating fiduciary duties
   • Compensation—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
2. C’s liability
   • General rule—C is not liable for pre-incorporation transactions, even those for the benefit of C (there is no principal-agent relationship)
   • Adoption—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

Question 2

Incorporation

Answer 2

1. Articles of incorporation
   • Must include the corporate name and a statement of C’s legal purpose, and be filed with the state
   • May enumerate powers that C possesses, or limit its duration
   • Corporate existence—begins when the articles are filed, unless the articles establish a later date
2. Ultra vires actions
   • Act—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
   • Challenges to ultra vires acts (will only be enjoined if it is equitable to do so)—a shareholder can file suit to enjoin the C’s ultra vires action; C can take action against a director (D), officer (O), or employee who engaged in the action, or the state can initiate a proceeding
3. “De jure” C—when all statutory requirements for incorporation are satisfied, C is liable for C activities
4. Defective incorporation
   • 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 • Good-faith effort—two ways to escape personal liability:
   o 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
   o Corporation by estoppel—a person dealing with an entity in a contractual agreement as if it were a C is estopped from denying its existence and seeking personal liability