Formation Flashcards
What is the source of law for corporations questions?
Corporate procedures are controlled by state law and the Revised Model Business Corporations Act, which has been adopted in most states. Unless a corporation adopts contrary bylaws, the RMBCA supplies default provisions for the internal governance of the corporation.
What is a promoter?
The person acting as the corporation’s agent in forming the corporation.
What is the fiduciary status of a promoter?
A fiduciary owing a duty of care, loyalty, and fair dealing.
- no conflicts of interest, unless [consent or?] ratification of subscribers or board of directors
- must make full disclosures
- no secret profits
Is a promoter personally liable for pre-incorporation contracts he enters on the corporation’s behalf?
Yes, even after adoption by the corporation, unless and until there is a novation
How does a promoter get reimbursed and compensated for time spent during the pre-incorporation process?
Only if the board of directors later approves compensation or reimbursements. There is no absolute right to reimbursement for time or costs for pre-incorporation services under the RMBCA.
When does a corporation’s legal existence begin?
When the articles of incorporation are filed
What must the articles of incorporation contain?
- registered agent
- incorporators
- name of corporation
- stock details
What must the articles of incorporation contain?
- registered agent name & address
- incorporators names & address
- name of corporation
- stock details
What is required of the registered agent?
The registered agent must affirmatively agree to accept service of process at an in-state address.
What rules apply to the corporation’s name?
It must contain one of these words or abbreviations:
- “corporation”/”corp.”
- “incorporated”/”inc.”
- “limited”/”ltd.”
What stock details must be included in the articles of incorporation?
- number of authorized shares per class
- descriptions of each class, if there’s more than one
What is required in creating classes of stock?
Preferences, limitations, voting powers, and relative rights must be the same for the whole class.
When can the articles of incorporation provide for indemnification of directors?
When not for an improper reason:
- breach of fiduciary duty
- intentional wrongdoing
- crimes
- excess distributions to shareholders
How are the articles of incorporation amended?
Minor ministerial matters: the articles can be amended by the board.
Significant effect on rights of shareholders: must be approved by shareholders
What is required for an amendment to pass a vote of shareholders?
If closely held: 2/3 majority
If publicly traded: simple majority
What happens when an entity has failed to meet a requirement of state law in the formation process?
If a corporations is not properly formed, the purported shareholders may be held jointly and severally liable as partners.
However, the doctrines of “de facto corporation” and “corporation by estoppel” may shield shareholders form liability.
What is required for a “de facto corporation”?
If the corporation has acted in good faith as if fully legally incorporated, though failing to meet every requirement of state law, then it will be deemed a “de facto” corporation and the shareholders may be shielded from liability.
What is a corporation by estoppel?
if creditors dealt with the entity as if a corporation, then they are estopped form bring claims against the individual shareholders.
After the articles of incorporation are filed, what must happen?
- An organizational meeting must be held.
- An initial report must usually be filed within 120 days, specifying officers, directors, and describing the nature of the business.
What happens at the organizational meeting?
- the corporation accepts stock
- shares are distributed
- the board of directors is elected
- the board appoints officers
- bylaws are adopted
- any ratifications of acts, or adoption of contracts can also be made
Must the organizational meeting be in person?
In most states no, as long as minutes are written.
In a closely held corporation, what additional right do shareholder’s have?
They have a right to participate in management.
What is the hierarchy of authority limiting corporate activity?
(1) state law
(2) articles
(3) bylaws
(4) resolutions and minutes
What are foreign corporations required to do?
obtain a certificate of authority to transact business in the state
What is the test for whether an entity “transacts business in the state”?
If the in-state activities are permanent, substantial, and continuous.
- having a fixed facility in the state qualifies
- taking orders on a website qualifies
NOT sufficient on their own:
- sales by mail or by independent contractors
- owning property
- holding meetings
- a passive website
- borrowing money
If transacting business in a state without a certificate of authority, what can happen?
- civil fines
- potential personal liability
- lose the right to sue in the state as plaintiff
