Formation

Question 1

Promoter

Answer 1

Engages in activities such as raising capital and forming contracts in order to bring a corporation into existence

These pre-incorporation transactions can sometimes raise legal problems

Question 2

Promoter Liability

Answer 2

Personally liable for pre-incorporation transactions

Corporation can release promoter from personal liability through a subsequent NOVATION (express adoption or use of contractual benefits not enough)

Corporation may also indemnify promoter from personal liability

Question 3

Duties of Promoters

Answer 3

Prior to incorporation, each promoter will owe the corporation a FIDUCIARY DUTY

Promoter cannot benefit personally at the expense of the corporation

Question 4

Compensation for Promoters

Answer 4

Promoter may seek compensation or reimbursement for expenses related to pre-incorporation

However, promoter CANNOT COMPEL corporation to pay

Question 5

Corporation’s Liability for Pre-Incorporation Transactions

Answer 5

Corporation IS NOT liable for pre-incorporation transactions

Corporation IS LIABLE if it expressly or impliedly adopts a contract by accepting the benefits of the transaction or if it accepts liability

Question 6

The Incorporator

Answer 6

Signs and files the key formation documents with the state

Usually a lawyer

Not liable for pre-incorporation contracts formed by promoter

Question 7

Articles of Incorporation

AKA Charter

Answer 7

Primary document that must be filed with the Indiana secretary of state to form a corporation

Question 8

What Must Be Included in the Articles of Incorporation?

Answer 8

(1) Name of corporation
(2) Number of shares authorized to issue
(3) Place in Indiana of its registered office and name of its registration agent in the state
(4) Name and address of each incorporator

Question 9

Can You Amend the Articles Later?

Answer 9

Yes

If no stock issued yet, can be amended by board of directors

If stock has been issued, need board and shareholder approval

Question 10

Corporate Purpose

Answer 10

Corporations commonly use a broad statement of purpose in articles of incorporation

Question 11

Ultra Vires Actions

Answer 11

Occurs when a corporation that has stated a narrow business purpose in its articles but subsequently engages in activities outside that stated purpose

Question 12

Circumstances in Which an Ultra Vires Act Can Be Challenged

Answer 12

(1) SHAREHOLDER can sue to enjoin the corporation from conducting an ultra vires act
(2) CORPORATION can take action against director or officer
(3) STATE can initiate a proceeding against the corporation to enjoin an ultra vires act

Question 13

Remedies for Ultra Vires Act

Answer 13

The responsible officer or director may be held personally liable

Ultra vires act may be enjoined or rescinded if the third party was aware that the act was ultra vires

Question 14

Corporate Powers

Answer 14

The articles of incorporation may enumerate specific corporate powers

(1) Take actions necessary for carrying out its business
(2) Sue or be sued
(3) Purchase and transfer property
(4) Contract
(5) Be member of another entity
(6) Make donation

Question 15

Other Corporation Requirements

Answer 15

Must pay filing fee

Must file a biennial report (every 2 years) with the state

Legal existence begins upon filing or on a later date stated in the filing (not to exceed 90 days)

Question 16

De Jure Corporation

Answer 16

Occurs when all statutory requirements for incorporation are satisfied

Corporation liable for corporation activities

Shareholders, officers, directors have limited liability for activities undertaken by the corporation

Question 17

Defective Incorporation: Lack of Good Faith

Answer 17

If someone purports to conduct business in Indiana as a corporation without making any good faith attempt to comply with the requirements, they will be personally liable for any obligation incurred in the name of the fake corporation

If there are multiple people involved, this liability is joint and several

Question 18

Defective Incorporation: De Facto Corporation

Answer 18

An owner who tries to meet the requirements and operates without knowing that something went wrong will be treated as having created a de facto corporation

Allows owner to avoid personal liability

Question 19

Defective Incorporation: Corporation by Estoppel

Answer 19

Two common situations:

(1) When a defectively formed corporation holds itself out as a valid corporation to a third party, it cannot avoid liability by raising its lack of corporate status as a defense
(2) Person who deals with an entity in a contractual agreement as if it were a corporation is estopped from denying its existence and seeking personal liability

Usually limited to contract claims

Question 20

Steps Taken After Articles of Incorporation are Filed

Answer 20

(1) Draft bylaws (cannot be inconsistent with articles)
(2) Hold organizational meeting to appoint officers, adopt the bylaws, and approve pre-incorporation contracts (meeting need not physically occur in Indiana.)