Formation

Question 1

Promoter

Answer 1

-Person participating in the formation of a corporation

• Fiduciary duty of fair dealing, disclosure, and good faith (analogous to those of partners or joint ventures)
  
  • to corporation
  • to each other

Question 2

Promoter: No Secret Profit

Answer 2

• Promoter cannot make secret profit on dealings with corporation
• Promoter liable to corporation for any profits unless disclosed to an independent board

Question 3

Pre-Incorporation Contracts

Answer 3

BLL: Promoter personally liable for pre-incorporation contracts made on behalf of corporation IF third party unaware corporation not yet formed.

-Corporation is not liable on pre-incorporation contracts until adopted

Question 4

Pre-Incorporation Contracts: Ways corp. can adopt

Answer 4

• Express (board resolution)
• Implied (accept benefits)

*If contract says corp. not formed, issue is intent of the parties

Question 5

Pre-Incorp. Contracts: Promoter liability

Answer 5

UNLESS K SAYS OTHERWISE, promoter liable absent novation (agreement between all parties to release promoter from liability)

• promoter personally liable; guarantor
• may seek indemnification/quasi-contract

Question 6

Formation Requirements: 1) Incorporators

Answer 6

• person or persons who form corp.

- only one needed in majority of states

Question 7

Formation Requirements: 2) Articles

Answer 7

Defn: document filed with Secretary of State (also known as “charter”)

Usually contains:

1. name of corporation
2. purpose or powers (e.g. make money by any lawful means)
3. capital structure (stocks)

*Note: articles control over inconsistent bylaws

Question 8

Capital Structure (stocks)

Answer 8

• Authorized stock = # shares corp can sell
• Issued stock = # actually sold
• Outstanding stock = # issued

Question 9

Formation Requirements: 3) Act

Answer 9

File

-date of incorporation retroactive to filing date

Question 10

Formation Defects: De Jure

Answer 10

• Full or substantial compliance
• If de jure fails, can use doctrine of de facto or estoppel

GR: shareholders not personally liable

Question 11

Formation Defects: De Facto

Answer 11

• Good faith, colorable attempt to comply (unaware of invalidity)
• Some exercise of corporate privileges

*Abolished in most states: issue is did D know or have reason to know of invalidity

Question 12

De Facto: effect

Answer 12

• Treat as corp for all purposes except in action by the state
• If D knows or has reason to know of invalidity, D personally liable

Question 13

Formation Defects: Estoppel (defense)

Answer 13

• One dealing with a business as a corp may be estopped from denying its corp status
• Usually Ks; not torts; abolished in many states (judge-made doctrine - use as persuasive authority)

Question 14

Formation Defects: Piercing

Answer 14

GR: Shareholder not personally liable for corp debts

*Note: shareholder may be required to return improper dividend

Question 15

Piercing: 3 ways

Answer 15

1. Alter ego theory (failure to follow corporate formalities; e.g. shareholders treat corp assets as their own, fail to observe corp formalities)
   
   • identity of interest
   • commingle - only the one at fault is liable
   • injunction
2. Inadequate capitalization (at the time of formation)
   
   • to meet prospective business risks
3. Fraud
   
   • e.g. using corp to avoid existing liabilities (NOT using corp to avoid FUTURE liabilities)

Question 16

Piercing: notes

Answer 16

-piercing more likely where tort (rather than voluntary contract) involved

• parent corp generally not liable for subsidiary, unless
  
  • active participation; AND
  • control

Question 17

Post-Incorporation Agreements

Answer 17

Use contract laws