Formation Issues Flashcards
Internal Affairs Doctrine
Under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation.
De Facto Corporation Characteristics and Requirements
For a de facto corporation to exist, we must meet the following requirements:
* There must be a relevant incorporation statute. (On the exam, you can address this requirement quickly—it will always be met, because there’s an incorporation statute in every state.)
* The parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corporation; and
* There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation. If the de facto corporation doctrine applies, the business is treated as a corporation for all purposes except in an action by the state (called a “quo warranto” action).
Corporation by Estoppel
Under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.
PRE-INCORPORATION CONTRACTS (WE KNEW THERE WAS NOT A CORPORATION)
A promoter is a person acting on behalf of a corporation not yet formed. Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation.
Promoters’ Relationship with Each Other
Absent an agreement to the contrary, promoters are joint venturers (partners) who have a fiduciary relationship with each other. They will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters.
Promoters’ Relationship with Corporation
A promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith.
Promoters’ Relationship with Third Parties—
Preincorporation Agreements
Corporation’s Liability
Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation. The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.
Promoter’s Liability
Under the MBCA, anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred. Thus, if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract. The promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it. The promoter will be released from liability only if there is an express or implied novation
