Formation of Corporations Flashcards
What are the 3 main ways that a corporation can be created?
- De Jure Corporation
- De Facto Corporation
- Corporation by Estoppel
De Facto Corporation and Corporation by Estoppel have been abolished in most states, BUT if one or both is relevant to an essay raise them in your answer with this caveat
How is a De Jure Corporation Formed?
Incorporators must:
- File articles of incorporation with the state and
- Pay whatever fees the state directs.
What are the main required contents that must be contained in an Articles of Incorporation?
- The name of the corporation.
- The number of shares the corporation is authorized to issue
- A registered agent and the street address of the registered office.
- The name and address of each incorporator
The registered agent MUST be located in the state.
What is an Ultra Vires Act?
If a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose. Activities beyond the scope of the stated business purposes are said to be “ultra vires.”
What is the Common Law rule vs. the MCBA rule for Ultra Vires Acts?
Common Law — Ultra vires acts were void and unenforceable.
MBCA — Ultra vires acts generally are enforceable, and the ultra vires nature of an act can be raised in only three situations:
- A shareholder may sue corporation to enjoin a proposed ultra vires act;
- The corporation may sue an officer or director for damages for approving an ultra vires act; and
- The state may bring an action to dissolve a corporation for committing an ultra vires act.
What is the main requirement that both De Facto Corporation and Corporation by Estoppel require?
Anyone asserting either doctrine MUST be UNAWARE of the failure to form a de jure corporation
What happens if failure to form under De Jure, De Facto, or Corporation by Estoppel?
Courts will hold only the active business members personally liable, and their liability is joint and several
What are the main requirements for De Facto Corporation?
- There must be a relevant incorporation statute (every state has one)
- The parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corporation
- There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.
How is a De Facto Corporation Different from a De Jure Corporation?
Generally, if a de facto corporation is found, it is treated like any other corporation for all purposes, EXCEPT that the state may seek dissolution in a quo warranto proceeding.
When does Corporation by Estoppel apply?
Corporation by Estoppel applies when people treat an entity as a corporation. The doctrine is applied to estopp them from later claiming that the entity was not a corporation.
The doctrine can be applied either to an outsider seeking to avoid liability on a contract with the purported corporation, OR to a purported corporation seeking to avoid liability on a contract with an outsider.
What is a promoter?
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.
What fidicuiary duties does a promoter owe a corporation?
- Fair Disclosure
- Good Faith
When is a promoter liable for breach of fidicuary duty?
A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed.
- Independent Board of Directors: If the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable for his profits.
- Disclosure to All Subscribers or Shareholders: If the board of directors is not completely independent, the promoter’s transaction must be approved by the shareholders or subscribers to the stock of the corporation. The promoter is insulated from a breach of fiduciary duty if the subscribers knew of the transaction at the time they subscribed or, after full disclosure, unanimously ratified the transaction.
Is a corporation bound to contracts entered by a promoter?
No, the corporation is not bound because the corporate entity does not exist prior to incorporation.
BUT the corporation may become bound on promoter contracts by adopting the contract
What is a promoter’s liability for contracts with third parties?
Promoter is liable for contracts even after incorporation and will not be released from liability only if there is an express or implied novation (an agreement to release the promoter from liability and substitute the corporation for the promoter in the contract)
