Other Formation Issues Flashcards
Internal Affairs Doctrine
- internal affairs of a corporation are governed by the law of the state of incorporation
Entity Status
- corp has entity status upon formation -> qualifies as a legal person
Abilities included in that:
- can sue + be sued
- hold property
- be a partner in a partnership
- invest in other companies + commodities
Benefit Corporation
- B Corp = one formed for profit + also to pursue some benefit to a broader social policy cause
- articles must say it’s a “benefit corporation” (otherwise works as a regular corp.)
- corp also files an annual benefit report assessing how it pursued its stated social mission
- decisionmakers must consider impact on broader community or env in addition to SHs
- managers shouldn’t be liable for failing to maximize profits alone (co has broader purpose)
Limited Liability
- one of the most important consequences of forming a corp = limited liability -> SHs usually liable only to pay for stock, not corp debts
Defective Incorporation - Basic Concept
- if incorporators thought they’d formed a corp but failed to do so, they’d be personally liable for business debts
-> would’ve formed a general partnership
Defective Incorporation - Doctrines That Allow to Escape Liability
- de facto corporation
- corporation by estoppel
- under both, anyone asserting the doctrine must be unaware of the failure to form a de jure corporation
De Facto Corporation
Can exist where following reqs met:
- relevant incorporation statute (there’s one in every state, so this element is easily met)
- parties made a good faith, colorable attempt to comply with the statute
-> meaning they tried + came close to forming a corp AND
- there has been some exercise of corporate privileges (i.e. the parties were acting as though they thought there was a corporation
- if all of these apply, the business is treated as a corporation for all purposes except in an action by the state
De Facto Corporation Doctrine - Limitation
- can be raised as a defense to personal liability only by a person who is UNAWARE there was no valid incorporation
- vs persons who act on behalf of corp knowing there was no incorporation are jointly + severally liable for all liabilities created in so acting
Corporation by Estoppel
- persons who have dealt with the entity as if it were a corporation will be estopped from denying its existence
-> applies in contract to prevent “corporate” entity + parties who dealt w/ it from backing out of their contracts
-> also prevents improperly formed corp from avoiding liability by saying not properly formed
Corporation by Estoppel - Limitation
- ONLY applies in CONTRACT cases, not torts
Application of De Facto Corp vs. Estoppel
- if de facto corp found, treated like corp for all purposes
- vs. estoppel applies only on a case by case basis
What happens if neither de facto nor estoppel reqs met?
- courts will hold only the active business members personally liable -> their liable is joint + several
Status of De Facto Corp and Estoppel
- ABOLISHED IN MANY STATES
- should still raise in essay with that caveat (likely doesn’t apply, but if it does, here’s how it would work)
Pre-Incorporation Contracts
- NO corp formed yet and they know it
- promoter: person acting on behalf of corp not yet formed
-> procures commitments for capital + other instrumentalities that will be used by the corp after its formation
Promoters’ Relationship with Each Other
- joint venturers (absent agreement to the contrary)
- have fiduciary relationship w/ each other
-> breach this if secretly pursue personal gain at the expense of their fellow promoters
