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
Promoters’ Relationship with Corporation
- fiduciary duty of fair disclosure and good faith to corp
Promoters - Breach of Fiduciary Duty Arising from Sales to Corp
- promoter who profits by selling property to corp may be liable for his profit unless all material facts of the transaction were disclosed
-> if disclosed to independent board of directors + approved, promoter has met duty + won’t be liable for his profits
-> if board not independent, promoter still not liable if subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure
–> disclosure must be to all who are contemplated to be part of the initial financing scheme
Promoters - Fraud
- may always be liable if pls can show they were damaged by promoters’ fraudulent misrepresentations or fraudulent failure to disclose all material facts
Promoters’ Relationship with Third Parties - Preincorporation Agreements: Basic Concept
- promoter may enter into Ks on behalf of corp not yet formed -> who bears the liability?
- note that CMR tip did note you might need to discuss this
Preincorporation Ks - Corporation’s Liability
- NOT bound on Ks entered into promoter in corporate name prior to incorporation (b/c didn’t exist then)
- may become liable only if expressly + impliedly adopts the promoter’s contract (express or implied by accepting benefit)
Preincorporation Agreements - Promoter’s Liability
- under MBCA, anyone who acts on behalf of a corp knowing that it’s not in existence is jointly + severally liable for the obligations incurred
- if promoter enters into K w/ 3rd party on behalf of a planned but unformed corp, promoter is personally liable on the K
-> liability continues after corp formed, EVEN if corp adopts K + benefits from it - released from liability only if express or implied novation
Preincorporation Agreements - Promoter’s Liability - Exception
- agreement expressly relieves promoter of liability -> NO contract
- such arrangement construed as revocable offer to proposed corporation, + promoter has no rights or liabilities under the agreement
Promoter’s Right to Reimbursement
- promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation
Foreign Corporations
- must register + pay fees if they’re transacting business in a state
