Pg 13 Flashcards
If you fail to follow the proper procedure to set up a corporation, what happens?
The organizers are treated as partners and subject to personal liability
What law governs the internal affairs of a corporation?
The law of the state of incorporation
If a Delaware subsidiary of a Panama corporation is having a legal issue, what is the choice of law that applies?
Panama law, because the applicable law is that of the state of incorporation, and this is a Panama corporation
What is the rule for choice of law for corporations in California?
Corporations that have half of their taxable income or property and half of their shareholders in California are subject to many provisions of the California Corporate Code. But these do not apply to companies that are listed on the national security exchange.
What happens if there is defective formation or incorporation?
If a corporation doesn’t comply with statutory formalities they can lose their corporate status and then individuals involved in the corporation become personally liable
What are different problems that can happen with formation of a corporation?
– defective formation
– premature commencement of business
What are some examples of defective formation or incorporation?
– associates pretend to be incorporated and act as a corporation even though they know they have not taken the proper steps
– articles of incorporation are executed but not filed
– articles of incorporation get rejected by the state
– fail to have meeting of incorporators
– continue to do business as a corporation after the term for existence expires
If someone assumes to act as a corporation without authority to do so, what happens?
They are held jointly and severally liable for all debts and liabilities that are incurred unless some exception applies such as a de facto corporation or corporation by estoppel
What is a corporation de jure?
This is a properly formed corporation that was organized under a valid law and complied with all mandatory requirements for incorporation.
What are the two different exceptions to a corporation de jure?
– de facto corporation
– corporation by estoppel
What do de facto corporations and corporations by estoppel have in common?
They both involve a “corporation“ functioning and presenting itself to the public as a corporation, but it isn’t actually
What is a de facto corporation?
A “corporation” that presents itself to the public as a valid corporation, has made good faith but defective attempts at incorporating, and has an officer/employee/agent act on its behalf without knowledge of the defect. Courts can treat defective corporations as this by recognizing them as having continuity of life, limited liability, and other corporate attributes. This doesn’t protect the organization in direct actions by the state, but no one else can successfully challenge their existence
What are the requirements for a de facto corporation?
– need a valid/apparently valid statute that the corporation tried to be formed under
– good faith attempt to comply with the statute
– colorable compliance with statutory requirements (enough to give the appearance of validity to incorporate)
– use of corporate powers
- officer, employee, or agent that did not know the organization wasn’t validly incorporated did something on the corporation’s behalf
Basically what happens when there is a de facto corporation?
There was a legitimate attempt to incorporate, but something went wrong
What’s the purpose of de facto corporations?
To promote security of business transactions and eliminate arguing over irregularities. The idea is that wrongdoers cannot fight over incorporation defects in order to escape liability
