Rule Statements Flashcards
Pre-incorporation Promoter Liability
A promoter is a person who acts on behalf of a corporation prior to formation. They are personally liable for Pre-incorporation Ks unless
- there is a subsequent novation, or
- the contract explicitly provides there is no promoter liability.
Corporate Liability
A corporation is not liable for a pre-incorporation K unless the corp. knows the material terms and accepts the benefits of the K.
If the corporation accepts the benefits of the K, it may be adopted, and while it doesn’t relieve the promotor of liability, it offers the creditor an alternative avenue to seek reimbursement.
Corporations
A corporation is a legal entity that exists separate from its owners, thus shielding the owners and managers from liability.
Formation
A corporation’s existence begins on the date the Articles of Incorporation are filed with the Secretary of State, unless a delayed effective date is specified.
Articles of Incorporation
The AOI must contain: (4x)
- Corporate Name
- Number of shares the corporation is authorized to issue
- Corporation’s initial registered office address and the name of its initial registered agent at that office; and
- The name and address of each incorporator.
Election of Directors
Shareholders elect directors at the annual shareholder meetings. Shareholders may remove directors with or without cause.
Primary officers are appointed by the board, who determine their salary.
Fundamental Changes
Fundamental Changes require a special meeting and majority of all votes, not just those at the quorum. Fundamental changes include merger, consolidation, changes to the AOI, sale of all or substantial assets, and dissolution.
De Jure Corporation
A DJC is a legally formed corporation. A corporation is legally formed when the AoI are filed with the Secretary of State. If the corporation is not legally formed, it cannot enter into contractual obligations. In such instance,owner/spromoters will be personally liable, unless either an exception for De Facto Corporations or Corporation by Estoppel applies.
De Facto Corporation
A DFC enjoys the benefits and powers of a properly formed corporation, but through some error, it is not legally incorporated. A DFC exists where the entity:
- made a good faith attempt to incorporate;
- is otherwise eligible to incorporate; and
- Took some action indicating that it considered itself a corporation. However, only a person who was unaware that the corporation was not proeprly formed may assert the de facto corporation defense.
Corporation by Estoppel
Any person or entitty that treated a business as a corporation may be later estopped from denying that the business is a corporation, even if a valid corporation was not formed.
Ultra Vires Act
When a corporation’s activities are outside the scope of their Articles of Incorporation, such activities are deemed Ultra Vires Acts. Under CL, Ultra Vires Acts are void and unenforceable. However, under the Revised Model Business Corporation Act (RMBCA), UVAs are generally enforceable if they benefit the corporation. However, individual directors and officers who approved these UVAs can be held personally liable. UVA claims are raised when
- A shareholder sues to enjoin the UVA;
- The corporation sues an officer; or
- A state brings action to dissolve the corporation based on UVA.
Piercing the veil
Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation. However, a court will pierce the corporate veil and hold shareholders personally liable when: 1) the corporation is acting as the alter ego of shareholders; 2) where shareholders fail to follow corporate formalities; 3) the corporation was inadequately capitalized at formation or 4) to prevent fraud.
Duty of Care
Directors have a duty to act in good faith, in a manner in the best interests of the corporation, and with the care of a like person in similar circumstances. This requires they be reasonably informed. If they meet these elements they are generally not liable for decisions that adversely affect the corporation.
Business Judgement Rule
The business judgement rule is a rebuttable presumption that a director reasonably believed their actions were in the best interest of the corporation.
Duty of Loyalty–Fiduciary Duty Owed (CUCT)
A Director must act in the corporation’s best interest and without personal conflict. This duty of fiduciary loyalty forbids (CUCT)
- Entering conflicting interest transactions;
- Usurping a Corporate opportunity;
- Competing with the corporation; and
- Trading on inside information.