Suits by Creditors Flashcards
Who can a creditor of a C sue?
A creditor may seek to enforce corporate liability against SHs or agents. The success of this attack depends on compliance with incorporation and the C’s legal status.
What is a de jure C?
A C organized in compliance with the statute.
Noncompliance will preclude de jure status.
A copy of the CoI is prima facie evidence that the incorporators satisfied all conditions precedent to incorporation.
What is a de facto C?
If statutory compliance is insufficient for de jure status, a de facto C may still be deemed to have been formed if:
- there is a law under which the corporation could have been lawfully formed;
- a good faith, colorable attempt was made to comply with the incorporation statute; and
- the corporate principals acted in good faith as if they were a C.
De facto status insulates directors, SHs, and the like from liability except from actions by the state.
What is C by estoppel?
If a creditor always dealt with the principals as if they were a C, the creditor will be estopped from later alleging that the C is defective if that would unjustly harm the principals.
Additionally, a D that holds itself out as a C is estopped from claiming that it is not a legal entity.
The focus is on the understanding of the party seeking to impose personal liability.
Oklahoma has codified this doctrine. No C or person sued by a C shall be permitted to assert the want of legal organization as a defense to any claim. This does not apply to actions dealing with the regularity or validity of the organization. This does not apply to tort actions.
What is ultra vires act?
The board of directors cannot undertake action that is beyond the C’s authority as set forth in the CoI or bylaws. A C cannot be obliged to undertake a contract or activity that is beyond the scope of its power as described by the CoI or bylaws.
Generally, the validity of corporate action may not be challenged on the ground that the C lacks or lacked power to act. However, a C’s power may be challenged in a proceeding by:
- Sh against the C to enjoin the act;
- the C, directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former officer or director of the C for loss or damage due to his unauthorized act; or
- the attorney general to dissolve the corporation, or to enjoin the C from the transaction of unauthorized business.
What are promoters?
They are persons who causes the C to be formed, organized, and financed.
In small Cs, the promoters usually, although not necessarily, become the incorporators, the SHs, and the officers and directors of the new C.
Generally, promoters will:
- manage the initial financing of the C;
- arrange for a meeting of the investor;
- negotiate and prepare the preincorporation agreements;
- lease office and factory space; and
- contract for the initial needs of the business.
What is the promoters’ relationship to the corporation?
Promoters stand in a fiduciary relationship to teh C and its subscribers for stock, and to those who it is expected will afterwards buy stock from the corporation.
Thus, they are under a duty to avoid self-dealing concerning any assets they sell to the corporation.
Do promoters have a duty of disclosure?
Promoters are under a duty to fully disclose all material facts concerning any assets they sell to the C, including whether the promoters are making a profit on the sale.
If an acquisition by the promoter was fully disclosed to an independent board of directors and the board approved, the promoter has not breached his fiduciary duty.
If the promoters are the only SHs and there is no new issuances of stock, there is no violation for failure to disclose. However, federal securities laws may find a violation.
If the original promotional scheme contemplates sale of stock to other investors, the C has an action for breach of fiduciary duty against a promoter who fails to fully disclose material facts about property transferred.
The promoter will not be liable to the C if he made full disclosure to:
- all the original subscribers for shares and obtained their approval; or
- the SHs of the established C, and they ratified the transaction.
What is the promoters’ liability for breach of fiduciary duty?
In an action for breach of the promoters’ fiduciary duty, the corporation may either:
- avoid the transaction; or
- hold the promoters liable for the secret profits.
What are the rules governing a promoter’s relationship with other promoters?
If there is more than one promoter of a C, the promoters are, in effect, joint venturers and owe each other a fiduciary duty.
As fiduciaries, they cannot make a secret profit on assets that they transfer to the promoters as a group, and must fully disclose to each other information concerning the formation of the C.
There is a mutual agency among the promoters, so that each can bind the others on contracts within the scope of the promotion.
What rules govern preincorporation agreements?
Before incorporation, promoters frequently enter into consensual agreements with third parties relative to the proposed C.
Since the C is not yet in existence, it cannot contract in its own name, nor can the promoters contract on its behalf as its agents. The question then arises as to who is liable on the contracts and who can enforce them.
Generally, promoters are liable for the contracts entered into on behalf of the C not formed, but where the contract specifically disclaims personal liability of the promoter, the obligee will not be able to successfully maintain an action against the promoter.
