Corporations - FORMATION/ORGANIZATION, Powers, General Matters, Pre-Incoration Contracts

Question 1

Corporations - Formation Requirements

Answer 1

people, paper, acts

(1) INCORPORATORS - who
(i) execute the certificate,
(ii) deliver it to the dept of state, and
(iii) hold the organizational meeting

[Note: you only need 1 or more incorporators, and incorporators must be adult humans only, no entities]

(2) CERTIFICATE of Incorporation (the “paper”)
- which is a contract between the corporation and shareholders, and a contract between the corporation and the state

(3) SIGNING, ACKNOWLEDGMENT and DELIVERY - each incorporator signs certificate and acknowledges it before a notary, then they deliver it to the NY Dept of State. If it conforms with the law, and filing fees are paid, the DEPT FILES the certificate

the department’s filing is CONCLUSIVE EVIDENCE of valid formation, in other words we have a “DE JURE” Corporation

Question 2

What information must be included in the “certificate of incorporation” ?

Answer 2

(1) Corporate NAME (which must include either “corporation” “incorporated” or “limited” or an abbreviation of one of those)
(2) Address - the county in New York of the office of corporation (which does not have to be a place where the corporation actually does business)
(3) must DESIGNATE the corporation’s AGENT for service of process as the NY Secretary of State, along with an address for forwarding process to the corporation (in addition, you MAY, but don’t have to, name a registered agent for service of process)
(4) Name and address of each INCORPORATOR (again only need 1 or more)
(5) STATEMENT OF DURATION (if doesn’t contain one, corporation has PERPETUAL existence)
(6) CORPORATE PURPOSE - generally this will be to “engage in all lawful activity, after first obtaining necessary state agency approval.” - but can be more specific too

(7) CAPITAL STRUCTURE - Authorized stock, Issued stock, Outstanding Stock, etc.but MUST include:
(i) Authorized Stock
(ii) Number of Shares per class
(iii) Information on par value, rights, preferences and limitations of each class
(iv) Info on any series of Preferred Stock
[NOTE** at least ONE class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights]

Question 3

What if the certificate indicates that the corporation’s purpose is limited - e.g. “to manufacture and sell refrigeration components” - and the corp manufactures and markets tee shirts?

Answer 3

This is an “ULTRA VIRES” act (i.e. beyond the scope of the certificate)

Consequences of Ultra Vires Acts:

(1) Ultra Vires contracts are valid
(2) shareholders can seek an injunction
(3) Responsible managers are liable to the corporation for ultra fires losses

Question 4

What is “Authorized” stock?

Answer 4

AUTHORIZED STOCK is the maximum number of shares the corporation can sell

Question 5

What is “Issued Stock” ?

Answer 5

ISSUED STOCK is the number of shares the corporation actually sells

Question 6

What is “Outstanding Stock” ?

Answer 6

OUTSTANDING STOCK is stock the corporation has sold and has not reacquired

Question 7

What must be included in the certificate about the corporation’s stock?

Answer 7

(1) Authorized stock
(2) Number of shares per class
(3) Information on par value, rights, preferences and limitations of each class
(4) Info on any series of preferred stock

**But NOTE: at least one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights

Question 8

Each incorporator signs the certificate and acknowledges it before a notary. They then deliver it to the New York Department of State. If it conforms to the law, and the filing fee is paid, the DEPARTMENT (not you) files the certificate - What is the effect of the Department’s filing?

Answer 8

It is CONCLUSIVE EVIDENCE of valid formation - meaning we have a “DE JURE” corporation

Question 9

Incorporators then hold an “Organizational meeting” - what happens at this meeting?

Answer 9

They adopt bylaws and elect initial directors, at that point, the board takes over management

Question 10

What law governs if we form a NY corporation but the company only does business in Iceland?

Answer 10

NY law governs the internal affairs even if the company does no business in NY

Question 11

Can a corporation make political contributions?

Answer 11

YES, but no more than $5,000 per year, per candidate or organization

Question 12

Can a corporation make charitable contributions?

Answer 12

YES, with no statutory ceiling

Question 13

Can a corporation guaranty a loan that is NOT in the furtherance of corporate business?

Answer 13

YES, if approved by 2/3rds of the shares entitled to vote

Question 14

Liability of Corporations

IF a corporation does something like incur a debt, breach a contract, or commit a tort, are the people who run the corp. (directors and officers) liable for what the corp. does? Are the shareholders?

What are the powers of a corporation?

Answer 14

NO - shareholders have limited liability, meaning the shareholders are liable only to pay for their stock - this is WHY people incorporate.

so who is responsible for what a corporation does? - the corporation ITSELF

A corporation is a SEPARATE LEGAL PERSON. It has broad powers by statute, including the power to

(i) enter contracts,
(ii) transfer property,
(iii) buy and sell securities and
(iv) sue or be sued

Question 15

De Facto Corporation Doctrine

Answer 15

The proprietors fail to form a de jure corporation so they are nervous that they will be liable for what the business does (bc they just have a partnership). A business is TREATED as a corporation (so SHs not personally liable for what business does) if:

(1) there is relevant incorporations statute (there is in NY - the BCL)
(2) the parties made a good faith, colorable attempt to comply with it; and
(3) the business is being run as a corporation

If this applies, the business is treated as a corporation for all purposes EXCEPT in an action by the state

in NY, almost completely abolished, only real situation is if you put together a proper certificate and deliver it to the Dept of State, but Dept failed to file it (without rejecting it), you can argue “de facto corp”

Question 16

Corporation by Estoppel

Answer 16

theory is that one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business’s corporate status. So such a person, under this theory, cannot sue the individual proprietors

THIS IS ABOLISHED IN NY, meaning proprietors ARE liable if they fail to form a “de jure” corporation (except for the tiny exception when you deliver proper certificate and Dept of state fails to file it without rejecting

Question 17

Can you have a corporation without bylaws?

BYLAWS

Answer 17

YES, (you only need a certificate, not bylaws) but almost every corporation has them to set up procedures and responsibilities of people like officers, set forth the type of notice required for meetings etc.

Question 18

If the bylaws are inconsistent with the certificate, which document controls?

Answer 18

the certificate

Question 19

are outsiders bound by the bylaws?

Answer 19

no, bylaws are an internal document

note: bylaws are NOT filed with the state

Question 20

Who adopts the initial bylaws?

who can amend or repeal the bylaws or adopt new ones?

Answer 20

the incorporators at the organizational meeting adopt the initial bylaws - these bylaws will have the status of shareholder bylaws (ie bylaws adopted by the shareholders)

SHAREHOLDERS entitled to vote in the election of directors may, by majority vote, adopt new bylaws, amend or repeal the bylaws

Question 21

Who can amend or repeal the bylaws or adopt new ones?

Answer 21

shareholders

Question 22

When does the board of directors ever get to amend or repeal bylaws or adopt new ones?

Answer 22

ONLY IF the certificate or a sbylaw adopted by the shareholders allows for this - and even then, shareholders can amend or repeal any director-adopted bylaw

Question 23

What is a “Promoter” ?

PRE-INCORPORATION CONTRACTS

Answer 23

A PROMOTER is a person acting on behalf of a corporation not yet formed

-e.g. she might enter a contract with a third party on behalf of the corporation not-yet-formed

Question 24

Is the corporation liable for pre-incorporation contracts?

PRE-INCORPORATION CONTRACTS

Answer 24

ONLY IF it ADOPTS the contract

can do this in 2 ways:

(1) Express adoption - board action
(2) Implied adoption - arises if the corporation knowingly accepts a benefit of the contract

Question 25

Is the PROMOTER liable on pre-incorporation contracts?

PRE-INCORPORATION CONTRACTS

Answer 25

YES - unless the contract clearly indicates otherwise, the promoter is liable on pre-incorporation contracts until there is a NOVATION (i.e. agreement among the promoter, the corporation, and the other contracting party that the corp. will replace the promoter under the contract) - IF NO NOVATION, both CORP (bc id adopted it) and PROMOTER will be liable under the contract

e. g. Jan 10, promoter (P) acting for corporation not yet formed, leases a building from Cramer and signs the lease “oscar rental cars, inc.” On feb 20, Oscar rental cars, inc. is incorporated
- corp is liable only if adopts expressly, by board action, or impliedly, for eg. by moving into the leased premises
- if Oscar rental inc is never formed - P IS LIABLE
- if no NOVATION, P is still liable (but if adopted, corp is liable too)
- P only off the hook if NOVATION

Question 26

Secret Profit Rule

Answer 26

Promoter cannot make a SECRET profit on her dealings with the corporation. If she does, she is liable (and has to account for the profit - aka return it to the corporation)

If promoter sells property acquired BEFORE becoming promoter to corp then profit = price paid by corp minus fair market value

• — e.g. Jan 10, P begins working as promoter
• Apr 4, P sells corp Green Acre for $40k; P had bought Green Acre in 1931 for $1.98 - calculate price paid minus FMV

If the promoter sells property acquired AFTER becoming promoter profit = price paid by corporation minus price paid by promoter
– e.g. Jan 10, P begins working as promoter
Feb 20, P buys property for $18k
Mar. 3, P sells that property to corp for $25k - so if it was SECRET, P must account for $7k in profit to corporation, but if P told corp, no problem

NOTE: only a problem if the profit is SECRET - if corp knows about it there is no problem

Question 27

What is a “Foreign Corporation” ?

Answer 27

A “foreign corporation” is a corporation incorporated outside of New York (even another state is “foreign”)

NY corporations are called “domestic” corporations

Foreign corporations “DOING BUSINESS” in NY must qualify to do so

“Doing Business” - means the corporation is in “the regular course of intrastate business activity.”

Question 28

How does a foreign corporation QUALIFY to do business in NY?

Answer 28

FOREIGN CORPORATION can QUALIFY by applying to the NY Dept of State and designating the Secretary of State as agent for service of process. It also has to pay fees to NY for the privilege of doing business here

In applying to qualify, FC must give NY dept of state:

(1) info from its certificate and
(2) proof of good standing in its home state

Question 29

What is the consequence of doing business in NY without qualifying?

Answer 29

The corporation cannot sue in NY (ie can’t enforce its rights) until it qualifies, pays fees, taxes and accrued penalties and interest