Formation Flashcards
Promoter
A person who, prior to formation of the corporation, procures capital and enters into contracts to bring the corporation into existence
Liability for pre-incorporation agreements
A promoter is personally liable for a contract entered into pre-incorporation, even after the corporation comes into existence
Exceptions:
(i) Novation: corporation and other party agree to substitute cororation for promoter in the contract, promoter will no longer be liable
(ii) Adoption: Corporation adopts the contract (express or implied by use of benefits) and agrees to accept sole liability on the contract
Incorporation Procedure
A document (articles of incorporation) must be filed with the state
Must include: statement of corporation’s purposes (broad statement acceptable)
Incorporation: Ultra Vires
Ultra Vires Act: corporation engages in activities outside its narrow purpose stated in its articles of incorporation
IF THIS OCCURS:
(i) Shareholder can file suit to enjoin action
(ii) Corporation can take action against the agent of the corporation who engaged in the act.
Third parties are not released from contracts due to ultra vires acts
De Jure Corporation
Statutory requirements for incorporation are met, “de jure” corporation has been formed.
De Jure corporation is liable for activities.
Failure to meet requirements
If a person makes a good faith effort to incorporation, but does not meet requirements, may still be able to escape personal liability.
Two Types:
(i) De Facto Corporation
(ii) Corporation By Estoppel
De Facto Corporation
IF:
(i) Owner made a good faith effort to incorporate and
(ii) operates the business without knowing requirements were not met
Corporation by Estoppel
Party who deals with an entity as if it were a corporation is estopped from denying its existence and prevented from seeking personal liability against business owner
*Limited to contractual agreements
*Must have made a good faith effort to incorproate and operate business without knowing requirements were not met
