Formation of Corporations Flashcards
(15 cards)
What is a de jure corporation?
It meets all statutory requirements for incorporation.
This includes fling articles of incorporation with a state official.
How can a corporation benefit shareholders?
Shields shareholders from personal liability.
What is a de facto corporation?
One that failed to meet the requirements of a de jure corporation, but otherwise has the **rights and power of a de jure corporation.
Exists when the business owner makes a good faith effort to comply with requirements and operates the business without knowing the requirements were not met.
Piercing the Corporate Veil
Generally, shareholders are shielded from liability.
UNLESS
Under the totality of the circumstances, shareholder’s actions warrant “piercing the corporate veil.”
Look for fraud, misleading, alter ego, not having enough money at time of incorporation; ANYTHING SHADY!
What is Corporation by Estoppel?
A creditor who deals with a business as if it were a corporation may be estopped from denying the business’s corporate status, which protects the business owner from personal liability.
The business owner must have made a good-faith effort to comply with the incorporation requirements and must lack knowledge that the requirements were not met.
This doctrine is limited to contractual agreements.
What is a promotor?
A promotor is someone who enters in contracts:
1) Before incorporation
2) For the benefit of the corporation
3) To assist corporation into coming into existence
When is a promotor personally liable?
Personally liable for all contract that it knowingly enters
This is the case even if it was not for the corporation’s benefit!
When does novation occur in terms of promotor liability?
A corporation may relief a promotor of liability through a novation.
What is adoption re: incorporation?
Corporation may expressly or impliedly adopt a contract following it’s incorporation.
However, adoption does not relieve the promotor of liability.
What is the difference between express and implied adoption?
Express: Corporation expressly assumes liability
Implied: Occurs when corporation accepts benefits of transaction
Corporate Liability for Pre-Incorporation Agreements
Generally, a corporation is not liable for pre-incorperation contracts.
UNLESS it has *Expressly or implicitly adopted them** following formation.
Ultra Vires
If a corporation has a narrow business purpose in it’s AOI, and engages outside said purpose, then this is an ultra vires act.
At this point, a shareholder can file suit to enjoy the action, or corporation can take direct action against an employee or director.
What is the traditional rule regarding ultra vires acts?
Traditionally, ultra vires acts were void or voidable.
What is the modern rule regarding ultra vires acts?
Corporations or third party’s are not permitted to void contracts spawning from ultra vires acts.
However, the action itself can still be challenged:
1) Shareholder can file suit to enjoin action
2) Corp can take action against director, officer, or employee
3) State can initiate proceeding against corp to enjoin the action.
What is a closed corporation?
When a corporation has a limited number of shareholders.
However, this does not change the BOD’s duties to shareholders or the corporation itself.
