Life and Death of a Corporation Ch 33

Question 1

Promoter’s Liability

Answer 1

• A promoter is personally liable on any contract signed before the corporation is formed.
• The corporation is not liable on any contracts signed before incorporation unless it adopts the contract after incorporation.
• Even if the corporation adopts the contract, the promoter is still liable until the third party (in this case, the landlord) agrees to a novation. A novation creates a new contract.
• If it is clear that the parties did not intend the promoter to be liable, then he is released from liability once the corporation adopts the contract

Question 2

Defetive Incorporation
(De Jure, De Facto, Corp by Estoppel)

Answer 2

• De Jure: Latin for “by law.” A de jure corporation means that the promoter has substantially complied with the requirements for incorporation but has made some minor error.
  In the case of a de jure corporation, no one, not even the state, can challenge its validity.
• De Facto: Latin for “in fact.” A de facto corporation means that the promoter has made a good-faith effort to incorporate and has actually used the corporation to conduct business.
  In the case of a de facto corporation, the state can challenge the validity of the corporation, but a third party cannot.
• Corporatoin by Estoppel: if a party enters into a contract believing in good faith that the corporation exists, that party cannot later take advantage of the fact that it does not.

Question 3

Incorporatoin Process

Answer 3

Because there is no federal corporation code, a company can incorporate only under state law. No matter where a company actually does business, it may incorporate in any state. This decision is important because the organization must live by the laws of whichever state it chooses for incorporation.

Question 4

Where to Incorporate?

“Doesn’t really matter” - Kenner

Answer 4

Delaware offers corporations several advantages:

• Flexible laws that favor management.
• An efficient court system.
• An established body of law
• A neutral arena.

Question 5

Buye
R & S Fuel, Inc.
BY ______
Simpson President.

Question 6

Charter’s Required Provisions
(Name, Address and Registerd Agent, Incorporators, Purpose.. and Stock)

Answer 6

• Name: all corporations must use one of the following words in their name: Corporation, Incorporated, Company, or Limited. Delaware also accepts some additional terms, such as Association or Institute.
• a new corporate name must be different from that of any corporation or similar entity (such as any LLC) that already exists in that state.
• Address and Reg. Agent: A company must have an official address in the state in which it is incorporated..
• Incorporators: The incorporator signs the charter and files it with the secretary of state
• Purpose: Under the ultra vires doctrine, a corporation cannot undertake any transaction unless its charter permits it.

Question 7

Charter’s Required Provisions:
Stock

The charter must provide three items of information about the company’s stock: par value, number of shares, and class and series.

Answer 7

• Par Value: it is a nominal figure such as 1¢ or $1 per share
• Number of Shares: Before stock can be sold, it must first be authorized in the charter. The corporation can authorize as many shares as the incorporators choose, but the more shares, the higher the filing fee.
• Classes and Series: Different shareholders often make different contributions to a company. Some may be involved in management, while others may simply contribute financially. Divided into categories called classes and sub categories called series.
  -Dividend rights. The charter establishes whether the shareholder is entitled to dividends and may also specify the amount and timing of payment.
  -Liquidation rights. The charter specifies the order in which classes of stockholders will be paid upon dissolution of the company.
  -Conversion rights. Some classes of stock may have the right to convert into shares of a different class.
  -Redemption rights. Similarly, the shareholders of some classes of stock may have the right to force a company to buy their stock back if, for example, the company does not meet its financial goals.
  -Preemptive rights. If a corporation later issues additional shares of its stock, the original shareholders will own a smaller percentage of the company.
  -Anti-dilution rights. If the holders of one class of stock (say, convertible preferred) have the right to convert their shares into common stock, anti-dilution rights adjust that conversion ratio.
  -Voting rights. Shareholders are usually entitled to elect directors and vote on charter amendments, among other issues, but these rights can vary among different series and classes of stock.

Question 8

Preferred,Common, and other stock options

Answer 8

• Treasury Stock: Stock that a compnay has sold, but later bought back
• Preferred:
  -Dividends. If a class of preferred stock is entitled to dividends, then it must receive its dividends before common stockholders are paid theirs.
• Liquidation. When a company dissolves or, sometimes, even when it is sold, preferred stockholders typically have the right to receive payment before common shareholders.
• Common stock. Common shareholders have a right to share in the profits of the company and typically have most of the voting rights.
• Participating preferred stock. Venture capitalists (professional investors who are in the business of financing companies) often choose this type of stock, which permits them to have their cake and eat it, too
• Tenure voting. Under a tenure voting system, the longer shareholders own their stock, the more votes they have

Question 9

Charter’s Optional Provisions
(Director Liability, Cumulative Voting)

Answer 9

• Director Lia: Under most state statutes, a corporation may include in its charter a provision that protects directors from personal liability to the corporation and its shareholders for anything other than egregious misbehavior involving, for example, bad faith or intentional misconduct.
• exculpatory clauses: A provision that protects direcotrs form personal liabiity to the corporation and its shareholders.
• indemnification provision: requires the company to pay the legal fees of directors who are sued for actions taken on behalf of the company.
• Cumulative Voting: Under a cumulative voting system, however, Pickens could aggregate his shares and vote them all for the same person (in this case, himself)

cum vot: (600/(5+1)) + 1 = 101 for the ability to vote a director slot.

Question 10

After Incorporation: …A few additional tasks remain.

Directors and Officers

Answer 10

the incorporators elect the first set of directors. Thereafter, shareholders elect directors.
1. all the shareholders sign an agreement that eliminates the board or
2. the corporation has 50 or fewer shareholders.
-more typical case for a small company, they elect directors by written consent.
-the directors must elect the officers of the corporation.
-The written consents and any records of actual meetings are kept in a minute book, which is a record of the corporation’s official actions.

Question 11

Shareholder Agreements

Answer 11

shareholders of start-ups often sign a shareholder agreement that establishes a process for selling their stock, should the need arise.

Question 12

Bylaws

Answer 12

The bylaws list the organizational rules for the corporation. For example, bylaws set the date of the annual shareholders’ meeting, define what a quorum is (e.g., how many people or shares must be present for a meeting to count)
Shareholders Agreements
-Shareholder agreements establisha process for selling stock, should the need arise.

Question 13

Foreign Corporations

Answer 13

A company is called a domestic corporation in the state in which it incorporated and a foreign corporation everywhere else.
A corporation must qualify to do business in any state in which it is doing business but was not incorporated.

Question 14

Death of the Corporation: some fail or are unsuccessful cannot work well

Voluntary Termination by the Shareholders
(To terminate a corporation, the shareholders undertake a three-step process:)

Answer 14

1. Vote: The directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree.
2. The directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree.
3. Winding up. The officers of the corporation pay its debts and distribute the remaining property to shareholders. When the winding up is completed, the corporation ceases to exist.

Question 15

Termination by the State

Answer 15

The secretary of state may dissolve a corporation that fails to comply with state requirements such as paying the required annual fees.
The secretary of state may dissolve a corporation that fails to comply with state requirements such as paying the required annual fees.

Question 16

Piercing the Corpororate Veil
(courts generally pierce a corporate veil in four circumstances)

Answer 16

1. Failure to observe formalities: If an organization does not act like a corporation, it will not be treated like one.
2. Commingling assets: Nothing makes a court more willing to pierce a corporate veil than evidence that shareholders used corporate assets to pay their personal debts or mixed their assets with those of the corporation.
3. Inadequate capitalization. If the founders of a corporation do not raise enough capital (either through debt or equity) to give the business a fighting chance of paying its debts, courts may require shareholders to pay corporate obligations
4. Fraud. Corporations cannot be used to shelter fraud. If a con artist uses a corporation to steal money, the victims can go after his personal assets, even though the fraud was committed in the name of a corporation.