The Corporate Form Flashcards
(23 cards)
Pre Incorporation Transactions
Promoters
person preparing corporation to commence business
supervises compliance with the requisites necessary to exist
Bears liability to creditors for transactions entered into on behalf of corporation prior to formation.
Corporations and their Characteristics
4 Characteristics:
- Shareholder liability limited to amount invested
- Shares = ownership interest - freely transferrable
- perpetual, independent existence - no fixed dissolution date.
- Centralized management - decision making vested in bd of dir’s
Incorporator
person responsible for setting up corporation
filing the certificate of incorporation with state.
Can be a promoter, but not necessarily.
Incorporator can be one or more natural persons over the age of 18.
Special Obligations of Promoters
if promoter receives stock in exchange for assets transferred or services rendered,
must make full disclosure to all disinterested directors
or to all the shareholders.
Subscription for Shares - generally
Pre-incorporation subscription agreements
subscriber promises to purchase a prescribed number of shares for a specific amount after corporation is formed.
Subscribers attain shareholder status after contract is accepted by the corporation - even absent payment of subscription price when initially tendered
Enforceability of Subscription Agreements
Subscribers attempting to avoid obligations under a subscription agreement is entitled to any contractual defenses.
Signed Agreements are irrevocable for 90 days after issuance
unless otherwise stated in the agreement.
Failure to purchase shares renders subscriber liable to other subscribers for liability they incur as a consequence of breach.
creditors can enforce subscription agreements when corporation becomes insolvent
Pre-Incorporation Agreements
Contracts with 3rd Parties
Corporation not liable for contracts made by promoter prior to incorporation unless expressly or impliedly ratified.
Promoter is liable on pre incorporation agreements entered into on behalf of the corporation, absent contrary intent.
When a promoter is freed from liability depends on the intent of the obligee and the promoter. If the contract specifically disclaims liability of a promoter, the obligee will not maintain an action against promoter.
After adoption by the corp, the promoter may not enforce the contract
Corporation fails to adopt, the promoter may enforce the agreement.
Promoter remains jointly liable on the contract unless the contract provides for substitution of the corporation in the place of the promoter.
Certificate of Incorporation - in general
A corporation is created by delivering a properly executed certificate of incorporation to the Department of State with the requisite filing fee.
Information necessary in the Certificate of Incorporation (6)
- Name of the Corporation including word corporation, incorporation, limited or some abbreviation of these words.
- Purpose of the corporation
- County office is located
- Number of shares and par value if any. If multiple classes are issued, the number of shares, rights, privileges, and limitations of each class of securities authorized for issuance.
- Designation of the Secretary of State as an agent for service of process
- Name and Address of the registered agent, should the corporation designate one.
Organizational Meeting
A formal meeting of the incorporator must be held after the corporation has been formally organized.
Meeting must adopt bylaws; elect directors; conduct any other business.
Bylaws of a corporation
Bylaws contain any provision relating to the business of the corporation, the conduct of its affairs, its rights or powers, or the rights and powers of the shareholders.
Provided such provisions do not conflict with the laws of NY or the certificate of incorporation.
May be changed by majority vote of the shareholders cast at a meeting. May be changed by the board of directors if the certificate or bylaws so provide. Such actions may be repealed by a majority of the shareholders.
Express Powers of a Corporation (12)
- perpetual existence
- Operate anywhere
- Adopt, alter, and use corporate seal
- Establish, adopt, and amend bylaws
- be a promoter, partner, associate, or manager of another business or an incorporator of another business outside of NYS
- Invest and borrow money
- make contracts, give guarantees, make obligations, incur liabilities
- sue and be sued in its own name
- deal in securities, including its own
- employ officers, directors, and agents
- make donations irrespective of corporate benefit
- have all other powers necessary to effect the purpose of the corporation
Defense of Ultra Vires
Doctrine holds that a corporation cannot be obligated to undertake a contract or activity that is beyond the scope of its powers as described in the certificate of incorporation or by laws.
May not be used as a defense to get out of a contract by the party or the corporation.
Controversial Corporate Activities
Board of Directors has the power to bind the corporation to contracts extending beyond its term of office unless the contract is unreasonably lengthy.
Corporations may make contributions to federal campaigns. Citizens United
Reasonable charitable donations are ordinarily upheld as long as a plausible argument for long term benefit to the corporation can be made.
Limited Liability of Shareholders in a Corporation
Shareholders are not personally liable for the debts and obligations of a corporation EXCEPT
10 largest beneficial shareholders of any non-publicly traded corporation have unlimited personal liability for unpaid wages and benefits of the corporations employees.
When the Corporate Veil may be pierced
Shareholders may be personally liable for corporate contractual or tort obligations when necessary to prevent
“fraud or injustice”
In order to pierce the corporate veil, Plaintiff must show:
- Abuse of the corporate form; and
2. It would not be inequitable to impose personal liability.
Factors the court will consider when deciding if the corporation is acting as the ALTER EGO of the Shareholders or as a MERE INSTRUMENTALITY.
- Shareholders fail to observe corporate formalities.
a. do not deal with the corporation as a separate distinct entity.
b. Neglect to hold director and shareholder meetings
c. commingling corporate and private funds - Corporation inadequately capitalized
- Corporation was formed by shareholders for purpose of evading contractual obligations or statutory laws.
- One individual or corporation owns most or all stock thereby controlling policy and/or business decisions.
- Shareholders siphoned off corporate funds or used corporate assets as if their own.
- Interlocking shareholders which perform different aspects of a single business operation or enterprise.
Piercing the corporate veil of subsidiary corporations
Exposure for liabilities of a subsidiary may be found if the parent corporation so dominates the subsidiary that the two can be taken to act as a single entity.
De Jure Corporations
Where there has been substantial compliance with the statutory requisites for corporate formation.
This means that he entity is sufficiently formed to be recognized as a corporation for all purposes.
A certificate of incorporation is conclusive evidence of de jure corporate status
De facto Corporation
Exists where there has been a good faith attempt to comply with the statutory requisites for formation and
some actual use of the purported corporate existence
Liability for corporation that is not de jure for lack of filing
there would be personal liability only against those owners who actively participated in the management of the enterprise
Corporation by Estoppel
When an independent 3rd party deals with the entity’s principals as if the entity were a corporation, the 3rd party would be estopped from claiming the corporation did not exist if such a claim would unjustly injure the principals.
