Corporation Formation & Liability: Promoter, Incorporation Process, & Post-Incorporation -, Study notes of Business and Labour Law

Download Corporation Formation & Liability: Promoter, Incorporation Process, & Post-Incorporation - and more Study notes Business and Labour Law in PDF only on Docsity! Chapter 34 – Life and Death of a Corporation - Text Outline I. Before the Corporation is Formed A. Promoter’s Liability 1. The promoter is liable on any contract signed before the corporation is formed. 2. The corporation is NOT liable on any contracts signed before incorporation unless it adopts the contract after incorporation. a. Adoption is done by either… 1. The directors vote to adopt the contract 2. It is adopted by action. 3. Even if the corporation adopts the contract, the promoter is still liable until the third party agrees to a novation. a. Novation – A new contract with different parties. 4. If the contract clearly indicates that the other party is relying only on the corporation, although he knows the corporation does not yet exist, the promoter is released from liability once the corporation adopts the contract. (ie. State the corporation is not yet formed, and that the promoter is not personally liable once the corporation adopts the contract.) B. Defective Incorporation – when a promoter signs contract thinking the corporation has been formed only to discover that the incorporation was somehow defective. 1. De Jure Corporation (minor error) – validity cannot be challenged by state or a third party. (ie. Misspelled name) 2. De Facto Corporation (operating business after a good faith effort) – the state can challenge the validity but a third party cannot. 3. Corporation by Estoppel (operating believing a corporation exists to discover later it does not) – one cannot take advantage of the situation unfairly II. Incorporation Process A. Introduction 1. Corporation charter – defines the corporation, including everything from the company’s name to the number of shares it will issue and the liability of its directors. 2. No federal corporate code exists, which means incorporation is governed by state law. 3. Model Business Corporation Act – a guide to encourage similarity among state corporate statutes. Some states use this as a guide, however Delaware does not. 4. More than half of public companies are incorporated in Delaware. B. Where to Incorporate? 1. Delaware became the most popular state to incorporate in the early 1900’s due to… a. Laws that favor management i. Majority vote required instead of unanimous vote ii. Eliminated rigid format for corporation charters b. An efficient court system i. Chancery Court – hears nothing but business cases. ii. Can hear cases on short notice. c. An established body of precedent 2. Nevada is attractive to those in the west. 1 C. Charter’s Required Provisions 1. Name a. Model Act requires… i. Inclusion of “Corporation”, “Incorporated”, “Company”, or “Limited”. ii. Name must be different than any other name in that jurisdiction. iii. Can reserve a name days by forming a “nameholder” corporation before incorporating. b. Delaware requires… i. Inclusion of “Corporation”, “Incorporated”, “Company”, or “Limited” just as the model act does plus the choices of “Association” and “Institute”. ii. Name must be different than any other name in that jurisdiction. iii. Can reserve a name for 120 before actually incorporating. c. Expanding into multiple states will require buying the name from someone if it currently is in use by someone else, or using a different name in that state. 2. Address and Registered Agent – must have an official address in the state in which you are incorporated. Most companies hire a registered agent if their office is not in that state. 3. Incorporators – signs the charter and delivers it to the Secretary of State for filing. Can be a lawyer or the promoter. The incorporator assumes liability only if he knows something in the charter is not true when he signs it. 4. Purpose – why the corporation exists. a. Ultra Vires Doctrine – States that a corporation cannot undertake a transaction unless permitted to do so by its charter. b. To avoid ultra vires your purpose should be stated broadly. (ie. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.) 5. Stock – Charter requires three items about stock a. Par Value – originally designed to protect investors by being close to the market value which would forbid the sale of stock for less than par. Today it is a nominal figure such as $.0001. b. Number of Shares – The more share authorized by the charter, the higher the filing fee. i. Authorized and Unissued – Stock has been authorized, but not yet sold. ii. Authorized and Issued (outstanding stock) – Stock has been authorized and sold. iii. Treasury stock – Stock that a company sold, but later bought back. 6. Classes and Series a. Classes – Different classes of stock may have very different rights. (ie. Preferred stock v. common stock) b. Series – A sub category of a class c. Rights i. Dividend – Charter establishes entitlements of dividends. A corporation cannot pay dividends unless it is solvent. ii. Voting – Can vary among different series and classes. Different classes can have more voting power. iii. Preemptive Rights – To prevent dilution of the original shareholders shares a preemptive clause can be included. This is where the old shareholders have the right to acquire enough new stock to prevent their share of the company from being diminished. iv. Conversion – May have the right to convert one class of stock to another. v. Redemption – May have the right to force a company to buy their stock back. d. Preferred stock – The owners of preferred stock have preference on dividends and also in liquidation. 2