Nature of Corporations Chapter 41

Definition A corporation is a legal entity created by state law to accomplish a stated purpose. Three Types: 1. Corporations for profit 2. Corporations not for profit 3. Government owned corporations

For Profit Corporation Stockholders invest in corporation with expectation of earning a profit on their investment in the form of dividends or increased market value of their shares Shareholders have limited liability. Both Corporation and Shareholders pay taxes. Subchapter S Corp./ Avoids double tax

For Profit Corporations Professional Corporations: Physicians, dentists, lawyer, accountants (Usually cannot avoid liability for professional negligence) Close Corporation: Stock not publicly available. Small number of shareholders who also manage corporation. (Some states allow to operate like partnership)

Not-for-profit Corporation None of the surplus revenue (profit) may be distributed to shareholders (members). Often have members rather than shareholders Examples: Charities, Churches, Fraternal Organizations

Government Corporations Municipalities School Districts Federal Insurance Deposit Corporation

Other Classifications Domestic Corporation: Corporation is a domestic corporation in the state that has granted its charter. Foreign Corporation: Corporation is foreign in all states other than state of incorporation. (Must file for certificate of authority to do business in foreign state.) Alien Corporations: Corporation from another country

Foreign Corporation: Doing Business Following activities do not constitute “doing business” 1. Maintaining, defending ,or settling any proceeding 2. Maintaining bank accounts 3. Holding meetings 4. Selling through Independent contractors 5. Soliciting orders from out of state. i.e. Catalog sales 6 Lending or borrowing money

Doing Business 7. Collecting debts 8. Owning property 9. Conducting an isolated transaction. (i.e. Tree grower bringing Christmas trees into a state in order to sell to one retailer) 10. Hiring employees If a foreign corporation transacts business without a certificate of authority, it is subject to fines and will not be permitted to file lawsuits in the foreign state.

Nature of A Corporation 1. Corporations are distinct legal entities which exist separate from shareholders (Shareholders have limited liability) 2. Corporations can sue and be sued 3. Corporations can own property 4. Corporations may and usually have a perpetual life.

Formation a. filing Articles of Incorporation with the secretary of Corporations are created by compliance with state corporation statutes which usually require, a. filing Articles of Incorporation with the secretary of state, and b. paying a fee Corporate existence begins when the articles of incorporation are filed, unless a delayed effective date is specified in the articles. (2.03 (a))

Articles of Incorporation Articles must include the following: (2.02) 1. Name of corporation 2. Number of shares authorized to issue 3. Address of corporate office and name of initial registered agent 4. Name and address of each incorporator

Articles of Incorporation Articles of Incorporation may include: (2.02) 1. Names of initial directors 2. Corporate management 3. Definition and/or limitation of powers 4. Par value of corporate stock 5. Corporate purpose. (To conduct any lawful business)

Articles of Incorporation 6. Provisions defining, limiting and regulating powers of directors / shareholders 7. Par value of authorized shares 8. Imposition of personal liability on shareholders for the debts of corporation to a specified extent and upon specified conditions.

Articles of Incorporation 9. Release of Directors from liability to corporation or shareholders except for: a. financial benefit received to which director is not entitled. b. Intentional infliction of harm c. Liability for unlawful distributions d. Intentional violation of criminal law.

Formation De Jure Corporation All requirements for incorporation are met De Facto Corporation Good faith effort to incorporate, however all requirements not met and operate as a corporation Business will be treated as a corporation in all respects, except state may bring an action challenging the corporate status

Formation Corporation by Estoppel Occurs when a. purported corporation holds it self out as being a corporation, and it is not. b. Third party relies on representation. Purported corporation and third party will be estopped (prevented) from denying corporate existence. Applies only to specific situation.

Formation Defective Incorporation Attempts to incorporate fail to meet minimum requirements No corporation is formed Incorporators are treated as general partners

Formation Model Business Corporation Act eliminates the concepts of de facto corporation and corporation by estoppel. Revised Model Business Corporation Act section 2.03 (b) “The secretary of state’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except a proceeding by the state to cancel or revoke the incorporation or inv9luntarily dissolve the corporation”

Promoters Promoters: Person or persons who organize and start the corporation, negotiate and enter into contracts in advance of its formation, find the initial investors to finance the corporations, etc. PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO ITS PROSPECTIVE INVESTORS. CORPORATION IS NOT OBLIGATED TO COMPENSATE A PROMOTER FOR PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO. MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTER’S WORK

Promoters Promoters: Person or persons who organize and start the corporation, negotiate and enter into contracts in advance of its formation, find the initial investors to finance the corporations, etc. PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO ITS PROSPECTIVE INVESTORS. CORPORATION IS NOT OBLIGATED TO COMPENSATE A PROMOTER FOR PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO. MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTER’S WORK

Promoter Liability Pre -incorporation contracts: a. Leases b. Sales contracts c. Purchase of property d. Employment PROMOTERS ARE PERSONALLY LIABLE ON PRE-INCORPORATION CONTRACTS.

Promoter Liability Corporation never formed All promoter(s) have joint personal liability Corporation formed Promoter(s) remains liable on contracts even after incorporation even thought corporation adopts contracts. Novation: A three-party agreement whereby the corporation agrees to assume the contract liability of the promoter(s) with the consent of the third party who agrees to release the promoter(s) from the contract.

Incorporators One or more persons, partnerships, corporations or other associations which file the documents (articles of incorporation) necessary to create the corporation.

Corporate Objective ? Traditional View: Objective of business corporation is to enhance corporate profits and shareholder gain. Modern View: Corporation is a collection of interests working together for the purpose of producing goods and services at a profit considering not only shareholders, but other constituencies, such as: employees, customers, community, suppliers and the like.

Corporate Powers Sources of power: State Corporation Statute Articles of Incorporation Bylaws and Board resolutions Implied powers: Barring express prohibition a corporation has certain implied power to perform acts reasonably appropriate and necessary to accomplish its corporate purposes. For example: Borrow and lend money and/ or extend credit.

Ultra Vires Doctrine Ultra Vires = “beyond the powers” Corporate actions beyond its express or implied powers are ultra vires. Remedies for Ultra Vires acts: 1. Shareholders suit to obtain injunction or recover damages. 2. Suit by corporation 3. State action for injunction or dissolution

Shareholders (Own the Corporations) Powers: 1. Elect Board of Directors. 2. Approve fundamental corporate changes: a. Amend articles of Incorporation b. Amend bylaws c. Approve merger or dissolution d. Approve sale of substantially all of corporate assets

Rights of Shareholders 1 Vote 2. Receive payment of dividends 3. Inspect corporate books and records 4. Receive distribution upon termination 5. Purchase proportionate share of a new issuance or corporate stock to maintain current ownership percentage. (Preemptive Right)

Rights of Shareholders 6. Right of first refusal to purchase stock offered for resale by fellow shareholders. (If permitted by corporate bylaws) 7. File derivative suit to redress wrong suffered by the corporation. (Damages recovered belong to corporation)

Shareholder Voting Shareholder’s Meeting Shareholder’s meetings must occur a least annually. Special meetings may be called to deal with urgent matters according to bylaws after appropriate notice.

Piercing the Corporate Veil Disregarding the corporate entity which shields shareholders from liability and piercing through the corporation to hold shareholders personally liable for corporate obligations. Requires: 1. Domination of a corporation by its shareholders a. Corporation is alter ego of shareholders b. Corporation is an instrumentality of shareholders 2. Use of domination for improper purpose.

Reasons for Piercing Corporate Veil 1. Commingling Personal Funds with Corporate Funds or otherwise ignore corporate formalities 2. Inadequate Capitalization: Must start corporation with sufficient capital to reasonably meet prospective liabilities 3. Committing Fraud on Existing Creditors