Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 44 Corporation Formation Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Corporation as a Person A corporation is an artificial person created by government action. It exists as a separate and distinct entity possessing certain powers. Shareholders are not personally liable for corporate obligations.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Classifications of Corporations The most common forms of corporations are: –Private business corporations whose stock is sold to the public (publicly held) and –Close corporations, which are business firms whose shares are not traded publicly.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Classifications of Corporations Corporations may be formed for purposes other than conducting a business. –For example, there are nonprofit corporations, municipal corporations, and public authorities for governmental purposes.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Corporations Domestic Corporation Special Service Corporation Public Corporation Close Corporation Private Corporation Professional Corporation Quasi-Public Corporation Nonprofit Corporation Public Authority “S” Corporation Foreign Corporation Classifications of Corporations

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Corporations and Goverments Power to Create: corporation is created by state or federal statute. Power to Regulate: –Protection of the corporation as a person. –Protection of the corporation as a citizen.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Corporate Powers A corporation has the power to continue as an entity forever or for a stated period of time regardless of changes in the ownership of the stock or the death of a shareholder.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Corporate Powers It may make contracts, issue stocks and bonds, borrow money, execute commercial paper, transfer and acquire property, acquire its own stock if it is solvent and the purchase does not impair capital, and make charitable contributions.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Corporate Powers Subject to limitations, a corporation has the power to do business in other states. A corporation also may participate in a business enterprise to the same extent as an individual. That is, it may be a partner in a partnership, or it may enter a joint venture or other enterprise.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Particular Corporate Powers Perpetual Succession Issuing Stock Issuing bonds Doing Business in Another State Making Contracts Transferring Property Participating in Enterprises Corporate Seal Executing Commercial Paper Acquiring Property (Investments & Holding companies) Paying Employee Benefits Making Bylaws Buying Back Stock Making Charitable Contributions Corporate Name Borrowing Money

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Corporate Powers Special service corporations, such as banks, insurance companies, and railroads, are subject to separate statutes with regard to their organization and powers.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Corporate Powers An ultra vires act occurs when a corporation acts beyond the scope of the powers given it. –Because states now grant broad powers to corporations, it is unlikely that a modern corporation would act beyond the scope of its powers.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 A promoter is a fiduciary who brings together the persons interested in the enterprise and sets in motion all that must be done to form a corporation. The promoter is personally liable for contracts made for the corporation before its existence. The corporation is not liable on these contracts unless it adopts them. Promoters

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Liability during Formation

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Incorporation Process The procedures for incorporation are set forth in the statutes of each state. In most states, the corporation comes into existence upon compliance with requirements and the issuance of the certificate of incorporation.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Incorporation Process When all requirements have been satisfied, the corporation becomes a corporation de jure, meaning corporation by virtue of law.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Proper and Defective Formation De Facto Corporation. Compliance with some but not all requirements for incorporation and the corporation is functioning already (existing in fact). But when sufficient compliance even for a de facto corporation does not exist, there is no corporation.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Proper and Defective Formation Corporation by Estoppel. A third person may be estopped from denying the legal existence of a “corporation” that did not exist, after they did business with it.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 19 Consolidations & Mergers Two or more corporations may be combined to form a new enterprise. This combination may be a consolidation, with a new corporation coming into existence, or a merger, in which one corporation absorbs the other.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 20 Liability of Successor Corporations Mergers and Consolidations: –Generally, surviving corporation that continues to do business succeeds to all the rights and property of the predecessor, or ‘disappearing’ corporation. –Liabilities can be imposed upon ‘disappearing’ corporations by law or by agreement.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 21 Liability of Successor Corporations Asset Sales: –A corporation may merely purchase the assets of another corporation. –In that case, the purchaser is not liable for the obligations of the selling corporation.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 22 Corporation A Corporation A Corporation B Corporation B New Corporation C (A & B Disappear) New Corporation C (A & B Disappear) Consolidation Transaction Consolidation Transaction Consolidation

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 23 Corporation A Corporation B (Survivor) Corporation A (Corporation B Disappears) Merger Transaction Merger