Corporations Organization (Formation) And Financial Structure

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 1. Discover a business or idea to be developed 2. Finds investors 3. Negotiates contracts necessary for initial operation. 4. Incorporates the business 5. Helps management start operations

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.

Formation 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 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 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”

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

Financing the Corporation Equity Securities: Stock Create an ownership relationship. Holders of stock (shares) are the owners of the corporation. Debt Securities: Bonds (debentures) Represent the borrowing of funds by the corporation.

Corporate Bonds Debenture Bonds:.(unsecured) Bonds for which not specific assets of the corporation are pledged. Backed by general credit rating of thecorporation Bonds: (Secured) Bonds pledge specific property. (real or personal Mortgage Bond: Pledges real property.

Corporate Bonds Convertable Bonds: Bonds that can be exchanged for a specified number of share of stock under certain conditions. Callable Bonds: bonds that may be called in and the principal repaid at specific times or under conditions stipulated in the bond when it is issued.

Corporate Stock Common: Voting shares that represent ownership interest in the corporation. Preferred: (May or may not have right to vote) Shares of stock that have priority over common- stock as to payment of dividends and distribution of assets on dissolution. Dividend payments usually fixed percentage of face value.

Corporate Stock Cumulative Preferred: Required dividends not paid in a given year must be paid in a subsequent year before any common stock dividends are paid. Participating Preferred: Share entitling the owner to receive (1) the preferred dividend and (2) additional dividends after dividends are paid on common stock

Corporate Stock Convertible Preferred: Shares entitling the owner to convert share into a specified number of common shares. Redeemable, or Callable Preferred: Shares issued with the express condition that the issuing corporation has the right to repurchase shares as specified.