Ch. 28 terms and homework

Involuntary Dissolution:

A court may order the corporation dissolved for: •Failure to pay franchise taxes. •Failure to file the corporation's annual report. •Shareholder request (disagreement among shareholders). •Creditors proving insolvency.

Corporations are an intangible "artificial person" with a life separate from owners.

Corporations can: •Hold property for long periods of time. •Hold and convey property in their own name. •Sue and be sued in their own name. •Make bylaws to govern relations among shareholders.

Dissolution By Agreement:

Corporations need state's consent to dissolve since they are created by the state: •Corporations automatically terminate if they are created for a limited duration. •Written consent and vote by shareholders.

Governance Issues

Courts may impose a fiduciary duty on corporate officers and majority shareholders to treat minority shareholder fairly.

A business can incorporate by preparing and filing articles of incorporation as required by state statute.

Delaware and Ohio, most popular to incorporate (business friendly).

Termination of the Corporation

Dissoultion by agreement, involuntary dissolution

A promoter's liability on a preincorporation contract does not terminate when a novation is signed.

False

Failure to appoint a registered agent in its state of incorporation is not grounds for an involuntary dissolution of a corporation.

False

Promoters are agents of the corporation prior to its incorporation.

False

With a due-on-sale clause, a would-be seller must gain the permission of the corporation's board of directors or shareholders for any sale of shares other than to the corporation or pro rata to present shareholders.

False

•Alter-ego:

If shareholders mix personal dealings and corporate transactions, the veil may be pierced.

•Undercapitalization:

If the objectives to incorporating appear to involve operating a risky business and avoiding creditor claims, the veil may be pierced.

The _________ is the basis for the majority of statutes regulating corporations in most states.

Model Business Corporation Act (M B C A) •The M B C A was completely revised in 19 84.

Transferability of Shares

Shares of close corporations are seldom intended for public sale.

Modern Regulation of Close Corporations

Traditional corporate law is largely unsuitable for close corporations.

A court may pierce the corporate veil if the corporation is undercapitalized.

True

According to the Model Business Corporation Act (MBCA), the number of shares of capital stock the corporation is authorized to issue must be included in the articles of incorporation.

True

Close corporation shares are seldom intended to be sold to the public at large.

True

Courts have begun to recognize a fiduciary duty in corporate officers and majority shareholders to treat minority shareholders fairly.

True

Generally, corporations are not required to compensate promoters for the services they render during the preincorporation process.

True

Generally, promoters are liable for contracts they make on behalf of corporations that are not yet formed.

True

If two (2) corporations consolidate into a new corporation, both of the old ones are dissolved.

True

Most incorporated businesses are close corporations.

True

The articles of incorporation serve the same function as a charter.

True

The current trend in law is to permit the corporation to issue shares in return for the promoters' preincorporation services.

True

The traditional judicial rule is that the court will pierce the corporate veil when the corporation has been dominated by one or more of its shareholders and the domination has resulted in an improper purpose.

True

Creditors may persuade the court to pierce the corporate veil and hold shareholders liable:

Undercapitalization and Alter Ego

Shareholders are not usually personally liable for corporate debt. Their losses are limited___________

[to investment (share ownership)].

Corporations generally adopt a __________

corporate seal.

Most incorporated businesses are close corporations;

original form and then "go public."

Bylaws must be consistent with _______

state and federal law.

Ultra Vives Doctrine

•A corporation obtains legal powers from the state in which it is incorporated. •M B C A eliminated ultra vires as a defense to enforcement of a contract.

The Certificate of Incorporation.

•A state's secretary of state certifies the articles of incorporation complied with all legal requirements.

Government Corporations

•Also called municipal corporations. •Examples include a school, city, and sewage district. •Government corporations may have the power to tax. •Government corporations normally do not seek to make a profit. Federal corporations include: U.S. Postal Service, Amtrak, U.S. Mint.

De Facto Corporation

•An honest but failed attempt was made to comply with mandatory provisions of the corporate statute. •The corporation could not deny its existence or be challenged by a third party.

Bylaws establish the rules for the conduct of a corporation's internal affairs.

•Bylaws set the duties and authority of officers and the conduct of meetings.

Common traits of close corporations:

•Fewer shareholders. •Shareholders may live near each other and/or know each other (many times family and/or relatives). •All or most shareholders are active in the business. •There is no established market for the stock.

Business corporations derive their existence from state law where they are incorporated.

•General incorporation laws make incorporating a right, not a legislative privilege.

Defective Incorporation: Corporate promoters may claim to act on behalf of a corporation before incorporation requirements are met:

•Most states follow the "old M B C A" rule holding the issuance of the certificate of incorporation is conclusive proof of incorporation in all challenges except a quo warranto action (one brought by state attempting to force business to stop acting as corporation). •All persons who act as a corporation before it is legally formed are jointly and severally liable. •The revised M B C A clarifies joint and several liability for business debts after defective incorporation.

The Judiciary may intervene to protect minority shareholders in conflicts without statutory authority if:

•Officers or majority shareholders are guilty of fraud, gross mismanagement or oppressing minority shareholders. •A deadlock among shareholders results in failure to hold corporate meetings, or some shareholders have taken control and excluded others. •A business cannot be carried on properly because of deadlock or dissension.

A court will pierce the corporate veil when:

•One or more shareholders dominates the corporation. •The domination results in an improper purpose. •If allowed by specific statute.

Corporation by Estoppel

•People hold themselves out as corporations without attempting to comply with incorporating requirements. •Courts do not allow parties to a contract to avoid liability.

Steps in Incorporation

•Preparation of the articles of incorporation (charter). •Signing and authenticating the articles by one or more of the incorporators. •Filing the articles with the secretary of state and paying all required fees. •Issuance of the certificate of incorporation by the secretary of state. •Holding an initial organizational meeting.

A corporation may be formed in any state where the company does business or where the laws are most favorable to the corporation.

•Promoters consider tax benefits, corporate law, and judicial decisions.

Promoters bring a corporation into being:

•Promoters may start with an idea or convert an existing sole proprietorship or partnership into corporate form. •Corporations are not automatically liable for contracts made by promoters and not required to compensate promoters.

Promoters are not agents of the corporation or of persons interested in the business venture:

•Promoters owe a fiduciary duty to the corporation. •Promoters are generally liable for contracts made on behalf of an unformed corporation. •A corporation may assume liability for contracts after it comes into existence.

De Jure Corporation

•Promoters substantially complied with all mandatory provisions. •Business is treated as a corporation in all instances except a quo warranto proceeding.

Transfer restrictions on shares of close corporations:

•Right of first refusal stipulates that the corporation or shareholders must be given the option to buy shares before outsiders are allowed. •Buy-sell agreements can set an agreed-upon price at which shareholders must sell and corporations must buy. •Consent restraint requires a seller to get permission from the company's board of directors.

Nonprofit Corporations

•Similar to nontaxing government corporations except formed and operated by private persons or groups. •Examples include hospitals, clubs and large organizations such as Blue Cross-Blue Shield. •Founders and shareholders cannot make a profit from operation of business. Officers and members may be paid a salary.

Bylaws set rules for the transfer of shares, for dividends and for stock records.

•Some of these rules are included in articles of incorporation for closely held companies.

States have enacted laws recognizing the close corporation and special protections:

•Some states have a special section in the general incorporation statute, deals with close corps. •Some have provisions related to close corporations throughout the general incorporation act; less rigid/strict. •Some states do not mention close corps. but include provisions attractive to, but not specifically for, them.

Who Can Incorporate?

•States sometimes require at least three natural adult persons to serve as incorporators. M B C A relaxed this requirement to one person (single, partnership, unincorporated association, another corporation).

Organizational Meeting.

•The Board of Directors must conduct a meeting after the articles of incorporation are approved.

Optional Contents for Articles of Incorporation Under M B C A

•The duration of the corporation, which usually is perpetual. •The purpose of the corporation (often broadly stated as "any lawful activity"). •The par value of the shares of the corporation. •The number and names of the initial board of directors. •Additional provisions consistent with the state's laws of incorporation such as dividend rights.

For-Profit Corporations

•The most common type of corporation. •The goal is to make a profit that is distributed to shareholders as dividends. •Profits can be reinvested. •Shareholders may sell stock. •Can be publicly held or private-closely held.

Mandatory Contents for Articles of Incorporation Under M B C A

•The name of the corporation, which must not be deceptively similar to other registered corporations. •The number of shares of capital stock the corporation has the authority to issue. •The address of initial registered office of the corporation and the name and address of its registered agent. •The name and address of each incorporator.