Chapter 33: Nature and Formation of Corporations

Corporation de Facto

A failure to comply substantially with the incorporation statute. A de facto corporation will be recognized if a general corporation statute exists, there is a bona fide effort to meet statutory requirements, and the company transacts business demonstrating a belief that the corporation has been properly formed. De facto status may not be challenged by anyone other than the state.

Professional Corporations

Corporate form under which duly licensed individuals may practice their professions.

Free Transferability of Corporate Shares

Corporate shares are readily transferable unless there is an agreement to the contrary.

Definition of Ultra Vires Acts

any action that goes beyond express and implied powers of a corporation.

Effect of Ultra Vires Acts

are not invalid under RMBCA.

Articles of Incorporation

charter or basic organizational document of a corporation.

Selection of Name

must clearly designate the entity as a corporation.

Public

one created to administer a unit of local civil government or one created by the United States to conduct public business. • PBS

Domestic Corporation

one created under the laws of a given state.

Foreign Corporation

one created under the laws of any other State or jurisdiction; must obtain certificate of authority to do business.

Corporation de Jure

one formed in substantial compliance with the incorporation statute and having all corporate attributes.

Private

one founded by and composed of privat

Profit Corporation

one founded to operate a business for profit

Profit Corporation

one founded to operate a business for profit.

Closely Held Corporation

one that is owned by few shareholders and whose shares are not actively traded. • Usuallyfriends/family. • Thetransferofsharesofcloselyheldcorporationsisoftenrestrictedtoprevent "outsiders" from obtaining stock.

Nonprofit Corporation

one whose profits must be used exclusively for charitable, educational, or scientific purposes.

Publicly Held Corporation

one whose shares are owned by a large number of people and are widely traded. • "a corporation that has shares listed ona nationalsecuritiesexchangeorregularlytraded in a market maintained by one or more members of a national securities association."

Incorporators

persons who sign the articles of incorporation.

Subchapter S Corporation

Eligible corporation electing to be taxed as a partnership under the Internal Revenue Code. • (1)itmustbeadomesticcorporation;(2)itmusthavenomorethan100shareholders; (3) each shareholder must be an individual, an estate, or certain types of trusts; (4) no shareholder may be a nonresident alien; and (5) it may have only one class of stock, although classes of common stock differing only in voting rights are permitted.

Organizational Meeting

the first meeting, held to adopt the bylaws and appoint officers.

Statutory Powers

typically include perpetual existence, right to hold property in the corporate name, and all powers necessary or convenient to effect the corporation's purposes

Closely Held Corporations

• Courts have generally pierced the veil when shareholders: • Have not conducted corporate business on a regular basis, or •Have not provided an adequate financial basis for business,or • Have used the corporation to defraud.

Crimes

A corporation may be criminally liable for an offense perpetrated by a high corporate officer or its board of directors.

As a Person

A corporation is a "person" under the Fifth and Fourteenth Amendments as related to the requirement that no person be deprived of "life, liberty, or property without due process of law" and under the Fourteenth Amendment equal protection clause. Corporations are not persons with regard to the Fifth Amendment right against self-incrimination. • Corporations are citizens of the state(s) where they are incorporated and they have their principal office located for diversity jurisdiction purposes. They are not citizens with respect to the Fourteenth Amendment privileges and immunities clause.

Limited Liability

A corporation is liable for payment of debts, and shareholders are usually held liable only to the extent of their investment. The limitation on liability, however, will not affect the liability of a shareholder who committed the wrongful act giving rise to the liability. A shareholder is also personally liable for any corporate obligations the shareholder guarantees

Legal Entity

A corporation is recognized as having a legal existence separate from its shareholders. It may sue or be sued as a legal entity, and it holds title to all corporate property..

Parent-Subsidiary

A subsidiary is a corporation in which another corporation (the parent) owns at least a majority of the shares. Courts will pierce the corporate veil in this situation if there is inadequate capitalization, formalities are not observed, each corporation is not held out to the public as separate enterprises, funds are co-mingled, or the parent firm dominates the operations of the subsidiary.

The Pyro Corporation has outstanding 20,000 shares of common stock, of which 19,000 are owned by Peter B. Arson; 500 shares are owned by Elizabeth Arson, his wife; and 500 shares are owned by Joseph Q. Arson, his brother. These three individuals are the officers and directors of the corporation. The Pyro Corporation obtained a $750,000 fire insurance policy to cover a certain building it owned. Thereafter, Peter B. Arson set fire to the building, and it was totally destroyed. Can the corporation recover from the fire insurance company on the $750,000 fire insurance policy? Why?

No. Judgment in favor of the fire insurance company. The court would pierce the corporate veil and not permit Arson to do indirectly, through the instrumentality of the corporation, what he could not do directly.

Green&FreedmanBakingCompany(Green&Freedman)wasafamily-ownedMassachusetts corporation that produced and sold baked goods. The terms of a collective bargaining agreement required Green & Freedman Baking Company to make periodic payments on behalf of its unionized drivers to the New England Teamsters and Baking Industry Health Benefits and Insurance Fund (Health Fund). After sixty years of operation Green & Freedman experienced financial difficulties and ceased to make the agreed-upon contributions. The mixed their own finances with those of Green & Freedman's. The Elmans, through their domination of Green & Freedman, caused the corporation to make payments to themselves and their relatives at a time when the corporation was known to be failing and could be expected to default, or was already in default, on its obligations to the Health Fund. It then transferred all remaining assets to a successor entity named Boston Bakers, Inc. (Boston Bakers). Boston Bakers operated essentially the same business as Green & Freedman until its demise two years later. The Health Fund sued Green & Freedman, Boston Bakers, and the two corporations' principals, Richard Elman and Stanley Elman, to recover the payments owed by Green & Freedman with interest, costs, and penalties. There was no evidence of financial self-dealing in the case of Boston Bakers. Both corporate defendants conceded liability for the delinquent contributions owed by Green & Freedman to the Health Fund. The suit against the Elmans was based on piercing the corporate veil with respect to Green & Freedman and Boston Bakers. The Elmans, however, denied they were personally liable for these corporate debts. Are the Elmans liable? Explain.

The Elmans are not liable for the obligations of Green &Freedman butare liable for the obligations of Boston Bakers. The legal standard for when it is proper to pierce the corporate veil is not precise because it can vary according to the case circumstances. Courts consider the respect paid by the shareholders themselves to the separate corporate identity; the fraudulent intent of the individual defendants; and the degree of injustice that would be visited on the litigants by recognizing the corporate identity. • Inthiscase,thereisampleevidenceoffraudulentintenttoaffordareasonablejury,applyingthe these criteria, and exercising its broad authority over the veil-piercing issue, a legally sufficient basis to reach beyond Green & Freedman's corporate identity and hold the Elmans liable for the corporation's unpaid contributions. These facts support a reasonable inference by a jury that the Elmans, in the two years before Green & Freedman's demise, did not treat Green & Freedman as a separate entity, placed personal interests ahead of the corporation's responsibilities, and did not themselves honor the corporate form. • ThenextquestioniswhetherajurycouldholdtheElmanspersonallyliableforBostonBakers' successorship obligation to pay Green & Freedman's indebtedness. For this to happen there must be showing of fraud related to Boston Bakers. The Health Fund claims the bulk transfer of assets is inherently fraudulent, a claim which is undercut by the fact that the Elmans did not conceal the transfer. There is no evidence of financial self-dealing in the case of Boston Bakers such as occurred with Green & Freedman. The Elmans do not have personal liability for Boston Bakers' corporate obligation to make good Green & Freedman's delinquent payments to the Health Fund.

Centralized Management

The shareholders elect a board of directors to manage the business of the corporation. The board appoints officers to run the day-to-day operations. Since management responsibility is separated from ownership, shareholders do not as shareholders participate in the running of the company.

Defective Incorporation: Corporation by Estoppel

This doctrine will recognize corporate existence despite a substantial defect in statutory compliance if the business has held itself out as a corporation and third parties have relied on this representation. Then neither party may deny the corporate existence of the business.

Torts

Under respondeat superior, a corporation is liable for torts committed by its employees within the course of their employment.

Defective Corporation

Where it is demonstrated that the de jure, de facto and estoppel principles are inapplicable, the corporate existence is denied and those persons involved in the business are not accorded limited liability protection. Liability among all associates for debts is joint and several as well as unlimited.

Perpetual Existence

Where the articles of incorporation do not specify a limited duration, corporations have a perpetual existence. As a result, the withdrawal of a shareholder or officer will not cause a dissolution of the firm.

Purposes

a corporation may be formed for any lawful purposes unless its articles of incorporation state a more limited purpose.

Bylaws

rules governing a corporation's internal management

emedies for Ultra Vires Acts

the RMBCA provides three possible remedies

General Rule

the courts may disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law.