Module 6

Proxy

(Contracted from "procuracy.") Written authorization given by one person to another so that the second person can act for the first, such as that given by a shareholder to someone else to represent him and vote his shares at a shareholders' meeting.

Consolidation

A consolidation of two or more corporations is a combination of all of their assets, the title to which is taken by a newly created corporation known as the consolidated corporation. Each constituent corporation ceases to exist, and all of its debts and liabilities are assumed by the new corporation. The shareholders of each constituent corporation receive stock or other securities, not necessarily of the same class, issued to them by the new corporation, or other consideration provided in the plan of consolidation. A consolidation requires the approval of each corporation's board of directors, as well as the affirmative vote of each corporation's holders of a majority of the shares entitled to vote. Dissenting shareholders have an appraisal remedy. The Revised Act, however, has deleted all references to consolidations, because in modern corporate practice, ensuring the survival of one corporation is almost always advantageous.

perpetual existence

A corporation has perpetual existence unless otherwise stated in its articles of incorporation. Consequently, the death, withdrawal, or addition of a shareholder, a director, or an officer does not terminate its existence. A corporation's existence will terminate upon its dissolution or merger into another business

limited liability

A corporation is a legal entity and is therefore liable out of its own assets for its debts. Generally, the shareholders have limited liability for the corporation's debts—their liability does not extend beyond the amount of their investment—although later in this chapter we discuss certain circumstances under which a shareholder may be personally liable. 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 a legal entity separate from its shareholders, with rights and liabilities entirely distinct from theirs. It may sue or be sued by, as well as contract with, any other party, including any one of its shareholders. A transfer of stock in the corporation from one individual to another has no effect on the legal existence of the corporation. Title to corporate property belongs not to the shareholders but to the corporation. Even where a single individual owns all of the stock of the corporation, the shareholder and the corporation have distinct existences.

Merger

A merger of two or more corporations is the combination of all of their assets. (The Revised Act has been amended to authorize corporations to merge with any eligible entity.) One of the corporations, known as the surviving corporation, receives title to all the assets. The other party or parties to the merger, known as the merged corporation or corporations, is merged into the surviving corporation and ceases to exist as a separate entity. Thus, if A Corporation and B Corporation combine into the A Corporation, A is the surviving corporation and B is the merged corporation. Under the Revised Act and most statutes, the shareholders of the merged corporation may receive stock or other securities issued by the surviving corporation or other consideration including cash, as provided in the merger agreement. Moreover, the surviving corporation assumes all debts and other liabilities of the merged corporation. A merger requires the approval of each corporation's board of directors, as well as the affirmative vote of each corporation's holders of a majority of the shares entitled to vote. Under the 1999 amendments to the Revised Act, a merger need be approved by only a plurality of the shares cast at a meeting at which exists a quorum consisting of at least a majority of the votes entitled to be cast on the merger. Dissenting shareholders of each corporation have an appraisal remedy. The 1999 amendments to the Revised Act eliminated the appraisal rights of shareholders in the surviving corporation. However, the 1999 amendments permit additional appraisal rights to be made available for mergers to the extent provided by the articles of incorporation, the bylaws, or a resolution of the board of directors. Many states and the 1999 amendments to the Revised Act permit the vote of the shareholders of the surviving corporation to be eliminated when a merger increases the number of outstanding shares by no more than 20 percent. In 2016, the Revised Act was amended to permit the vote of the shareholders of the surviving corporation to be eliminated in additional circumstances, unless the articles of incorporation provide otherwise.

Authority to amend

Accordingly, incorporation statutes grant the authority to amend the corporate articles of incorporation if specified procedures are followed. The amended articles of incorporation, however, may contain only those provisions that might lawfully be contained in the articles of incorporation at the time of the amendment.

Professional corporation

All of the states have professional association or professional corporation statutes that permit duly licensed professionals to practice in the corporate form. Some statutes apply to all professions licensed to practice within the state, whereas others apply only to specified professions. There is a Model Professional Corporation Supplement to the MBCA.

Non-for-profit corporation

Although a nonprofit (or not-for-profit) corporation may make a profit, the profit may not be distributed to its members, directors, or officers but must be used exclusively for the charitable, educational, or scientific purpose for which the corporation was organized. Most states have special incorporation statutes governing nonprofit corporations, most of which are patterned after the Model Nonprofit Corporation Act.

Corporation de facto

Although it fails to comply in some way with the incorporation statute and, hence, is not de jure, a corporation de facto is nevertheless recognized for most purposes as a corporation. A failure to form a de jure corporation may result in the formation of a de facto corporation if the following requirements are met: the existence of a general corporation statute, a bona fide attempt to comply with that law in organizing a corporation under the statute, and the actual exercise of corporate power by conducting business in the belief that a corporation has been formed. The existence of a de facto corporation can be challenged only by the state in an action of quo warranto ("by what right").

de jure

Descriptive of a condition in which there has been total compliance with all requirements of law. In this sense it is the contrary of de facto. See also corporation, corporation de jure.

de facto

In fact, in deed, actually. This phrase is used to characterize an officer, a government, a past action, or a state of affairs which must be accepted for all practical purposes but which is illegal or illegitimate. See also corporation, corporation de facto.

Public corporation

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

Profit Corporation

One founded for the purpose of operating a business for profit.

Private Corporation

One organized to conduct either a privately owned business enterprise for profit or a nonprofit corporation.

Subscriber

Person who agrees to purchase initial stock in a corporation.

organizational meeting

The Revised Act and most states require that an organizational meeting be held to adopt the new corporation's bylaws, appoint officers, and carry on any other business brought before it. If the articles do not name the corporation's initial directors, the incorporators hold the organizational meeting to elect directors, and either the incorporators or the directors then complete the organization of the corporation.

Bylaws

The bylaws are the rules and regulations that govern the internal management of a corporation. Because bylaws are necessary to the organization of the corporation, their adoption is one of the first items of business at the organizational meeting held promptly after incorporation. The bylaws may contain any provision that is not inconsistent with law or the articles of incorporation. Under the Revised Act, the shareholders may amend or repeal the bylaws, which, in contrast to the certificate of incorporation embodying the articles of incorporation, do not have to be publicly filed. In addition, the board of directors may amend or repeal the bylaws, unless the articles of incorporation or other sections of the RMBCA reserve that power exclusively to the shareholders in whole or in part or the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.

Corporation by estoppel

The doctrine of corporation by estoppel is distinct from that of corporation de facto. Estoppel does not create a corporation. It operates only to prevent a person or persons under the facts and circumstances of a particular case from questioning a corporation's existence or its capacity to act or to own property. Corporation by estoppel requires a holding out by a purported corporation or its associates and reliance by a third party. In addition, application of the doctrine depends on equitable considerations. A person who has dealt with a defectively organized corporation may be precluded or estopped from denying its corporate existence if the necessary elements of holding out and reliance are present. The doctrine can be applied not only to third parties but also to the purported corporation and to the associates who held themselves out as a corporation.

Articles of incorporation

The instrument under which a corporation is formed. The contents are prescribed in the particular state's general incorporation statute.

Quorum

When a committee, board of directors, meeting of shareholders, legislature, or other body of persons cannot act unless at least a certain number of them are present.

Incorporators

are the persons who sign the articles of incorporation filed in the state of incorporation with the secretary of state. Although they perform a necessary function, in many states their services as incorporators are perfunctory and short-lived, ending with the organizational meeting following incorporation. Furthermore, modern statutes have greatly relaxed the qualifications of incorporators and also have reduced the number required. The Revised Act and almost all states provide that only one person need act as the incorporator, though more may do so. The Revised Act and most states permit artificial entities to serve as incorporators. For example, the Revised Act defines a "person" to include individuals and entities, with an entity defined to include domestic and foreign corporations, not-for-profit corporations, profit and not-for-profit unincorporated associations, business trusts, estates, partnerships, and trusts.

Foreign corporation

every other state or jurisdiction

domestic corporation

in the state in which it is incorporated

Promoter

is a person who takes the preliminary steps to organize a corporation. The promoter arranges for the capital and financing of the corporation; assembles the necessary assets, equipment, licenses, personnel, leases, and services; and attends to the actual legal formation of the corporation. On incorporation, the promoter's organizational task is finished.

corporation de jure

is one that has been formed in substantial compliance with the incorporation statute and the required organizational procedure. Once a de jure corporation is formed, its existence may not be challenged by anyone, even the state in a direct proceeding for this purpose.

Closely-held corporation

is one whose outstanding shares of stock are held by a small number of persons, frequently relatives or friends. In most closely held corporations, the shareholders are active in the management and control of the business. Accordingly, the shareholders, concerned about the identities of their fellow shareholders, frequently restrict the transfer of shares to prevent "outsiders" from obtaining the stock. Although a vast majority of corporations in the United States are closely held, they account for only a small fraction of corporate revenues and assets.

Publicly held corporation

is one whose shares are owned by a large number of people and are widely traded. There is no accepted minimum number of shareholders, but any corporation required to register under the federal Securities and Exchange Act of 1934 is considered to be publicly held. In addition, corporations that have issued securities subject to a registered public distribution under the federal Securities Act of 1933 usually are also considered publicly held. (The federal securities laws are discussed in Chapter 39.) To distinguish publicly held corporations from other corporations, the Revised Act was amended to define the term "public corporation" as "a corporation that has shares listed on a national securities exchange or regularly traded in a market maintained by one or more members of a national securities association." This definition was deleted in the 2016 RMBCA.

Procedure for amending

the typical procedure for amending the articles of incorporation requires the board of directors to adopt a resolution setting forth the proposed amendment, which must then be approved by a majority vote of the shareholders entitled to vote, although some older statutes require a two-thirds shareholder vote. In some states, shareholders may approve amendments to the articles of incorporation without a prior board of directors' resolution. After the shareholders approve the amendment, the corporation executes articles of amendment and delivers them to the secretary of state for filing. The amendment does not affect the existing rights of non-shareholders. Under the Revised Act, dissenting shareholders receive the appraisal remedy only if an amendment materially and adversely affects their rights by altering or abolishing a preferential right of the shares; creating, altering, or abolishing a right involving the redemption of the shares; altering or abolishing a preemptive right of the holder of such shares; excluding or limiting a shareholder's right to vote on any matter or to cumulate his votes; or reducing to a fraction of a share the number of shares a shareholder owns, if the fractional share is to be acquired for cash.