Corporations Quick Outline
Corporations:
I. Charitable contributions:
MBCA §3.02 allows corporations to make donations for public welfare, charitable, scientific or educational purposes.
1/Must be reasonable as to amount and purpose. Factors: (Theodora v. Henderson)
a/ Is the contribution within federal tax deduction limit (10%)
b/ Total cost to shareholders proportional to overall finances of the corp.
c/ Whether it serves philanthropic need and benefits corp in long run.
2/ Board members connected with the charity do not necessarily create a conflict of interest or make contribution improper even where there is an existing quid pro quo. (Kahn v Sullivan)
a/ If board members are concerned about liability through derivative suit for waste of corporate assets, the may first:
i. seek approval from independent directors or
ii. put the contribution up for shareholder vote.
II. Corporate formation: (MBCA §2.01 -2.06)
§2.01: Incorporators
1/One or more persons may act as the incorporator by filing the AOI with the Secretary of State,
§2.02 Articles of Incorporation must set forth:
A> 1/ Corporate name
2/ The number of authorized shares
3/ The name & street address of initial registered office and name of the agent.
4/ The name and address of each cooperator.
B> Articles MAY set forth:
1/ Names and addresses of initial directors
2/ Provisions (within law regarding): purpose, management, defining powers of board/ shareholders etc., a par value for authorized shares. Imposition of personal liability on shareholders under specified conditions.
3/ Provisions applicable by state law
4/ Limitation on director liability except (benefits not entitled to, criminal violations, intentional violations.
§2.03 Incorporation
A> Corporation begins when AOI are filed (unless specified)
B> SOS filing is proof that the incorporators satisfied their requirements (except in a proceeding to revoke the incorporation.
§2.05 Organization of the Corporation ??
§2.06 By-laws:
A> Incorporators or Board shall adopt initial by-laws.
B> By-Laws may contain any management provision.
II. Choice of State issues (state law controls the corporate form)
1/ Factors to consider when selecting a state
a/ Operation in a single state or multiple
b/ Tax rates
c/ Ease of Operation
d/ Regulations on stock and dividends
e/ Specific rules for close corporation
f/ Possible liability of shareholders for wages (rare)
III. Ultra Vires doctrine
A> Common law origin: Originally, corporations could not act outside the parameters of its defined purpose – this was an attempt to limit the concentration of economic power. Once states began to draft there own corporate statutes the laws were circumvented by attorneys who drafted very broad articles of incorporation.
B> Modern Rule: Reverses the thinking
1/MBCA§3.01(a) allows corporations to do anything lawful unless a limit is placed in the AOI.
2/ Modern corporate statutes limit the use of Ultra Vires to prevent its use as a defense against an otherwise valid obligation
3/ Ultra vires still has some validity on questions of whether a corporate contribution is a waste of corporate assets.
IV. Defective incorporation: Relevant to determine liability for transactions made in the corporations name when the corporation has not been created. The question arises whether a third party needs
present another client in the same or substantially related matter in which the new client’s interests are adverse to the interests of the former client unless there is informed consent confirmed in writing.
B>A lawyer shall not knowingly represent a client in the same or substantially related matter in which the lawyer’s previous firm had previously represented a client.
1/whose interests are materially adverse to the new client and
2/ About whom the lawyer had acquired knowledge covered in 1.6
C> A lawyer shall not use information gathered from representation of a former client to that client’s disadvantage or reveal that information.
Corporation as client: “Entity Rule”: Who does the lawyer work for.
A> A lawyer represents the organization acting through its duly authorized constituents.
Entity rule is retro active. When a person hires a lawyer to create the corporation, the lawyer ceases to represent the individual and becomes the representative of the organization.
B> Modern test: The modern test for determining who the client is is the “reasonable expectations test”. If the attorney leads an individual or entity to believe that they are a client and the belief is reasonable under the circumstances and attorney-client relationship will be assumed/created whether or not the client pays a fee or has a formal retainer agreement.
