Business Associations/Corporations Outline

Corporations Kaplan Fall 2012
 
Limited Liability
The corporation is its own legal entity, and the articles of incorporation are like its birth certificate.  Also, the owners of the corporation are not personally liable for the debts the corporation incurs.  Shareholders may lose their money, but they are not on the hook if the corporation commits a tort.  A creditor must generally seek payment only from the corporation.
 
MBCA § 6.22 – Liability of Shareholders.  (b) A shareholder is not personally liable for the acts or debts of the corporation, except that he may become liable for his own acts.
Piercing the Corporate Veil
Generally
The shareholder is an agent of the corporation.  When a corporation's veil is pierced, the shareholder or other corporation becomes the principle.  The idea is that the corporation is no longer regarded as a separate legal entity.
 
The Van Dorn Test.  A corporate entity will be disregarded and the veil of limited liability pierced when both of the following requirements are met:         
Such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer exist.  Factors include
(1)   failure to maintain adequate corporate records or to comply with corporate formalities,
(2)   commingling of funds or assets,
(3)   undercapitalization, and
(4)   one corporation treating the assets of another corporation as its own.
 
Circumstances such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.  (Once the first element of the test is established, either the sanctioning of a fraud (intentional wrongdoing) or the promotion of injustice, will satisfy the second element)
(1)   Sanctioning a Fraud – Ruling for the promoter would allow him to get away with fraud, i.e. deceiving the third party to his prejudice and accomplishing the purpose.
(2)   Promoting injustice – It is not enough for the plaintiff to “be denied a judicially-imposed remedy.”  The prospect of an unsatisfied judgment looms in every veil-piercing action; why else would a plaintiff bring such an action? Thus, if an unsatisfied judgment is enough for the “promote injustice” feature of the test, then every plaintiff will pass on that score, and Van Dorn collapses into a one-step “unity of interest and ownership” test.  Examples of promoting injustice in Illinois:
                                                              i.      Pederson – “Some element of unfairness, something akin to fraud or deception or the existence of a compelling public interest must be present in order to disregard the corporate fiction.”
                                                            ii.      Perivoliotis –  Injustice would have been promoted when an individual (Woulfe) tried to adversely posses a strip of land from a corporation (TomDon) that held title to the land, when Woulfe was the president and one of only two shareholders (the other, his wife) of TomDon.
                                                          iii.      Gromer, Wittenson & Myer v. Strom – When three partners signed a note agreeing to be jointly and severally liable for a debt owed to a bank, one of the partners left.  The other two then set up their own partnership, paying off the note and suing the third partner for the balance.  The court held that a judgment on the note would promote injustice.
                                                          iv.      Kreisman v. First Arlington National Bank –  Defendant corporation stiffed plaintiff for the bill on some restaurant equipment, so plaintiff sued for a mechanics lien.  Noting that the equipment, though never paid for, was used by the defendant corporation for several years, the appellate court stated, “Under these circumstances we believe the corporate veil should be pierced to require [the `dominant individual to be personally liable;  to say otherwise would promote an injustice and permit her to be unjustly enriched at plaintiff's expense.”
Alter-Ego or “Reverse Piercing” Theory
In re Silicone Gel Breast Implants Products Liability Litigation. When a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corporate form may be disregarded.   Factors include:
common directors or officers
common business departments
they file consolidated financial statements and tax returns
parent finances the subsidiary
parent caused the incorporation of the subsidiary
subsidiary operates with grossly inadequate capital
parent pays the salaries and other expenses of the subsidiary
subsidiary receives no business except that given to it by the parent
parent uses the subsidiary's property as its own
daily operations of the two corporations are not kept separate
subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings.
Enterprise or “Scrambled Egg” Theory
When several subsidiaries act as one enterprise, all should be held liable for the actions of one.  In other words, we superimpose larger corporate entity over all smaller businesses. Must prove operations are so comingled that none of them have a single or independent existence.
 
See Walkovszky (Dissent)
       I.            Formation and Articles of Incorporation
Choosing the State of Incorporation
MBCA § 3.01(b).  Corporations are allowed to incorporate in other states.
The “internal affairs doctrine. The choice of state of incorporation determines the substantive law that will govern the business’s internal affairs. 
Advice for choosing a state of incorporation.
Listen to client and get the facts.  Is this client wealthy or not?  Are they trying to protect wealth?  If the client isn't wealthy then incorporation might not be the best way to go about it.
Nature of the business – some are required to be incorporated in the state where they do business. 
Risk of the business – bullet proof vest manufacturer or hot dog stand?  Is insurance needed?
Where will the business operate.  If operations are solely local, then home state incorporation is usually preferable, unless the home state's laws are particularly inhospitable to the corporation.  If operations are widespread, pick whichever is most favorable.
Perfecting the Incorporation
MBCA § 2.02 –  Articles of Incorporation.
[Says what the articles MUST and MAY include]  
MBCA § 2.06 – Bylaws
(a)    The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation.
(b)   The bylaws of a corporation may contain any provision that is not inconsistent with law or the articles of incorporation.
(c)    The bylaws may contain one or both of the following provisions:
(1)   A requirement that if the corporation solicits proxies or consents with respect to an election of directors, the corporation include in its proxy statements and any form of its proxy or consent, to the extent and subject to such procedures or conditions as are provided in the bylaws, one or more individuals nominated by a shareholder in addition to individuals nominated by the board of directors; and