I. The Nature of the Corporation
Model Business Corporation Act § 6.21(b)
Model Business Corporation Act § 3.01
Model Business Corporation Act § 3.02
Model Business Corporation Act § 3.04
Model Business Corporation Act § 2.05
a. The Corporate Entity, Promoters, and Limited Liability
Southern-Gulf Marine Co. 9 Inc v. Camcraft
– Facts: Before SG was incorporated, it entered into a contract with Camcraft to build a ship for SG. Subsequently, SG informed Camcraft by letter that SG had been incorporated. Camcraft signed a written acceptance and agreement to the letter. When Camcraft defaulted on its obligation, SG brought suit, seeking to sequester the vessel involved and demanding specific performance and damages.
– Rule of Law: Where a party has contracted with what he acknowledges to be a corporation, he is estopped from denying the existence/legal validity of such a corporation. (visa versa)
In re Silicone Gel Breast Implants Products Liability Litigation
– Facts: MEC was an independent, privately owned corporation manufacturing breast implants. Bristol purchased MEC’s stock for $28 million through a series of mergers and corporate reorganizations. Plaintiff wanted to pierce the corporate veil of MEC to get to Bristol.
§ 2/3 of MEC’s board members were Bristol executives.
§ Cash received by MEC was transferred to an account maintained by Bristol.
§ Bristol set employee policies and wage scales that applied to MEC’s employees.
§ Another subsidiary of Bristol distributed MEC’s breast implants. Bristol assisted MEC in seeking out new product lines.
§ Bristol funded tests on implants.
§ Some of Bristol’s in house counsel acted as MEC attorneys.
§ Bristol used its name and logo to promote the product.
– Rule of Law: When a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corporate form may be disregarded.
– court looks at the actual operations of the companies to determine if they are so conjoined that they are indistinguishable from each other
§ if the court finds that, then they are estopped from saying that they are separate corporations.
§ Advice to Bristol so they don’t have this kind of problem with subsidiaries:
o Don’t vouch for the product of another corp. Establish a brand name (credibility). Hire good PR to establish a good name, liability shield. Bristol should try to settle with confidentiality.
Sea-Land Services v. Pepper Source
– Facts: Sea Land defaulted on a contract with Pepper Source which had been dissolved and had no assets. Sea Land filed another law suit, seeking to pierce the corporate veil and hold Marchese, sole shareholder of Pepper Source and other corporations, personally liable. Pepper Source was reinstated as a corporation in Illinois.
§ Marchase ran all his businesses out of the same office, same phone line, same expense account, and used corp bank accounts to pay personal expenses.
– Rule of Law: The corporate veil will be pierced when there is a unity of interest and ownership between the corporation and an individual and where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice.
– IL test for Piercing the Corporate Veil:
o There must be such unity of interest and ownership that the separate personalities of the corporation and the individual/other corporation no longer exists AND
o The unity of interest resulted in fraud or injustice.
¨ promote injustice: 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
Walkovszky v. Carlton
Facts: ∏ (Injured) ∆: Seon Cab Co.; Marchese (garage owner/ shareholder); Carlton (individual owner). ∏ was severely injured when a NYC cab ran him over 4 yrs ago owned by Seon Cab Corp. and negligently operated by Marchese. The individual ∆, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum auto liability insurance required by law (in the amount of $10,000) is carried on any one cab. Walkovszky wanted to get to defendant Carlton individually but he had to amend his complaint to say that Carlton was managing these corporations to personally benefit from creating alter egos and constituted an unlawful attempt to defraud members of the general public.
– Rule of Law: Whenever anyone uses control of the corporation to further his own rather than the corporation’s business, he will be liable for the corporation’s acts. Upon the principle of respondeat superior, the liability extends to negligent acts as well as commercial dealings. However, where a corporation is a fragment of a larger corporation combine which actually conducts the business, a court will not ‘pierc
a director of the Chicago Cubs baseball team. Shlensky, a minority shareholder, sought to bring a shareholders derivative action to compel the directors to equip Wrigley Field with lights so that night games could be played, and revenues could be increased.
– Rule of Law: A shareholder’s derivative suit can only be based on conduct by the directors which borders on fraud, illegality, or conflict of interest.
– The court held that the decision is one properly before the directors and the motives alleged in the amended complaint show no fraud, illegality or conflict of interest in their making of that decision.
– Elements of acquiescence:
§ Accepting without challenge
§ Board has a duty to corp and shareholders, it has knowledge that something is happening/not happening but instead of exercising their duty they sit back and reap the benefits.
II. Corporate Finance
Model Business Corporation Act § 6.01(a)
Model Business Corporation Act § 6.21 (b)
Hospes v. Northwestern
– Facts: Seymour, Sabin & Co owned property of the value of several million dollars, and a business then supposed to be profitable. A car company was organized, to which was sold the greater part of the assets of Seymour, Sabin & Co. for $2,267,000. Shares of the preferred stock of the car company were issued to Seymour, Sabin & Co. of the par value of $2,267,000/ The stockholders of Seymour, Sabin & Co. wanted common stock in the car company, and caused Seymour, Sabin & Co. to subscribe for and agree to take common stock of the car company of the par value of $1,500,000. Seymour, Sabin & Co. never paid any consideration for the stock.
– Rule of Law: subsequent creditors should not be required to allege and prove affirmatively that they relied on the capital represented by the bonus shares, but that lack of reliance might be a defense
Model Business Corporation Act § 6.22(a)
Model Business Corporation Act § 6.40
