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Business Associations/Corporations
South Texas College of Law Houston
Ricks, Val D.

Corporations “MASTER”

Ricks – Spring 2012


A. Exam: mostly MC and probably some essay as well

B. Codes – we use Texas because we are in Texas but its about learning how to address the issues

1. Delaware code – over half of public corporations are formed in Delaware

2. Most local business are formed under their local codes

3. Texas Code: patterned after the revised model business code

C. What is a Corporation?

1. Corporation – legal fiction we use for arguments, conclusions, etc.

a. No real existence, but the law acts as if they do

b. Just as in creation of a K, we do the same with corporations

c. Unicorn – its not real, remember this or you will be disadvantaged

d. If you could string away everything, what is really at issue, is a dispute between two people over money (or some other resource)

2. Board and officers are agents of “somebody” – maybe investors

a. The relationship these people have are described in terms of an entity and their relationship to the entity

D. Nomenclature (board, directors, etc.) is a way to identify and legally categorize

E. Classification scheme is what we want to focus on

I. Formation of Corporations (Chapter 1) [Tommy’s notes only as of now]

A. Statutes and Questions

1. §§ 1.002(14), (25), (26), (35), (37), (63), (64), (81); 2.001; 2.002; 2.008; 2.101; 3.001; 3.003; 3.004; 3.005; 3.007; 3.101; 4.001; 4.002; 4.004; 4.051; 4.152(1); 5.053; 5.054; 22.051; 22.053; 22.054; 1.101; 1.102

a. Types of corps

i. For-profit, Not-for profit, S-corp, C-corp, Closed Corporation (few owners and know each other), Open Corporation (many owners), Public Corp (anyone can buy into it, ie, the stock market), Foreign, Domestic, Municipality (probably the first kind)

ii. Corporation soul – most ongoing positions

(1) Ie, bishop, king, etc.

b. Potato org – Closed so one person can own it and I reap all the benefits unless opportunity to reorganize without going into debt or diluting your ownership interest/value (hard to do)

c. What kind of body will the governing authority be? Board of directors

d. Does governing body own – NO 1.002(63)

e. Does owner necessarily participate in management? NO – 1.002(64)

i. Can and might want to, but doesn’t have to

ii. If sole owner and haven’t appointed anyone or the company by-laws don’t’ say otherwise, then you will (in our potato chip business, most likely)

f. Is a nonprofit allowed to own a business? 2.002 – can operate and manage (doesn’t prohibit)

i. 22.053 – a dividend may not be paid to or income distributed to its members, directors, or officers

g. Power to sue? 2.101(1)

i. To own property? (3)

ii. Borrow money? (6)

iii. Be a partner in a partnership? (10), and a member of an LLC

iv. Lend money? (7)

v. Hire agents to do work? (17)

vi. Donations for charitable purposes? (18)

h. On date of filing the de jure corporation begins – 4.051

i. de jure – corporation “by law”

ii. Must state recognize de jure corps? – yes 3.001(d)

i. Can a corp not form de jure and yet still be recognized by courts as a corp? What is it called?

i. De facto – acting as if but not technically a corp yet

j. How long does a corp last? Perpetual – 3.003

k. Can a mentally incompetent form a corp? No – 3.004(a)

i. Need capacity to contract (corp does through agents)

ii. Corp can organize a corp – 3.004(a) and 1.002(69-b)

iii. Can commit crimes but can’t not self-incriminate

iv. Can require effective assistance of counsel

v. Corp has free speech (sort of)

l. Must cert of formation state a period of duration? NO – 3.005(a)

i. (4) if perpetual, don’t have to say it, but if not perpetual, have to give duration

m. Why is address of initial registered agent necessary? To be served as “agent” for corp

n. Must address of “organizer” be on file? No; don’t sue organizer, since don’t hold a position and only send paper in to the SoS

o. Must the cert list the number of authorized shares? Must list “par” values? NO – 3.007(b)(3) – or state without par

p. Must the cert name the initial board? NO – not listed in 3.007

q. Who will manage affairs of the corp? whoever the organizer sets as the agents, like a board of directors

i. Corp docs govern – 3.101

r. Must the cert be signed by an initial board member? No, although they might be – 4.004(a)

i. Who/What is an organizer? 3.004(a) – only requirement is the person have the capacity to contract

(1) Two spaces on cert of formation – 3.005(a)(6)(a)

(2) Cert must state if the corp to be managed by a board, who and their address until the initial meeting – 3.007(a)(3)

s. Can cert be faxed to SoS office? YES – 4.001(a)(2) lists in person, mail, facsimile or electronic submission

t. Find filing fee for a for-profit corp: $300 formation fee


u. Form for filing for-profit, do you need corporation’s purpose?

i. Wise to change what is on the form? No because why would you more narrowly construe your business purpose that is required? Language says “may supplement”

v. Must be filed, but when is filing effective? Takes effect on filing, 4.051

w. Can it be named “The Incredible Company?” OK

i. Incredible People – NO

ii. Googol, Inc. – NO – deceptively similar

iii. Afford Motor Company? – NO – similarity and “afford” has its own implications

iv. If it’s not deceptive at all, can the SOS file it? What if they agree its not deceptive

(1) 4.001(a)(1-2)

(2) NO – because its “similar” – disjunctive

(3) “Deceptively similar” is not the only standard

(4) Why does this matter? Rather, why would anyone care if not deceptive?

x. If a corp forms when its cert of form is filed in Texas, which state’s law governs whether it has power to borrow money? Rights of shareholders? Whether a director is properly elected? Whether it can lawfully grow and sell genetically modified corn?

i. Domestic corps – 1.101 – Internal Affairs Doctrine –

(1) Borrowing money and rights of shareholders / direct election fall under 1.101 and determined under TX laws

(2) Genetically modified corn is not an internal affair – so

ii. Foreign corp – 1.102 – wherever its filed

B. Basic characteristics of the corporate form offset the weaknesses of a partnership (which requires no filing to be formed)

1. Legal personality with indefinite life

2. Limited liability for investors

3. Free transferability of share interests

4. Centralized management

5. Appointment by equity investors

C. Partnerships:

1. Partners are each liable for the business liabilities (both in K and tort)

2. Lasts only long s the partners are co-owners of the business

a. Agencies end at will

3. Partners have the legal right to withdraw their capital at any time; each can quit. If a partner quits, the partnership may cease to exist

D. Basic corporate structure



Board of Directors



E. In re Estate of Hausman

1. Divided estate between 4 children; one child appointed executor and was to create an LLC, then transfer rental property to the LLC

a. Cleaners and some other businesses, apartments, etc. on other floors and taking rent

2. No entity had officially been formed

3. De facto entity – as a matter of fact, not by function of law (de jure)

a. So, when do we have a De facto Formation?

i. Exists a law under which to organize the corp

ii. Attempt to organize a corp

iii. Existence of corp powers thereafter

b. Applicable to LLCs

c. Code 3.001(d)

d. Need a ceremony of some sort that signals formation – this is a state official stamping something “filed”

F. Hypo #1 – Sell your small Eye corp to Big corp and have noncompete then claim formation defective because organizer not real corp

1. Even if facts stated are true, as we saw in the In re Estate of Hausman, a corp can exist as a de facto entity by what it does and claims to do

G. Hypo #2 – essentially facts of Cranson v. IBM

1. Not liable – good-faith, under de facto Formation Doctrine

2. Never filed anything, or even sent anything in, but being told by a lawyer there was a corporation there, that is enough

H. Estoppel – can’t deny the statement (party usually wanting the statement of a corp existing to not be allowed denial)

1. Statement of fact

2. Reliance that is

3. Reasonable

4. To the detriment

II. Governing Documents (Chapter 2)

A. Statutes and Questions

1. [Certificate Amendments] TBOC §§ 3.051; 3.052; 3.053; 3.054; 3.056(a); 4.152(2); 21,052; 21.053; 21.054; 21.055; 21.364(a)(1), (b), (c), (d), (c), (e).

2. [Bylaws] TBOC §§ 21.057, 21.058

3. [Duty to Keep Records and Allow Inspection] TBOC §§ 3.151, 3.153, 21.173, 21.218,21.219, 21.220, 21.222

4. [Voting Agreement] TBOC §§ 6.251, 6.252

5. [Shareholder Agreements] TBOC §§ 21.101, 21.102, 21.103, 21.104, 21.105, 21.106, 21.107, 21.109

a. It is allowed under 3.005(b) – though not most likely place

b. An amendment to a certificate of formation must be filed – 3.052(b) – a filing entity that amends its certific

erson who will perform the functions

c. Number of shares: the corporation is authorized to issue àEven if corp. does not plan to actually issue that many

d. IF corp. issues one class of shares only:

i. The par value of each share OR

ii. A statement that each share is without par value;

e. If Corp. Issues More than One Class: with respect to each class:

i. designation of the class;

ii. aggregate number of shares in the class;

iii. par value of each share or a statement that each share is without par value;

iv. preferences, limitations, and relative rights of the shares; and

v. if the shares in a class consist of more than one series, the following with respect to each series:

(1) the designation of the series;

(2) the aggregate number of shares in the series;

(3) any preferences, limitations, and relative rights of the shares to the extent provided in the certificate of formation; and

(4) any authority vested in the board of directors to establish the series and set and determine the preferences, limitations, and relative rights of the series.

f. Preemptive Right: SHs of corp. do not have unless it is in CoF

i. To acquire proportional unissued treasury shares when corp. issues the treasury shares

g. Cumulative Voting Right: SHs of corp. do not have unless it is in CoF

i. When electing directors, cumulate SH votes by giving one candidate as many votes as the total of the number of director seats open

D. Amendments to the Certificate

1. Limits to Amending: Provision cannot be added/eliminated from CoF if that addition/deletion would NOT have been allowed for a new CoF being filed

2. Voting rights: Any class of SHs who would be adversely affected by amendment, must approve the it by majority vote

a. EX: a particular amendment would eliminate the accrued dividends owed to preferred stockholdersà which would help the common SHs at the preferred SHs expense

E. Signed: Must be signed by officer

F. Effect: An amendment to a CoF takes effect when the filing of the certificate of amendment takes effect

G. Fees: For Profit à $150; Non-Profit à $125

H. Voting and Approval of Amendment

1. a “fundamental action”

2. The BoD may amend w/o SH approval

a. IF a corp. does not have any issued and outstanding shares; OR

b. IF expressly authorized by the corp.’s CoF

c. In all other instances, SH approval required

3. Requires: an affirmative vote of the holders of at least 2/3 of the outstanding shares entitled to vote on the fundamental action

4. Class and Series: IF a class/series of shares is entitled to vote as a class/series

a. Requires affirmative vote of holders of at least 2/3 of the outstanding shares in each class/series

b. And at least 2/3 of the outstanding shares otherwise entitled to vote on the action

c. But, shares entitled to vote as a class/series shall be entitled to vote ONLY as a class/series

i. UNLESS, otherwise entitled to vote on each matter submitted to the SH generally or otherwise provided by CoF

5. Separate voting by a class/series of shares (even if otherwise do not have right to vote under the CoF) is required for approval of amendment that would result in a change to that class/series

I. Recap: Overall Amendment Procedure

1. First, BoD adopts a resolution of proposal of amendment

2. Second, BoD submits resolution to SHs via meeting

3. Third, SH must receive written notice of meeting containing the proposed amendment or summary of

4. Fourth, at the meeting the amendment will be adopted ONLY on receiving affirmative vote of SHs entitled to vote

a. Likely 2/3 of outstanding shares of SHs entitled to vote

5. NOTE: an unlimited number of amendments may be submitted for adoption by the SHs at a meeting