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Business Associations/Corporations
South Texas College of Law Houston
Carson, Loftus C.

Background/Development of Corporate Law

I. Alternative Business Forms
a. Proprietorship
b. Partnership
c. Limited partnership and limited liability partnership (one or more general partners who are unlimitedly liable and one or more limited partners who aren’t liable).
d. Limited Liability Company- the newest alternative.
e. Corporation
i. An S Corp is simply a tax entity. Must have 75 or fewer interest holders, among other limitations.

I. The Corporate Formation

I. MBCA §8.01(a) requires a board of directors unless eliminated by agreement (MBCA §7.32).
II. Articles of Incorporation (§2.01-2.07)
a. Incorporators
i. One or more persons may act as an incorporator, which may be a receptionist at the company doing the incorporating. So, the incorp not significant.
ii. Usually the incorporators perform no practical function once they have signed the incorporation papers.
b. Only §2.02(a) is required. Contact info. for Initial Directors-Don’t put in b/c that’s how crazy people find out where you are.
i. The Name §4.01
1. When Esso changed is name to Exxon, in some of the states the right to “Exxon” was already purchased after publicity and they had to pay a lot to get the name.
2. The name cannot be “substantially similar” to a name already in use.
3. Fictitious Name Statutes- when a company buys the goodwill of another company and uses their name but the corp is different.
4. Make sure name is available.
ii. Number of shares Corp Authorized to Issue (§2.02a2)
1. This number should be substantially more than the corporation plans to issue in the near future, so that if more shares need to be issued the articles of incorporation will not need to amended by shareholder vote.
2. 6.01 AoI must set forth any class of shares and series of shares that Corp is authorized to issue, and the No of shares of each class. See next chapter.
3. 6.02 Blank check preferred File Certificate of designations (terms including the preferences, rights, and limitations for each class) which does not need Shldrs approval. Dlwr 151.
iii. Office address
iv. Name & address of each incorporator
1. Secretary won’t check what address you’re at, but it’s important b/c that’s where you get served.
c. The articles can be amended only by a resolution of the board, and shareholder approval of the resolution.
d. Purpose § 3.01
i. The purpose clause is almost always as broad as possible. In fact, the MBCA eliminates the requirement of a purposes clause entirely (§2.02) and provides that every corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation (§3.01a).
ii. You can limit the purposes of a corporation. Several reasons on p. 217, but may subject to ultra vires.
iii. TX and most states have business corp statutes and non-profit statutes. DL has general corp statutes, which includes profit and non-profit. If you want a tax exemption under the non-profit statute, you MUST state the purpose.
iv. If it’s charitable, no division or liquidation of assets upon dissolution.
e. Secretary of State’s powers:
i. May NOT prescribe a mandatory form for AoI § 1.21(b), filing duties expressly defined as “ministerial” § 1.25(d), and he is expressly commanded to file a document if it “satisfies the requirements of Sec. 1.20 § 1.25(a). Many States granted greater review powers than provided in MBCA.

f. Regulation/Management of Business
i. Can put anything in here that you want, or put nothing, w/ an exception: 6.30 says the default rule is that there are no preemptive rights, unless you state otherwise in the art of incorp that preemptive.
g. Limitation of Powers
i. Remember you can’t change this w/o shareholder approval.
h. Par Value Shares
i. If you’re par value shares was 100 dollars, you had to get 100 dollars for each share. The legal capital is how much you got for your shares and the shareholders couldn’t get any distributions from the legal capital, only the profits. This was for the protection of unsecured credit. This changed in the 19th century. Corp lawyers separated the par value from the consideration price: for example 1 dollar par value sold for 100 times 10 shares, giving you 1k capital but only 10 dollars in legal capital. So, if the company made 1,500, you could pay out 1,490. The par value system no longer provided protection against unsecured creditors. Basically, the corporation must maintain assets equal to its par value. Theoretically, it’s a fund that creditors can look to. As a result, corporations aren’t allowed to issues dividends if assets fall to par value. Today, many corporations get around this be establishing a nominal par value. Receive at least par value and do not distribute so you intrude on a legal capital. Unsecured creditors now get the credit report and tailor their percentage to the risk of the particular debtor. No reliance on par value.
i. §2.02c – Powers
i. 3.02 (Powers) provides a laundry list of general powers. Needn’t provide for these powers in the articles b/c the default rules is that the corporation has them. You can, however, limit these.
j. §2.02d – Provisions may be made dependent upon facts outside of the articles of incorporation.
k. Limiting the Liability of the Directors
i. §2.20b4 limits the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except there is liability for:
1. The amount of a financial benefit received by a director to which he is not entitled.
2. An intentional infliction of harm on the corporation or the shareholders.
3. A violation of §8.33.
4. An intentional violation of criminal law.
5. This contravenes the CL. So, a provision in the articles wouldn’t have any force w/o a statute to back it up.
ii. Fiduciary duties: care (skillfulness) and loyalty (honesty). (b)(4) says there is no personal liability for the duty of care, but you can still get injunctive relief.
iii. (5) Indemnification- Basically gives you even more rights than the statute if you put it in the art of incorp, as long as it’s not against public policy.
l. Amending the Articles – see §10.01 and 10.04
i. Requires a vote of resolution by the board, and a vote of affirmation by the shareholders.
III. Registered Office and Agent
a. All states require corporations incorporate in the state to maintain a registered office and a registered agent at that office.
b. The registered office may be different than the principal place of business.

, unless the article of incorporation expressly limit the corporation’s powers, it will be deemed to have the power to engage in any lawful business activity.
b. Abolition of the UV Doctrine – §3.04
i. 3.04(a) says “the validity of corporate action may not be challenged on the ground that the corporation lacks of lacked power to act.” Exceptions:
1. 3.04(b): a suit brought by a shareholder to enjoin the corporate act if an injunction would be equitable, a suite by the corporation against a director or officer, or a suite brought by the state through Attorney General to enjoin the act.
2. 3.04(c): under (b)(1), the court may enjoin or set aside the act if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits) suffered by the corporation or another party because of enjoining the unauthorized act.
EX: A and B, UV for B. If A doesn’t know of the limitation, A’s ranks may not be effective. If A knows of the limitation and nonetheless enters the agreement w/ B, B can then void it. if both parties knew that it was ultra Vires, and especially if the Shareholder of B Corp can show that Corp A new (this is what equitable means), Crt will enjoin.
c. So, essentially the UV doctrine has viability when shareholders bring proceedings against corp; or Corp, directly or derivatively, against their officers and directors, taking the corp beyond either its purposes, powers, or both.

II. Premature Commencement

Problem of substantial, but not complete formal compliance w. prerequisites of the Statute in formation of Corp.:

De jure Corp: arises where there has been conformity w. mandatory conditions precedent, i.e. after certificate is issued under §2.03(a).
De facto Corp (presumably eliminated by MBCA §2.03 enactment): exists where

i. The existence of law authorizing incorporation;
ii. an effort in good faith to incorporate under existing law;
iii. actual use or exercise of corporate powers

Corp by estoppel – (presumably eliminated by MBCA §2.03 enactment), applied where a person seeking to hold the officer personally liable has contracted w. association in a manner that recognizes and admits its existence as a Corp.

i. Used when creditor dealt w. business as a Corp., and agreed to look at the Corp assets to satisfy the debt.
Innocent non-compliance: a person who is asserting the defense must NOT have KNOWN that incorp was defective. Happens when a Shldr relies on a third party (lawyer, promoter) to hande incopr, and, based on this person assurances, falsely but honestly