Select Page

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

Corporations Ricks Fall 2016

Formation of Corporations – 1

Governing Authority

Board of Directors
Owned by shareholders

Shareholders

Interest in share of profits & losses
Right to receive distributions

Corporations have ability to:

1. Sue

5. Hire agents; employees

2. Borrow Money

6. Make donations

3. Be a partner in a partnership

7. Pay Taxes

4. Lend Money

8. Protest Taxes

Corporation’s powers may be limited by the Certificate of formations

A corporation’s purpose may be limited, but can still transfer property

Exception: Ultra Vires Act – A shareholder may enjoin the performance of an act or transfer

A corporation can form de jure – on acknowledgment of the filing of a certificate of formation issued by the filing officer

The State must recognize as conclusive evidence of formation & existence

De Facto incorporation:

Must show:

A colorable attempt to comply with the statutes of incorporation

Attempt in good faith to file

An exercise of corporate powers thereafter (use of corporate name)

Corporation Characteristics

Exists perpetually – unless otherwise provided for in the governing docs.
Limited Liability
Free Transferability of Shares
Centralized Government

Governing Documents -2

Certificate of Formation – Must State:

Name of filing entity –

Cannot be the same or deceptively similar to existing name; must contain the word company, corporation, incorporated or limited

Purpose – can include social purpose
Street address of initial registered office and name of agent
Aggregate number of shares & Par-value OR that no par-value
Name the initial board – (until the first meeting of shareholders)
Must be signed by a person authorized by the code to act on behalf of the entity

Must have the capacity to contract for himself or others
Must be filed with the Secretary of State

$300.00 fee
Takes effect upon filing
The law of the State in which the Corporation is formed governs the corporation.

Certificate of Formation Amendments

Must be filed – signed and file like the original

If shares been issued – a majority of the directors sign for an amendment
Takes effect upon filing

$150.00 fee

If shares issued or if the amendment relates to a series of shares established by the board – need the affirmative vote of 2/3 of the shareholders

Any fundamental action requires an affirmative vote of 2/3 of outstanding shares

Unless stated in the certificate – If amendment results in increase or decrease of the aggregate number of shares in a series or class; the increase or decrease of par value; or exchange, reclassification or cancellation – requires voting by the class or series

Bylaws

Initially adopted by the Board of Directors

Certificate of Formation trumps the bylaws

The Board can amend/repeal/adopt bylaws –

Unless the Certificate gives that right to shareholders OR a bylaw expressly says they cannot

Certificate can reserve powers to the shareholders entirely or in part

Shareholders can also amend/adopt /repeal –

certificate provides otherwise can be limited by certificate or bylaws

Limitation on powers should be in the Certificate to avoid constant changing of the bylaws

Record and Accounts

Corporation must keep books and records of accounts – including all current and past shareholders
Upon a written request, must produce an annual statement to a shareholder
Shareholders have a right to examine the corporate records

If permission denied – sue for damages incurred in enforcing the rights of the shareholder

Request for Shareholder List:

Shareholder is presumed to have a proper purpose – burden on corporation to rebut – only if purpose is indefinite or doubtful will presumption be rebutted

Request for Books & Records:

Higher burden- Shareholder has the burden of establishing proper purpose

Not adverse to the corp. interest & only essential & sufficient to effectuate purpose

Voting Trust

Shareholders may enter into a voting trust agreement to confer a trustee with their rights to vote.

The agreement must be written; deposited at the principal office; subject to examination by any sh

Cash

Contract for services

Promissory note

Security of the corporation

Board decides on value of consideration
Consideration may not be for less than a stated par-value

Limited Liability

Shareholders, as shareholder status alone, have no liability for debts or obligations of the corporation

Cannot lose more than the amount invested

However, they can personally contract to be a corporate guarantor

Public Policy – Encourage investment in equity securities

Decreases need to monitor managers

Increases diversification; Minimizing risk

Reduces cost of monitoring other shareholders
Free Transfers of Shares – poorly run firms will attract new investors to install new management

Centralized Management

Agency problems mitigated – Management appointed by board – Board elected by shareholders

Share Ownership

Preemptive Rights – right to purchase additional shares before the general public

Not a default share option
Allows a shareholder to retain the same voting power
Preferred Shares cannot have preemptive rights
Preemptive rights can be waived

But upon waiver cannot be retracted
A limitation period for violations of preemptive rights exists to not delay the issuance of shares

Unless specifically assigned, preemptive rights Do Not run with the shares

Transferable Shares

Personal legal property, transferred with all rights

Permits firms to conduct business uninterrupted
Creditworthiness of firm not tied to individual shareholders
Provides for liquidity

Transfer Restrictions

Transferability can be limited by agreement
A transfer restriction can run with a share if – Conspicuously noted on the share