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

Ricks | Corporations | Spring 2018

Formation of Corporations

Types of corporations



General powers: same power as an individual to carry out affairs

sue, be sued, defend suit
have, use, and alter a seal
become indebted
acquire its own bonds, debts, or interests (and dispose of or hold in treasury)
elect officers/agents, and set their terms
adopt/amend government documents
make donations for the public welfare or for a charitable, scientific, or educational purpose
voluntarily windup
take action to aid governmental policy
renounce corporate opportunities
take other action necessary or appropriate to further the purposes of the entity

Constitutional rights

Internal affairs doctrine: the law of the state of incorporation governs the internal affairs of a corporation, including such matters as who votes, on what, and how often
Ultra vires acts

corporation’s lack of capacity may not be basis of claim or defense
act or transfer of property is not invalid, even if

beyond scope/purposes of corporation or
inconsistent with a limitation as is expressed in the certificate of formation

Formation theories

De jure/de facto corporation

De jure: complies with all statutory requirements
De facto corporation doctrine (Hausman)

law under which the corporation might be organized
an attempt to organize the corporation AND
an exercise of corporate powers thereafter

Formation by estoppel

a person makes a statement to another (a corporation has formed)
the other relies on that statement
to the other’s detriment
the effect is that the statement cannot be denied in court

Governing Documents

Shareholder rights to inspect

Shareholder list

to be entitled to inspect, must state a purpose reasonably related to its interest as a shareholder

presumed to have a proper purpose
if the stated purpose is so indefinite, doubtful, uncertain, then the presumption may be rebutted

Book and records

shareholder has burden of establishing a proper record

purpose must not be adverse to the corporation’s interest
the court will compel production of records only if they are “essential and sufficient” for the shareholder’s purpose

Shareholder voting

straight voting: each shareholder has one vote per office, but each director runs for a separate office
cumulative voting: each share gets one vote per office

directors run for the board at large
the shareholder can cast all three votes, or cumulate the votes, for one person

Limitations of shareholder agreements

shareholders may lawfully contract with each other to vote a certain way for themselves or for the majority of the group

voting agreements binding as a contract

court may reject votes of a shareholder if the voting violates another person’s rights
Unenforceable agreements

provisions of contract requiring directors to select and maintain certain individuals as corporate officers

The Corporate Form

General corporation attributes

forms on filing
gives limited liability to owners
is perpetual
keeps the capital (it cannot be withdrawn)
has centralized (delegated) management

Voting trusts and agreements

any number of owners can enter into a voting trust to grant a trustee right to vote or represent shares
agreements must be filed with domestic entity


to make a principal liable on a contract, an agent must disclose the principal’s existence and identity. If the agent forming a contract does this, the agent is not liable
actual authority

manifestation of intent by the principal that the agent is authorized, such that
the agent actually believes
reasonably, that the agent is authorized

apparent authority (Jennings): authority that the principal isn’t actually granted, but knowingly permits the agent to exercise or holds him out as posse

rtificate of formation, a contract, or governing documents

transfer restrictions

shares generally transferable
restrictions can be imposed on transfer, registration, or ownership by

certificate of formation or bylaws
contract if corporation files copy at principal place of business/registered office AND copy is subject to same shareholder examination rules

valid if they are reasonable and

preemptive rights
contract to transfer the shares
provides for consent to specific transfers or approvals of transferees to prevent violation of law
prevents transfers to specific persons so long as not manifestly unreasonable
maintains the status of the corporation
retains tax advantage
requires holders of the shares to transfer the shares upon a certain event

presumed reasonable if for legal or tax purposes

Capital Structure and Finance



authorized: those authorized by the certificate
treasury: held by the corporation, except as a fiduciary

optional characteristics

automatic buyback/redemption provisions
establish whether distributions will be cumulative, partially cumulative, or non-cumulative
create superiority to distributions or net assets
are exchangeable/convertible for other consideration at the request of the corporation, shareholder, or other person
shares without par value may not be converted to those with par value unless

stated capital of the converted shares is at least equal to the stated capital of the par value share OR
if the difference can be transferred surplus to stated capital