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Business Associations/Corporations
Southern Illinois University School of Law
Brittingham, Mark A.

Brittingham

Corporations

Fall 2012

S corporations- same limitation of liability that a C corp has. No double tax because profits and losses go to shareholders.

LLC- provide all the benefits of a corporation and a partnership, without the disadvantages of an S corporation. Taxed as parternship. Limited liability. No limit on number or types of owners.

With the IRS you decide how you want to be taxed.

Where to incorporate: generally locally makes most sense. Fortune 500 or publicly traded are incorporated in state of Delaware because the state taxes were favorable and state law doesn’t change very much. Would have to defend suit in state where incorporated.

Have to give a registered office and agent with secretary of state. To get notice for official papers. Registered agent is usually the attorney. Many did this to generate more work.

Corporation documents- pre incorp agreement, articles of incorporation, by laws, organizational resolutions/ minutes, shareholder agreement, employment agreement, stock certificates and records,

Shareholder agreement necessary to take care of deadlock. Put to call- one shareholder offers another a good faith offer knowing that offeree can turn the offer around on the offeror. Helps buyouts to stop deadlock.

Name- must be original. Cant be confusingly similar to another corp. in the state of incorporation. Must include inc. co. ltd. Etc can reserve name for 90 days. Cant include insurance or bank.

Board of directors- manage corporations business and affairs. Elected by shareholders.

Must meet annually. May act by consent even in lieu of an annual meeting. MUST KEEP MINUTES

Annual report & franchise tax- names and address of corporate directors, shares, location and value of property. Franchise tax: 1/10 of 1% of paid in capital.

Corporate Powers:

Ultra vires- outside the scope of corporation’s powers.

B. Corporate Purposes/Powers

1. Purposes (RMBCA § 3.01, p. 578) a. What the business specifically intends to do

b. Ultra Vires (“beyond the power”) usually goes toward purpose of the corporation

2. Powers

a. What the business specifically is allowed to do

b. Enabling authorities that a corporation needs to carry out its purposes

c. See RMBCA § 3.02, p. 578 for list of powers corporation has

3. 711 Kings Hwy Corp. v. F.I.M.’s Marine Repair (1966), p. 263

K was to lease property of movie theater to Def. Purpose of corporation was marine activities (building boats, repairs). Pl. corp. is leasor and wants to break lease; seeks declaratory judgment to declare lease invalid. On Motion to dismiss or in alternative Motion for Summary Judgment

a. RULE: NY Statute (§ 203 NY Business Corp Law) limited use of Ultra Vires doctrine to 3 circumstances:

i. In an action brought by shareholder to enjoin a corporate act

ii. In an action by or in the right of a corporation against an incumbent or former officer or director of

the corporation; or

iii. In an action or special proceeding brought by the Attorney General

b. If act is otherwise legal, it can’t be held invalid based solely on a lack of capacity (except for 3 situations above)

c. Example of legislatures limiting unfair use of Ultra Vires

d. RMCBA § 3.04, p. 602 (very similar to the NY, NJ acts)

i. Validity of corporate action may not be challenged

Sullivan v. Hammer- shareholders want dividends rather than this frivolous spending. A settlement is reached. Court approved settlement.

This is the business judgment rule Presumption that when directors make a business decision they are acting on an informed basis and good faith in best interest of the company. The shareholders would have to rebut that presumption. Nearly impossible to overcome. Unless illegal. Brittingham hates it.

V. PREMATURE COMMENCEMENT OF BUSINESS

This refers to the early stages of a business

A. Promoters 1. Any person who, acting alone or in conjunction with others, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer (e.g., buying, leasing property, arranging borrowing of money, hiring employees)

2. Fiduciary Duty- a. Promoter owes a fiduciary duty to the company and not toward herself personally. Example, the promoter goes out and buys property for 300K and then sells that property to the company for 350K. Here, the promoter used its power and information to work for himself and not for the company.

b. Also owes duty to co-promoters

c. Full disclosure, which includes: i. Duty to refrain from misrepresenting any material facts; and

ii. Duty to make known any personal interests in any transaction relating to the company

d. Act in good faith

e. High standard of honesty and frankness

f. No self-dealing; secret profit-making

g. Command dedication of corporate funds to corporate purposes

h. Breach of fiduciary duty is in itself a cause of action.

Could also be a tort (misrepresentation of material fact) or in contract (mischaracterization)

i. Promoter is liable for common law fraud in event of misrepresentation. Liable to subsequent investors, creditors, and co-promoters

3. The Legal Relationships: a. Between Promoter and company to act in its best interest and to shareholders’ interest (when added) Fiduciary duty that the promoter owes to the company.

i. HYPO – Promoter buys land, paying $200K. Forms corp., gets investors and borrows money. He sells land to corp. for $250K

ii. RULE – Promoter has duty to act in interest of the corporation

0, p. 460 –holds that filing Articles of Incorporation cuts off personal liability. Conversely, here the rule is that the issuance of the certificate of incorporations provides the cut-off point … before issued, personal liability

In situation where attorney screws up brittingham thinks that the corp should be liable then they go after attorney.

Rule: If you act before you receive official documentation then you are personally liable. If you represent the seller don’t let them do business until all incorporating material is completing. If represent the buyer then have them get a personal guarantee.

Frontier Refining Company v. Kunkel’s Inc., 407 P.2d 880 (1965)

Kunkel contracts to take over a petrol station

Refining company insists on Kunkel incorporating

Kunkel held out that he had incorporated

Kunkel submitted his personal financial statement to Frontier

Fairfield denied that Frontier spoke to him about requirement to incorporate

Kunkel signs Ks as Clifford D. Kunkel DBA Kunkel’s Inc.

When he goes bust and disappears, the Refining Company is on the hook for the bill of petrol sold to Kunkel’s

Fairfield and Beach signed to support Kunkel’s business, so they were sued as individually liable

Ct said they were not liable because they did not agree to be partners (all liable), they only agreed that Kunkel would incorporate

MBCA 2.04 – statute does not recognize de jure or de facto corporations; but ct inferred from the indebtedness that the co was not incorporated because of the DBA (doing business as) designation by Kunkel

Fairfield and Beach did not hold themselves out as part of Kunkel’s

But Frontier extended credit and obtained a chattel mortgage from Kunkel individually and DBA Kunkel’s, giving up their claim against Fairfield and Beach

Comes down to who is in the better position to bear the responsibility

Frontier should have done due diligence to check and ensure Kunkel was incorporated

Burden of proof is on Frontier. Brittingham says that the court can decide these cases by putting burden of proof on either party. Can be decided on how you make your claim.