Mechanics of Incorporation:
1. Selection, clearance and reservation of corporate name:
i. Checking to see if any other business is using that corporate name
2. Securing pre-incorporation share subscriptions:
3. Arrange for an office and in-state agent:
4. Draft Articles of Incorporation:
A. The way that the corporation will be run
B. Look to the state law to determine what is required in the articles
i. Two types of provisions:
1). Look to state incorporation code to determine what’s required
a.) Corporate name, # of shares issued, street address, agent’s name, etc.
C. You have to file the articles w/ the secretary of state in the state that you’re incorporating with
i. The corporation comes into existence when filed (in most states) and that’s important b/c it makes the shareholders less liable
ii. Incorporators (initial directors) must sign the articles of incorporation for filing:
5. Draft Bylaws:
A. More in-depth than articles of incorporation
B. These contain any provision for managing the business and regulating the affairs of the corp.
i. These cannot conflict w/ state statute or with the articles
ii. Other than that, they’re pretty free to include anything
C. Bylaws may be amended or repealed by:
ii. Board of Directors, UNLESS:
a. The articles of incorporation reserve that power to the shareholders OR
b. The shareholders expressly say that the Board CAN’T amend or repeal the bylaws
6. Hold organization meeting of directors:
7. Comply w/ federal and state securities law, if necessary:
8. Secure payment of share subscriptions by subscribers:
9. Issue shares of stock:
10. Qualify to do business in other states as foreign corp.:
A. Individuals acting on behalf of a corporation that is to be formed
i. Determining whether the corporation is liable for the acts of a promoter
ii. Unless there is an express or implied agreement to the contrary, promoters are generally personally liable on their pre-incorporation contracts even though the contracts are made on behalf of the corporation to be formed
C. 5 theories on how liability of the corp. can arise from promoter’s acts:
a. Corporation takes the rights and obligations of a promoter and makes them their own
a. Corporation accepts an act made on its behalf by an agent
iii. Acceptance of a continuing offer:
a. Continuing proposal; corporation accepts proposal after it comes into existence
iv. Formation of a contract:
a. The corporation is substituted for the promoter in the original contract
D. De facto/Corporation by Estoppel:
i. De Facto:
a. Situation where the corporation has been improperly formed but there was a good faith effort to incorporate
b. Courts REFUSE to hold the members of the corporation PERSONALLY liable
c. 3 elements:
1). The existence of law authorizing incorporation
2). An effort in good faith to incorporate under the existing law
3). Actual user or exercise of corporate powers
ii. Corporation by Estoppel:
a. The person seeking to hold the officer personally liable has contracted or otherwise dealt w/ the association in such a manner as to recognize and in effect admit its existence as a corporate body.
b. A person can deal w/ an individual as if they are a corporation and then turn around and try to hold the person personally liable
Financing the Corporation/Capitalization:
Piercing the Corporate Veil:
1. Intro: Creditors will try to pierce the veil
A. Holding a shareholder personally liable for debts of the corporation merely b/c they’re a shareholder…not b/c of their status as an agent or personal guarantor
i. Piercing the corporate veil does NOT apply when:
a. The owner acts as an agent of the corp.
1). However, this is another way owner can be personally liable.
b. The owner becomes a guarantor of the debts of the corp.,
1). Even though it exposes owner to personal liability.
B. Normally, shareholders are PROTECTED from the liability and debt of the corporation
C. Piercing the corporate veil ONLY applies to closely held corporations…never applies to public corps.
i. Relatively few shareholders
ii. Most, if not all of the shareholders are active in the management of the business.
iii. No ready market for the stock of these corps
A. Step 1:
i. What type of creditor is trying to pierce?
1). Ones that can protect themselves in advance…i.e. banks, lenders, secured creditors etc.
a.) Can require cash up front, take security interests, can look at balance sheet and get personal guarantees
2). Ordinary consumers dealing w/ corps. are not norm
very jurisdiction allows a corp. to use an “all purpose” clause in their articles
1). All-purpose clause:
a.) The purpose of the corp. is to transact any business that may lawfully be transacted
b. Modern Remedy:
1). State legislatures have adopted remedies
2). Go after the directors that enter into the contract
2. Corporate Responsibility:
A. Powers of corp. to do things that don’t have an immediate impact on the corp.
i. Example: charitable contributions, giving corp. assets to widows, putting $ back into corp. rather than paying dividends, etc.
B. Today, most states say that if contributions are REASONABLE or are for a credible business purpose, then there is no problem
Management of the Corporation:
1. The affairs of the corp. must be managed under the direction of the Board of Directors
2. Hierarchy of Authority w/in Corp.:
B. Articles of Incorporation
3. Shareholders can elect directors
A. They can’t make decisions unless there is a meeting
B. Every corporation has an annual meeting were they elect the board of directors
i. 1 share = 1 vote…not 1 person = 1 vote
C. Special meetings
i. These are in between the annual meetings and must be approved by enough shareholders
4. Shareholders can remove directors
A. For cause:
i. Always have the right to remove directors for cause
a. Ex: fraud, violation of fiduciary duty, etc.
1). Simply disagreeing w/ a director’s way of doing things is not for cause
ii. When shareholders attempt to remove a director for cause, there must be:
a. Service of specific charges
b. Adequate notice
c. Reasonable opportunity to be heard
B. W/o cause:
i. State statutes permit removal w/o cause
a. If the board is elected to staggered terms, cannot remove directors w/o cause
5. Powers and Mechanics of Corporate Action:
A. The board of directors must act as a group, not as individuals