BUSINESS ASSOCIATION COYLE SPRING 2015
Promoter liability
1. §2.04 MBCA àre: pre-incorporation liability for promoters
o all persons purporting to act as/on behalf of corp, KNOWING there’s no corp yet, are jointly & severally liable for liabilities incurred while so acting
o Where the corporation either never comes into existence or rejects the preformation contract negotiated for its promoters, or ratifies preformation contracts but never performs or pays as agreed, the other party to the contract frequently attempts to hold the promoters personally liable.
2. Case:
O’Rorke v Geary
Rule: agency theory doesn’t apply here b/c corporation didn’t exist yet;
o Agencyàactual vs. apparent authority; Geary had no actual authority b/c the corporation didn’t exist (if no principle, no agency); Geary also lacks apparent authority (b/c 3P must infer the apparent authority from the principle, but without an existing principal
3. what steps should we advise G to avoid liability here?:
a) Ex ante solution: Use the magic world: “on behalf and solely on the credit of a yet-to-be-formed corporation
Ex Post Solution:
b) Corporation could assume the contractà ratification: so they pull out Geary name from the contract and put the name of the corporation into it.
o Corporation may expressly ratify or adopt promoters’ contracts by a resolution by the BoD. The ratification may be express or may implied.
c) Novation
o Have corporation (once formed) adopt the contract
o Need consent from other party. Parties hereby agree that Geary is no longer a party + O’rorke shall look exclusively to assets of Corp.
o That’ll mean the parties = O’Rorke, Geary, AND corporation
o Get Geary’s name off the K via novation (substitution of one party for another in a contract; requires consent of all parties; can offer consideration to obstinate parties to accept the novation)
d) Geary Pays the O’Rorke, then gets the reimbursed by Corp
4. Restatement § 5.04 (2d ed. 2003)
a. Adoption. Adoption occurs when a corporation takes the contract rights and obligations of the promoter and make them its own;
b. Ratification. It’s the corporation acceptance of an act purportedly made on its behalf by an agent.
c. Acceptance of continuing offer. In this circumstances, a person who is not a party to a contract become a party by adoption. This theory is that the original promoter’s contract is in the nature of continuing proposal, which the corporation may accept when it comes into existence.
d. Formation of a new contract. Corporation’s adoption of a promoter’s contract is nothing more than the making of a new contract.
e. Novation. Whenever the parties to a promoter’s contract anticipate that the corporation when formed will accept the contract and take over its performance, the contract is to be viewed as contemplating a novation by which the corporation, when it assents after organization, is substitute to the promoter.
5. NOTE. Where the parties do not clearly intends to hold only the corporation liable, the promoters are liable and remain liable even if the corporation adopts or ratifies the contract after it is formed.
Incorporation mechanics
6. 2 key documents:
o Articles of incorporation = govern its operation
o Bylaws = tell you how things work, outline procedures, subordinate to articles of incorporation, usually far easier to change bylaws; bylaws include procedural details.
7. Defects in Formation Process: De Jure Corporation, De Facto and Corporation by Estoppel
a. De jure Corporationà all done right.
b. De Facto Corporationsà Bona fide attempt to comply with law creates de facto corporation.
o Here, the step to form a corporation is insufficient compliance to constitute a de jure corporation, but the step taken toward formation are sufficient to treat the corporation with to respect to its dealings with third parties.
o Pocahontas fuel v Tarboroà Ct holds no personal liability for defective incorp b/c of bona fide attempt to comply with the law creates de facto corporation
o MBCA § 2.04 notes there are 5 classes of cases where the issue of a de jure corporation may arise:
(a) The participant honestly and reasonably believes the certificate of corporation has been filed by the attorney when, in fact, it has not been;
(b) The article of corporation are mailed to the Secretary of State but are delayed or return by the Secretary do to some error;
(c) A third party agrees to enter into contract with a company in its corporate name even though the third party knows that the company has not filed its charter;
(d) A defendant enter into a contract on behalf of a company even though its charter has not been filed. The opposite party, however, dealt with the defective corporation and not with the defendants as an individual;
(e) A passive investor provides funds with the instruction not to engage in business until the article of corporation are filed, but business is commence anyway before incorporation.
c. Corp by estoppelà if the parties to a transaction treat a business entity as if it were a corporation, they may be estopped from later denying the corporation’s existence.
o One party has dealt with another expecting limited liability + is estopped from going back on that.
o Cranson v IBMà Ct holds C is NOT personally liable, via corp by estoppel
o IBM dealt w/ the company as though it were a corporation, relied on its credit rather than Cranson’s; this estops IBM from asserting its NOT a corporation just b/c it’s now convenient to do that (again, reading 3Ps mind, avoiding windfall)
CAPITAL FORMATION-Financing the corporation
8. When somebody give their money for your business, what are the methods?
a. Debt/bond (borrow the $);
o Contract claim
o If payment is missedà default
b. Equityà Stock are simply certificates that reflect an ownership interest in a corporation
(1) Common stockà Common stocks usually confer the right to vote to elect the board of directors and to vote on other issues submitted to the shareholders (in order to take control of the corp)
o default rule = all stock is common stock, but this can change when investors negotiate for preferred stock.
c. Preferred stockà priority for dividends; but the often have no voting right
Liquidation
i. Debtholders;
ii. Preferred shareholders
iii. Common Stockholders
d. Retained earnings (use profits to fund business; doesn’t work for newly founded company)
PUBLIC v. PRIVATE COMPANY
9. A privately held company has fewer shareholders and its owners don’t have to disclose much information about the company;
10. Public companies have thousands of shareholders and are subject to strict rules and regulations;
11. 3 recourses for unhappy public s/h:
o Sell your shares (allows you to get out, signals disapproval)
o Vote for different directors at annual meeting in the hopes they’ll replace the managers with better ones
o Sue
12. Other alternatives to fund your corporation/IPO
Mutual Funds
Private Equity Funds
Venture Capital Funds
Hedge Funds
Other Sources of Capital
Who
Anyone
Accredited investor
Qualified Institute Buyer: mutual funds, hedge fund
Accredited investor
Qualified Institute Buyer: mutual funds,
Friend
Family
Angels investorsà wealthy people
Banksàto find a loan
Credit cards
Public securities
Crowdfunding sites (kick starter, lending club)
What is used to do
a. Money market:
b. liquid but low yield of investment (gold, etc)
c. Bond market (debt)
d. Stock market (stock)
Buy a whole company
Stake in a small company tech biotech or rapid growth industry
Public stock
Foreign exchange
everything
Why
a. Professional manager (to manage your money)
b. Diversification
c. Affordable
d. Liquid
a. Professional manager
b. Access to opportunity which not available to regular investor
c. Possibility of huge return of investment
Why Not
a. Performance issuesà the manager get pay regardless
b. No control over the manager
a. Illiquidàthey will keep your money for min 7 years
b. Not affordable (min $2500)
c. Management fees are huge
d. No control
=
with the CAVEAT:
Huge failure rate
a. Illiquidàthey will keep your money for min 7 years
b. Not affordable (min $2500)
c. Management fees are huge
d. No control
Scope/misuse of corps form (suits by corporate creditors against shareholders)
13. Piercing the Corporate Veilà personal li
the officer or director;
b) The state can sue a corporation to enjoin it from transacting unauthorized business;
c) A shareholder can sue to enjoin performance of an ultra vires act if all parties to the contract are made parties to the suit and injunctive relief would be adequately.
21. Classic case. Wiswall v Greenville & Raleigh Plank Road Coà stated purpose in corporation charter = build road; s/h sue directors, who seek to buy stages & secure mail delivery K. Court held this is outside the scope of the charter.
22. Modern case. Cross v Midtown Clubà lunch club that doesn’t allow ladies, P sues b/c he wants to eat with his lady-friend, arguing nothing in charter mentions ladies or excluding them, therefore its Ultra Vires. Court held excluding ladies isn’t expressly authorized.
Corporate Citizenship & social responsibility
23. MBCA 3.02(13); DGCL 122.9 = statutory reflections of broader trend of allowing donations to charity for public welfare (but doesn’t necessarily apply re: individuals)
o So, today basically if your corporation want to give money for charity is always permitted unless the corporate charter forbid it (which now almost never we can find that kind of charter).
24. Wiswall; Cross; Smith; Adams and Dodge
Wiswall
Cross
AP Smith Mfg
Adams
Dodge
Charterà Corporation purpose=
Build plank to build road from Gille to Raleigh
– run mail service
– basically their change their business plan
o Ct holds P is correct, this is outside the scope of the charter ($ stays with corporation, not necessarily for dividends, could be used for upkeep, finishing the road, etc)
Purposesàto provide facilities for srving of luncheon or other meals to members
àOnly men.
No women as guest or members.
o Ct agrees, excluding ladies isn’t expressly authorized, nor is it necessary or convenient to fulfill the charter’s stated purposes
Corporate Charter is silent as to power to give money to worthy causes (Princeton)
Adams v Smith
Corp chapter is silentà payments to widows
Dodge v Ford Motor Co
No dividends, lower price of cars: Ford wants to use the $ to reinvest/expand his business, create more plants, more jobs, buy iron mines, ships for transport
Dodge refuse the plan, he want more dividends for his share in the corporation.
Dodge sought an injunction to stop the Ford decision
Ultra vires
Ultra vires (but Coyle think this was not right)
Court hold: permitting charitable contributions; this is basically OK
Ct holds on this point that P is rightàthis isn’t allowed
The general rule is that the objective of the business corporation is to conduct business activity with a view to corporate profit and shareholder gain
Ct orders Ford to distribute the special dividend
Corporate Social Responsibility 2 models:
Shareholder primacy ruleà shareholder interest is always placed in the first place; corporation exists to benefit investors
Stakeholder ruleà stakeholders mean all the people around the corporation (employee, distributor, etc); Stakeholder = EVERYBODY who has anything to do with you has an interestàcustomers, employees, suppliers, etc.
25. Better alternative (if you are attny): put the policy in the bylaws/charter OR put it in all the officers’ employment contracts (then there’s sufficient consideration to pay widows as 3rd P beneficiaries of their dead husband executive Ks).
o This scheme make the payment not as a gift but it’s part of the contractual obligation rendered as part of employment contract.
MANAGEMENT OF CORPORATIONS
