ADW Draft 9/25/11
AP edits 2/19/12
Chapter 7. Forming the Corporation
Sources Used in this Chapter
MBCA §§ 2.01, 2.02, 2.04, 2.05, 3.01, 3.02, 4.01, 5.01, 5.02, 6.01, 8.03, 14.20, 14.22
DGCL §§ 102
Restatement (Third) of Agency §6.04
ABA Model Rules of Professional Conduct, Rules 1.4, 1.6, 1.7, 1.13
Concepts for this Chapter
 Process of incorporation
o Contents of articles
o Formalities
 Role of lawyers
o Who is the client?
o Client confidences
o Lawyer as director
 Defective incorporation
o Corporation not formed: parties aware /parties not aware
o Corporation formed: dissolved by state /misused by parties
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A.
Process of Incorporation
1.
Formal Requirements
Question: Who forms a corporation?
Answer: The incorporators.
MBCA § 2.01. Incorporators
One or more persons may act as the incorporator or incorporators of a
corporation by delivering article of incorporation to the secretary of state for
filing.
Incorporation is available to multinational businesses and to individuals starting a
business in a garage. The corporate form is used by businesses of all sizes and types.
Question: How is a corporation formed?
Answer: The process of incorporation is simple. States have made incorporation
virtually painless and available to almost anyone seeking the advantages of the corporate
form.
The incorporators file articles of incorporation with the state - typically, the state's
"secretary of state" office. The articles of incorporation include information such as:
 the corporate name;
 the number of authorized shares, and
 the name and address of each incorporator.
MBCA§ 2.02. Articles of Incorporation.
(a)
The articles of incorporation must set forth:
(1) a corporate name for the corporation that satisfies the
requirements of section 4.01;
(2) the number of shares the corporation is authorized to issue;
(3)
the street address of the corporation's initial registered office
and the name of its initial registered agent at that office; and
(4) the name and address of each incorporator.
The articles of incorporation may also information such as:
 the corporate purpose;
 provisions regulating the management of the corporation; and
 limitations on the power of the corporation and its shareholders, officers or
directors.
MBCA § 2.02. Articles of Incorporation.
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(b) The articles of incorporation may set forth:
(1) the names and addresses of the individuals who are to serve as the
initial directors;
(2) provisions not inconsistent with law regarding:
(i)
the purpose or purposes for which the corporation is organized;
(ii)
managing the business and regulating the affairs of the
corporation;
(iii) defining, limiting, and regulating the powers of the corporation,
its board of directors, and shareholders;
(iv) a par value for authorized shares or classes of shares;
(v) the imposition of personal liability on shareholders for the debts
of the corporation to a specified extent and upon specified
conditions;
(3) any provision that under this Act is required or permitted to be set forth
in the bylaws;
(4) a provision eliminating or limiting the liability of a director to the
corporation or its shareholders for money damages for any action
taken, or any failure to take any action, as a director, except liability
for (A) the amount of a financial benefit received by a director to
which he is not entitled; (B) an intentional infliction of harm on the
corporation or the shareholders; (C) a violation of section 8.33; or
(D) an intentional violation of criminal law; and
(5) a provision permitting or making obligatory indemnification of a
director for liability (as defined in section 8.50(5)) to any person for
any action taken, or any failure to take any action, as a director,
except liability for (A) receipt of a financial benefit to which he is
not entitled, (B) an intentional infliction of harm on the corporation
or its shareholders, (C) a violation of section 8.33 or (D) an
intentional violation of criminal law.
(c) The articles of incorporation need not set forth any of the corporate
powers enumerated in this Act.
(d) Provisions of the articles of incorporation may be made dependent upon
facts objectively ascertainable outside the articles of incorporation in
accordance with section 1.20(k).
Delaware law includes similar provisions.
DGCL § 102. Contents of certificate of incorporation.
(a)
The certificate of incorporation shall set forth:
(1)
The name of the corporation
***
(2)
The address . . . of the corporation's registered office in this
State, and the name of its registered agent at such address;
3
(3)
(b)
The nature of the business or purposes to be conducted or
promoted. It shall be sufficient to state, either alone or with
other businesses or purposes, that the purpose of the
corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation
Law of Delaware, and by such statement all lawful acts and
activities shall be within the purposes of the corporation,
except for express limitations, if any;
(4)
If the corporation is to be authorized to issue only 1 class of
stock, the total number of shares of stock which the
corporation shall have authority to issue and the par value of
each of such shares, or a statement that all such shares are to
be without par value. If the corporation is to be authorized to
issue more than 1 class of stock, the certificate of
incorporation shall set forth the total number of shares of all
classes of stock which the corporation shall have authority to
issue and the number of shares of each class and shall specify
each class the shares of which are to be without par value and
each class the shares of which are to have par value and the par
value of the shares of each such class.
***
(5)
The name and mailing address of the incorporator or
incorporators;
(6)
If the powers of the incorporator or incorporators are to
terminate upon the filing of the certificate of incorporation, the
names and mailing addresses of the persons who are to serve
as directors until the first annual meeting of stockholders or
until their successors are elected and qualify.
In addition to the matters required to be set forth in the certificate of
incorporation by subsection (a) of this section, the certificate of
incorporation may also contain any or all of the following matters:
(1)
Any provision for the management of the business and for the
conduct of the affairs of the corporation, and any provision
creating, defining, limiting and regulating the powers of the
corporation, the directors, and the stockholders, or any class of
the stockholders, or the governing body, members, or any class
or group of members of a nonstock corporation; if such
provisions are not contrary to the laws of this State. Any
provision which is required or permitted by any section of this
chapter to be stated in the bylaws may instead be stated in the
certificate of incorporation;
***
(3)
Such provisions as may be desired granting to the
holders of the stock of the corporation, or the holders of any
class or series of a class thereof, the preemptive right to
subscribe to any or all additional issues of stock of the
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(4)
(5)
(6)
(7)
corporation of any or all classes or series thereof, or to any
securities of the corporation convertible into such stock. No
stockholder shall have any preemptive right to subscribe to an
additional issue of stock or to any security convertible into
such stock unless, and except to the extent that, such right is
expressly granted to such stockholder in the certificate of
incorporation. * * *
Provisions requiring for any corporate action, the vote of a
larger portion of the stock or of any class or series thereof, or
of any other securities having voting power, or a larger number
of the directors, than is required by this chapter;
A provision limiting the duration of the corporation's existence
to a specified date; otherwise, the corporation shall have
perpetual existence;
A provision imposing personal liability for the debts of the
corporation on its stockholders to a specified extent and upon
specified conditions; otherwise, the stockholders of a
corporation shall not be personally liable for the payment of
the corporation's debts except as they may be liable by reason
of their own conduct or acts;
A provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided
that such provision shall not eliminate or limit the liability of a
director: (i) For any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under § 174 of this title; or (iv)
for any transaction from which the director derived an
improper personal benefit. * * *
http://delcode.delaware.gov/title8/c001/sc01/index.shtml#102
Example: Articles of Incorporation
ARTICLES OF INCORPORATION
1. Name. The name of corporation is Your
Awesome Home, Inc.
2. Shares authorized. The corporation can issue
1,000 shares of stock.
3. Registered office and agent. The corporation’s
registered office is 1301 Worrell Prof Bldg,
WFU. Registered agent is AR Palmiter.
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4. The incorporator is AR Palmiter, 3333
Worrell, W -S, NC 27109.
AR Palmiter
AR Palmiter, incorporator
Question: Are these articles of incorporation sufficient to form a corporation?
Answer: Yes. They satisfy the MBCA, which includes requirements relating to:
 Name of corporation
 Shares authorized
 Registered office/agent
 Incorporator
Question: What is required for the name of a corporation?
Answer: The articles must state the corporation’s complete name and a formal indication
of its corporate status—a reference such as “Corporation,” “Incorporated,” or “Inc.” will
suffice. The corporate name must also be different from the names of other corporations
in the state.
States are split as to the degree corporate names must be different from previously
incorporated firms of a similar name. One set of (newer) statutes require that the name
must be “distinguishable upon the records” of the secretary of state from other corporate
names already taken or reserved for future use.
MBCA § 4.01. Corporate Name.
(a)
(b)
A corporate name:
(1)
must contain the word corporation, incorporated, company,
or limited, or the abbreviation corp., inc., co., or ltd., or
words or abbreviations of like import in another language;
and
(2)
may not contain language stating or implying that the
corporation is organized for a purpose other than that
permitted by section 3.01 and its articles of incorporation.
Except as authorized by subsections (c) and (d), a corporate name
must be distinguishable upon the records of the secretary of state
from:
(1)
the corporate name of a corporation incorporated or
authorized to transact business in this state;
(2)
a corporate name reserved or registered under section 4.02
or 4.03;
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(3)
(c)
(d)
(e)
the fictitious name adopted by a foreign corporation
authorized to transact business in this state because its real
name is unavailable; and
(4)
the corporate name of a not-for-profit corporation
incorporated or authorized to transact business in this state.
A corporation may apply to the secretary of state for authorization
to use a name that is not distinguishable upon his records from one
or more of the names described in subsection (b). The secretary of
state shall authorize use of the name applied for if:
(1)
the other corporation consents to the use in writing and
submits an undertaking in form satisfactory to the secretary
of state to change its name to a name that is distinguishable
upon the records of the secretary of state from the name of
the applying corporation; or
(2)
the applicant delivers to the secretary of state a certified
copy of the final judgment of a court of competent
jurisdiction establishing the applicant's right to use the
name applied for in this state.
A corporation may use the name (including the fictitious name) of
another domestic or foreign corporation that is used in this state if
the other corporation is incorporated or authorized to transact
business in this state and the proposed user corporation:
(1)
has merged with the other corporation;
(2)
has been formed by reorganization of the other corporation;
or
(3)
has acquired all or substantially all of the assets, including
the corporate name, of the other corporation.
This Act does not control the use of fictitious names.
Another group of (older) statutes further specify that the name not be “deceptively
similar” to existing names.
Question: What must the articles of incorporation include regarding the capital structure of the
corporation?
Answer: In addition to the corporate name and registered office and agent, the articles
must also specify the securities the corporation will have authority to issue. The articles
must express the various classes of authorized shares, the number of shares of each class,
and the privileges, rights, limitations, and preferences of each class. MBCA §6.01.
MBCA § 6.01. Authorized Shares.
(a)
The articles of incorporation must set forth any classes of shares
and series of shares within a class, and the number of shares of
each class and series, that the corporation is authorized to issue. If
more than one class of shares or series of shares is authorized, the
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articles of incorporation must prescribe a distinguishing
designation for each class or series and must describe, prior to the
issuance of shares of a class or series, the terms, including the
preferences, rights, and limitations, of that class or series. Except
to the extent varied as permitted by this section, all shares of a
class or series must have terms, including preferences, rights and
limitations, that are identical with those of other shares of the same
class or series.
(b)
The articles of incorporation must authorize (1) one or more
classes of shares that together have unlimited voting rights, and (2)
one or more classes of shares (which may be the same class or
classes as those with voting rights) that together are entitled to
receive the net assets of the corporation upon dissolution.
(c)
The articles of incorporation may authorize one or more classes or
series of shares that:
(1)
have special, conditional, or limited voting rights, or no
right to vote, except to the extent otherwise provided by
this Act;
(2)
are redeemable or convertible as specified in the articles of
incorporation:
(i)
(ii)
(iii)
(3)
at the option of the corporation, the shareholder, or
another person or upon the occurrence of a specified
event;
for cash, indebtedness, securities, or other property;
and
at prices and in amounts specified, or determined in
accordance with a formula;
entitle the holders to distributions calculated in any manner,
including dividends that may be cumulative,
noncumulative, or partially cumulative;
(4)
(d)
(e)
(f)
have preference over any other class of shares with respect
to distributions, including dividends and distributions upon
the dissolution of the corporation.
Terms of shares may be made dependent upon facts objectively
ascertainable outside the articles of incorporation in accordance
with section 1.20(k).
Any of the terms of shares may vary among holders of the same
class or series so long as such variations are expressly set forth in
the articles of incorporation.
The description of the preferences, rights and limitations of classes
or series of shares in subsection (c) is not exhaustive
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Question: Why is disclosure regarding the corporation’s authorized shares required?
Answer: Disclosure of the kinds and quantities of shares to be authorized is important
because it reveals the capital structure of the corporation—how a corporation plans to
finance its existence. It also allows an investor to know what proportion of the shares that
can be issued that the investor is buying. For example, in a corporation with 1000
authorized shares, an investor who acquires 501 shares is assured of majority control.
Question: Why do the articles of incorporation have to include the registered office and agent of
the corporation?
Answer: The articles must state the corporation’s address for both service of
process and for sending official notices. MBCA §2.02. In addition to the registered
office, often the articles must provide the name of a registered agent at that office on
whom process can be served. MBCA §§2.02, 5.01. Changes in the registered office or
registered agent must be filed with the secretary of state. MBCA § 5.02.
MBCA § 5.01. Registered Office and Registered Agent.
Each corporation must continuously maintain in this state:
(1)
a registered office that may be the same as any of its places of business;
and
(2)
a registered agent, who may be:
(i)
an individual who resides in this state and whose business office is
identical with the registered office;
(ii)
a domestic corporation or not-for-profit domestic corporation
whose business office is identical with the registered office; or
(iii)
a foreign corporation or not-for-profit foreign corporation
authorized to transact business in this state whose business office is
identical with the registered office.
MBCA § 5.02. Change of Registered Office or Registered Agent.
(a)
A corporation may change its registered office or registered agent by
delivering to the secretary of state for filing a statement of change that sets
forth:
(1)
the name of the corporation,
(2)
the street address of its current registered office;
(3)
if the current registered office is to be changed, the street address
of the new registered office;
(4)
the name of its current registered agent;
(5)
if the current registered agent is to be changed, the name of the
new registered agent and the new agent's written consent (either on
the statement or attached to it) to the appointment; and
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(6)
(b)
that after the change or changes are made, the street addresses of
its registered office and the business office of its registered agent
will be identical.
If a registered agent changes the street address of his business office, he
may change the street address of the registered office of any corporation
for which he is the registered agent by notifying the corporation in writing
of the change and signing (either manually or in facsimile) and delivering
to the secretary of state for filing a statement that complies with the
requirements of subsection (a) and recites that the corporation has been
notified of the change.
Question: Do the articles of incorporation require only that the incorporator(s) be named, or do
they require that management, directors, or officers be named as well?
Answer: Most modern statutes have done away with earlier requirements that the articles
of incorporation name and number the corporation’s initial directors. MBCA § 2.02
provides that articles may define and number its board of directors.
MBCA § 8.03. Number and Election of Directors.
(a)
(b)
(c)
A board of directors must consist of one or more individuals, with
the number specified in or fixed in accordance with the articles of
incorporation or bylaws.
The number of directors may be increased or decreased from time
to time by amendment to, or in the manner provided in, the articles
of incorporation or the bylaws.
Directors are elected at the first annual shareholders’ meeting and
at each annual meeting thereafter unless their terms are staggered
under section 8.06
Question: How many directors does a corporation have to have?
Answer: MBCA §8.03 (above) requires only that the board be composed of “one or more
individuals”. Notice that corporations and other entities cannot be directors.
Question: In addition to the required information in the articles of incorporation, what other
information can and should be included?
Answer: The articles may contain a wide variety of other provisions to “customize” the
corporation. MBCA §2.02(b). These provisions can be particularly useful in closely held
corporations where the participants seek specific protections and responsibilities. Such
optional provisions can include:

voting provisions,

membership requirements,

management provisions, and

indemnification provisions.
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Question: What are the requirements regarding a description of the corporation’s purpose in the
articles of incorporation?
Answer: MBCA §2.02 includes information regarding the corporation’s purpose as
information that may be included in the articles of incorporation. MBCA §3.01 sets out a
default purpose of “any lawful purpose” unless the articles specify a more limited
purpose.
MBCA § 3.01. Purposes.
(a)
Every corporation incorporated under this Act has the purpose of
engaging in any lawful business unless a more limited purpose is
set forth in the articles of incorporation.
Question: What can the articles of incorporation specify regarding the powers of the
corporation?
Answer: The MBCA again sets out a broad default provision in §3.02:
MBCA § 3.02. General Powers.
Unless its articles of incorporation provide otherwise, every corporation
has perpetual duration and succession in its corporate name and has the
same powers as an individual to do all things necessary or convenient to
carry out its business and affairs, including without limitation power:
(1)
to sue and be sued, complain and defend in its corporate name;
(2)
to have a corporate seal, which may be altered at will, and to use it,
or a facsimile of it, by impressing or affixing it or in any other
manner reproducing it;
(3)
to make and amend bylaws, not inconsistent with its articles of
incorporation or with the laws of this state, for managing the
business and regulating the affairs of the corporation;
(4)
to purchase, receive, lease, or otherwise acquire, and own, hold,
improve, use, and otherwise deal with, real or personal property, or
any legal or equitable interest in property, wherever located;
(5)
to sell, convey, mortgage, pledge, lease, exchange, and otherwise
dispose of all or any part of its property;
(6)
to purchase, receive, subscribe for, or otherwise acquire; own,
hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose
of; and deal in and with shares or other interests in, or obligations
of, any other entity;
(7)
to make contracts and guarantees, incur liabilities, borrow money,
issue its notes, bonds, and other obligations (which may be
convertible into or include the option to purchase other securities
of the corporation), and secure any of its obligations by mortgage
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(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
or pledge of any of its property, franchises, or income;
to lend money, invest and reinvest its funds, and receive and hold
real and personal property as security for repayment;
to be a promoter, partner, member, associate, or manager of any
partnership, joint venture, trust, or other entity;
to conduct its business, locate offices, and exercise the powers
granted by this Act within or without this state;
to elect directors and appoint officers, employees, and agents of the
corporation, define their duties, fix their compensation, and lend
them money and credit;
to pay pensions and establish pension plans, pension trusts, profit
sharing plans, share bonus plans, share option plans, and benefit or
incentive plans for any or all of its current or former directors,
officers, employees, and agents;
to make donations for the public welfare or for charitable,
scientific, or educational purposes;
to transact any lawful business that will aid governmental policy;
to make payments or donations, or do any other act, not
inconsistent with law, that furthers the business and affairs of the
corporation
Question: What happens after incorporation?
Answer: After incorporation, an organizational meeting is required to begin the
procedures necessary to get the corporation operational. In order for the corporation to
function, the effective corporate planner must create a working structure. This takes place
at an organizational meeting.
If the initial directors are named in the articles of incorporation, those directors hold the
organizational meeting at the call of a majority vote. If the initial directors are not named
in the articles, an organizational meeting is held at the call of a majority of the
incorporators.
At the organizational meeting, the first act is to elect a board of directors unless the
articles have named initial directors who are to remain in office. The board then proceeds
to complete several necessary tasks in creating a functional business structure. Those
tasks may include:

approving bylaws,

electing officers,

adopting the contracts of pre-incorporation promoters,

adopting a corporate seal,

choosing a bank for deposit of corporate funds,

authorizing the issuance of shares and setting the consideration for the shares, and

approving shareholders’ agreements.
MBCA § 2.05. Organization of Corporation.
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(a)
(b)
(c)
After incorporation:
(1)
if initial directors are named in the articles of incorporation,
the initial directors shall hold an organizational meeting, at
the call of a majority of the directors, to complete the
organization of the corporation by appointing officers,
adopting bylaws, and carrying on any other business
brought before the meeting;
(2)
if initial directors are not named in the articles, the
incorporator or incorporators shall hold an organizational
meeting at the call of a majority of the incorporators:
(i)
to elect directors and complete the organization of
the corporation; or
(ii)
to elect a board of directors who shall complete the
organization of the corporation.
Action required or permitted by this Act to be taken by
incorporators at an organizational meeting may be taken without a
meeting if the action taken is evidenced by one or more written
consents describing the action taken and signed by each
incorporator.
An organizational meeting may be held in or out of this state.
Question: How are the actions taken at the organizational meeting documented?
Answer: The minutes of the meeting document what happened. The meeting minutes
are the principal paper trail of a corporation's early legal life.
2.
Choice of the State of Incorporation
The choice of a state of incorporation may depend on where a company intends to operate. A
company that expects to operate locally incorporates locally. A company that expects to operate
nationally may incorporate more strategically, perhaps in Delaware. Remember that the internal
affairs doctrine means that the state of incorporation may have a significant impact in future
litigation.
Bonus Question: Find the most recent amended and restated articles of incorporation for
PepsiCo, which was incorporated in North Carolina after the state legislature passed a version of
the MBCA (with antitakeover provisions for public corporations) that suited Pepsi.
Answer: There are three ways to get this information.
(1) Information about all corporations is available from the secretary of state in the state
in which the company is incorporated. In the case of PepsiCo, the North Carolina
Secretary of State’s website has this information:
http://www.secretary.state.nc.us/corporations/searchresults.aspx?onlyactive=OFF&
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Words=STARTING&searchstr=pepsi
Students can type in “PepsiCo”, and then select the PepsiCo entity they want to know
about. Once on the main PepsiCo page, they can select “view document filings” and then
scroll down to find the most recent version of the articles of incorporation.
The articles of incorporation, as of their amendment and restatement on May 9, 2011, are
available here:
http://www.secretary.state.nc.us/corporations/Corp.aspx?PitemId=5064574
The articles are also attached to this Teacher’s Manual as Appendix A.
(2) Public corporations (ones whose stock is traded on a stock exchange) must also
comply with substantial federal disclosure rules. Detailed financial and business
information about such corporations is available on EDGAR (the Securities and
Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system).
Students can go to http://sec.gov and select “Search for Company Filings.” They can then
choose to search by company name. They will be given a chance to type in “PepsiCo,”
which will yield a large list of documents that have been filed with the SEC.
http://sec.gov/cgi-bin/browseedgar?company=PepsiCo&match=&CIK=&filenum=&State=&Country=&SIC=&owner
=exclude&Find=Find+Companies&action=getcompany
If students look through the PepsiCo documents, they will find that on May 9, 2011,
PepsiCo made a Form 8-K filing, which announced and attached the (same) amended and
restated articles of incorporation:
http://sec.gov/Archives/edgar/data/77476/000095012311047532/y91180e8vk.htm
(3) A third way to find out information about a company is through its own website. The
PepsiCo.com website contains a lot of useful information, including the May 9, 2011
amended and restated articles of incorporation:
http://www.pepsico.com/Download/AmendedandRestatedArticlesofIncorporation.pdf
3.
Multiple Parties in a Business Formation
Question: When you form a business for multiple parties, who is your client?
Answer: The role of the lawyer in the incorporation process may be that of corporate
planner. If the corporate planner has done her job effectively, the organizational meeting
is normally just a formality (sometimes not even attended, but handled by unanimous
written consent) to put in place the plan laid out clearly by the parties.
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The incorporation process, however, may also trigger trying legal situations—situations
that may implicate professional ethics and an analysis of the lawyer-client relationship.
In simplest terms, the lawyer-client relationship is straightforward: the lawyer serves her
client. But the corporate planner’s client relationships are not so readily defined. In the
corporate context, the corporation as well as its individual participants may vie for
possible status as “client.”
The potential for conflict between parties involved exists throughout the formation of the
corporation. This is particularly true in closely held corporations, where the same parties
serve double and triple-duty as officers, directors, and shareholders, each with different
sets of expectations.
Hypothetical 7.1 – Part One (p. 171)
Question: Basil (whose divorce you handled) asks you to help him, along with Sybil and
Gowan, form a corporation. Who do you represent?
Answer: The corporation is a legal person. However it is 1) not actually a "natural
person" and 2) comprised of various participants. Who does corporate counsel represent?
The answer comes from corporate law and rules of professional responsibility.
The corporate lawyer represents the corporation – and even pre-incorporation the entity
to-be. The entity theory is embodied in Model Rule 1.13 (p. 169), and many jurisdictions
have adopted it.
ABA Model Rules of Professional Conduct. Rule 1.13 Organization as Client
(a) A lawyer employed or retained by an organization represents the organization
acting through its duly authorized constituents.
http://www.americanbar.org/groups/professional_responsibility/publications/model_rules
_of_professional_conduct/rule_1_13_organization_as_client.html
The corporate entity, and not the individuals that make up that entity, is the client.
Before incorporation, the lawyer often acts on behalf of multiple parties. In such an
instance, that lawyer acts as a “lawyer for the situation.” No one client is exclusively
represented, instead, all parties involved comprise the “situation” to be represented.
Question: Do people acting as a corporation know this?
Answer: Professional ethics rules require a lawyer acting in such a capacity to
communicate to the parties the advantages and risks of multiple representation, and,
under Rule 1.7, to get the consent of the represented parties to the arrangement.
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The lawyer must make this fact clear to corporate participants at the outset of her service
to the firm.
ABA Model Rules of Professional Conduct. Rule 1.7 Conflict of
Interests: Current Clients
(a)
(b)
Except as provided in paragraph (b), a lawyer shall not represent a
client if the representation involves a concurrent conflict of
interest. A concurrent conflict of interest exists if:
(1)
the representation of one client will be directly adverse to
another client; or
(2)
there is a significant risk that the representation of one or
more clients will be materially limited by the lawyer's
responsibilities to another client, a former client or a third
person or by a personal interest of the lawyer.
Notwithstanding the existence of a concurrent conflict of interest
under paragraph (a), a lawyer may represent a client if:
(1)
the lawyer reasonably believes that the lawyer will be able
to provide competent and diligent representation to each
affected client;
(2)
the representation is not prohibited by law;
(3)
the representation does not involve the assertion of a claim
by one client against another client represented by the
lawyer in the same litigation or other proceeding before a
tribunal; and
(4)
each affected client gives informed consent, confirmed in
writing.
http://www.americanbar.org/groups/professional_responsibility/publications/mod
el_rules_of_professional_conduct/rule_1_7_conflict_of_interest_current_clients.h
tml
Hypothetical 7.1 – Part Two
You represented Basil in his divorce. Basil says, “As you know from your work for me on my
divorce, there are some pretty personal things that I’ve told you. I assume you won’t be telling
the others.” Under his breath he adds, “Like you know I’m really strapped for cash. What with
child support and alimony, I’m not sure what to do. But with this new company I plan to get out
as much cash as quickly as I can.”
Question: What should you do?
Answer: You have a potential conflict of interest and you will need to consult the ABA
Model Rules of Professional Conduct.
Question: Do you still represent Basil?
16
Answer: Yes. Under Rule 1.6, his confidences to you during the divorce cannot be
disclosed to others without his consent.
ABA Model Rules of Professional Conduct Rule 1.6 Confidentiality of
Information
A lawyer shall not reveal information relating to the representation of a
client unless the client gives informed consent . . .
http://www.americanbar.org/groups/professional_responsibility/publications/mod
el_rules_of_professional_conduct/rule_1_6_confidentiality_of_information.html
Question: Can you represent the corporation?
Answer: No. There is a conflict – Basil’s interests seem to be at odds with the
corporation (see Rule 1.7 above).
Question: What do you have to do to represent the corporation?
Answer: Under Rule 1.4, you would have to disclose to “it” (that is, to Gowan and
Sybil) that Basil may be planning to loot the corporation.
ABA Model Rules of Professional Conduct. Rule 1.4 Communication
(a)
A lawyer shall …
(1)
promptly inform the client of any decision or circumstance with
respect to which the client’s informed consent … is required.
http://www.americanbar.org/groups/professional_responsibility/publications/mod
el_rules_of_professional_conduct/rule_1_4_communications.html
Question: What is the likely outcome?
Answer: It looks like you would have to withdraw from representing the corporation.
You cannot disclose exactly why. See again Rule 1.6. Sybil and Gowan will be
flummoxed. You should tell them to look for another lawyer, who should explain what is
happening.
Hypothetical 7.1 – Part Three
Gowan says, “Thanks for explaining that you will represent the corporation. As you know my
son Gowan, Jr. is pretty unsure about his future. I’m investing in this company so there will be a
place for him. I would like you to draft papers that give me voting control, though Basil and
Sybil do not have to know. Please hold this in confidence and draft the papers as I want. As you
know, I’m paying your bill.”
17
Question: What should you do? Who do you represent?
Answer: The assumption is that you’ve explained that a corporate lawyer represents the
corporation, not any individuals. (see Rule 1.13(a)). Gowan – not a previous client-- has
just given you personal instructions and highly relevant information about his plans. You
owe it to the corporation not to carry them out.
What should you do? Say no. And if Gowan persists, you must tell him that you will
have to tell the others about his plans, on behalf of the corporation. You should tell
Gowan you are not acting on behalf of his personal legal interests. Model Rule 1.13
states that “(i)n dealing with an organization’s directors, officers, employees, members,
shareholders or other constituents, a lawyer shall explain the identity of the client when
the lawyer knows or reasonably should know that the organization’s interests are adverse
to those of the constituents with whom the lawyer is dealing.”
It is a hard thing. Even though Gowan will now see that you are fired or not paid, you
assumed obligations to the “situation”
Hypothetical 7.1 – Part Four
Sybil says, “Thanks for forming the company. Now that you’re our lawyer, I thought you should
know that I told the others I have an MBA and know accounting, but I don’t. Not to say I’m
clueless – in my last job I actually got away with embezzling about $250,000. I really hope you
won’t tell Basil or Gowan.”
Question: What should you do?
Answer: Sybil is not a client, nor is she asking for separate representation. She is simply
revealing information that there is a risk that she will commit a crime against the
corporation. You are obligated to give this information to corporate decision
makers/overseers – that is, to Basil and Gowan if they are directors. This is up-the-ladder
reporting. Rule 1.13(b).
If they do nothing, you may be allowed under the ethics rule to reveal this to outside
regulators. Rule 1.13(c).
ABA Model Rules of Professional Conduct. Rule 1.13 Organization as Client
(a)
(b)
A lawyer employed or retained by an organization represents the
organization acting through its duly authorized constituents.
If a lawyer for an organization knows of [someone intending to
violate legal obligation or law], the lawyer shall refer the matter to
higher authority in the organization [including the board of
directors]
18
(c) ..
If despite the lawyer’s efforts in (b) [the highest authority fails to
act and the lawyer believes substantial injury is reasonably certain]
the lawyer may reveal information relating to the representation
If it were a public corporation, you would have to follow the SEC’s up-the-ladder
reporting rules for lawyers who do securities work for the corporation. Under the rules
you must bring possible securities fraud and fiduciary breaches to the attention of the
company’s general counsel (or both the general counsel and CEO), and then the board of
directors or the board's compliance committee. You are not required, however, to bring it
to the attention of the SEC and other authorities. But notice the Professional Conduct
Rules permit you to do this if you believe "substantial injury is reasonably certain."
Hypothetical 7.1 – Part Five
Your law firm is asked to represent a client, Patty, who claims that she lost everything in a
hurricane but has no insurance because Gowan committed insurance fraud.
Question: What do you say when the firm’s “conflicts” email reaches you?
Answer: This question brings up the issue of conflicts within a firm. You did not
represent Gowan – you made that perfectly clear when he asked you to draft the
corporate documents to suit his personal interests.
Must you tell the firm that there’s no way the firm can represent Patty since you represent
Gowan’s corporation?
Under the entity theory you might simply conclude that you do not represent Gowan, but
instead the corporation in which he is a shareholder. But Gowan might view things
differently – particularly in a small three-person corporation.
Under the aggregate theory, courts say that you represent all the participants and the
corporation.
Which theory applies here? It is a close question. You probably should not make the call
without talking to others in the firm. That is, in response to the conflicts email – “we
should discuss this.” Ultimately, whether the entity or aggregate theory applies may well
turn on the reasonable expectations of the parties – how clear were you with Gowan that
you did not represent him?
Hypothetical 7.1 – Part Six
You resolve all the possible conflicts, misunderstandings, tensions, and so on. You represent the
“situation” – the corporation.
Basil, Sybil and Gowan recognize your wisdom and ask you to sit on the company’s board.
19
Question: Can you serve on the board of directors?
Answer: Lawyers are not prohibited from sitting on the boards of corporations they
represent. This once used to be a common practice for public corporations, but much less
so as new rules on “independent directors” would disqualify outside counsel from that
status.
Having legal counsel on the board of directors can cause businesses great headache when
lawyers are in a position where business judgment advises one course and legal judgment
another. There is no clean way to resolve such a conundrum – it is best for a company to
avoid putting itself in that position in the first place.
B.
Corporate Powers (and the Ultra Vires Doctrine)
Under the common law doctrine of ultra vires, which means “beyond the power,” a corporation
could not engage in activities outside the scope of its defined purpose.
Modern statutes typically provide that “[e]very corporation incorporated under this Act has the
purpose of engaging in any lawful business unless a more limited purpose is set forth in the
articles of incorporation” (MBCA§ 3.01(a) above) and include very broad provisions regarding
corporate powers (MBCA §3.02 above). As a result, very little is ultra vires, and the discipline it
used to provide is largely handled by expanded fiduciary duties.
C.
Defective Incorporation
What happens if incorporation has not yet happened or somehow fails? Who is liable in dealings
with outsiders? This question involves the concept of corporate limited liability. Whether or not
the corporation has been formed also determines whether or not parties to the corporation are
personally liable for debts incurred.
Question: What is corporate limited liability?
Answer: In this context, corporate limited liability refers to the limitation of liability on
the part of the promoters of the corporation. Promoters can become liable for their
actions during the formation of the business. Limited liability only arises upon formal
incorporation. Promoters can become liable for both pre-incorporation contracts entered
into before the business is incorporated as well as contracts they sign for an improperly
incorporated firm (i.e., defective incorporation).
There are four permutations of defective incorporation that have implications for the liability of
the promoters.
(1)


Corporation Not Formed – Parties Aware
Promoters and outside parties are aware of the lack of incorporation
A creditor sues the promoters
20
Question: What are the consequences for promoters’ liability if the corporation has not yet been
formed and the parties enter into a contract, aware that it has not been formed?
Answer: In the event the corporation is not formed, it does not exist under the laws of
contract and agency and cannot be a principal or a party to a contract. This leaves only
the question of liability for the promoters involved in the initial set-up.
When both parties know there is no corporation, there exists what is essentially a
presumption of liability for the promoters. The Restatement (Second) of Agency §326
states that “Unless otherwise agreed, a person who, in dealing with another, purports to
act as agent for a principal whom both know to be nonexistent or wholly incompetent,
becomes a party to such a contract.” The Restatement (Third) of Agency §6.04 takes a
slightly different approach:
Restatement (Third) of Agency §6.04 Principal Does Not Exist or
Lacks Capacity
Unless the third party agrees otherwise, a person who makes a contract
with a third party purportedly as an agent on behalf of a principal becomes
a party to the contract if the purported agent knows or has reason to know
that the purported principal does not exist or lacks capacity to be a party to
the contract.
http://web2.westlaw.com/find/default.wl?rs=WLW11.07&rp=%2ffind%2fdefault.
wl&vr=2.0&fn=_top&mt=208&cite=rest+3d+agen+6.04&sv=Split
This default rule can be circumvented only by agreement.
Hypothetical Contract – Part One
RKO owns a chain of movie houses. It wants to sell one of its Philadelphia houses to Graziano,
who plans to incorporate his new business.
RKO wants a deal now and presents a contract to your client Graziano.
Contract
Parties:
Buyer's obligations:
Seller's obligations:
Warranties:
Representations:
Seller & Buyer
[…]
[…]
[…]
[…]
¶ 19. It is understood that it is the intention of the Purchaser to
incorporate. Upon condition that such incorporation be
completed by closing, all agreements, covenants, and
21
warranties contained herein shall be construed to have been
made between Seller and the resultant corporation ...
RKO (Seller)
Kent Enterprises, Inc. (Buyer)
[signed by Graziano]
Question: What is the impact of ¶ 19. Does this get Graziano off the hook?
Answer: Not according to the court. He remains liable as a promoter even after the
corporation is formed and accepted the contract. There must be some indication of a
novation (explained in the breakout box on p. 173) – that after incorporation and
acceptance, RKO will no longer look to him, but only the corporation.
Graziano should have waited until the business was properly incorporated (and the
contract approved by the board) before entering into the contract.
Hypothetical Contract – Part Two
Board Minutes
Kent Enterprises, Inc .
The organizational meeting of the Board of Directors of Kent
Enterprises Inc. was duly convened in ____ on _____, at _____.
***
On motion duly made, seconded and unanimously adopted, it
was RESOLVED, that the Corporation adopt all agreements,
covenants and warranties of [Contract with RKO] dated _____
and cause all documents to reflect the same.
Question: Does this do the trick?
Answer: Not really. There is no indication from the contract itself that corporate
adoption works as a novation. Even after adoption of the contract by the corporation,
RKO can still look to Graziano for performance. He is not off the hook.
(2)
Corporation Not Formed - Parties Not Aware
 Promoters believe (wrongly) that the business is incorporated
 Creditor believes (wrongly) that the business is incorporated
Question: What are the consequences for the promoter if the parties contract while they are
unaware that the corporation has not been formed?
Answer: For there to be corporate limited liability, the firm must be validly incorporated,
so failure to properly incorporate would result in liability for corporate participants.
22
Courts are split on whether to limit limited liability to properly incorporated firms or
extend some measure of leniency.
Traditionally, courts have implied limited liability when third parties believe they are
dealing with a “nonrecourse” agent for a corporation. These courts have developed two
concepts, the de facto corporation and corporation by estoppel, to ease the consequences
of defective incorporation.
Whether or not a court elects to use one of these doctrines depends on two factors.

First, the state corporate statute must permit imputation of limited liability by the
courts when there has not been incorporation.

Second, the circumstances must justify the court’s imputation of limited liability.
Hypothetical - Rental Agreement
Equipment Inc. rents equipment to Robert Bennett. However, there is no MyNew Corp. Bob
thought the articles were filed, but they have not been.
Rental Agreement
[…..]
MyNew Corp.
Robert Bennett
By: [signed by Robert Bennett], President
Question: What is the result here?
Answer: The result depends whether this jurisdiction has developed doctrines of de facto
corporation and/or corporation by estoppel. We also need more facts: was there an
attempt to incorporate?
Question: What is the difference between de facto corporation and corporation by estoppel?
Answer: Under the doctrine of de facto corporation, courts infer limited liability if there
has been a good faith attempt to incorporate, the promoter was unaware that
incorporation had not happened, and the promoter used the corporate form with a third
party.
Under the doctrine of corporation by estoppel, courts prevent a third party from asserting
the promoter’s personal liability when there has been no attempt to incorporate but the
third party assumes she is dealing with a corporation. In these cases, not recognizing
limited liability would create a windfall for the third party.
De Facto Corporation
 Good faith attempt
Corporation by Estoppel
 Third party assumes
23


Promoter unaware
Use corporate form
corporation
A minority of courts interpret modern incorporation statutes—which greatly facilitate
incorporation—as abolishing the de facto corporation and corporation by estoppel
doctrines. Given how convenient modern statutes have made incorporation, the
reasoning runs, forgiving failure to incorporate and imputing liability may be overly
lenient. These courts would refuse to impute limited liability and hold corporate insiders
personally liable.
Question: Do statutes answer this question? How does the MBCA change these doctrines?
Answer: The current MBCA does not reject common law doctrines imputing limited
liability. Instead, it stakes out a middle ground essentially saying that bad faith triggers
promoter liability – and excuses good faith use of corporate form.
MBCA §2.04 Liability for Preincorporation Transactions
All persons purporting to act as or on behalf of a corporation, knowing
there was no incorporation under this Act, are jointly and severally liable
for all liabilities created while so doing.
The Official Comment to MBCA §2.04 clarifies that there is no liability for insiders who
“erroneously but in good faith” believe articles to have been filed.
3.


Corporation Formed - Contracting While Dissolved
Participants fail to pay franchise taxes or file annual reports
The corporation is dissolved, and then contracts with creditor
Pursuant to corporate statutes, corporations may be administratively dissolved if the corporation
fails to pay state franchise taxes and fees, to report a change in registered agent, or to file a
required annual report. See MBCA § 14.20.
MBCA § 14.20. Grounds for Administrative Dissolution.
The secretary of state may commence a proceeding under section 14.21 to
administratively dissolve a corporation if:
(1)
the corporation does not pay within 60 days after they are due any
franchise taxes or penalties imposed by this Act or other law;
(2)
the corporation does not deliver its annual report to the secretary of
state within 60 days after it is due;
(3)
the corporation is without a registered agent or registered office in
this state for 60 days or more
(4)
the corporation does not notify the secretary of state within 60 days
that its registered agent or registered office has been changed, that
24
(5)
its registered agent has resigned, or that its registered office has
been discontinued; or
the corporation's period of duration stated in its articles of
incorporation expires.
Problems of liability can arise when corporate insiders engage in activities in the corporate name
after the corporation is dissolved. If the corporation is not reinstated, modern statutes hold those
who have knowingly acted on behalf of the nonexistent corporation personally liable. This is true
even if creditors had not relied on personal assets in entering into the agreement. See MBCA §
2.04 (above).
If, however, the corporation is later reinstated, these statutes provide that reinstatement reaches
back to the date of administrative dissolution. The effect is that the dissolution is treated as if it
had never occurred. See MBCA § 14.22 (requiring that reinstatement occur within two years of
administrative dissolution).
MBCA § 14.22. Reinstatement Following Administrative Dissolution.
(a)
A corporation administratively dissolved under section 14.21 may
apply to the secretary of state for reinstatement within two years
after the effective date of dissolution. The application must:
(1)
recite the name of the corporation and the effective date of its
administrative dissolution;
(2) state that the ground or grounds for dissolution either did not exist
or have been eliminated;
(3) state that the corporation's name satisfies the requirements of
section 4.01; and
(4) contain a certificate from the [taxing authority] reciting that all
taxes owed by the corporation have been paid.
(b)
If the secretary of state determines that the application contains the
information required by subsection (a) and that the information is
correct, he shall cancel the certificate of dissolution and prepare a
certificate of reinstatement that recites his determination and the
effective date of reinstatement, file the original of the certificate, and
serve a copy on the corporation under section 5.04.
(c)
When the reinstatement is effective, it relates back to and takes
effect as of the effective date of the administrative dissolution and
the corporation resumes carrying on its business as if the
administrative dissolution had never occurred.
Hypothetical – Reviving a Corporation
Dec. 2010
Corporation fails to pay its franchise taxes
State administratively dissolves the corporation
25
Sept. 2011
“Corporation” enters into a contract with an
innocent third party
Dec. 2011
Corporation pays its taxes
State reinstates the corporation
Question: After the corporation has been formed, if it is later dissolved for failing to pay its
franchise tax, are its insiders liable for entering into contracts while it is dissolved?
Answer: Because corporation paid its taxes, and the corporation was reinstated, the
reinstatement relates back to the date of administrative dissolution. Corporate insiders
will not be held liable under this set of facts.
Question: Why do states offer reinstatement?
Answer: It encourages late payment of taxes.
4.
Corporation Formed - Corporation Misused
 Participants abuse the corporate form
 A creditor seeks to disregard limited liability
Question: What are the consequences for limited liability if corporate insiders abuse the
corporate form after incorporation? Do creditors have any recourse?
Answer: This scenario brings up the all-important concept of piercing the corporate veil
(PCV), which is the subject of Chapter 11.
Summary
The main points of this chapter are:

Incorporation is a simple process
o Articles of incorporation need only name the corporation, the number of shares,
the registered office/agent, and the name of the incorporator
o The organizational meeting is where the working structure happens (bylaws,
issuance of shares, naming of directors)

A lawyer can represent a corporation (or a situation)
o Participants should understand and give consent
o Confidences by participants are not necessarily protected
o Representation of the corporation does not necessarily create individual conflicts

Defective incorporation can happen in different ways
o The parties are aware that no corporation has been formed, the promoter is
presumed liable, unless agreed otherwise
o The parties are unaware that no corporation has been formed and act as though
26
there is a corporation, corporate attributes through de facto corporation or
corporation by estoppels
o A corporation is formed, but dissolved by the state for not paying franchise taxes;
the corporation can be retroactively reinstated
o The corporation is formed, but misused; piercing the corporate veil is possible
27
Appendix A
Amended and Restated Articles of Incorporation of PepsiCo, Inc.
May 9, 2011
FIRST: The name of the corporation is PepsiCo, Inc., hereinafter referred to as the
“Corporation”.
SECOND: The Corporation is to have perpetual existence.
THIRD: Intentionally omitted.
FOURTH: The purpose or purposes for which the Corporation is organized and the objects
proposed to be transacted, promoted or carried on by it are as follows:
(1) To engage in the manufacture, purchase, sale, bottling and distribution, either at wholesale,
retail or otherwise, of beverages, syrups, flavors and extracts, carbonated and aerated water, soda
water, mineral waters, soft drinks and non-alcoholic beverages of every kind, and any and all
other commodities, substances and products of every kind, nature and description;
(2) To purchase, lease, construct or otherwise acquire, and to hold, own, use, maintain, manage
and operate, plants, factories, warehouses, stores, shops and other establishments, facilities and
equipment, of every kind, nature and description, used or useful in the conduct of the business of
the Corporation;
(3) To manufacture, purchase, sell and generally to trade and deal in and with goods, wares,
products and merchandise of every kind, nature and description, and to engage or participate in
any mercantile, manufacturing or trading business of any kind or character whatsoever;
(4) To build, erect, construct, purchase, hold or otherwise acquire, own, provide, maintain,
establish, lease and operate, buy, sell, exchange or otherwise dispose of mills, factories,
warehouses, agencies, buildings, structures, offices, works, plants and workshops, with suitable
plant, engines, boilers, machinery and equipment, and all things of whatsoever kind and nature
suitable, necessary, useful or advisable in connection with any or all of the objects herein set
forth;
(5) To acquire by purchase, lease or otherwise, upon such terms and conditions and in such
manner as the board of directors of the Corporation shall determine or agree to, and to the extent
to which the same may be allowed by law, all or any part of the property, real and personal,
tangible or intangible, of any nature whatsoever, including the good will, business and rights of
all kinds, of any other corporation or of any person, firm or association, which may be useful or
convenient in the business of the Corporation and to pay for the same in cash, stocks, bonds or in
other securities of the Corporation, or partly in cash and partly in such stocks, bonds or other
securities, or in such other manner as may be agreed, and to hold, possess and improve such
properties, and to assume in connection with the acquisition of any such property any liabilities
of any such corporation, person, firm or association, and to conduct in any legal
28
manner the whole or any part of any business so acquired, and to pledge, mortgage, sell or
otherwise dispose of the same. To carry on the business of warehousing and all business
incidental thereto, including the issue of warehouse receipts, negotiable or otherwise, and the
making of advances or loans upon the security of goods warehoused; to maintain and conduct
stores for the general sale of merchandise, both at wholesale and retail;
(6) To borrow money, and, from time to time, to make, accept, endorse, execute and issue bonds,
debentures, promissory notes, bills of exchange and other obligations of the Corporation for
moneys borrowed or in payment of property acquired or for any of the other objects or purposes
of the Corporation or its business, and to secure the payment of any such obligations by
mortgage, pledge, deed, indenture, agreement or other instrument of trust, or by other lien upon,
assignment of, or agreement in regard to all or any part of the property, rights, privileges or
franchises of the Corporation wheresoever situated, whether now owned or hereafter to be
acquired;
(7) To apply for, obtain, register, purchase, lease, or otherwise acquire, and to hold, use, own,
operate and introduce, and to sell, assign or otherwise dispose of, any trademarks, trade names,
patents, inventions, improvements and processes used in connection with or acquired under
letters patent of the United States or elsewhere, and to use, exercise, develop, grant licenses in
respect of, or otherwise turn to account any such trademarks, patents, licenses, processes and the
like;
(8) To guarantee and to acquire, by purchase, subscription or otherwise, and to hold and own and
to sell, assign, transfer, pledge or otherwise dispose of the stock, or certificates of interest in
shares of stock, bonds, debentures and other securities and obligations of any other corporation,
domestic or foreign, and to issue in exchange therefor the stock, bonds, or other obligations of
the Corporation, and while the owner of any such stock, certificates of interest in shares of stock,
bonds, debentures, obligations and other evidences of indebtedness, to possess and exercise in
respect thereof all of the rights, powers and privileges of ownership, including the right to vote
thereon, and also in the manner, and to the extent now or hereafter authorized or permitted by the
laws of the State of North Carolina, to purchase, acquire, own and hold and to dispose of the
stock, bonds or other evidence of indebtedness of the Corporation;
(9) To guarantee the payment of dividends upon any shares of the capital stock of, or the
performance of any contract by any other corporation or association in which the Corporation
shall have an interest, and to endorse or otherwise guarantee the payment of the principal and
interest, or either, of any bonds, debentures, notes, securities, or other evidences of indebtedness
created or issued by any such other corporation or association or by individuals or partnerships,
to aid in any manner any other corporation or association, any bonds or other securities or
evidences of indebtedness of which, or shares of stock in which (or voting trust certificates
therefor) are held by or for the Corporation, or in which, or in the welfare of which, the
Corporation shall have any interest, and to do any acts or things designed to protect, preserve,
improve or enhance the value of any such bonds or other securities or property of the
Corporation, but nothing contained herein shall be construed to authorize the Corporation to
engage in the business of a guaranty or trust company;
(10) In general, to do any or all of the things hereinbefore set forth, and such other things as are
incidental or conducive to the attainment of the objects and purposes of the
29
Corporation, as principal, factor, agent, contractor or otherwise, either alone or in conjunction
with any person, firm, association or corporation, and in carrying on its business, and for the
purpose of attaining or furthering any of its objects, to make and perform contracts, and to do all
such acts and things, and to exercise any and all such powers, to the same extent as a natural
person might or could lawfully do to the extent allowed by law;
(11) To have one or more offices and to carry on its operations and transact its business within
and without the State of North Carolina and in other states of the United States of America, and
in the districts, territories or dependencies of the United States and in any and all foreign
countries and, without restriction or limit as to the amount, to purchase or otherwise acquire,
hold, own, mortgage, sell, convey or otherwise dispose of real and personal property of every
class and description in any of the states, districts, territories or dependencies of the United
States, and in any and all foreign countries, subject always to the laws of such state, district,
territory, dependency or foreign country; and
(12) To do any or all of the things herein set forth, and such other things as are incidental or
conducive to the attainment of the above objects, to the same extent a natural person might or
could do, and in any part of the world, in so far as the same are not inconsistent with the laws of
the State of North Carolina.
The purposes and powers specified in any clause contained in this Fourth Article shall, except
where otherwise expressed in said articles, be in nowise limited or restricted by reference to or
inferences from the terms of any other clause of this or any other article of these Articles of
Incorporation, but the purposes and powers specified in each of the clauses of this article shall be
regarded as independent purposes and powers.
In general, the Corporation shall have the authority to carry on any other business in connection
with the foregoing, whether manufacturing or otherwise, and to have and to exercise all the
powers conferred by the laws of the State of North Carolina upon corporations formed under the
North Carolina Business Corporation Act.
FIFTH: The total number of shares of Common Stock which the Corporation shall have authority
to issue is 3,600,000,000 of the par value of one and two-thirds cents (1-2/3(cent)) per share. The
total number of shares of Convertible Preferred Stock which the Corporation shall have authority
to issue is 3,000,000 of no par per share. The preferences, limitations and relative rights of the
shares of the Convertible Preferred Stock are attached to these Amended and Restated Articles of
Incorporation as “Exhibit A,” and made a part hereof as if set forth in full herein.
SIXTH: The private property of the stockholders shall not be subject to the payment of corporate
debts to any extent whatever.
SEVENTH: No holder of the Corporation's Common Stock and no holder of the Corporation's
Convertible Preferred Stock shall be entitled, as of right, to subscribe for, purchase or receive
any part of any new or additional issue of its capital stock, of any class, whether now or hereafter
authorized (including treasury stock), or of any bonds, debentures or other securities convertible
into stock, or warrants or options to purchase stock of any class, but all such additional shares of
stock or bonds, debentures or other securities convertible into stock,
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including all stock now or hereafter authorized, may be issued and disposed of by the board of
directors from time to time to such person or persons and upon such terms and for such
consideration (so far as may be permitted by law) as the board of directors in their absolute
discretion may from time to time fix and determine.
EIGHTH: The following provisions are intended for the regulation of the business and for the
conduct of the internal affairs of the Corporation, and it is expressly provided that the same are
intended to be in furtherance and not in limitation of the powers conferred by statute:
(1) The number of directors of the Corporation shall be fixed and may be altered from time to
time, as may be provided in the by-laws, but at no time is the number of directors to be less than
three. The directors need not be stockholders. In case of any increase in the number of directors,
the additional directors may be elected by the directors or by the stockholders entitled to vote
therefor at an annual or special meeting, as shall be provided in the by-laws;
(2) The board of directors may, by resolution passed by a majority of the whole board, designate
three or more of their number to constitute an executive committee, to the extent provided in said
resolution or in the by-laws, shall have and exercise the powers of the board of directors in the
management of the business and affairs of the Corporation, and may have power to authorize the
seal of the Corporation to be affixed to all papers which may require it. From time to time the bylaws, or the board of directors by resolution, may provide methods for the permanent or
temporary filling of any vacancy in the executive committee or in any other committee appointed
by the board;
(3) The board of directors shall have power to sell, assign, transfer, convey, exchange, or
otherwise dispose of the property, effects, assets, franchises and good will of the Corporation as
an entirety, for cash, for the securities of any other corporation, or for any other consideration,
pursuant to the vote at the special meeting called for the purpose, of the holders of at least twothirds of the issued and outstanding Common Stock and Convertible Preferred Stock of the
Corporation voting as a single class.
(4) The board of directors may make by-laws from time to time, and may alter, amend or repeal
any by-laws, but any by-laws made by the board of directors may be altered, amended or
repealed by the stockholders entitled to vote;
(5) In case of any vacancy in the board of directors, through death, resignation, disqualification
or other cause, the remaining directors by an affirmative vote of a majority thereof, may elect a
successor to hold office for the unexpired portion of the term of the directors whose place shall
be vacant, and until the election of a successor;
(6) The directors shall have power, from time to time, to determine whether and to what extent,
and at what times and places and under what conditions and regulations, the accounts and books
of the Corporation, or any of them, shall be open to the inspection of stockholders; and no
stockholder shall have any right to inspect any books or account or document of the Corporation
except as conferred by the statutes of the State of North Carolina, or authorized by the directors;
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(7) The board of directors shall have power to appoint such standing committees as they may
determine, with such powers as shall be conferred by them or as may be authorized by the bylaws;
(8) The board of directors shall elect a president and vice president and appoint a secretary and
treasurer. Any two of such offices may be held by the same person, except that the president
shall hold no other of such offices. The board of directors may also appoint one or more
additional vice presidents, one or more assistant secretaries, and one or more assistant treasurers,
and to the extent provided by the by-laws or by the board of directors by resolution from time to
time, the persons so appointed shall have and exercise the powers of the president, secretary and
treasurer, respectively. The board of directors may appoint other and additional officers, with
such powers as the directors may deem advisable;
(9) Both stockholders and directors shall have power, if the by-laws so provide, to hold their
meetings and have one or more offices without the State of North Carolina, and to keep the
books of the Corporation (subject to the provisions of the statutes) outside of the State of North
Carolina, at such places as may be from time to time designated;
(10) The Corporation may in its by-laws confer powers additional to the foregoing upon the
directors, in addition to the powers and authorities expressly conferred upon them by the statutes;
(11) No contract or other transaction between the Corporation and any other corporation shall be
affected or invalidated by the fact that any one or more of the directors of the Corporation is or
are interested in, or is a director or officer, or are directors or officers of, such other corporation,
and any director or directors, individually or jointly, may be a party or parties to, or may be
interested in, any contract or transaction of the Corporation or in which the Corporation is
interested; and no contract, act or transaction of the Corporation with any person or persons, firm
or corporation, shall be affected or invalidated by the fact that any director or directors of the
Corporation is a party, or are parties, to or interested in such contract, act or transaction, or in any
way connected with such person or person, firm or corporation, and each and every such person
or persons, firm or corporation, and each and every person who may become a director of the
Corporation is hereby relieved from any liability that might otherwise exist from contracting
with the Corporation for the benefit of himself or any firm, association or corporation in which
he may be in any wise interested;
(12) The Corporation reserves the right to amend, alter, change, or repeal any provision herein
contained, in the manner now or hereafter prescribed by law, and all the rights conferred on
stockholders hereunder are granted and are to be held and enjoyed subject to such rights of
amendment, alteration, change or repeal.
(13) Except as provided in Section (5) of this Article, each director shall be elected by a
majority of the votes cast with respect to the director by the shares represented in person or by
proxy and entitled to vote at any meeting for the election of directors at which a quorum is
present; provided, however, that if the number of director nominees exceeds the number of
directors to be elected, each director shall be elected by a vote of the plurality of the shares
represented in person or by proxy at any such meeting and entitled to vote on the election
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of directors. For purposes of this Section, a majority of the votes cast means that the number
of shares voted “for” a director must exceed the number of votes cast “against” that director.
NINTH: The number of directors
constituting the initial Board of Directors
shall be twelve; and the names and addresses
of the persons who are to serve as directors
until the first meeting of stockholders, or
until their successors are elected and
qualified, are:
Name
D. Wayne Calloway
Frank T. Cary
William T. Coleman, Jr.
Clifton C. Garvin, Jr.
Michael H. Jordan
Donald M. Kendall
John J. Murphy
Andrall E. Pearson
Sharon Percy Rockefeller
Robert H. Stewart, III
Address
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
700 Anderson Hill Road
Purchase, New York 10577
SOURCE: http://www.pepsico.com/Download/AmendedandRestatedArticlesofIncorporation.pdf
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