Class Six:
Introduction to Corporations
Pre-incorporation, Formation and Powers
Last Time We Spoke About:
• Sole Proprietorships
• Partnerships
- 1 NATURE OF PARTNERSHIPS
- 2. FORMATION OF PARTNERSHIPS
- 3. PROPERTY OF A PARTNERSHIP
- 4. DISSOLUTION OR TERMINATION OF PARTNERSHIPS
- 5. RELATIONS BETWEEN PARTNERS
- 6. LIMITED PARTNERSHIPS
Tonight We Will Speak About:
• Corporations
- 1. Nature of corporations
- 2. Pre-incorporation
- 3. Formation Corporations
- 4. Property of Corporations
- 5. Powers of Corporations
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
1. Corporation Defined:
• Blacks Law Dictionary defines a Corporation as:
“An artificial person or legal entity
created by or under the authority
of the laws of the state or nation,
which has an existence distinct from that
of its associated individuals,
and has a duration that is either perpetual
or for a limited term of years,
and which acts as a unit
in matters relating to the common purpose of the association
and within the scope of the powers
conferred upon it by law.”
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
2. Corporations Introduced:
● Foundations of a Corporation:
✭
✭
An Artificial Person: A corporation is an artificial person created by
government action, that exists as a separate and distinct entity possessing
certain powers.
Limited Liability: Shareholders are not personally liable for corporate
obligations.
● Types of Corporations:
✭
Private Corporations
◆ Business
Corporations:
➔ Foreign / Domestic
➔ Close / Private / Publically
◆ Professional
Corporations:
◆ Subchapter S Corporations:
✭
Public Corporations
◆ Public
Benefit Corporations:
➔ Public Authorities
◆ Municipalities:
✭
Not for Profit Corporations
Traded
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
3. Generally:
• Meaning of “Corporation”:
A corporation is a legal entity (an artificial person)
created in accordance with statutes.
The corporate entity is separate and distinct from the legal personalities
of those who own and manage the corporation.
In New York, as elsewhere, corporate law is mostly statutory,
and most of the statutory law relating to general business corporations
(i.e. corporations formed for profit)
is contained in the New York Business Corporation Law ("BCL").
4. Constitutional Status:
A corporation is a "person" entitled to due process and equal protection of the law
under the Fifth and Fourteenth Amendments,
A Corporation is not, however, a "citizen" under the Privileges and Immunities
Clause of Article IV or the Fourteenth Amendment.
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
5. Elements of a Corporation:
• Principal Characteristics
In general, corporations have the following principal characteristics:
a.
Limited Liability
Because a corporation is a separate legal entity, its debts and obligations are treated as being
distinctly its own; its shareholders and managers are ordinarily not liable for corporate
indebtedness. One exception is the liability of the 10 largest shareholders of nonpublicly traded
corporations for the wages of corporate employees. [BCL §630]
b. Entity Powers
As a separate entity, a corporation can contract in its own name, sue or be sued, own or convey
property, and be held criminally liable for crimes that it commits. [BCL §202]
c. Centralized Management
Control of a corporation is centralized in a board of directors elected by shareholders. In general,
the shareholders have only extremely limited power to make management decisions (except
insofar as they may elect and remove directors).
d. Continuity of Existence
Unless duration is specifically limited in the certificate of incorporation, a corporation's duration is
"perpetual"; i.e., it continues until dissolved, merged, or consolidated in accordance with the BCL.
The death, withdrawal, bankruptcy, or incapacity of any of its shareholders or managers has no
effect on the corporation's existence. [BCL §202(a)]
e. Free Transferability of Interests
The interest of the corporation's owners is divided into shares, and these shares may be freely
transferred; that is, another person may be fully substituted in the place of the transferor as the
holder of ownership interests (shares) in the corporation.
f. Statutory Sources of Authority
A corporation is a creature of statute; it and its managers and agents have only such authority to
act as is conferred by or pursuant to statutes (principally the BCL), the case law (to a lesser
extent), or legally permitted provisions of the certificate of incorporation or bylaws.
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
6. Distinguished from Other Business Organizations:
• Distinguishing Characteristics
A corporation having the characteristics discussed above may be validly formed only by
compliance with certain statutorily prescribed formalities. If there is a failure to comply,
an inadvertent partnership among the owners will be the probable result. Alternatively,
the owners may deliberately form a partnership or another of the possible forms of
business organizations below.
a. Comparison with Partnership
A partnership is not a separate entity distinct from its owners, the partners. Each partner is jointly
and severally liable for the debts of the partnership [NYSPL §26]. Moreover, each partner has a
voice in management unless the partners all agree to the contrary. The existence of the partnership
and the ownership interests are not freely transferable.
b. Comparison with Limited Partnership
A limited partnership is similar to a general partnership, previously described, except that the limited
partnership includes one or more "limited partners." The liability of limited partners to partnership
creditors does not exceed the limited partners' respective investments in the business. Strict
compliance with the Revised Uniform Limited Partnership Act (NYSPL §121] is required to create a
limited partnership.
c. Comparison with Joint Stock Association
A joint stock association can be conferred certain corporate characteristics, such as continuity of
existence (perpetual existence), centralized management, and freely transferable ownership interest
(shares). However, the owners (shareholders) of joint stock associations do not have the benefit of
limited liability. Joint stock companies are formed pursuant to, and regulated by, the New York
General Associations Law.
d. Comparison with Business Trust
The business trust (so-called Massachusetts Business Trust) is recognized as a business form in
NYS.. The holders of shares of beneficial interest in the trust (the owners) do have the advantage of
limited liability provided they have no power to control the trustees in the management of the trust. A
board of trustees should be a sew-perpetuating body. [Brown v. Bedell, 263 N.Y. 177 (1934)]
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
7. Classification of Corporations
• Types of Corporations:
 The Most Common Forms of Corporations are:
 Private Business Corporations: Private Business Corporations are corporations
formed pursuant to the Business Corporation Law to conduct a business for profit
and whose stock is offered for sale to the public (can be publicly traded or not);
 Publicly Traded Corporations: Publicly Traded Corporations are business
corporations, that have their stock publicly traded for investments, which triggers
federal regulation by the Security and Exchange Commission;.
 Close Corporations: Close Corporations, are business corporations whose shares
are not traded publicly, but are limited to a group of people;
 Nonprofit Corporations: Not for Profit Corporations are corporations formed for a
charitable, educational, civic or other quasi public purpose:
 Municipal Corporations: Municipal corporations are corporations formed to
establish a local government, pursuant to government charter; and
 Public Benefit Corporations: Public benefit corporations are corporations
chartered by an act of Congress or a state legislature, and can include public
authorities, for the purpose of accomplishing a public project or mission.
TYPES OF BUSINESS ORGANIZATIONS
Corporations
A. What is the Nature of a Corporation?
7. Classification of Corporations Continued:
TYPES OF BUSINESS ORGANIZATIONS
Corporations
B. Promoters and Preincorporation Transactions
1. Promoters – Generally:
● Promoter Defined:
✭
✭
✭
✭
✭
What is a Promoter: A promoter is a fiduciary who brings together the persons
interested in the enterprise and sets in motion all that must be done to form a
corporation.
Promoters as Fiduciaries: A promoter, as viewed by the courts, refers to a
person who provides the organizational initiative for the founding of a business
and for the formation of a corporation (or other form) to carry on the business.
Promoters as Insiders: The term “promoter” is often used to refer to the
"insiders" (as opposed to the "outsiders") whose efforts and resources are
contributed in the early stages of a new business enterprise, and in this latter
sense, the term implies the existence of certain fiduciary duties aimed at
protecting (indirectly) the "outsiders“ who invest.
Promoters vs Incorporators: Promoters may be, but need not be, the
"incorporators“ of the Corporation.
Promoters Liability: The promoter is personally liable for contracts made for the
corporation before its existence, and the corporation is not liable on these
contracts unless it adopts them.
TYPES OF BUSINESS ORGANIZATIONS
Corporations
B. Promoters and Preincorporation Transactions
2. Duties of Promoters:
● Duty as Between the Promoters:
✭ Explanation
of Duty: As long as there are no "outside" investors, the promoters
are the only ones having any legal interest in the transactions of the corporation;
thus, self-dealing at this stage is not improper [See Northridge Cooperative v.
32nd Avenue Construction Corp., 286 A.D. 422 (1955), aff'd, 2 N.Y.2d 5 14
(1957)]
✭
Fiduciary Duty: Nonetheless, as between themselves, promoters have the
fiduciary duties of joint venturers until the corporation is organized. [See Macklem
v. Marine Park Homes, Inc., 8 A.D.2d 824 (1959), afl'd, 8 N.Y.2d 1076 (1960)]
✭
Transformative Duty Duty: After incorporation, promoters cease to have such
"partnership" fiduciary duties, and among themselves they have only the rights,
duties, and obligations of shareholders (and of managers if such be the case).
[See Weisman v. Awnair Corp. of America, 3 N.Y.2d 444 (1957)].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
B. Promoters and Preincorporation Transactions
2. Duties of Promoters Continued:
● Duty as to Outside Investors:
✭
Profits Taken After Outsiders Come In: Once "outside" investors come into the
picture, promoters are charged with fiduciary obligations of disclosure and accountability to
the corporation for their secret profits and profits from self-dealing-unless there is at least
consent or ratification. [See Northridge supra].
✭ Profits Taken Before Outsiders Come In: Promoters must account to the corporation
for profits from self-dealing before "outsiders" came in if the issuance of additional shares to
uninformed outsiders was contemplated or the public was invited to become original
subscribers.
◆ Exception: The promoters are not accountable for profits of which the outsiders had notice.
[See Northridge Cooperative supra]
✭
When Promoters' Fiduciary Duties Terminate: The fiduciary duty of promoters to
the corporation is not "enlarged" by introduction of new shareholders several years after the
complained-of transactions. [Continental Securities Co. v. Belmont, 168 A.D. 483 (1915), aff'd,
222 N.Y. 673 (1918)j
✭ Promoters' Continuing Duties: Promoters have a fiduciary duty to the corporation as to
investors who subscribed while the promoters were in control; and as to transactions that
were fixed in their terms while the promoters were in control, even if the subscribers purchase
and the transactions are consummated after the promoters dispose of their interests. [Shore
Terrace Cooperative, Inc. v. Roche, 25 A.D.2d 666 (1966)]
TYPES OF BUSINESS ORGANIZATIONS
Corporations
B. Promoters and Preincorporation Transactions
3. Preincorporation Contracts with Third Parties:
● Liability of the Corporation:
General Rule: "Adoption“:
✭
A contract signed by a promoter before the corporate
existence begins cannot, in its inception, be the corporation's contract or binding upon the
corporation because an "agent" cannot bind a nonexistent principal. [See Oakes v.
Cattaraugus Water Co., 143 N.Y. 430 (1894)l Under this concept, however, the corporation
may become liable on the promoter's contract by "adopting" (ratifying) it.
◆ Express Adoption: "Adoption" may be express, i.e., by a positive, authorized act. [See
Reif v. Williams Sportswear, Inc., 9 N.Y.2d 387 (1961)]
◆ Implied Adoption: "Adoption" may also be implied, i.e., by an from an acceptance of the
benefits with full knowledge (through the corporation's officers) of the contract's existence.
[See Morgan v. Bon Bon Co., 222 N.Y. 22 (1917)]
✭
Alter Ego" of Predecessor: A corporation will be liable on preincorporation contracts
when it takes over completely the assets of an unincorporated predecessor and becomes the
"alter ego" of its promoters. [See Reif v. Williams Sportswear, Inc., supra]
TYPES OF BUSINESS ORGANIZATIONS
Corporations
B. Promoters and Preincorporation Transactions
3. Preincorporation Contracts with Third Parties:
● Liability of the Promoter:
✭ General Rule: New York courts have recognized the general rule that holds the promoter
personally liable for contracts entered into "on behalf" of a proposed (but still nonexistent)
corporation, [See Puro Filter Corp. v. Trembley, 266 A.D. 750 (1943)]
◆ Exception: But courts have held the promoter not subject to personal liability where:
 Intention of the Parties: Where the intention of parties was evidently to bind only the corporation.
[See Weiss v. Baum, 218 A.D. 83 (1926) where a contract was signed by a promoter as "Ruth Realty
Corp.; by Charles Baum" and all the other parties knew that the corporation was not yet existing, and
Cinema North Corp. v. Plaza Latham Associates & Hoyt's Cinema Corp., 867 F.2d 135 (2d Cir. 1988),
which held that even under such circumstances, the promoter also may not have the contract enforced.]
 Novation of the Contract: Where a novation of the contract has occurred between the third party
and corporation, for example, by express or implied assent of the third party to look only to the
corporation for responsibility. Pursuant to "novation" the releasing of the promoter may result from the
third party's agreeing to a minor modification of the contract after the corporation is formed. [See
International Agricultural Corp. v. Carpenter, 190 A.D. 359 (1920) aff 'd, 232 N.Y. 568 (1922)]
● Enforcement by the Corporation:
✭ Agreement for the Benefit of the Corporation: A preincorporation agreement
intended for the benefit of the proposed corporation is enforceable by the corporation if the
corporation expressly or impliedly adopts the contract. Acts in furtherance of contracts are
sufficient for this purpose. [See S&B Rubber & Chemical Corp. v. Stein, 7 N.Y.S.2d 553, aff'd,
255 A.D. 1012 (1938)].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
1. Generally:
● Means of Incorporation:
✭ Process of Incorporation Generally:
◆
Procedures: The procedures for incorporation are set forth in the statutes of each state.
◆
Corporation Exists After Filing: In most states, the corporation comes into existence upon
compliance with the statutory requirements and the issuance of the certificate of incorporation by
the secretary of state.
◆
Corporation De Jure: When all requirements have been satisfied, the corporation becomes a
corporation de jure, meaning corporation by virtue of law.
✭
Process of Incorporation in New York:
◆
Procedures: A business corporation is formed by compliance with the formalities prescribed in
the Business Corporation Law.
◆
Incorporation by Special Act: The creation of corporations by special act of the legislature is
unnecessary except for municipal purposes, for public authorities, or for cases where, in the
judgment of the legislature, the corporation's objectives cannot be attained under the general
laws. [See NYS Constitution, Article 10, Section 1].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
2. Incorporators:
● Creating a Business Corporation:
✭
Who Incorporators Are: Incorporators are one or more natural persons of the age of 18
or over who act as the incorporators of a corporation. [See BCL §401].
✭ The
◆
◆
◆
Role of Incorporators:
Signing the Certificate: The role of the incorporators is to sign (with an acknowledgment)
the certificate of incorporation for delivery to the New York Department of State.
Deliver the Certificate: Upon delivery, the department of state thereupon files the
certificate.
Organizational Meeting: When the corporate existence has begun (when filing has
occurred) the incorporators hold an organizational meeting for the adoption of bylaws and
the election of the first board of directors. [See BCL §402 and 404].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
3. The Certificate of Incorporation:
● The Foundation of the Certificate:
✭ What is a Certificate of Incorporation: The certificate of incorporation is the legal
document, which when filed with the office of secretary of state, creates the corporation.
● What is Included in the Certificate:
✭ The Name of the Corporation:
What’s in a Name: The name of the corporation must include the word "corporation,“
"incorporated," or "limited,“ or an abbreviation thereof [See BCL §301(a)] , and the use of the
word “company" is not sufficient.
◆ The Name Cannot be Confusing: The name cannot be the same as or confusingly similar to the
name used or reserved by any other domestic or foreign corporation [See BCL §301(a)(2)] , and
the name may not contain any word or phrase prohibited by statute, or that implies that the
corporation has powers or purposes that it does not have (e.g., "bank," "doctor," "finance,"
"insurance,“ "lawyer," or "loan“), unless of course, the corporation is an appropriate professional
corporation that can use such words. Moreover, the use of any name with intent to deceive is a
misdemeanor and may be enjoined. [See N.Y. Gen. Bus. Law §133]
◆ Reservation of Name: A name may be reserved for 60 days by application to the New York
Department of State, and on good cause shown by affidavit, two separate 60-day extensions
may be granted. [BCL §303(d)].
◆ Foreign Corporation: In general, foreign corporations doing business in New York are subject to
the same rules as to name as are domestic corporations, but it should be noted that a foreign
corporation whose corporate name is not acceptable pursuant to sections 301 and 302 may
submit in its application for authority a fictitious name under which it will do business in New York
[See BCL §1301(d)].
◆
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
3. The Certificate of Incorporation Continued:
● What is Included in the Certificate Continued:
✭
Purposes of the Corporation:
◆
What’s in a Purpose: The purpose of the corporation must specify what the purpose of the
business is that the corporation will conduct. word "corporation,“ "incorporated," or "limited,“ or
an abbreviation thereof [See BCL §201 and 202].
◆
Must be Formed for a Lawful Purpose: A corporation may be formed under the Business
Corporation Law for "any lawful purposes" except purposes reserved to corporations formed
under another state statute (e.g., railroad, banking, transportation, insurance, ect.) [See BCL
§201 (a)].
◆ Catch-All
Purpose Clause Permitted: The use of a single catch-all purpose clause (e.g., "to
engage in any lawful act or activity for which corporations may be organized") is permitted [See
BCL §401 (a)(2)].
◆
Enumerated Powers Not Required: All the powers that the corporation would hope to have
need not be enumerated in the certificate of incorporation [See BCL §402 (c)], and except as
restricted in the certificate or by law, a corporation in furtherance of its purposes has all the
powers specified by the Business Corporation Law [See BCL §202].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
3. The Certificate of Incorporation Continued:
● What is Included in the Certificate Continued:
✭
Office of Corporation:
◆ County
Must be Stated: The county in New York of the "office of corporation" must be stated
on the certificate [See BCL §402(a)(3)].
◆ Need Not Be Place of Business: "Office of corporation" means the office referred to in the
certificate of incorporation and need not be a place of business [See BCL §102 (a)(10)].
✭
Authorized Shares and Description: The certificate of incorporation must set forth:
◆
Aggregate Number of Shares: The aggregate number of shares authorized to be issued
[See BCL §402(a)].
◆
Statement of Par Value:
A statement of the par value of the shares to be issued or a
statement that they will have no par value [See BCL §402(a)].
◆ Statement of Classes: If shares are to be divided into classes, the number of each class,
statement of par value or no par value, statement of designations, and relative rights,
preferences, and limitations of shares of each class [See BCL §402(a)(4) and (5)].
◆ Statement of Preferred Shares: If preferred shares are to be issued in series, a statement of
variations in the series, a statement of the board's authority, if any, to establish and designate
series and fix variations between them, and a statement of any limitation on the board's authority
to change the number of shares of any series of preferred shares. [BCL §402(a)(6)].
◆ Statement of Pre-emptive Rights: Any provision limiting or denying preemptive rights, for
corporations in existence prior to February 22, 1998. [See BCL §622].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
3. The Certificate of Incorporation Continued:
● What is Included in the Certificate Continued:
✭
Service of Process:
◆ Designation
of Secretary of State: The New York Secretary of State must be designated as
agent for service of process (and post office address given for forwarding process) [See BCL
§402(a)(7)].
◆ No
Designation: Even without express designation, the secretary of state is the agent for
process for all domestic corporations and also foreign corporations subject to New York
jurisdiction [See BCL §304,306 and 307].
◆ Registered
Agent: The corporation's registered agent for service of process, if any, must be
designated in the certificate of incorporation [See BCL §402(a)(8)], but it should be noted that a
registered agent is optional and in merely an addition to the secretary of state designation. The
registered agent must be a resident of New York State, or have a business address there, or
have a domestic or foreign corporation registered in New York [See BCL 9305(a)]
✭ Duration
◆ Length
of Corporation:
of Duration: If the duration is not to be "perpetual," the period of duration must be
stated [See BCL §402(a)(9)].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
3. The Certificate of Incorporation Continued:
● What is Included in the Certificate Continued:
✭ Limitations
◆
on Director's Liability:
Limitation for Certain Breaches: The certificate of incorporation may limit the liability of
directors to shareholders for breaches of duty where the breach is not found:
■ To be in bad faith;
■ To be due to a director's intentional misconduct or knowing violation of the law;
■ To result in a financial profit or other advantage to which the director was not legally entitled; or
■ To violate statutory liabilities of directors [See BCL §402(b)].
◆ When
Such Limitations May Be Applied: These limitations, however, cannot be applied to
acts occurring prior to the adoption of a section 402(b) clause in the certificate of incorporation.
✭ Other
◆
Provisions:
Insertion of Additional Provisions:
Incorporators may insert other provisions, not
inconsistent with statutes, relating to the corporation's affairs or to the rights or powers of its
shareholders, directors, or officers [See BCL §402(c)].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
C. Corporate Formation
4. Execution and Filing of the Certificate:
● The Process of Filing and Executing the Certificate:
✭ Actions
◆
of Filing and Execution:
Signing and Acknowledgment: The certificate of incorporation must be signed by the
incorporator(s) and acknowledged before a notary public [See BCL §402(a)].
◆
Filing: The executed certificate of incorporation is delivered to the department of state and, if it
conforms to law and taxes and filing fees are paid, it must be filed by the department of state
[See BCL §104(e)].
◆
Corporate Existence Commences: The corporate existence commences upon the filing of
the certificate of incorporation by the department of state.
■ Date: The certificate of incorporation may set forth a date subsequent to filing, not to exceed 90 days
after filing, upon which corporate existence shall begin [See BCL §403]. No further action is required.
◆
Organization Meeting: Once corporate existence begins:
■ The Meeting: Incorporators hold an organization meeting to adopt bylaws and elect the first board of
directors, who then take over the management of the corporation, issue shares to shareholders, and
the like [See BCL §404].
■ Written Consent: Incorporators may act on written consent of the majority without a meeting [See BCL
§615].
TYPES OF BUSINESS ORGANIZATIONS
Corporations
D. Corporate Powers
1. Generally:
● General Powers of the Corporation:
✭
Powers of the Corporation:
◆
Enumerated Powers Not Required: All the powers that the corporation would hope to have
need not be enumerated in the certificate of incorporation [See BCL §402 (c)], and except as
restricted in the certificate or by law, a corporation in furtherance of its purposes has all the
powers specified by the Business Corporation Law [See BCL §202], and such powers include:
■ To have perpetual duration;
■ To sue and be sued ;
■ To have a and use a corporate seal;
■ To acquire, own, sell, improve, lease, use, or create a security interest in, real or personal property;;
■ To acquire, own, hold, vote, lend, lease, or dispose of, bonds ,obligations, shares, or other securities.
■ To make contracts, give guarantees, incur liabilities, and issue notes, bonds and other obligations;
■ To lend money, invest its funds, and take and hold real and personal property as security;
■ To do business, carry on operations, and have offices and exercise its powers in any US jurisdiction;
■ To elect or appoint officers, employees and agents, define duties, fix compensation, and to indemnify;
■ To make charitable donations, irrespective of corporate benefit, for public welfare or community benefit;
■ To pay and establish pensions, profit-sharing, share bonuses and options, savings and incentive plans;
■ To acquire, own, hold, sell, exchange, or dispose of, pledge, use and deal its own shares;
■ To be a promoter, partner, member, associate, incorporator or manager of another business enterprises;
■ To adopt, amend or repeal by-laws, including emergency by-laws; and
■ To have and exercise all powers necessary to effect any purpose for which the corporation is formed.
Liability during Formation
Promoter: one or more persons who
bring together other persons to form
the corporation itself
Corporation: an artificial being,
existing as a person, separate and
distinct from the persons who own it
Liable for all contracts made on behalf
of the corporation before its existence,
unless exempted by agreement or
circumstances. Liable on contractions
if the corporation is never formed,
unless exempted by agreement
Not liable on a contract made by its
promoter for its benefit unless it adopts
such contract
Liable for all torts committed in
connection with promoter’s activities
Not ordinarily liable for torts of the
promoter, but may become liable by its
own conduct after incorporation
Cannot make secret profits at the
expense of the corporation or its
subscribers
Not liable for expenses and services of
promoter, unless it subsequently
promises to pay, or charter or statute
imposes such liability
25
Incorporation Process
• The procedures for incorporation
are set forth in the statutes of
each state.
• In most states, the corporation
comes into existence upon
compliance with requirements
and the issuance of the certificate
of incorporation.
26
Incorporation Process
• When all requirements have been
satisfied, the corporation
becomes a corporation de jure,
meaning corporation by virtue of
law.
27
Proper and Defective Formation
• De Facto Corporation. Compliance with
some but not all requirements for
incorporation and the corporation is
functioning already (existing in fact).
• But when sufficient compliance even for a
de facto corporation does not exist, there
is no corporation.
28
Proper and Defective Formation
• Corporation by Estoppel. A third person
may be estopped from denying the legal
existence of a “corporation” that did not
exist, after they did business with it.
29
Consolidations & Mergers
• Two or more corporations may be
combined to form a new enterprise.
• This combination may be a consolidation,
with a new corporation coming into
existence, or a merger, in which one
corporation absorbs the other.
30
Liability of Successor
Corporations
• Mergers and Consolidations:
– Generally, surviving corporation that
continues to do business succeeds to all the
rights and property of the predecessor, or
‘disappearing’ corporation.
– Liabilities can be imposed upon ‘disappearing’
corporations by law or by agreement.
31
Liability of Successor
Corporations
• Asset Sales:
– A corporation may merely purchase the
assets of another corporation.
– In that case, the purchaser is not liable for the
obligations of the selling corporation.
32
Consolidation
Corporation
A
Corporation
B
New
Corporation
Consolidation
C
Transaction (A & B Disappear)
33
Merger
Corporation
A
Corporation
B
Merger
Transaction
(Survivor)
Corporation
A
(Corporation B
Disappears)
34
Corporate Powers
• A corporation has the power to
continue as an entity forever or
for a stated period of time
regardless of changes in the
ownership of the stock or the
death of a shareholder.
35
Corporate Powers
• It may make contracts, issue
stocks and bonds, borrow money,
execute commercial paper,
transfer and acquire property,
acquire its own stock if it is
solvent and the purchase does
not impair capital, and make
charitable contributions.
36
Corporate Powers
• Subject to limitations, a corporation has
the power to do business in other states.
• A corporation also may participate in a
business enterprise to the same extent as
an individual.
• That is, it may be a partner in a
partnership, or it may enter a joint venture
or other enterprise.
37
Particular Corporate Powers
Perpetual
Succession
Issuing
Stock
Corporate
Name
Corporate
Seal
Making
Bylaws
Making
Contracts
Borrowing
Money
Executing
Commercial
Paper
Issuing
bonds
Transferring
Property
Doing
Business
in Another
State
Participating
in
Enterprises
Acquiring
Property
(Investments
& Holding
companies)
Paying
Employee
Benefits
Buying
Back
Stock
Making
Charitable
Contributions
38
Corporate Powers
• Special service corporations,
such as banks, insurance
companies, and railroads, are
subject to separate statutes with
regard to their organization and
powers.
39
Corporate Powers
• An ultra vires act occurs when a
corporation acts beyond the
scope of the powers given it.
–Because states now grant broad
powers to corporations, it is unlikely
that a modern corporation would act
beyond the scope of its powers.
40
Thank you for Coming
• Bonus Questions of the Day
• For next time – Read Chapter 45
We are a hot bench.
• Questions.