Life and Death of a Corporation

1. Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide. CHAPTER 35 Life and Death of a Corporation

2. Quote of the Day “CORPORATION, n. An ingenious device for obtaining individual profit without individual responsibility.” Ambrose Bierce, American writer, “The Devil’s Dictionary”

3. Promoter’s Liability Before the Corporation is Formed • The promoter is personally liable on any contract signed before formation. • The corporation is not liable unless it adopts the contract after incorporation. • Even if the corporation adopts the contract, the promoter is still liable until the third party agrees to a novation (new contract), unlessthe contract clearly indicates that the other party is relying only on the corporation, which he knows does not yet exist.

4. Defective Incorporation • De Jure Corporation • The promoter has substantially complied with the requirements for incorporation, but has made some minor error. • De Facto Corporation • The promoter has made a good faith effort to incorporate and has actually used the corporation to conduct business. • Corporation by Estoppel • If a party enters into a contract believing the corporation exists, he cannot later take advantage of the fact that it does not.

5. Incorporation Process • Where to Incorporate • In a state –either the home state of the business or a state which has favorable laws for corporations (often Delaware) • Charter’s Required Provisions • Name of corporation • Address and Registered Agent • Incorporator –person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter) • Purpose – this can be a broad statement, such as “to conduct lawful business” • Stock – number and types to be offered

6. Stock • Stock can be: • Authorized and unissued • Authorized and issued or outstanding • Treasury stock (been issued, then bought back by company) • Par value - minimum issue price • Classes and series • Owners of preferred stock have preference on dividends and liquidation. • Common stock is last in line for any corporate payouts, including dividends and liquidation.

7. Charter’s Optional Provisions • Indemnification of Officers and Directors • Cumulative Voting • Under a cumulative voting system, a shareholder is allowed to pool his shares and vote them all for the same person.

8. After Incorporation • Directors and officers are elected, unless all shareholders agree to not have a board of directors. • Minute book holds records of all meetings. • Bylaws set the rules for the corporation. A sample of bylaws can be seen on the Web by clicking here.

9. After Incorporation (cont'd) • Shareholder Agreements – set procedures for voting stock. • Issuing Debt – corporations often need to borrow funds for start-up. • Bonds – long term debt secured by company assets. • Debentures – long term, unsecured debt. • Notes – short term, either secured or unsecured.

10. Foreign Corporations • Foreign means any other state (not country) besides the state of incorporation. • Qualifying to Do Business • Opening an office or establishing any other ongoing presence counts as doing business.

11. Defending a Lawsuit A corporation can be sued in a state only if the firm has sufficient contact so that a suit would not violate “traditional notions of fair play and substantial justice.” Circumstances under which a foreign company may sue and be sued: Foreign Corporations (cont’d)

12. Death of a Corporation • May be voluntary (shareholders vote) or forced (by court order). • Piercing the Corporate Veil -- a court may hold shareholders liable for debt. • This happens in four circumstances: • Failure to observe formalities (such as holding meetings, keeping records) • Commingling of assets (using corporate funds to pay personal debts, etc.) • Inadequate capitalization (the corporation should obtain insurance against liability for torts) • Fraud (injured party may recover from the guilty party, even if the action was the corporation’s)

13. Termination • Terminating a corporation is a three step process: • Vote by a majority of the shareholders. • Filing Articles of Dissolution with the Secretary of State. • Winding up – paying debts and distributing assets.

14. “Entrepreneurs often become impatient with the legal technicalities required to form and maintain a corporation. However, these legalities can have a profound impact on the success of the business.”