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Class Six: Introduction to Corporations Pre-incorporation, Formation and Powers

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

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Class Six: Introduction to Corporations Pre-incorporation, Formation and Powers

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  1. Class Six: Introduction to Corporations Pre-incorporation, Formation and Powers

  2. 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

  3. Tonight We Will Speak About: • Corporations • - 1. Nature of corporations • - 2. Pre-incorporation • - 3. Formation Corporations • - 4. Property of Corporations • - 5. Powers of Corporations

  4. 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.”

  5. 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 Traded • ◆ Professional Corporations: • ◆ Subchapter S Corporations: • ✭ Public Corporations • ◆ Public Benefit Corporations: • ➔ Public Authorities • ◆ Municipalities: • ✭ Not for Profit Corporations

  6. 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.

  7. 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: • 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 limitedpower 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.

  8. TYPES OF BUSINESS ORGANIZATIONS • Corporations • A. What is the Nature of a Corporation? • 6. Distinguished from Other Business Organizations: • Distinguishing Characteristics • Acorporation having the characteristics discussed above may be validly formed only by compliance with certain statutorily prescribed formalities. If there is a failure to comply, aninadvertent partnership among the owners will be the probable result. Alternatively, the owners may deliberately forma 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 andseverally 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)]

  9. 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.

  10. TYPES OF BUSINESS ORGANIZATIONS • Corporations • A. What is the Nature of a Corporation? • 7. Classification of Corporations Continued:

  11. 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 notbe, 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.

  12. 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.2d5 14 (1957)] • ✭ Fiduciary Duty: Nonetheless, as between themselves, promoters have the fiduciary duties of joint venturers until the corporation is organized. [See Macklemv. 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)].

  13. 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)]

  14. 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 Reifv. Williams Sportswear, Inc., supra]

  15. 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:Wherethe 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)].

  16. 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].

  17. 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].

  18. 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)].

  19. 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].

  20. 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].

  21. 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 of Corporation: • ◆Length of Duration:If the duration is not to be "perpetual," the period of duration must be stated [See BCL §402(a)(9)].

  22. 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)].

  23. 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].

  24. 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.

  25. Liability during Formation

  26. 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.

  27. Incorporation Process • When all requirements have been satisfied, the corporation becomes a corporation de jure, meaning corporation by virtue of law.

  28. 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.

  29. 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.

  30. 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.

  31. 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.

  32. 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.

  33. Corporation A Consolidation Transaction Corporation B Consolidation New Corporation C (A & B Disappear)

  34. Corporation A Merger Transaction Corporation B Merger (Survivor) Corporation A (Corporation B Disappears)

  35. 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.

  36. 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.

  37. 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.

  38. Particular Corporate Powers Perpetual Succession Corporate Name Corporate Seal Making Bylaws Executing Commercial Paper Borrowing Money Issuing Stock Making Contracts Acquiring Property (Investments & Holding companies) Issuing bonds Transferring Property Buying Back Stock Doing Business in Another State Paying Employee Benefits Making Charitable Contributions Participating in Enterprises

  39. Corporate Powers • Special service corporations, such as banks, insurance companies, and railroads, are subject to separate statutes with regard to their organization and powers.

  40. 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.

  41. Thank you for Coming • Bonus Questions of the Day • For next time – Read Chapter 45 • We are a hot bench. • Questions.

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