Glossary of Corporations Formation

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Formation of the corporation
1) Incorporator signs and files articles; 2) Articles of incorporation; 3) Act of filing the AoI with the Secretary of State.
Requirements of the AoI
1) Names includes Inc, Co, Corp. or Limited; 2) Name of incorporator and Board members if known; 3) Name and address of registered agent; 4) Address of registered office; 5) Purpose and duration; 6) Description of Capital Structure
Ultra Vires Doctrine
Corporation has powers expressly conferred upon it by either AoI or state statute. Any action outside of these expressed or implied powers is an ultra vires act.
Amending AoI
Amend by majority vote of shares entitled to vote.
REgulation of internal affairs, amend by Directors and Shareholders, and cannot conflict with AoI or State law. Shareholders are presumed to have knowledge of bylaws.
De Jure Corporation
Complete and substantial compliance with all formation requirements.
De Facto Corporation
Colorable good faith attempt to incorporate under valid statute. Only state may complain of defect in corp. quo warrento proceeding.
Corporation by Estoppel
3P creditor expectation of corp. will be liable under K. Estopped from holding shareholder liable for corp. debt.
Defective Corp.
Active participants of defective corp. held liable to 3P.
Enters into pre-corp. contracts on behalf of corp. before it comes into existance.
Fiduciary duty of fair dealing, disclosure and good faith.
Secret Profit Rule
Promoter may not make a secret profit on dealings w/corp. Promoter liable for profits unless disclosed to independent board.
1) Was there a profit?
2) Was the profit secret?
Pre Incorporation contracts
Promoter Liability
Unless K stipulates otherwise:
1) Promoter liable
2) Liable unless a novation.
Pre-Incorp Contracts
Corp Liability
Corp. not liable on pre-incorp. contract until it adopt agreement, express or implied.
If adopted, both promoter and corp. liable until a novation.
Capital Structure
1) Authorized Stock
2) Issued Stock
3) Outstanding Stock
Piercing Corp. Veil
Failure to observe formalities of corp. form.
Confusion between shareholder and corp. affairs
In adequate capitalization.
what is a Stock Subscription?
A stock subscription is an offer to buy a corporations' stock.
What is a Pre-Subscription Agreement?
A pre-subscription agreement is an offer to buy stock from a yet to be formed corporation. It is irrevocable for a period of 6 months unless:
1) Revocation is provided in the agreement
2) All subscribers agree to let you out of the agreement.
What is a Post-Subscription Agreement
A post Subscription agreement is an agreement to purchase stock, after the corporation has been formed. It is revocable at any time, before the Board accepts the offer.
Once the stock is sold, what is "legal" consideration?
Proper consideration in exchange for stock consists of:
1) Money
2) Tangible and intangible property
3) Past Services performed.
Once Stock is sold, what is improper consideration?
Stock exchanged for the following would be considered an improper exchange:
1) Future Services performed.
2) good Will
3) promissory Notes
What is impoper consideration in exchange for stock called?
Water Stock
What two steps are required in an analysis for the purchase of stock.
1) Proper form
2) Proper amount
How do you determine the proper amount for stock pricing?
Par Value of stock is the minimum value that can be paid for the stock. The Par value is set by the Board.

No Par Value is stock that has no minimum value. Any price can be paid, also set by the board.

Treasury stock may be paid used to purchase on behalf of the corporation. It is stock that has bee previously issued, reacquired by the corporation and deposited in the corp. treasury.
If stock a stock has a par value of $3.00 per share, and 1000 shares are exchanged for property, how do we know the property is valued to meet the par value requirement?
Value of the property must be at or above the par value price.

The Board makes a good faith effort in evaluating and valuing the property.

Board will estimate the value of property in exchange for stock, if in reality the property is below par value, it will be OK, as long as Board made a good faith effort in valuation.
What are the consequences for a corporation accepting an improper form of consideration in exchange for stock?
If stock is exchanged for less than par value, or for an improper form, the shortfall is called "water."

Creditors can sue for the balance of the water.

Directors are liable for the shortful is they knowingly issued watered stock.

An investor who paid for the water stock is also liable.

A transferee, however, if took the stock without notice and in good faith is not liable.
What are pre-emptive rights?
Pre-Emptive rights gives an existing shareholder the right to maintain a certain percentage of ownership in the stock when a new stock issurance is offered for cash.
If I own 20% of the corporations stock, and there is a new issuance of stock, what are my rights?
You are entitled to purchase 20% of the newly issued stock, in order to maintain your 20% ownership in the corporation's stock.
What authority supports my pre-emptive rights as a shareholder?
At common law, pre-emptive rights were assumed, no provision in the articles of incorporation were required.

Modernly, rights are provided within the State's statute, unless the eliminated in the
What is Opt In?
Opt In describes the situation where the pre-emptive rights only exist if they are included in the corp. AoI.
What is Opt Out?
Opt Out describes the situation where the pre-Emptive rights exist, unless a express provision in the AoI, eliminates the right.
What happens to my pre-emptive rights if stock is not issued for cash?
There are no preemptive rights if stock is issued in exchange for property.. This is also the case at common law.
What is the fiduciary duty of due care?
Directors and officers must act with the reasonable care and skill that a prudent person would with respect to their own business affairs.
Elements of Breach
Plaintiff has burden to show breach/ absence of reasonable skill and care.
Must show causation between act and damage to corp.
Liability only if corp. damaged/ suffered loss.
What are the types of breach?
Misfeasance; conduct or act causes a loss to the corp.

Non-feasance; failure to act, when there was a duty to do so.
Are there any defenses to a breach of duty of care or loyalty?
Business Judgment Rule
What is the Business Judgment Rule
Good faith decisions made by disinterested Directors may be void if the Directors acted with gross negligence and breached their fiduciary duties.
What are the elements of BJR?
1)Directors were reasonably informed.
2) Acted as a reasonable person would
3) rational basis for the decision.
What if Breach is established? What is the liability?
Directors and Officers are jointly and severally liable for the harm proximately caused.
What is the duty of loyalty?
Directors and officers must act in good faith in the best interests of the corp. w/o regard to personal gain.
What are common breaches of loyalty?
1) Insider Trading
2) Self-Dealing
3) Liability for passive participants
4)Other Duties
If the deal personally benefits the Director:
1) the deal is set aside unless;
a. the deal was fair to corp.OR
b. Interest was disclosed or known and approved by maj. of disinterested Dir. and SH.
c. Remedy - damages, injunction.
What is the Corporate Opportunity Doctrine?
Directors and officers cannot usurp a corp. opportunity unless there is full disclosure and the board approves.
What are the 4 tests to the Corp. Opportunity Doctrine?
1) Was the thing necessary to the co.
2) Level of the Co interest
3) Co is in the same line of business as the thing
4) Overall fairness
Remedies: damages, constructive trust, corp gets opportunity costs.
Liability for Passive Participants
A director is presumed to have concurred with a Board action unless he dissents in writing in corp. records.
1) Enter dissent in minutes.
2) Registered letter to corp. immediately after adjournment.
Exceptions: Absent Director not liable, unless nonfeasance.
Good faith reliance on independence sources such as expert or accountant.
Duty to Manage the Company
Cannot delegate all powers and responsibilities to a committee. Unlawful delegation rises to the level of breach of fiduciary duty.
No proxy or voting agreements, must exercise independent judgment.
How are Directors removed from the Board?
Shareholders can remove Directors with or without cause, by a Maj. entitled to vote.
By court; removal based on fraud or gross abuse.

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