Comprehensive Volume, 18th Edition

Chapter 46: Introduction to Corporation Law

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Formation of a CorporationA corporation is an artificial person created by government action. It exists as a separate and distinct entity possessing certain powers. In most states, the corporation comes into existence when the secretary of state issues a certificate of incorporation.

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Types of CorporationsThe most common forms of corporations are:

Private business corporations whose stock is sold to the public (publicly held) and Close corporations, which are business firms whose shares are not traded publicly.

Corporations may be formed for purposes other than conducting a business.

For example, there are nonprofit corporations, municipal corporations, and public authorities for governmental purposes.

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Corporations

DomesticCorporation

Special ServiceCorporation

PublicCorporation

CloseCorporation

PrivateCorporation

ProfessionalCorporation

Quasi-PublicCorporation

NonprofitCorporation

PublicAuthority

“S”Corporation

ForeignCorporation

Classificationsof

Corporations

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PromotersA promoter is a person who brings together the persons interested in the enterprise and sets in motion all that must be done to form a corporation. The promoter is personally liable for contracts made for the corporation before its existence. The corporation is not liable on these contracts unless it adopts them. A promoter stands in a fiduciary relation to the corporation and stockholders.

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Liability During FormationPromoter: one or more persons whobring together other persons to formthe corporation itself

Corporation: an artificial being,existing as a person, separate anddistinct from the persons who own it

Liable for all contracts made on behalfof the corporation before its existence,unless exempted by agreement orcircumstances. Liable on contractionsif the corporation is never formed,unless exempted by agreement

Not liable on a contract made by itspromoter for its benefit unless it adoptssuch contract

Liable for all torts committed inconnection with promoter’s activities

Not ordinarily liable for torts of thepromoter, but may become liable by itsown conduct after incorporation

Cannot make secret profits at theexpense of the corporation or itssubscribers

Not liable for expenses and services ofpromoter, unless it subsequentlypromises to pay, or charter or statuteimposes such liability

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ProceduresThe 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. When all requirements have been satisfied, the corporation becomes a corporation de jure, meaning corporation by virtue of law.

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Defective FormationWhen there is compliance with some but not all requirements for incorporation, but the corporation is functioning already, it may be declared to be a de facto corporation (existing in fact). When sufficient compliance even for a de facto corporation does not exist, there is no corporation.

However, in some jurisdictions a third person may be estopped from denying the legal existence of such a “corporation” after they did business with it. It then becomes a corporation by estoppel.

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Piercing the Corporate VeilOrdinarily each corporation will be treated as a separate person, even if two corporations have the same shareholders. However, when a corporation is formed to perpetrate a fraud, a court will ignore the corporate form, or “pierce the corporate veil.” The corporate form will also be ignored to prevent injustice or because of the functional reality that the two corporations in question are one.

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Duration and RightsA 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. 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.

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Corporate RightsSubject 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.

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Particular Corporate Powers

PerpetualSuccession

Issuing Stock

Issuingbonds

Doing Business

in Another State

MakingContracts

TransferringProperty

Participatingin

Enterprises

CorporateSeal

ExecutingCommercial

Paper

AcquiringProperty

(Investments& Holding companies)

PayingEmployeeBenefits

MakingBylaws

Buying BackStock

MakingCharitable

Contributions

CorporateName

BorrowingMoney

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Limitations on RightsSpecial service corporations, such as banks, insurance companies, and railroads, are subject to separate statutes with regard to their organization and 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.

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CombinationsTwo 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.

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Consolidation

CorporationA

CorporationB

NewCorporation

C(A & B Disappear)

Consolidation Transaction

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CorporationA

CorporationB

(Survivor)Corporation

A(Corporation B

Disappears)

MergerTransaction

Merger