Organizing the corporation

ORGANIZING THE CORPORATION

ORGANIZING THE CORPORATION.

A. FORMALITIES IN ORGANIZING CORPORATION.

1. CERTIFICATE OR ARTICLES OF INCORPORATION—state law governs the content of the articles, which are filed with the secretary of the state. Usually, the articles must specify the corp name, number of shares and classes of stock authorized, address of the corp’s initial registered office, name of initial registered agent, and the name and address of each incorporator.

a) Purpose Clause—under most statutes, no elaborate purpose clause is needed. It is sufficient to state that the purpose of the corp is to engage in any lawful business activity.

b) State of Incorporation—incorporators need to consider how flexible the state’s corporate law is versus the costs associating with incorporating in that state.

2. ORGANIZATIONAL MEETING—filling the articles in proper form creates the corporation, after which an organizational meeting is held by either the incorporators or dirs named in the articles. Matters determined at meeting:

1) Incorporators elect directors, if no dirs are named in the articles,.

2) Directors choose officers,.

3) Directors ratify pre-incorporation transactions,.

4) Directors authorize issuance of shares.

5) Directors adopt by-laws (if necessary), corporate seal and stock certificate.

B. DEFECTS IN FORMATION PROCESS—"DE JURE" AND «DE FACTO» CORPS—when there is a defect or irregularity in formation, the question is whether the corp exists «de jure,» «de facto,» «by estoppel,» or not at all. This issue usually arises when a third party seeks to impose personal liability on would-be shs. Another method of challenging corporate status, used only by the state, is a quo warranto proceeding. Note: where there has not been compliance with the statute, we apply principles of de facto, de jure and corp by estoppel. Where there has been compliance with the statute, we apply principles of disregard of corporate fiction, a/k/a «piercing the corporate veil,» which is an exception, rather than a rule.

1. DE JURE CORPORATION—this exists when the corp is organized in compliance with the statute. Its status cannot be attacked by anyone—not even the state. Most courts require only «substantial compliance», others require exact compliance with the mandatory requirements.

2. DE FACTO CORPORATION (substantially abolished)—this exists when there is insufficient compliance as to the state (i.e., state can attack in quo warranto proceeding), but the steps taken are sufficient to treat the enterprise as a corp with respect to its dealings with third parties. Requirements:

1) Colorable or apparent attempt,.

2) Good faith,.

3) Some use of corporate franchise, Then ct will recognize status as to all but state.

3. CORPORATION BY ESTOPPEL.

a) Definition—estoppel is an equitable evidentiary rule which prevents a party from denying the existence of a fact notwithstanding that he fact is not true. Thus, certain parties are estopped from asserting defective incorporation when they have dealt with the corp as though properly formed.

b) Example—shs who claimed corp status in an earlier transaction are estopped to deny that status in a suit brought against the corp. The estoppel theory normally does NOT apply to bar suits against would-be shs by tort claimants or other involuntary creditors.

c) Overlap With De Facto—many of the facts which we would point to support a claim of de facto status are the same ones we point for estoppel. However, substantial abolition of de facto concept doesn’t necessarily abolish estoppel.

d) De Facto is For All, Estoppel is For One—estoppel depends on relationship between party and corp.

4. WHO MAY BE HELD LIABLE—when a would-be corp is not a de jure or de facto or a corp by estoppel, the modern trend imposes personal liability against only those owners who actively participated in management of the enterprise.

5. EFFECT OF STATUTES:

a) On De Facto Doctrine—states following the prior version of the Model Act have abolished the de facto doctrine, thus making all purported «shs» jointly and severally liable for all liabilities incurred as a result of the purported «incorporation.» However, statutes based on Revised Model Business Corporation Act require a person acting on behalf of the enterprise to know that there was no incorporation before liability attaches.

b) On Estoppel Doctrine—the effect of both acts is an unsettled issue.

c) On Liability—under the prior Model Act, liability extends to investors who also exercise control or actively participate in policy and operational decisions. It is expected that the Revised Model Act will be interpreted in the same manner.