Organization of Corporations (Outline 3)

To form a corporation, what must they file?

Articles of Incorporation

After filing a articles of incorporation what does the state do after?

They then issue a certificate of corporation

What does a certificate of corporation do?

It is proof that a corporation exists

What does the article of incorporation include?

The corporate name and principal office; the number and types of shares authorized; the name and office of the registered agent; and anything else the incorporaters might want → indemnity for directors

If you are a business in 50 states you need what?

You need 50 registered agents

Can a corporation hold its directors liable?

They cannot hold them liable for core liabilities, a corporation will protect them if shareholders sue, but they cannot protect them if the director harmed them on purpose.

What is a registered agent?

An agent who is authorized to receive notice of lawsuits against the corporation. Corporation have to name the registered agent; details like their address and other details.

Levy bought a magic store from Martin, giving him a promissory note for the purchase price. The note was signed, “Voodoo, Inc., by Eugene Levy, President.” Later Levy submitted articles of incorporation to the secretary of state, and a certificate of incorporation was issued for Voodoo, Inc.

Martin then accepted two payments on the promissory note from the corporation, but within six months the magic store failed and Voodoo, Inc. ceased doing business. Martin sued Levy for the balance due on the note.

A. Are corporate officers usually liable for corporate notes they sign?

B. At the time Levy signed the note, was he an agent for the corporation?

A. No; an agent is not liable if they acted within authority and they disclosed principal authority

B. No, the time he signed that note the corporation do not exist.

A corporation exists once when?

Once the state accept the articles of incorporation

Promoter

Somebody who makes contracts on the behalf of a corporation before it is formed

Promoters are personally liable for what

For the contracts that they make for corporations before they are one even if the corporations is later formed

Once its formed should a corporation be liable?

No, as the corporation wasn’t the principle

A corporation becomes liable for pre-incorporation when…

It adopts the contract → ys this corporation adopted the contract because the made two payments

Adoption of the contract does not release whom?

The promoter; promoters retain liability until release from creditors or corporations pays off the debt

Why should you incorporate before making contracts?

Because there is not good reason to accept contracts before you are a corporation

A corporation exists once they file articles but after what should they do?

They should hold an organizational meeting of the initial directors

What are the three things corporations need to do?

Adopt bylaws, Elect officers, and Issue shares.

Adopt bylaws?

Body of rules that govern that corporation

In case of a conflict between the Articles and Bylaws, what governs?

The articles

Articles charactersitics

Recorded, 1-3 pages, difficult to amend → needs approval

Bylaws characteristics?

Not recorded, 5-50 pages, easy to amend → board of directors can chose

The difference between constitution and statures?

Constitution = articles, statures = Bylaws

Can corporations have whatever officers they wish?

Yes, they can have a president, vice president, CFO, CEO, and COO etc.

What do some states require corporations to have?

Particular officers such as corporate secretary. Delaware requires you have a corporate secretary

Corporate secretary?

The point of contact with the state; keeps corporate records; signs official documents; and keeps the corporate seal

Who does the state contact to reach a corporation?

They talk to the corporate secretary

Corporate seal

Stamp or press on paper to show that something is genuine

A corporation can issue only such shares (both the number and type) as are authorized in what

The articles of incorporation

The board of directors has discretion regarding when to issue shares, how many, and at what price, but they must use what?

Due care not to set the share price below fair value. If you issue shares less than fair value you’re harming existing share holders

Wantered Shares

are shares issued for below fair value, and board of directors are personally liable/its illegal for an issuance of shares in violation.

Larry, Robin, and Keith formed a close corporation. Larry took a 60% interest, and Robin and Keith each took a 20% interest, and they became the only officers and directors. The corporation is their only source of income.

The company is successful and worth $30 million. Robin calculates her shares are worth $6 million, so she decides to retire and move to the Caribbean. She comes to you, her financial advisor, and asks, “How do I get my $6 million?”

A. Advise her.

B. Would your answer be different had they selected a different form of business organization?

A. She can sell her shares away to any buyer and get her 6 million but most probable is selling to the other partners. Good luck trying to find buyers in the public.

B. If she was a public corporation, she could sell to the public. LLC,LLP she could quit and that can still be wrongful dissociation but she will get paid

Shareholders’ (Buy-Sell) Agreement

A contract among all corporations and have any provisions. These are contracts and can contain anything

What is the first provision that most Shareholders’ (Buy-Sell) Agreement have? (1)

Obligation of the corporation or other shareholders to buy back shares of the existing shareholder (this is buy-sell feature and exit strategy) (1)

What is the second provision that most Shareholders’ (Buy-Sell) Agreement have? (2)

Voting restrictions. (2)

What is the third provision that most Shareholders’ (Buy-Sell) Agreement have? (3)

Restrict the transfer of shares.

Restrict the transfer of shares.

Restricts power to freely transfer shares. Anytime you restrict a transfer of shares it makes it less valuable

Voting restrictions

Agree to vote for each other as officers and directors. Shareholders will agree with each other beforehand.

What does life insurance do regarding shareholders?

Can fund buybacks upon a shareholder’s death

Ruth participates in FAMCO’s employee stock purchase plan. The plan restricts the transfer of shares as follows:

“Before an employee may sell his or her shares, FAMCO has a right of first refusal to buy the shares at the sale price.”

Ruth sold her shares to TP without giving FAMCO a right of first refusal. TP had no notice of the transfer restriction. As between FAMCO and Ruth the transfer restrictions were legally enforceable, so FAMCO wishes to cancel Ruth’s sale of the shares.

A. Whose rights are greater, FAMCO or TP’s?

B. What could FAMCO have done to prevent this from happening?

A.Third parties rights wins because FAMCO was at a better position to solve this problem

B. FAMCO could have given notice

What is a BONA FIDE PURCHASER and why are transfer restrictions not effective against one?

Transfer restrictions are not effective them because they gave valuable consideration → without any reason to suspect irregularities in the transaction

Transaction Statement

A statement that says there is a restriction on selling shares

Why do employers create employe stock purchase plans?

They want employers to be motivated to make the company to be more profitable. If you make. employees shareholders they will think like shareholders.

Another provision in the FAMCO Employee Stock Purchase Plan stated, “If employment terminates for any reason, FAMCO has an option to purchase the employee’s shares at book value.”

D. Why should employees avoid FAMCO’s stock purchase plan?

Book value is usually a lot less than market value. An employee who buys these shares and leave they are forced to sell to FAMCO for book value.