Chapter 34

Corporations

 

Objectives:

1. Attributes and classification of corporations

2. Formation of corporation, liability of promoters

3. Treatment of defectively formed corporations

4. Piercing the corporate veil

5. Source of corporate powers and consequences of going beyond powers

         

I. Nature of Corporations

          A. Corporate attributes

                   1. Separate legal entity

                   2. Limited liability

                   3. Free transferability of corporate shares

                   4. Perpetual existence

                   5. Centralized management

                   6. Rights as a person

                   7. Rights as a citizen

          B. Classification of corporations

                   1. Public or private

                   2. Profit or nonprofit

                   3. Domestic or foreign

                   4. Why Delaware?

                   Tiller, p. 675.

                   Facts: Nadler was sole shareholder of corporation Glenmar. Glenmar leased space in Maryland. Tiller Corp and Nadler entered into two contracts to build movie theaters. Tiller was to "do the work," and send bills to Glenmar. Nadler agreed to be personally liable on both contracts. Tiller sent bills for $493k, but Nadler refused to pay. Tiller sues.

                   Nadler made motion based on Tiller's failure to register foreign corporation under Maryland law. Trial court granted motion to dismiss, citing Tiller's large projects in Maryland.

                   Issue: Should the court dismiss Tiller's claim due to failure to comply with Maryland's corporation statute?

                   Holding: Yes. Tiller was doing too much in Maryland to avoid the registration requirement.

                   5. Publicly held v. closely held

                   6. S corporations

                   7. Professional corporations

 

II. Formation of Corporations

          A. Organizing the corporation

                   1. Promoters

                             a. Promoter contracts

                   Coopers & Lybrand, p. 679

                   Facts: Promoter decided to set up corporation. He hired C&L to do accounting work. They sent a reasonable bill for $10k+. Promoter only put $100 in corporation. He refused to pay, saying corporation was solely liable.

                   Issue: Can promoter rely on corporate shield when corporation was not formed at time of contract?

                   Holding: No. C&L's contract was with promoter as an individual.

                   (Note, C&L should have had written fee agreement, stating who was liable for payment of fees).

                             b. Promoter's fiduciary duty

                   2. Subscribers (agrees to buy stock before stock is issued)

          B. Formalities of incorporation

                   1. Selection of name

                   2. Incorporators

                   3. Articles of incorporation

                   4. Organizational meeting

                   5. Bylaws

          C. Defective incorporation

                   1. Common law approach

                   2. Statutory approach (filing is conclusive proof incorporation, even if mistakes or omissions exist)

                   Harris, p. 684

                   Facts:  Harris sells business to J&R Construction

                   Alexander signs on behalf of J&R Construction.

                   On same day Alexander and two others sign articles of incorporation.

                   Two days later, they file the articles of incorporation.

                   Dispute arose when buyer did not pay on their note. Court held Alexander liable, but not the other two.

                   Issue: Who is liable?
                   Holding: Only Alexander signed the contract. He is the only one on the hook.

          D. Piercing the corporate veil

                   1. Closely held corporations

                   2. Parent-subsidiary

                   National Hotel Associates, p. 687

                   Facts: O wanted to renovate hotel.

                   Players, Richard, O. Ahlborg (non-union, corporation), CSI (parent corporation, owned by Richard)

                   Richard referred to O. Ahlborg and CSI as "Siamese twins." He repeatedly boasted "I'm O. Ahlborg" and "I'm CSI." He would have the one company work on the other company's projects.

                   CSI gets in trouble.  O. Ahlborg loans $400k to CSI.

                   CSI never paid back O. Ahlborg.

                   $360k of the loan came from hotel project.

                   CSI claimed against O in arbitration for $400k owing. Richard said he and O. Ahlborg were real parties in interest.

                   O counterclaimed for $230k. O wins against CSI, then seeks to enforce against Richard and O. Ahlborg.

                   Trial court ruled in favor of Richard and O. Ahlborg.

                    Issue: Can O pierce the corporate veil of CSI and go after Richard and O. Ahlborg.

                   Holding: Yes. Statements and mixing of assets and liabilities indicate no real distinctions. Loan with no attempt to collect was a problem. Also, CSI was undercapitalized from the beginning and appeared to be a sham.

          E. Sources of corporate power

                   1. Statutory powers

                   2. Purposes

          E. Ultra Vires Acts

                   1. Effect of ultra vires acts

                   2. Remedies for ultra vires acts