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31 Cards in this Set

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What are the 2 types of pre-incorporation characters/people?
Promoters

Subscribers
What is a promoter?
a person acting on behalf of a corporation not yet formed
WHen does the corporation become liable on a promoter’s preincorporation contract?
when the corporation ACCEPTS the contract by EITHER:

1. Expressed board of director’s resolution OR
2. Implied acceptance through knowledge of the preincorporation K and acceptance of its benefits
HOw long does a promoter remain liable on preincorporation contracts?
UNtil there has been a NOVATION.
What is a novation?
Novation = an agreement (a new agreement) btw the promoter, the corporation (once it is formed), and the other contracting party that the corporation will replace the promoter under the contract.

(Why we care: the promoter remains liable on preincorp Ks until there has been a NOVATION)
If a promoter enters a K, and the corporation is never formed, what happpens? (Who is liable?)
the PROMOTER ALONE is liable on the K.

(If the corporation is never formed, it can’t accept the K, let alone novate it.)
If the promoter enters a preinc K, and the corp is formed, but the corp. merely accepts the K, who is liable on that K?
the promoter is ALWAYS LIABLE until novation.

Thus, BOTH the promoter and the corp are liable in this situation. A 3rd party can sue either, but not both (can’t sue twice)
What kind of duty do promoters owe? What is the consequence of this duty?
Promoters are fiduciaries of each other and the corporation.

Therefore, promoters cannot make a secret profit on their dealings with the corporation (i.e. sale to corp. of promoter’s own property at profit without disclosure to the corp.)


**Usually this shows up on exam w/ one promoter selling property at more than fair market value, and making a secret profit
What is a subscriber?
a person or a thing who makes a written offer to buy stock in a corporation not yet formed.
Is a preincorporation offer to buy stock in a corporation not yet formed revocable? Explain.
RULE: A preincorporation offer to buy stock in a corporation not yet formed is IRREVOCABLE for 6 MONTHS.
What are the ABSOLUTE formation requirements for a corporation?
1. Must have Incorporators –
Incorporators merely sign and file the Articles of Incorporation with the State Corporation Commission.

2. Must file Articles of Incorporation
WHat information must the Articles of Incorproation contain?
“A PAIN”:

a. # of Authorized shares (maximum # of shares corp. is authorized to issue. This is a ceiling. Can’t be exceeded w/o amending Articles. But corp can always issue fewer shares than listed.)

2. Preferences – If have more than one class of stock, Articles must describe the preferences (rights) assigned to each class

c.Agent – every corp must have an agent, and Articles must list name and address of the registered office

d. Incorporators – Names and addresses of all incorporators

e. Name of Corporation - The name of the corporation must contain some INDICIA of CORPORATE STATUS. (E.g, LLC, Inc).

iii. Exam Red Herring: The by-laws (laws by which the corporation is governed) NEED NOT be contained in the articles of corporation!
1. BUT the corporation MUST adopt by-laws.
a. The Board has power to adopt and amend by-laws, unless the articles give that power to the shareholders
Explain the legal significance of forming a corporation.
It is illegal to do biz as a corporation unless the corp is properly formed. If you have properly formed, then the corporation is a separate legal person. This mean that it incurs its own debts and obligations.

Generally, shareholders are not personally liable for debts & obligations of the corporation. This is the principle of limited liability, which means that the shareholder is liable only for the price of her stock.

Shareholders have to pay full consideration for their share, but that’s all they are liable for.

BY CONTRAST, if general partnership has formed, the general partners ARE liable for debts and obligations of the partnership
WHat is the principle of limited liability?
Generally, shareholders are not personally liable for debts & obligations of the corporation. The shareholder is liable only for the price of her stock.
What is "piercing the veil"?
When a court change the general rule that shareholders are not liable for corporate obligations, and holds individual owner(s) personally liable. This is usually done to avoid fraud or unfairness.
What the 2 specific, primary situations in which a court is likely to pierce the corporate veil?
Alter Ego and Undercapitalization

1. Alter ego - If corporation owners fail to observe sufficient corporate formalities, the court will fail to as well. (Eg, commingling of personal and corporate funds.)

2. Undercapitalization –failure to maintain sufficient capital to cover foreseeable liabilities.

Exam note: If it's a close call, courts more willing to pierce veil on behalf of innocent individual tort victim than on behalf of K claimant
Language to use on essay if there's a question about piercing the corporate veil and alter ego:
“As a rule, shareholders are NOT liable for this debt or obligation, EXCEPT courts will pierce the corporate veil to avoid fraud or unfairness. In this case, X has failed to observe sufficient corporate formalities by commingling personal and corporate funds. Therefore, the court will pierce the corporate veil to render X liable to this creditor.”
Language to use on essay if there's a question about piercing the corporate veil and undercapitalization:
“As a rule, shareholders are not liable for corporate obligations. EXCEPT courts will pierce the corporate veil to avoid fraud or unfairness. In this case, Glowco is undercapitalized because it has failed to maintain sufficient capital to cover foreseeable liabilities. They are in a dangerous business with no insurance and minimal capitalization. Therefore, the court will pierce the corporate veil to render S liable to the tort victim.”
Can a foreign corporation transact business in VA?
Yes, but foreign corporations transacting biz in VA must qualify to do so. Transacting biz means the regular course of intrastate biz activity.

Foreign businesses can qualify to transact business in VA by getting a Certificate of Authority from the State Corporation Commission. Have to give the same information contained in Articles (“A PAIN”).

(A foreign corporation is one incorporated outside VA.)
What can happen to a foreign corporation that transacts business in VA without registering in VA?
1. Could be a modest fine levied against you OR
2. May not initiate a lawsuit in Virginia state courts. (you can BE sued here, and CAN file a counterclaim)
WHat must the corporation receive when it issues stock?
CONSIDERATION.
What is par value?
the minimum issuance price of stock
Can a corproation issue stock for less than par value?
NO, a corporation may never receive LESS than par value
WHat is no par stock? Is it valid in VA?
there is no minimum issuance price. Yes, is it valid.
WHat is treasury stock?
stock that was previously issued and has since been reacquired by the corporation. It can then be resold.
What is the minimum issuance price for treasury stock?
treasury stock is deemed to be no par stock - so there is NO MINIMUM issuance price for treasury stock
Can a corporation acquire property in payment for the issuance of stock?
YES.

Rule: Any valid consideration may be received by the corporation so long as the Board values that consideration to be worth at least par value.
What happens if a corporation issues stock for less than par value?
Directors are liable personally for authorizing a below-par issuance.

Purchasing shareholder is liable for one thing only: to pay full consideration for their shares. (Full consideration = at least par value.)

Thus: the corporation has a choice of whom to sue: the directors or shareholders. They can’t recover twice; they must choose which to sue
WHat are preemptive rights?
the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.

(right to maintain your existing ownership percentage.)
Do preemptive rights have to be exercised(eg, are they mandatory?)
No - it's an option. you don’t have to exercise the right, but it’s your right to do so if you want to.
Are preemptive rights presumed?
Yes - in VA, they are presumed, unless the Articles of Incorporation say otherwise/take them away.

** Exam: If articles of incorporation are silent, or exam Q doesn’t indicate whether corp has preemptive rights, assume they exist