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Jean Metzinger, Paysage coloré aux oiseaux aquatique (1907). Module III – Corporate Form. Chapter 7 Forming the Corporation. Bar exam. Corporate practice. Process of incorporation Contents of articles Formalities Role of lawyers: Who is client? Client confidences

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Chapter 7

Forming the Corporation

Jean Metzinger, Paysage coloré aux oiseaux aquatique (1907)

chapter 7 forming the corporation

Module III – Corporate Form

Chapter 7Forming the Corporation

Bar

exam

Corporate practice

Process of incorporation

Contents of articles

Formalities

Role of lawyers:

Who is client?

Client confidences

Lawyer as director

Defective incorporation

Corporation not formed: parties aware / parties not aware

Corporation formed: dissolved by state / misused by parties

Law profession

Citizen of world

Chapter 7

Forming the Corporation

slide3

How do you incorporate?

ARTICLES OF INCORPORATION

1. Name. The name of corporation is Your Awesome Home, Inc.

2. Shares authorized. The corporation can issue 1,000 shares of stock.

3. Registered office and agent. The corporation’s registered office is 1301 Worrell Prof Bldg, WFU. Registered agent is AR Palmiter.

4. The incorporator is AR Palmiter, 3333 Worrell, W-S, NC 27109.

AR Palmiter

AR Palmiter, incorporator

Chapter 7

Forming the Corporation

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ARTICLES OF INCORPORATION
  • Name of corporation
    • How do you know the name is available, in proper form? MBCA § 4.01
    • What are the corporation’s purposes? MBCA § 3.01
    • What are the corporation powers? MBCA § 3.02

2. Shares authorized

    • Why is this so important?
    • What about the rights of the shares?
    • What about the share’s price? What about “par value”?

3. Registered office/agent

    • Who can be registered agent? MBCA § 5.01
    • Why is registered office/agent required?
    • Is the registered agent liable for corporate obligations?

4. Incorporator

    • Who are the directors, officers, shareholders?
    • Can liability of directors, officers, Shs be specified? MBCA § 2.02

Chapter 7

Forming the Corporation

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True or false. A corporation’s name must have an ending such as “Inc.” or “Corp.”

To know whether a corporate name is available --

a. Do a Google search

b. Check business directories and phone books

c. Check the Secy of State’s website

d. All of the above

3. The corporation’s powers ...

Must be specified in the articles

Cannot be specified in the articles, but bylaws

Must be consistent with stated purposes

Are those of natural persons

4. True or false? The board of directors can issue shares, to raise capital from new investors, even if shares are not authorized in the articles.

Pop quiz

1-T / 2-D / 3-C / 4-F

Chapter 7

Forming the Corporation

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5. The registered agent must be –

A person who works in the corporation’s principal offices

A natural person over the age of 18

A corporation that can receive service of process

In NC, an individual or business entity with the same business address as the corporation

6. True or false? The registered agent is liable for the corporation’s contractual and tort obligations.

7. The incorporator is:

An individual or company that files the articles

An individual or company that undertakes to file an annual report for the corporation

The individual or business entity that prepares a “certificate of existence”

8. The articles of incorporation can:

Limit the liability of directors for negligence

Limit the liability of directors who act in bad faith

Limit the liability of directors who approve illegal acts

None of the above

5-D / 6-F / 7-A / 8-A

Chapter 7

Forming the Corporation

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Two NC corporations …

Website

EDGAR

Chapter 7

Forming the Corporation

post incorporation formalities
Organizational meeting

Held by incorporators or initial board

Actions:

elect directors,

adopt bylaws,

appoint officers,

adopt corporate seal,

designate bank account,

sell stock,

approve shareholders’ agreement

Minutes of meeting

Post-incorporation formalities

shivaree (shiv-uh-REE) noun

A noisy, mock serenade to a newly married couple, involving the banging of kettles, pots and pans.

Chapter 7

Forming the Corporation

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Role of lawyer …

Basil (who you represented before) asks you to help him to form a corporation for a new beverage business.He will be joined by Sybil (who will handle finances) and Gowan (who has the money). You are a corporate lawyer – this is your work. Who do you represent?

Sybil

Basil

Gowan

Gowan, Jr.

Chapter 7

Forming the Corporation

who do you represent
Who do you represent?

Gowan:

Thanks for explaining that you’ll help form a corporation.

As you know my son Gowan, Jr. is pretty unsure about his future. I’m investing in this company so there’ll be a place for him. I’d like you to draft papers that give me voting control, though Basil and Sybil don’t have to know.

Please hold this in confidence and draft the papers as I want. As you know, I’m paying your bill.

What should you do?

Chapter 7

Forming the Corporation

model rules of professional responsibility
Model Rules of Professional Responsibility

Rule 1.13 Organization as Client

(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

Rule 1.4 Communication

A lawyer shall … promptly inform the client of any decision or circumstance with respect to which the client’s informed consent … is required.

Chapter 7

Forming the Corporation

what if a conflict
What if a conflict?

Basil:

Thanks for taking on this new legal work for us. As you know from your work for me on my divorce, there are some pretty personal things that I’ve told you. I assume you won’t be telling the others.

Under his breath, “Like you know I’m really strapped for cash. What with child support and alimony, I’m not sure what to do. But with this new company I plan to get out as much cash as quickly as I can.”

What should you do?

Chapter 7

Forming the Corporation

model rules of professional responsibility1
Model Rules of Professional Responsibility

Rule 1.4 Communication

A lawyer shall … promptly inform the client of any decision or circumstance with respect to which the client’s informed consent … is required.

Rule 1.6 Confidentiality of Information

A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent.

  • Rule 1.7 Conflict of Interests: Current Clients
  • … a lawyer shall not represent a client if the representation involves a concurrent conflict of interest [But] a lawyer may represent [such] a client if
    • [lawyer provides competent representation]
    • [not prohibited]
    • [not in same litigation]
    • [each affected client gives informed consent, in writing]

Chapter 7

Forming the Corporation

is employee constituent a client
Is employee/constituent a client?

Sybil:

Thanks for forming the company – things really seem to be going well.

Now that you’re our lawyer, I thought you should know that I told the others I have an MBA and know accounting, but I don’t. Not to say I’m clueless – in my last job I actually got away with embezzling about $250,000.

I really hope you won’t tell Basil or Gowan.

What should you do?

Chapter 7

Forming the Corporation

model rules of professional responsibility2
Model Rules of Professional Responsibility

Rule 1.13 Organization as Client

(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

(b) If a lawyer for an organization knows of [someone intending to violate legal obligation or law], the lawyer shall refer the matter to higher authority in the organization [including the board of directors]

(c) .. If despite the lawyer’s efforts in (b) [the highest authority fails to act and the lawyer believes substantial injury is reasonably certain] the lawyer may reveal information relating to the representation

Chapter 7

Forming the Corporation

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Chapter 7

Forming the Corporation

Jean Metzinger, Paysage coloré aux oiseaux aquatique (1907)

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Multiple representation …

Your law firm is approached by a prospective client, Patty, who claims that she lost everything in a hurricane – and she has no insurance because Gowan (her agent) committed insurance fraud.

What do you say when the firm’s “conflicts” email reaches you?

Law firm

Chapter 7

Forming the Corporation

serving as director for client
Serving as director for client …

You resolve all the possible conflicts, misunderstandings, tensions, and so on. You represent the “situation” – the corporation.

Basil, Sybil and Gowan recognize your wisdom and ask you to sit on the company’s board. Can you?

Louis Brandeis

“A man who is his own lawyer has a fool for a client.”

Chapter 7

Forming the Corporation

defective incorporation permutations
Defective incorporation … permutations

Pre-incorporation:

Post-incorporation:

  • (3) Corporation formed, but Secy State dissolves:
    • Insider liable on “corporate contract”?
  • Parties aware no incorporation:
      • Promoter liable to third party?

Incorporation

  • (4) Corporation formed, but misused:
    • Insiders liable to third parties (PCV)?
  • (2) Parties unaware no incorporation:
    • Promoter liable to third party?

Corporations:

A Contemporary Approach

Chapter 7

Forming the Corporation

Slide 19

of 28

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CONTRACT

Parties: Seller & Buyer

Buyer's obligations:  blah, blah

Seller's obligations:  sure, sure

Warranties:  I assure, I assure

Representations:  I say, I say

RKO (Seller)

Kent Enterprises, Inc. (Buyer)

[signed by Graziano]

(1) Pre-incorporation: both parties aware

¶ 19.  It is understood that it is the intention of the Purchaser to incorporate. Upon condition that such incorporation be completed by closing, all agreements, covenants, and warranties contained herein shall be construed to have been made between Seller and the resultant corporation ...

Chapter 7

Forming the Corporation

does this do the trick
Board Minutes

Kent Enterprises, Inc.

The organizational meeting of the Board of Directors of Kent Enterprises Inc. was duly convened in ____ on _____, at _____.

* * *  

On motion duly made, seconded and unanimously adopted, it was

RESOLVED, That the Corporation adopt all agreements, covenants and warranties of [Contract with RKO] dated _____ and cause all documents to reflect the same.

Does this do the trick?

Chapter 7

Forming the Corporation

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De facto corporation

Promoter good faith attempt

Promoter unaware

Promoter uses corporate form

Corporation by estoppel

Third party assumes corp.

Regardless of promoter

Regression analysis

Courts actually require BOTH

(2) Pre-incorporation: neither party aware

  • Sales agreement
  • * * *
    • M&P Corporation
    • Manuel
    • By: Manuel, President

Chapter 7

Forming the Corporation

do statutes answer
MBCA § 2.04

All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so doing.

NC BCA 55-2-04 (reserved) COMMENTARY

Section 2.04 of the Model Act, which relates to liability for pre-incorporation transactions, was omitted because it was thought to be too simplistic to apply to every pre-incorporation situation. General case law will apply. 

Do statutes answer?

Chapter 7

Forming the Corporation

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(3) Post-incorporation: administrative dissolution

Oft-repeated sequence –

  • 12/02: Corp not pay franchise taxes.  State adm dissolves.
  • 9/03: “Corp” enters into K with innocent third party.
  • 12/03: Corp pays its taxes and State reinstates. 

Who is liable on K?

Chapter 7

Forming the Corporation

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NC BCA § 55-14-22 Reinstatement following administrative dissolution.
  • A corporation administratively dissolved under G.S. 55-14-21 may apply to the Secretary of State for reinstatement within two years after the effective date of dissolution.  
  • If the Secretary of State determines that the application contains the information required by subsection (a) and that the information is correct, he shall cancel the certificate of dissolution and prepare a certificate of reinstatement that recites his determination and the effective date of reinstatement, file the original of the certificate, and mail a copy to the corporation.

 (c) When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred, subject to the rights of any person who reasonably relied to his prejudice upon the certificate of dissolution.

Chapter 7

Forming the Corporation

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Fundamentals

Introduction to firm

Corporate basics

Corporations and policy

Corporate federalism

Corporate social responsibility

Corporate political action

Corporate form

Organizational choices

Incorporation

Locating corporate authority

Corporate finance

Numeracy for corporate lawyers

Capital structure

Corporate externalities

Piercing corporate veil

Corporate environmental liability

Corporate criminal liability

Corporate governance

Shareholder voting

Shareholder information rights

Public shareholder activism

Fiduciary duties

Shareholder litigation

Board decision making

Board oversight

Director conflicts

Executive compensation

Corporate groups

Stock trading

Securities markets

Securities fraud class actions

Insider trading

Corporate deals

Sale of control

Antitakeover devices

Deal protection

Close corporations

Planning

Oppression

(4) Post-incorporation:

insiders exploit creditors

Chapter 7

Forming the Corporation

slide27
1. A and B plan to produce low-cost documentaries and post them on YouTube. A worries that B will become grandiose and rent a production studio for their business. What simple way can A’s worries be addressed?

A hold harmless clause for any unauthorized expansion of the business

A narrow purpose clause in the articles of incorporation

An indemnification provision in the bylaws

An employment agreement that outlines B’s responsibilities

A and B include a narrow purpose clause in the articles, and B nonetheless goes out and signs a rental on behalf of the corporation with an expensive production studio. Can A sue to have it voided?

Yes, third parties (here the lessor) are deemed to know any charter limits on corporate power

Yes, but only if the third-party lessor is aware of the limitation in the articles

No, limitations in a corporate charter only affect corporate parties (shareholders, directors, etc)

No, the ultra vires doctrine no longer applies in corporate law

3. A and B drop the idea of documentaries, and instead get back “to the earth” with a landscaping business. They agree to incorporate their business as AB Gardens, Inc. (ABG). Before incorporation, A signs a contract in the name of ABG to buy a truck.

The contract binds only ABG, assuming it was properly signed

The contract will bind only ABG, if the corporation later accepts it

The contract binds A, whether or not the seller agrees to look only to ABG under the contract

The contract binds A, only until ABG is formed and accepts the contract -- if the seller agrees

4. A mails articles of incorporation for ABG to the secretary of state’s office. But the filing is lost in the mail. Meanwhile, B signs a big landscaping job on behalf of ABG. The owner, unhappy with the work, sues A.

A is liable as a partner

A cannot be liable; he signed nothing

A is not liable, if B signed believing in good faith that ABG had been incorporated

A is not liable, if the owner (though not B) believed that ABG was incorporated

Group hypos

Chapter 7

Forming the Corporation

slide28
5. A calls the secretary of state’s office are realizes the ABG articles were lost in the mail. He mails another set, this time certified mail. In the meantime, A learns of a landscaping “going out of business” sale and buys all the equipment on behalf of “ABG, a business about to be formed.”

A is not liable, assuming the other party accepts this signature

A is liable, even if the other party later enters into a novation with ABG, once formed

A is not liable, a disclosed agent is not liable, only the principal

A is liable, because a person acting on behalf of a non-existent corporation always is liable

Finally! ABG’s articles of incorporation are filed. B signs a lease for a storefront as follows:

ABG, Inc.

____________________

B, President of ABG, Inc.

Only ABG is bound under the lease

Only B is bound under the lease

Both ABG and B are bound

Neither ABG nor B is bound

7. ABG is a great success! A and B are so busy they forget to file an annual report with the secretary of state. On July 1, 2014, the secretary of state dissolves ABG. On August 1, 2014, A and B sign a merger agreement with Big Landscaping Corp.

The merger is not binding, only the board can sign a merger agreement

The merger is not binding, because ABG did not exist

The merger agreement can be made retroactively binding by filing an annual report

The merger agreement can be made retroactively binding by filing annual report, paying fees, and applying for reinstatement

8. Whew! ABG is OK again. This time A falsely tells the company’s bank that their equipment is “in top shape.” When ABG does not repay the bank loan …

Only ABG is liable as party to the loan

Only ABG is liable because bank cannot rely on representations of company officer

A can be liable if it is “just and equitable” to disregard the corporation

B can be liable because A committed fraud on behalf of the corporation

Group hypos

Chapter 7

Forming the Corporation

the end

The end

Chapter 7

Forming the Corporation