Part Seven:
Corporations
CONTENTS
Chapter 33 Nature, Formation, and Powers
Chapter 34 Financial Structure
Chapter 35 Management Structure
Chapter 36 Fundamental Changes
ETHICS QUESTIONS RAISED IN THIS PART
1. Corporations owe their existence to the issuance of a charter by the state. Historically, both the law and
society have taken a very cautious approach to corporations. However, today the corporate form of
business is the dominant form of business organization in the United States and corporations wield
substantial power nationwide. Are corporations too powerful? Do they owe any special duties to society
in general, because they are allowed the privilege of a corporate charter?
ACTIVITIES AND RESEARCH PROBLEMS
1. Have groups of students work together to form a “corporation” of their own by drafting Articles of
Incorporation and Bylaws. Then have them present their corporation to the class and explain the reasons
why they organized it as they did.
2. Research selected provisions of the business corporation statute in your state, such as the standard for the
payment of corporate dividends, and compare its provisions to those of the Model Business Corporation
Act. How closely does the statute in your state follow the MBCA?
Chapter 33
NATURE, FORMATION, AND POWERS
I. Nature of Corporations
A. Corporate Attributes
1. Legal Entity
2. Creature of the State
3. Limited Liability
4 4. Free Transferability of Corporate
Shares
5. Perpetual Existence
6. Centralized Management
7. As a Person
8. As a Citizen
B. Classification of Corporations
1. Public or Private
2. Profit or Nonprofit
3. Domestic or Foreign
5 2. Subscribers
6 3. Selection of State for Incorporation
B. Formalities of Incorporation
1. Selection of Name
2. Incorporators
3. Articles of Incorporation
4. Organizational Meeting
5. Bylaws
III. Recognition or Disregard of Corporateness
A. Defective Incorporation
1. Common Law Approach
a. Corporation de Jure
b. Corporation de Facto
c. Corporation by Estoppel
d. Defective Corporation
Cases in This Chapter
Harold Lang Jewelers. Inc. v. Johnson
Coopers & Lybrand v. Fox
Harris v. Looney
Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC.
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Identify the principal attributes and classifications of corporations.
Explain how a corporation is formed and the role, liability, and duties of
promoters.
Distinguish between the statutory and common law approaches to
defective formation of a corporation.
TEACHING NOTES
I. NATURE OF CORPORATIONS
The corporation is the dominant form of business organization in the United
States, accounting for 85 percent of the gross revenues of all business
entities. Six million domestic corporations, with annual revenues
approximating 30 trillion dollars and revenues exceeding 50 trillion dollars,
are currently doing business in the United States. Approximately 50 percent
of American households own stock directly or indirectly through institutional
investors such as mutual funds, pension funds, banks, and insurance
companies.
In 1946, a committee of the American Bar Association, after careful study
and research, submitted a draft of a Model Business Corporation Act (MBCA).
The MBCA has been amended frequently since then. Although the provisions
of the Act do not become law until enacted by a State, its influence has been
widespread; and a majority of the States had adopted it in whole or in part.
*** Question to Discuss ***
Identify the principal attributes and classifications of corporations.
A. CORPORATE ATTRIBUTES
Corporations have attributes which make them distinct from any other form
of business entities.
Legal Entity
A corporation is recognized as having a legal existence separate from its
shareholders. It may sue or be sued as a legal entity, and it holds title to all
corporate property.
Creature of State
All States have general incorporation statutes authorizing the Secretary of
State to issue a certificate of incorporation or charter upon compliance with
its provision.
Limited Liability
A corporation is liable for payment of debts, and shareholders are usually
held liable only to the extent of their investment. The limitation on liability,
Free Transferability of Corporate Shares
Corporate shares are readily transferable unless there is an agreement to the
contrary. Article 8 of the Uniform Commercial Code, Investment Securities,
governs transfers of shares of stock.
Perpetual Existence
Where the articles of incorporation do not specify a limited duration,
corporations have a perpetual existence. As a result, the withdrawal of a
shareholder or oAcer will not cause dissolution of the firm. A corporation’s
existence will terminate upon its dissolution or merger into another business.
Centralized Management
The shareholders elect a board of directors to manage the business of the
corporation. The board appoints oAcers to run the day-to-day operations.
Since management responsibility is separated from ownership, shareholders
do not as shareholders participate in the running of the company.
As a Person
A corporation is a “person” under the Fifth and Fourteenth Amendments as
related to the requirement that no person be deprived of “life, liberty, or
As a Citizen
Corporations are citizens of the state(s) where they are incorporated and
they have their principal oAce located for diversity jurisdiction purposes.
They are not citizens with respect to the Fourteenth Amendment privileges
and immunities clause.
B. CLASSIFICATION OF CORPORATIONS
Public or Private
Public or municipal corporations are those owned and operated by civil
governments. Private corporations are formed for profit or not-for-profit.
Profit or Nonprofit
A profit corporation is founded for the purpose of operating a business for
profits which are paid to the shareholders. Profits made by a non-profit
company must be reinvested in the firm and cannot be distributed to its
members, oAcers or directors.
Domestic or Foreign
A corporation is a domestic corporation in the state in which it is
incorporated. It is a foreign corporation in every other state or jurisdiction. To
do business in any state other than its home state (with the exception of acts
in interstate commerce), a corporation must have authorization from the
CASE 33-1
HAROLD LANG JEWELERS, INC. v. JOHNSON
Court of Appeals of North Carolina, 2003
156 N.C. App. 187, 576 S.E.2d 360; review denied, 357 N.C. 458, 585 S.E.2d 765
http://scholar.google.com/scholar_case?
case=15826732712372931150&q=576+S.E.2d+360&hl=en&as_sdt=2,34
Hudson, J.
[Harold Lang Jewelers, Inc. (“Lang”)] filed suit * * * alleging that Johnson owed it
$160,322.90 plus interest for jewelry sold or consigned. Johnson answered * * * that Lang
could not sue in a North Carolina court because Lang had failed to obtain a certificate of
authority to transact business in the state. * * * [T]he district court granted the motion and
dismissed Lang’s action. Lang now appeals.
* * *
* * * Lang argues that the trial court did not find sufficient facts to support its
conclusion that Lang was, in fact, transacting business in the state of North Carolina. * * *
* * *
Our courts have interpreted transacting business in the state to “require the engaging
in, carrying on or exercising, in North Carolina, some of the functions for which the
corporation was created.” [Citation.] The business done by the corporation must be of such
nature and character “as to warrant the inference that the corporation has subjected itself to
Here, the trial court concluded that Lang’s business activity in North Carolina was
regular, continuous, and substantial such that it was transacting business in the state. We
uphold this conclusion * * *. [Citation.] Specifically, the court found that Lang, through its
single employee, had sold and consigned merchandise to jewelry stores in Franklin,
Asheville, and Highlands, North Carolina, since 1970. The court also found that Lang’s
employee came to North Carolina at least twice every six weeks during the year and at
least twice every four weeks during the summer months for the purpose of transacting
business. Sometime he came to North Carolina to transact business as often as three times
took orders, he either shipped the ordered items to the business in North Carolina or
personally delivered the merchandise. He also took returns of merchandise from customers
in the state. * * *
In sum, we conclude that the trial court’s conclusions of law are adequately supported
by the facts found in this case. There is ample evidence that Lang’s business in this state
has been regular, systematic, and extensive. * * *
Finally, Lang contends that the trial court erred when it dismissed the action, arguing
that the court should have continued the case to permit Lang to obtain the requisite
Scope of Regulation — The internal a?airs of a foreign corporation are
governed by the state of incorporation.
Sanction — Failure of a foreign corporation to qualify will result in that
corporation being denied access to the courts and possibly being fined.
Publicly Held or Closely Held
A publicly held corporation is one whose shares are owned by a large
number of people and are widely traded. Any corporation required to register
under the Federal Securities and Exchange Act of 1934 is considered to be
publicly held. A closely held corporation is one whose outstanding shares of
stock are held by just a few people, frequently friends or relatives. The
transfer of shares of closely held corporations is often restricted to prevent
Subchapter S Corporation
A Subchapter S corporation meets specified requirements of the Internal
Revenue Code and is thereby taxed like a partnership — that is, only at the
individual shareholder level. . The requirements for subchapter S treatment
Professional Corporations
Licensed professionals may practice under a corporate form by state
“professional association acts.”
II. FORMATION OF A CORPORATION
A. ORGANIZING THE CORPORATION
Promoters
A promoter is a person who takes the preliminary steps to organize a
corporation in compliance with the incorporation statute.
*** Question to Discuss ***
Discuss how a corporation is formed and the role, liability, and duties of promoters.
Promoters’ Contracts — Promoters remain liable on contracts entered into
on behalf of a corporation not yet formed unless the contract provides for a
termination of such liability or a novation is e?ected.
CASE 33-2
COOPERS & LYBRAND v. FOX
Colorado Court of Appeals, Div. IV, 1988
758 P.2d 683
http://scholar.google.com/scholar_case?case=12318371943544580212&q=758+P.2d+683&hl=en&as_sdt=2,34
Kelly, C. J.
In an action based on breach of express and implied contracts, the plaintiff, Coopers &
Lybrand (Coopers), appeals the judgment of the trial court in favor of the defendant, Garry J.
Fox (Fox). Coopers contends that the trial court erred in ruling that Fox, a corporate
promoter, could not be held liable on a pre-incorporation contract in the absence of an
agreement that he would be so liable, and that Coopers had, and I failed to sustain, the
burden of proving any such agreement. We reverse.
On November 3, 1981, Fox met with a representative of Coopers, a national
accounting firm, to request a tax opinion and other accounting services. Fox informed
Coopers at this meeting that he was acting on behalf of a corporation he was in the process
of forming, G. Fox and Partners, Inc. Coopers accepted the “engagement” with the
knowledge that the corporation was not yet in existence.
Fox argued at trial that, although Coopers knew the corporation was not in existence
when he engaged the firm’s services, it either expressly or impliedly agreed to look solely
to the corporation for payment. Coopers argued that its client was Garry Fox, not the
corporation. The parties stipulated that Coopers had done the work, and Coopers presented
uncontroverted testimony that the fee was fair and reasonable.
The trial court failed to make written findings of fact and conclusions of law. However,
in its bench findings at the end of trial, the court found that there was no agreement, either
express or implied, that would obligate Fox, individually, to pay Coopers’ fee, in effect,
On the contrary, the uncontroverted facts place Fox squarely within the definition of a
promoter. A promoter is one who, alone or with others, undertakes to form a corporation
and to procure for it the rights, instrumentalities, and capital to enable it to conduct
business. [Citations.]
When Fox first approached Coopers, he was in the process of forming G. Fox and
Partners, Inc. He engaged Coopers’ services for the future corporation’s benefit. In
addition, though not dispositive on the issue of his status as a promoter, Fox became the
president, a director, and the principal shareholder of the corporation, which he funded,
only nominally, with a $100 contribution. Under these circumstances, Fox cannot deny his
role as a promoter.
is not in existence but nevertheless agrees to look solely to the corporation and not to the
promoter for payment, then the promoter incurs no personal liability. [Citations.] In the
absence of an express agreement, the existence of an agreement to release the promoter
from liability may be shown by circumstances making it reasonably certain that the parties
intended to and did enter into the agreement. [Citations.]
Release of the promoter depends on the intent of the parties. As the proponent of an
alleged agreement to release the promoter from liability, the promoter has the burden of
proving the release agreement. [Citations.]
Fox seeks to bring himself within the exception to the general rule of promoter
liability. However, as the proponent of the exception, he must bear the burden of proving
the existence of the alleged agreement releasing him from liability. The trial court found
that there was no agreement regarding Fox’s liability. Thus, Fox failed to sustain his
burden of proof, and the trial court erred in granting judgment in his favor.
It is undisputed that the defendant, Garry J. Fox, engaged Coopers’ services, that G.
Subscribers
A subscriber is someone who agrees to purchase stock in a formed
(subscription contract) or not yet formed corporation (preincorporation
subscription agreement). Contemporary incorporation statutes provide that
preincorporation subscription contracts are irrevocable for six months absent
a stated agreement to the contrary.
Selection of a State for Incorporation
A corporation usually incorporated in its “home” state, the state where most
of the business is located and most transactions take place. It is possible,
however, to qualify to incorporate in a state where little or no business
activities occur. Therefore, many corporations incorporate in a state with
favorable corporate laws, then obtain a certificate of authority to conduct
most or all of their business elsewhere.
B. FORMALITIES OF INCORPORATION
Although the procedure involved in organizing a corporation varies
somewhat from State to State, typically the incorporators execute and
deliver articles of incorporation to the Secretary of State or another
Selection of Name
State statutes require that the company name indicate that it is a
corporation.
Incorporators
Persons who sign the article of incorporation which are then filed with the
state. The role of the incorporators ends after the organizational meeting.
Articles of Incorporation
Under the Revised Act the articles (or charter) must include: the
corporation’s name, the number of authorized shares, the name and street
address of the registered agent, and the name and address of each
Organizational Meeting
Required by the RMBCA to adopt the bylaws, elect directors and appoint
oAcers, and conduct other appropriate business.
Bylaws
Contain the rules and regulations governing the company’s internal
management. Bylaws need not be publicly filed and generally may be