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Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 1 of 32 Jean Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 1 of 32 Jean Metzinger, Paysage coloré aux oiseaux aquatique (1907)

Module III – Corporate Form Chapter 7 Forming the Corporation • Process of incorporation Module III – Corporate Form Chapter 7 Forming the Corporation • Process of incorporation Bar exam – Contents of articles – Formalities • Role of lawyers: Corporate practice Law profession Citizen of world Corporations: A Contemporary Approach – 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 Chapter 7 Forming the Corporation Slide 2 of 28

How do you incorporate? ARTICLES OF INCORPORATION 1. Name. The name of corporation is 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, incorporator Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 3 of 28

ARTICLES OF INCORPORATION 1. Name of corporation • • • How do you know ARTICLES OF INCORPORATION 1. 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 1. Why is registered office/agent required? 2. 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 Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 4 of 28

Pop quiz 1. 2. True or false. A corporation’s 3. The corporation’s powers. . Pop quiz 1. 2. True or false. A corporation’s 3. The corporation’s powers. . . name must have an ending a. Must be specified in the such as “Inc. ” or “Corp. ” articles b. Cannot be specified in the To know whether a corporate articles, but bylaws name is available -- c. Must be consistent with a. Do a Google search stated purposes b. Check business d. Are those of natural persons directories and phone books c. Check the Secy of State’s 4. True or false? The board of website directors can issue shares, to d. All of the above raise capital from new investors, even if shares are not authorized in the articles. 1 -T / 2 -D / 3 -C / 4 -F Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 5 of 28

5. The registered agent must be – a. A person who works in the 5. The registered agent must be – a. A person who works in the corporation’s principal offices b. A natural person over the age of 18 c. A corporation that can receive service of process d. 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: a. An individual or company that files the articles b. An individual or company that undertakes to file an annual report for the corporation c. The individual or business entity that prepares a “certificate of existence” 8. The articles of incorporation can: a. Limit the liability of directors for negligence b. Limit the liability of directors who act in bad faith c. Limit the liability of directors who approve illegal acts d. None of the above 5 -D / 6 -F / 7 -A / 8 -A Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 6 of 28

Two NC corporations … Website Corporations: A Contemporary Approach EDGAR Chapter 7 Forming the Two NC corporations … Website Corporations: A Contemporary Approach EDGAR Chapter 7 Forming the Corporation Slide 7 of 28

Post-incorporation formalities Organizational meeting • Held by incorporators or initial board • Actions: – 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 Corporations: A Contemporary Approach Chapter 7 Forming the Corporation shivaree (shiv-uh-REE) noun A noisy, mock serenade to a newly married couple, involving the banging of kettles, pots and pans. Slide 8 of 28

Role of lawyer … Basil (who you represented before) asks you to help him 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). Sybil Basil You are a corporate lawyer – this is your work. Who do you represent? Gowan, Jr. Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 9 of 28

Who do you represent? Gowan: Thanks for explaining that you’ll help form a corporation. 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? Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 10 of 28

Model Rules of Professional Responsibility Rule 1. 13 Organization as Client (a) A lawyer 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. Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 11 of 28

What if a conflict? Basil: Thanks for taking on this new legal work for 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? Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 12 of 28

Model Rules of Professional Responsibility Rule 1. 4 Communication A lawyer shall … promptly 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] Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 13 of 28

Is employee/constituent a client? Sybil: Thanks forming the company – things really seem to Is employee/constituent a client? Sybil: Thanks 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? Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 14 of 28

Model Rules of Professional Responsibility Rule 1. 13 Organization as Client (a) A lawyer 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 Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 15 of 28

Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 16 of 32 Jean Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 16 of 32 Jean Metzinger, Paysage coloré aux oiseaux aquatique (1907)

Multiple representation … Your law firm is approached by a prospective client, Patty, who 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? Corporations: A Contemporary Approach Law firm Chapter 7 Forming the Corporation Slide 17 of 28

Serving as director for client … You resolve all the possible conflicts, misunderstandings, tensions, 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. ” Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 18 of 28

Defective incorporation … permutations (1) Parties aware no incorporation: Promoter liable to third party? Defective incorporation … permutations (1) Parties aware no incorporation: Promoter liable to third party? (2) Parties unaware no incorporation: Promoter liable to third party? Corporations: A Contemporary Approach Post-incorporation: Incorporation Pre-incorporation: Chapter 7 Forming the Corporation (3) Corporation formed, but Secy State dissolves: Insider liable on “corporate contract”? (4) Corporation formed, but misused: Insiders liable to third parties (PCV)? Slide 19 of 28

(1) Pre-incorporation: both parties aware CONTRACT Parties: Seller & Buyer's obligations: blah, blah Seller's (1) Pre-incorporation: both parties aware CONTRACT Parties: Seller & 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] Corporations: A Contemporary Approach Chapter 7 Forming the Corporation ¶ 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. . . Slide 20 of 28

Board Minutes Kent Enterprises, Inc. Does this do the trick? The organizational meeting of Board Minutes Kent Enterprises, Inc. Does this do the trick? 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. Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 21 of 28

(2) Pre-incorporation: neither party aware Sales agreement * * * M&P Corporation Manuel By: (2) Pre-incorporation: neither party aware Sales agreement * * * M&P Corporation Manuel By: Manuel, President 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 Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 22 of 28

Do statutes answer? NC BCA 55 -2 -04 (reserved) COMMENTARY MBCA § 2. 04 Do statutes answer? NC BCA 55 -2 -04 (reserved) COMMENTARY 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. Corporations: A Contemporary Approach Section 2. 04 of the Model Act, which relates to liability for preincorporation transactions, was omitted because it was thought to be too simplistic to apply to every pre-incorporation situation. General case law will apply. Chapter 7 Forming the Corporation Slide 23 of 28

(3) Post-incorporation: administrative dissolution Oft-repeated sequence – – 12/02: Corp not pay franchise taxes. (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? Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 24 of 28

NC BCA § 55 -14 -22 Reinstatement following administrative dissolution. (a) A corporation administratively NC BCA § 55 -14 -22 Reinstatement following administrative dissolution. (a) 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. (b) 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. Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 25 of 28

(4) Post-incorporation: insiders exploit creditors 1. Fundamentals – – 2. Corporations and policy – (4) Post-incorporation: insiders exploit creditors 1. Fundamentals – – 2. Corporations and policy – – – 3. Chapter 7 Forming the Corporation Sale of control Antitakeover devices Deal protection Close corporations – – Corporations: A Contemporary Approach Securities markets Securities fraud class actions Insider trading Corporate deals – – – • Shareholder litigation Board decision making Board oversight Director conflicts Executive compensation Corporate groups Stock trading 1. 2. 3. 1. Shareholder voting Shareholder information rights Public shareholder activism Fiduciary duties 1. 2. 3. 4. 5. 6. • Piercing corporate veil Corporate environmental liability Corporate criminal liability Corporate governance – – – 7. Numeracy for corporate lawyers Capital structure Corporate externalities – – – 6. Organizational choices Incorporation Locating corporate authority Corporate finance – – 5. Corporate federalism Corporate social responsibility Corporate political action Corporate form – – – 4. Introduction to firm Corporate basics Planning Oppression Slide 26 of 28

Group hypos 1. A and B plan to produce low-cost documentaries and post them Group hypos 1. A and B plan to produce low-cost documentaries and post them on You. Tube. 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. A hold harmless clause for any unauthorized expansion of the business b. A narrow purpose clause in the articles of incorporation c. An indemnification provision in the bylaws d. An employment agreement that outlines B’s responsibilities 2. 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? a. Yes, third parties (here the lessor) are deemed to know any charter limits on corporate power b. Yes, but only if the third-party lessor is aware of the limitation in the articles c. No, limitations in a corporate charter only affect corporate parties (shareholders, directors, etc) d. No, the ultra vires doctrine no longer applies in corporate law Corporations: A Contemporary Approach 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. a. The contract binds only ABG, assuming it was properly signed b. The contract will bind only ABG, if the corporation later accepts it c. The contract binds A, whether or not the seller agrees to look only to ABG under the contract d. 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. A is liable as a partner b. A cannot be liable; he signed nothing c. A is not liable, if B signed believing in good faith that ABG had been incorporated d. A is not liable, if the owner (though not B) believed that ABG was incorporated Chapter 7 Forming the Corporation Slide 27 of 28

Group hypos 5. A calls the secretary of state’s office are realizes the ABG Group hypos 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. A is not liable, assuming the other party accepts this signature b. A is liable, even if the other party later enters into a novation with ABG, once formed c. A is not liable, a disclosed agent is not liable, only the principal d. A is liable, because a person acting on behalf of a non-existent corporation always is liable 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. a. The merger is not binding, only the board can sign a merger agreement b. The merger is not binding, because ABG did not exist c. The merger agreement can be made retroactively binding by filing an annual report d. The merger agreement can be made retroactively binding by filing annual report, paying fees, and applying for reinstatement 6. Finally! ABG’s articles of incorporation are filed. B signs a lease for a storefront as follows: ABG, Inc. __________ B, President of ABG, Inc. a. Only ABG is bound under the lease b. Only B is bound under the lease c. Both ABG and B are bound d. Neither ABG nor B is bound 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 … a. Only ABG is liable as party to the loan b. Only ABG is liable because bank cannot rely on representations of company officer c. A can be liable if it is “just and equitable” to disregard the corporation d. B can be liable because A committed fraud on behalf of the corporation Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 28 of 28

The end Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 29 of The end Corporations: A Contemporary Approach Chapter 7 Forming the Corporation Slide 29 of 28