Corporations

1
Corporations

• Organization (Formation)
• And
• Financial Structure

2
Promoters

• Promoters Person or persons who organize and
  start the corporation, negotiate and enter into
  contracts in advance of its formation, find the
  initial investors to finance the corporations,
  etc.

PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT
DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO
ITS PROSPECTIVE INVESTORS. CORPORATION IS NOT
OBLIGATED TO COMPENSATE A PROMOTER FOR
PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO.
MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTERS
WORK
3
Promoters

• 1. Discover a business or idea to be developed
• 2. Finds investors
• 3. Negotiates contracts necessary for initial
  operation.
• 4. Incorporates the business
• 5. Helps management start operations

4
Promoters

• Promoters Person or persons who organize and
  start the corporation, negotiate and enter into
  contracts in advance of its formation, find the
  initial investors to finance the corporations,
  etc.

PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT
DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO
ITS PROSPECTIVE INVESTORS. CORPORATION IS NOT
OBLIGATED TO COMPENSATE A PROMOTER FOR
PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO.
MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTERS
WORK
5
Promoter Liability

• Pre -incorporation contracts
• a. Leases
• b. Sales contracts
• c. Purchase of property
• d. Employment

PROMOTERS ARE PERSONALLY LIABLE ON
PRE-INCORPORATION CONTRACTS.
6
Promoter Liability

• Corporation never formed
• All promoter(s) have joint personal liability
• Corporation formed
• Promoter(s) remains liable on contracts even
  after incorporation even thought corporation
  adopts contracts.

Novation A three-party agreement whereby the
corporation agrees to assume the contract
liability of the promoter(s) with the consent of
the third party who agrees to release the
promoter(s) from the contract.
7
Incorporators

• One or more persons, partnerships,
• corporations or other associations which
• file the documents (articles of incorporation)
• necessary to create the corporation.

8
Formation

• Corporations are created by compliance with
• state corporation statutes which usually require,
  
• a. filing Articles of Incorporation with the
  secretary of
• state, and
• b. paying a fee
• Corporate existence begins when the articles of
• incorporation are filed, unless a delayed
  effective
• date is specified in the articles. (2.03 (a))

9
Articles of Incorporation

• Articles must include the following (2.02)
• 1. Name of corporation
• 2. Number of shares authorized to issue
• 3. Address of corporate office and name of
  initial registered agent
• 4. Name and address of each incorporator

10
Articles of Incorporation

• 6. Provisions defining, limiting and regulating
  powers of directors / shareholders
• 7. Par value of authorized shares
• 8. Imposition of personal liability on
  shareholders for the debts of corporation to a
  specified extent and upon specified conditions.

11
Articles of Incorporation

• 9. Release of Directors from liability to
  corporation or shareholders except for
• a. financial benefit received to which
  director is not entitled.
• b. Intentional infliction of harm
• c. Liability for unlawful distributions
• d. Intentional violation of criminal law.

12
Formation

• De Jure Corporation
• All requirements for incorporation are met
• De Facto Corporation
• Good faith effort to incorporate, however all
• requirements not met and operate as a corporation
• Business will be treated as a corporation in all
• respects, except state may bring an action
  challenging
• the corporate status

13
Formation

• Corporation by Estoppel
• Occurs when
• a. purported corporation holds it self out as
  being a corporation, and it is not.
• b. Third party relies on representation.
• Purported corporation and third party will be
  estopped (prevented) from denying corporate
  existence. Applies only to specific situation.

14
Formation

• Model Business Corporation Act eliminates the
• concepts of de facto corporation and
• corporation by estoppel.

Revised Model Business Corporation Act section
2.03 (b) The secretary of states filing of the
articles of incorporation is conclusive proof
that the incorporators satisfied all conditions
precedent to incorporation except a proceeding by
the state to cancel or revoke the incorporation
or inv9luntarily dissolve the corporation
15
Formation

• Defective Incorporation
• Attempts to incorporate fail to meet minimum
  requirements
• No corporation is formed
• Incorporators are treated as general partners

16
Financing the Corporation

• Equity Securities Stock
• Create an ownership relationship.
• Holders of stock (shares) are the owners of the
  corporation.
• Debt Securities Bonds (debentures)
• Represent the borrowing of funds by the
  corporation.

17
Corporate Bonds

• Debenture Bonds .(unsecured)
• Bonds for which not specific assets of the
  corporation are pledged. Backed by general credit
  rating of thecorporation
• Bonds (Secured)
• Bonds pledge specific property.
• (real or personal
• Mortgage Bond Pledges real property.

18
Corporate Bonds

• Convertable Bonds
• Bonds that can be exchanged for a specified
  number of share of stock under certain
  conditions.
• Callable Bonds
• bonds that may be called in and the principal
  repaid at specific times or under conditions
  stipulated in the bond when it is issued.

19
Corporate Stock

• Common
• Voting shares that represent ownership interest
  in the corporation.
• Preferred (May or may not have right to vote)
• Shares of stock that have priority over
  common-stock as to payment of dividends and
  distribution of assets on dissolution.
• Dividend payments usually fixed percentage of
  face value.

20
Corporate Stock

• Cumulative Preferred
• Required dividends not paid in a given year must
  be paid in a subsequent year before any common
  stock dividends are paid.
• Participating Preferred
• Share entitling the owner to receive (1) the
  preferred dividend and (2) additional dividends
  after dividends are paid on common stock

21
Corporate Stock

• Convertible Preferred
• Shares entitling the owner to convert share into
  a specified number of common shares.
• Redeemable, or Callable Preferred
• Shares issued with the express condition that
  the issuing corporation has the right to
  repurchase shares as specified.