Chapter 7. Forming the Corporation

ADW Draft 9/25/11

AP edits 2/19/12

Chapter 7. Forming the Corporation

Sources Used in this Chapter

MBCA §§ 2.01, 2.02, 2.04, 2.05, 3.01, 3.02, 4.01, 5.01, 5.02, 6.01, 8.03, 14.20, 14.22

DGCL §§ 102

Restatement (Third) of Agency §6.04

ABA Model Rules of Professional Conduct, Rules 1.4, 1.6, 1.7, 1.13

Concepts for this Chapter

· Process of incorporation

o Contents of articles

o Formalities

· Role of lawyers

o Who is the client?

o Client confidences

o Lawyer as director

· Defective incorporation

o Corporation not formed: parties aware /parties not aware

o Corporation formed: dissolved by state /misused by parties

A. Process of Incorporation

1. Formal Requirements

Question: Who forms a corporation?

Answer: The incorporators.

MBCA § 2.01. Incorporators

One or more persons may act as the incorporator or incorporators of a corporation by delivering article of incorporation to the secretary of state for filing.

Incorporation is available to multinational businesses and to individuals starting a business in a garage. The corporate form is used by businesses of all sizes and types.

Question: How is a corporation formed?

Answer: The process of incorporation is simple. States have made incorporation virtually painless and available to almost anyone seeking the advantages of the corporate form.

The incorporators file articles of incorporation with the state - typically, the state's "secretary of state" office. The articles of incorporation include information such as:

· the corporate name;

· the number of authorized shares, and

· the name and address of each incorporator.

MBCA§ 2.02. Articles of Incorporation.

(a) The articles of incorporation must set forth:

(1) a corporate name for the corporation that satisfies the requirements of section 4.01;

(2) the number of shares the corporation is authorized to issue;

(3) the street address of the corporation's initial registered office and the name of its initial registered agent at that office; and

(4) the name and address of each incorporator.

The articles of incorporation may also information such as:

· the corporate purpose;

· provisions regulating the management of the corporation; and

· limitations on the power of the corporation and its shareholders, officers or directors.

MBCA § 2.02. Articles of Incorporation.

(b) The articles of incorporation may set forth:

(1) the names and addresses of the individuals who are to serve as the initial directors;

(2) provisions not inconsistent with law regarding:

(i) the purpose or purposes for which the corporation is organized;

(ii) managing the business and regulating the affairs of the corporation;

(iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders;

(iv) a par value for authorized shares or classes of shares;

(v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions;

(3) any provision that under this Act is required or permitted to be set forth in the bylaws;

(4) a provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law; and

(5) a provision permitting or making obligatory indemnification of a director for liability (as defined in section 8.50(5)) to any person for any action taken, or any failure to take any action, as a director, except liability for (A) receipt of a financial benefit to which he is not entitled, (B) an intentional infliction of harm on the corporation or its shareholders, (C) a violation of section 8.33 or (D) an intentional violation of criminal law.

(d) Provisions of the articles of incorporation may be made dependent upon facts objectively ascertainable outside the articles of incorporation in accordance with section 1.20(k).

Delaware law includes similar provisions.

DGCL § 102. Contents of certificate of incorporation.

(a) The certificate of incorporation shall set forth:

(1) The name of the corporation

***

(2) The address . . . of the corporation's registered office in this State, and the name of its registered agent at such address;

(3) The nature of the business or purposes to be conducted or promoted. It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any;

(4) If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class.

* * *

(5) The name and mailing address of the incorporator or incorporators;

(6) If the powers of the incorporator or incorporators are to terminate upon the filing of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

(1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation;

* * *

(3) Such provisions as may be desired granting to the holders of the stock of the corporation, or the holders of any class or series of a class thereof, the preemptive right to subscribe to any or all additional issues of stock of the corporation of any or all classes or series thereof, or to any securities of the corporation convertible into such stock. No stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation. * * *

(4) Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power, or a larger number of the directors, than is required by this chapter;

(5) A provision limiting the duration of the corporation's existence to a specified date; otherwise, the corporation shall have perpetual existence;

(6) A provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts;

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. * * *

http://delcode.delaware.gov/title8/c001/sc01/index.shtml#102

Example: Articles of Incorporation

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

Question: Are these articles of incorporation sufficient to form a corporation?

Answer: Yes. They satisfy the MBCA, which includes requirements relating to:

· Name of corporation

· Shares authorized

· Registered office/agent

· Incorporator

Question: What is required for the name of a corporation?

Answer: The articles must state the corporation’s complete name and a formal indication of its corporate status—a reference such as “Corporation,” “Incorporated,” or “Inc.” will suffice. The corporate name must also be different from the names of other corporations in the state.

States are split as to the degree corporate names must be different from previously incorporated firms of a similar name. One set of (newer) statutes require that the name must be “distinguishable upon the records” of the secretary of state from other corporate names already taken or reserved for future use.

MBCA § 4.01. Corporate Name.

(a) A corporate name:

(1) must contain the word corporation, incorporated, company, or limited, or the abbreviation corp., inc., co., or ltd., or words or abbreviations of like import in another language; and

(2) may not contain language stating or implying that the corporation is organized for a purpose other than that permitted by section 3.01 and its articles of incorporation.

(b) Except as authorized by subsections (c) and (d), a corporate name must be distinguishable upon the records of the secretary of state from:

(1) the corporate name of a corporation incorporated or authorized to transact business in this state;

(2) a corporate name reserved or registered under section 4.02 or 4.03;

(3) the fictitious name adopted by a foreign corporation authorized to transact business in this state because its real name is unavailable; and

(4) the corporate name of a not-for-profit corporation incorporated or authorized to transact business in this state.

(c) A corporation may apply to the secretary of state for authorization to use a name that is not distinguishable upon his records from one or more of the names described in subsection (b). The secretary of state shall authorize use of the name applied for if:

(1) the other corporation consents to the use in writing and submits an undertaking in form satisfactory to the secretary of state to change its name to a name that is distinguishable upon the records of the secretary of state from the name of the applying corporation; or

(2) the applicant delivers to the secretary of state a certified copy of the final judgment of a court of competent jurisdiction establishing the applicant's right to use the name applied for in this state.

(d) A corporation may use the name (including the fictitious name) of another domestic or foreign corporation that is used in this state if the other corporation is incorporated or authorized to transact business in this state and the proposed user corporation:

(1) has merged with the other corporation;

(2) has been formed by reorganization of the other corporation; or

(3) has acquired all or substantially all of the assets, including the corporate name, of the other corporation.

(e) This Act does not control the use of fictitious names.

Another group of (older) statutes further specify that the name not be “deceptively similar” to existing names.

Question: What must the articles of incorporation include regarding the capital structure of the corporation?

Answer: In addition to the corporate name and registered office and agent, the articles must also specify the securities the corporation will have authority to issue. The articles must express the various classes of authorized shares, the number of shares of each class, and the privileges, rights, limitations, and preferences of each class. MBCA §6.01.

MBCA § 6.01. Authorized Shares.

(a) The articles of incorporation must set forth any classes of shares and series of shares within a class, and the number of shares of each class and series, that the corporation is authorized to issue. If more than one class of shares or series of shares is authorized, the articles of incorporation must prescribe a distinguishing designation for each class or series and must describe, prior to the issuance of shares of a class or series, the terms, including the preferences, rights, and limitations, of that class or series. Except to the extent varied as permitted by this section, all shares of a class or series must have terms, including preferences, rights and limitations, that are identical with those of other shares of the same class or series.

(b) The articles of incorporation must authorize (1) one or more classes of shares that together have unlimited voting rights, and (2) one or more classes of shares (which may be the same class or classes as those with voting rights) that together are entitled to receive the net assets of the corporation upon dissolution.

(1) have special, conditional, or limited voting rights, or no right to vote, except to the extent otherwise provided by this Act;

(2) are redeemable or convertible as specified in the articles of incorporation:

(i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a specified event;

(ii) for cash, indebtedness, securities, or other property; and

(iii) at prices and in amounts specified, or determined in accordance with a formula;