Chapter 6 Forming the Corporation
Outline
(last updated 7 Sep 06)
Chapter 6 Forming the Corporation
A. Lawyers’ Professional Responsibilities
1. entity theory of representation
o Jesse By Reinecke v. Danforth
2. the reasonable expectations test
· Who is client? participants, corporation?
o dual representation
o disqualification in subsequent settings
· revelation of information between parties
B. The Process of Incorporation
· How - filing of articles
o minimum requirements
o optional terms
· Where - Delaware or not?
· What law - internal affairs rule
· Corporate formation
o effect of incorporation
o signing in corporate name
o limits on corporation's powers: ultra vires
C. Ultra Vires
· The Ultra Vires doctrine: A corporation could not engage in activities outside the scope of its defined purposes.
o Rise and fall
o Modern powers/purposes
o Authorization of corporate charity
D. Defective Incorporation
· defective incorporation
o de facto corporation
o corporation by estoppel
o MBCA § 2.04
o liability of non-signatory
E. Pre-Incorporation Activities of Promoters
· Pre-incorporation contracts
o promoter's role
§ nonrecourse agent -- not liable
§ best-efforts agent -- not liable
§ interim party / until novation -- liable
§ additional contractor -- liable
o effect of ratification
Class Notes
A. Lawyers’ Professional ResponsibilitiesEthical obligations
As an attorney, you begin to wonder who you are working for and who will pay your bill. Michael is the manager of the business; Jessica is the financial officer; Bernie will contribute $600,000.
Assuming you represented Michael in the past, and it was he who called to ask that you help with the incorporation of Precision Tools.
You set up a meeting with Michael and Jessica to talk about their plans. Any problems in this "situation"? What should you do? Must they have their own lawyers? What might be their reaction if you suggest multiple representations? Should Bernie be there? / Rule 1.13(a) - ABA Model Rules of Professional Conduct
A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
Rule 1.7(a) - ABA Model Rules of Professional Conduct
A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and (2) each client consents after consultation.
Hazard, Ethics in Practice of Law
.. the lawyer is no one's partisan and ... everyone’s confidant. He ... knows the whole situation. He ... undertakes to discern the needs, fears and expectations of each and to discover the concordances among them. ... Playing God is a tricky business
You have a meeting with all three parties about their respective desires for the business. You explain you will try to create a structure that mediates their divergent interests.
After drafting the articles and sending Michael a package of documents for setting up the corporate structure -- bylaws, resolutions, minutes of the first meeting -- you decide it's time to get paid. Who should you send the bill to? Should you send multiple bills? What if Michael does not file the articles and the parties abandon their plans? / Rule 1.13 - ABA Model Rules of Professional Conduct
A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
Westinghouse Elec Corp. v. Kerr-McGee Corp (7th Cir 1978) - an attorney client relationship is created if attorney leads person to believe he is a client, even if the corporation pays the fees
After incorporating the business, one of your partners sends a "conflicts memo" describing his potential representation of Wilma, who is suing Pinson for divorce. Can the firm represent Wilma, after you helped set up Pinson's corporation? Assume that Pinson talked about his finances to you in connection with the corporation's capital structure. / Jesse by Reinecke v. Danforth (Wis 1992) - DeWitt corporate lawyer incorporated MRI business for two doctors; later DeWitt litigation lawyer represented family suing doctors for malpractice. Who are DeWitt's clients?
"... the entity rule applies retroactively such that the lawyer's pre-incorporation involvement with the person is deemed to be representation of the entity, not the person."
"... the communications between [the doctors relating to their personal finances and other pending litigations] were related to organizing MRIGM, we conclude [the doctors] cannot claim privilege of confidentiality.
Rule 1.6 - ABA Model Rules of Professional Conduct
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation.
After Pinmaking, Inc. is incorporated, Pinson asks you to be on the board? To whom would you owe your duties? What if the board had to consider firing Pinson? What should you say? / Rule 1.7 (comment) - ABA Model Rules of Professional Conduct
A lawyer for a corporation ... who is also a member of it board of directors should determine whether the responsibilities of the two roles may conflict. ... Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer's resignation from the board and the possibility of the corporation's obtaining legal advice from another lawyer in such situations.
Remember that Pinson and Ann contemplated they would ask Bill to invest additional money, if the venture were successful. After a couple months, Pinson comes to you and says the time is right to create the documentation to bring Bill into the corporation as a new shareholder. He shows you some financial figures that indicate the business has met its benchmarks. Pinson turns to you and says, "This should convince Bill, even though the numbers are a bit contrived."
What should you do? Pinson asks for you to set up a meeting with Bill to go over the subscription agreement you are to prepare. Must you tell Bill about the cooked books? / Rule 1.6 - ABA Model Rules of Professional Conduct
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation.
(b) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary: (1) to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm ...
B. The Process of Incorporation
What information is available on public companies? Consider eToys
· Company web page eToys web page
· Securities analysis Hoover's Online / IPOCentral (search for eToys)
· SEC database - EDGAR (find eToys original S-1 filing / also available on SECinfo EDGAR-online)
· Why did eToys file with the SEC when it went public? See Securities Act of 1933 § 5 / What information is available on non-public corporations? Consider NC's Secretary of State website
· "Wake Forest University"
· "Wake Forest Subway Inc"
· "PepsiCo"
HYPOTHETICAL
Pinmakers is looking for a new CEO. Attention turns to James L. Donald to be CEO. Donald, a hot shot in the telecommunications business, promises to take Pinmakers from fiber optics to the internet. His dream is that every phone will become a "window to the internet." Who is charged with setting corporate policy and choosing the officers to carry out policy? Donald presents to the board his compensation package, which includes the following proviso:
"If CEO determines that the board of directors has unreasonably interfered with his management of the corporation, he mayterminate his employment and receive severance payments equal to twice his base salary until the year 2008." / Delaware Gen Corp. Laws § 141
(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.
**********
Chancellor Allen:
.... the Donald agreements do not formally preclude the DSC board from exercising its statutory powers and fulfilling its fiduciary duty. Plaintiff omits to plead facts that ... would raise an issue concerning the [size of the scope of] the financial significance to DSC of a triggering of Donald's termination rights. ... Ultimately it is the responsibility and duty of the elected board to determine corporate goals, to approve of strategies and plans to achieve those goals and to monitor progress towards achieving them.
PROCESS OF INCORPORATION
Incorporation sounds like a fine idea. You prepare to incorporate Precision Tools. What are the steps in incorporating? What is purpose of filing articles? What are bylaws? Different from articles? Where do you incorporate?
You draft the following document. What is missing ?
ARTICLES OF INCORPORATION
1. Name. The name of the corporation is Precision Tools, Inc.
2. Shares authorized.Precision Tools can issue 1,000 shares of stock.
3. Registered office and agent. Precision Tools registered office is 1301 Worrell Prof Bldg, WFU. Registered agent is AR Palmiter.
4. The incorporator is AR Palmiter, 3334 Worrell, W-S, NC 27109.
AR Palmiter
AR Palmiter, incorporator
Compare
· North Carolina's "Articles for Incorporation of Business" <click on "Print Corporation Forms - Business Corporations" at bottom>
· Form with commentary / NC Business Corporation Act
§ 55-2-02 Articles of incorporation.
(a) The articles of incorporation must set forth:
(1) A corporate name for the corporation that satisfies the requirements of G.S. 55-4-01;
(2) The number of shares the corporation is authorized to issue and any other information required by G.S. 55-6-01;
(3) The street address, and the mailing address if different from the street address, of the corporation's initial registered office, the county in which the initial registered office is located, and the name of the corporation's initial registered agent at that address; and
(4) The name and address of each incorporator.
Look at corporate filings:
North Carolina Secretary of State
PepsiCo
The parties who are planning to buy Precision Tools Inc. worry about their personal liability. Can the shareholders promise never to sue them for their good-faith risk-taking? That is, eliminate the duty of care? / NC Business Corporation Act
§ 55-2-02 Articles of incorporation.
(b) The articles of incorporation may set forth any provision that under this Chapter is required or permitted to be set forth in the bylaws, and may also 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; (vi) any limitation on the duration of the corporation; and
(3) A provision limiting or eliminating the personal liability of any director arising out of an action whether by or in the right of the corporation or otherwise for monetary damages for breach of any duty as a director. No such provision shall be effective with respect to (i) acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the corporation, (ii) any liability under G.S. 55-8-33, (iii) any transaction from which the director derived an improper personal benefit, or (iv) acts or omissions occurring prior to the date the provisions became effective.
As used herein, the term "improper personal benefit" does not include a director's reasonable compensation or other reasonable incidental benefit for or on account of his service as a director, officer, employee, independent contractor, attorney, or consultant of the corporation.
NC Business Corporation Law
§ 55-8-01 Requirement for and duties of board of directors.
(a) Except as provided in subsection (c), each corporation must have a board of directors.
(b) All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, except as otherwise provided in the articles of incorporation ...
(c) A corporation may dispense with or limit the authority of a board of directors by describing in its articles of incorporation or in an agreement valid under G.S. 55-7-31(b) who will perform some or all of the duties of a board of directors; ...
NC Business Corporation Law
§ 55-4-01 Corporate name.
(a) A corporate name:
(1) Must contain the word "corporation", "incorporated", "company", or "limited", or the abbreviation "corp.", "inc.", "co.", or "ltd."; and
(2) May not contain language stating or implying that the corporation is organized for a purpose other than that permitted by G.S. 55-3-01 and its articles of incorporation.
(b) Except as authorized by subsection (c), 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 G.S. 55-4-02 or G.S. 55-4- 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 nonprofit corporation incorporated or authorized to transact business in this State.
(c) A person 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 applicant; 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.