Summary
Summary UBE - Corporations (Notes)
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Formation Pre-Incorporation Directors Shareholders Finance Fundamental Corporate Changes Dissolution
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CORPORATIONS1) Formation (RMBCA)
Under the Revised Business Model Corporation Act (RMBCA), a de jure corporation is formed if it
meets four elements. Firstly, the articles of incorporation must be created. This must include the name
and address of the corporation and its agent, signed by the incorporators, including the number of
shares to be issued. Secondly, the corporation must be formed to meet a lawful business purpose. If
it carries out activities outside of this purpose, it will be considered void (ultra vires). However, a
corporation may still exist under the RMBCA even though its purpose is ultra vires where a
shareholder or third party wants to enjoin the corporation’s actions. Otherwise, common law does not
recognise such right. Third, the corporation must conduct an organisational meeting in which the
incorporators must meet to vote and elect directors and officers as well as adopting the bylaws of the
company that run its day-to-day management. Where such bylaws and articles conflict, the articles
take precedence. Directors or shareholders can repeal or modify the bylaws by a majority vote. Lastly,
the articles must be filed with the secretary of state, so that the corporation’s existence comes into
effect.
Even if the formalities under the RMBCA are not all met, a corporation may still exist as a de facto
corporation under common law. This enables any shareholders to avoid liability towards third parties
with the protection of the veil who entered into contracts with the corporation that were not properly
formed. This applies to victims under both contract and tort law. However, common law requires that
there be an existing statute with which the corporation’s formation could have complied with. It also
requires that the incorporators acted in good faith to comply with the statute. But the shareholder
must not have been aware of its non-compliance with the statute, otherwise he will lose such right to
avoid liability, and he will ultimately be jointly and severally liable to the third party with the
corporation. Furthermore, business must have been conducted under the corporation’s name or under
corporate privilege. Also, a de facto corporation is still disadvantaged as it may be subject to attack
by the state under quo warranto proceedings.
Alternatively, the shareholder can enjoin the corporation by estoppel. This right only applies to
contract victims rather than tortious victims, unless the tortious victim took advantage of the
corporation’s existence to enter into the contract in which case this right will extend to them as well.
Here, the injured third party must show that he relied on the corporation’s existence when entering
the contract. Thus the corporation will be estopped from denying its existence, in which the
shareholder can avoid liability and the third party can directly sue the corporation for its damages.
However, this is determined on a case-by-case basis.
2) Pre-Incorporation (RMBCA)
Before a company is formed, the promoter of the company may enter into ‘pre-incorporation’
contracts with third parties. If the third party suffers damages, the promoter will be liable for damages
before and after incorporation under the RMBCA. However, the promoter can avoid liability if he
demonstrates novation, in which all the parties including corporation, third party and the promoter
signed in writing and agreed that the promoter be released from liability. The corporation is generally
not liable, unless there is evidence that it adopted the contract. For instance, express adoption requires
the directors had knowledge of the contract at the time it was entered. Implied adoption requires the
employees had knowledge and that they accepted the benefits of the contract.
, Under the RMBCA, employees may subscribe to any stock in the company if they do not require any
agency commission fees. Such subscriptions are irrevocable for usually six months, unless otherwise
expressly agreed in the subscription grant or the subscribers consent to the revocation.
3) Directors
Directors in a corporation may approve decisions on its behalf. Directors can approve without
attending any meeting, as long as all the directors in the company unanimously vote in favour of the
decision, and in writing. Otherwise, directors must attend a meeting. Firstly, they must attend either
a general meeting or special meeting with two days’ notice given to all directors specifying the date,
time and place of the meeting. The notice may be received by directors indirectly, in which such
notice requirement may be waived if they attend and vote at the meeting. Secondly, there must be a
majority vote in favour of the decision only by the directors present at the meeting. This is known as
a quorum. However, if the directors decide to leave the meeting, the quorum will be lost and the
meeting must take place again. Not all directors have to attend as some may attend by a conference
call, so long as all of the directors can hear each other participate.
Directors owe three duties to the corporation. Firstly, directors must owe a duty of care. Under the
‘business judgment rule’, this means that the director must discharge his duties in good faith by acting
as a reasonably prudent person would in like position in the best interests of the corporation.
Alternatively, the director may act in good faith by relying upon opinions, reports or conclusions
drafted by committees in the corporation, accountants or lawyers, unless they are directly related to
the director. Ultimately, the burden of proof is on the challenger to prove the director breached his
duty of care as it is generally assumed he acted with care. Secondly, directors must owe a duty of
loyalty to the corporation. Unlike duty of care, the burden of proof is on the directors to prove he did
not breach his duty of loyalty. For example, the director must avoid engaging in conflicting interests
whereby the director uses his position in the company to engage in a transaction with himself or a
related person. In such scenario, the director must disclose the material facts of the transaction to any
other disinterested shareholders or directors, and they must approve such transaction by a majority
vote. Alternatively, the director must demonstrate that the transaction is fair and beneficial to the
corporation, an option that is not afforded to trustees. Otherwise, the corporation can sue the director
for any damages, terminate the transaction or enjoin the director from engaging in such transactions
in the future. The director must also avoid engaging in competing ventures that fall within the same
industry as the corporation. Lastly, the director must avoid usurping any corporate opportunities that
fall within the same industry as the corporation, by informing the corporation of such opportunity to
give them a chance to accept or deny it. Otherwise, the corporation can sue the director or request to
account for any profits gained under a constructive trust theory to prevent unjust enrichment by the
director. Lastly, directors owe a duty to disclose all necessary and material information to the
corporation.
Directors have a duty to make proper declarations of distributions to record shareholders. These
include dividends and distributions made after the corporation is dissolved. The amount of dividends
will generally be determined by the Articles of Incorporation, although record shareholders may vote
in majority to approve the dividends. If the directors are found to have improperly made declarations,
they will be liable for the amount in difference between the distributed amount and the actual amount.
But directors could avoid liability by showing that they acted in good faith based upon reports or
financial statements made by accountants or lawyers. They can also demand contributions from the
other directors who also wrongfully approved the declarations. Shareholders may also be jointly and
severally liable if they were aware of the improper declarations.
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