Summary
Summary UBE - Corporations
- Module
- New York Bar Exam
- Institution
- New York Bar Exam
Formation Pre-incorporation Directors Shareholders Finance Fundamental corporate change 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.
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