Nature of a Corporation (part B)
by
Charles Lamson
Liability on Promoters' Contracts and Expenses
The corporation does not automatically become a party to contracts made by the promoter. After it is incorporated, a corporation will ordinarily approve or adopt the contracts made by the promoter (Promoter. A person who devises a plan for a business venture; one who takes the preliminary steps necessary for the formation of a corporation. Promoters are the people, who, for themselves or on behalf of others, organize a corporation. They issue a prospectus, obtain stock subscriptions, and secure a charter.). The approval may be either express or by the corporation's conduct. Once approved, such contracts bind the corporation, and it may sue on them.
The corporation does not automatically become a party to contracts made by the promoter. After it is incorporated, a corporation will ordinarily approve or adopt the contracts made by the promoter (Promoter. A person who devises a plan for a business venture; one who takes the preliminary steps necessary for the formation of a corporation. Promoters are the people, who, for themselves or on behalf of others, organize a corporation. They issue a prospectus, obtain stock subscriptions, and secure a charter.). The approval may be either express or by the corporation's conduct. Once approved, such contracts bind the corporation, and it may sue on them.
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The promoter may avoid personal liability on contracts made for the benefit of the corporation by including a provision in the contract that the promoter incurs no personal liability if the corporation does or does not adopt the contract. In the absence of such a provision, the promoter may have liability. Courts look at whether the other contracting party knew the corporation was not yet in existence. The wording of the contract is also very significant in determining whether it binds the promoter are there pending the formation of the corporation or after it has come into existence.
Along with the adoption of the promoter's contracts, the corporation may or may not pay the expenses of the promoter in organization of the corporation. After the corporation comes into existence, it customarily reimburses the promoter for all necessary expenses in forming the corporation. This may be done by a resolution passed by the board of directors.
Issuance of Stock
When a new corporation is about to be formed, agreements to buy its stock will generally be made in advance of actual incorporation. In such a case the purchase agreement or subscription to stock by a prospective stockholder or investor, called a subscriber, constitutes merely an offer to buy. In most jurisdictions this offer may be revoked any time prior to acceptance. As the offeree, the corporation cannot accept the subscription until the state issues its charter. If an existing corporation sells stock, it can accept all subscriptions immediately and make them binding contracts. If the promoter is to be paid by means of a stock option, the corporation can make such a contract with the promoter before any services are performed. Most state laws provide that a minimum amount of stock must be sold and paid for before the corporation can begin operations.
Once a valid subscription agreement is signed, the subscriber has rights in the corporation even if the stock certificate has not been received or issued.
Articles of Incorporation
The written document setting forth the facts prescribed by law for issuance of a certificate of incorporation or a charter and the asserting that the corporation that has complied with legal requirements is the articles of incorporation. Once approved by the state, the articles determine the authority of the corporation. This document constitutes a contract between the corporation and the state. So long as the corporation complies with the terms of the contract, the state cannot alter the articles in any material way without obtaining the consent of the stockholders. The articles include such information as the name of the corporation, the names of the people forming the corporation (the incorporators), and the amount and types of stock the corporation has authorization to issue. The incorporators elect a board of directors and begin business, which constitutes acceptance of the charter and binds all parties.
Powers of a Corporation
A corporation has three types of powers express, incidental, and implied.
Express Powers
the statute or code number under which a corporation is formed and, to a lesser degree, the corporation's articles of incorporation determine its expressed powers. In a few instances, the state constitution sets forth the powers of a corporation. The statutes limit a corporation's powers to what they grant and a corporation may not do what statutes prohibit.
Incidental Powers
Certain powers always incidental to a corporation's expressed powers are essential to its existence as a corporation include but are not limited to:
Corporate Name. A corporation must have a corporate name. The members may select any name they wish, provided that it does not violate the statutes or that another firm or corporation within the state does not use it. Many of the states have statutes regulating corporate names. For example, statutes may require the name to end with Corporation or to be followed by the word Incorporated, an abbreviation thereof, or other indication of corporate status.
Continuous Existence. The existence of the corporation continues for the period for which the state grants the charter. The feature of a corporation makes this form of organization valuable. The death of a stockholder does not dissolve the organization. Sometimes people refer to this characteristic as perpetual or continuous succession.
Property Rights. A corporation has the right to buy, sell, and hold property necessary and its functioning as a corporation and not foreign to its purpose.
Bylaws and Regulations. The organization needs rules and regulations to govern it and to determine its future conduct. They must conform to the statutes and must not be contrary to public policy. The corporation's board of directors adopts these rules, called the corporation bylaws.
Legal Actions. Long considered incidental to corporate existence is the corporation's power to sue in its own name. Since the corporation may be composed of hundreds or thousands of stockholders, it would be a cumbersome, if not impossible, task to secure the consent of all the stockholders each time a corporation needed to bring a suit. A corporation may likewise be sued in the corporate name. In some states a corporation may represent itself and low-level trial courts by an officer/shareholder who is not an attorney, just as a person who is not an attorney may represent himself.
Corporate Seal. A corporation has the incidental power to have and to own a seal. Normally a corporation need not use a seal except (1) in executing written instruments that require the use of a seal when executed by natural individuals, or (2) in carrying out transactions where special statutory requirements require the use of the seal. Implied powers
Implied Powers
In addition to incidental or express powers conferred upon all corporations, a corporation has the implied power to do all acts reasonably necessary for carrying out the purpose for which the corporation was formed. A corporation may borrow money and contract if such acts are necessary for the transaction of the corporate business. It may make, indorse, and accept negotiable instruments. It has the power to acquire and convey property and to mortgage or lease its property in case such transactions are necessary for carrying out its business. Corporation codes as a rule expressly list the various implied powers described above so that they constitute express powers.
Ultra Vires Contracts
Any contract entered into by a corporation that goes beyond its powers is called an ultra vires contract. As between the parties to the contract, the corporation and the third person, the contract generally binds them. However, a stockholder may bring an action to prevent the corporation from entering into such a contract or to recover damages from the directors or officers who have caused loss to the corporation by such contracts. In extreme cases, the attorney general of a state may obtain a court order revoking the articles of incorporation of the corporation for frequent or serious improper acts that make it proper to impose such an extreme penalty.
INTERNET RESOURCES FOR BUSINESS LAW  *SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, PGS. 412-415, 417*
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