A corporation is an artificial person that is created by governmental action. The corporation exists in the eyes of the law as a person, separate and distinct from the persons who own the corporation (stockholders). This means that the property of the corporation is not owned by the stockholders, but by the corporation. Debts of the corporation are debts of this artificial person, and not of the persons running the corporation or owning shares of stock in it. The corporation can sue and be sued in its own name. The shareholders cannot normally be sued as to corporate liabilities.
In a Delaware case, The Branmar Theatre Co., a family corporation, leased a theater from Branmar, Inc. The lease prohibited it from assigning the lease. The holders of the stock of Branmar Theatre Co. sold their stock to the Schwartzes. The lessor, Branmar, Inc., claimed that this sale of stock was a prohibited assignment and threatened to cancel the lease. Can Branmar, Inc. cancel the lease? NO. The corporation had not made a prohibited assignment of the lease. The fact that the shareholders of the corporation had transferred their shares did not constitute a transfer of the lease. It merely transferred the ownership and control of the lessee corporation, but that corporation was still the tenant.
A corporation is formed by obtaining approval of a Certificate of Incorporation, Articles of Incorporation, or a Charter from the State of incorporation. The Secretary of State is usually the official who approves or disapproves this certificate. The Revised Model Business Corporation Act (RMBCA) has done away with the Certificate of Incorporation in an attempt to simplify the paperwork handled by the Secretary of State. Under the RMBCA, a corporate existence begins when the Articles of Incorporation are filed with the Secretary of State. Mississippi has adopted the RMBCA.
CLASSIFICATION OF CORPORATIONS
A public corporation is one established for governmental purposes and for the administration of public affairs. A city is a public or a municipal corporation acting under authority granted to it by the State.
A private corporation is one organized by persons, either profit or nonprofit. Private corporations are often called “public” when the stock is sold to the public and traded on the stock exchanges.
A corporation is called a domestic corporation with respect to the State under whose law it has been incorporated. Any other corporation going into that State is called a foreign corporation. For example, a corporation holding a Texas Charter is a domestic corporation in Texas, but a foreign corporation in all other States. A foreign corporation must qualify to do business in a foreign State.
Special service corporations are corporations formed for transportation, banking, insurance, and similar specialized functions. These corporations are subject to separate codes or statutes with regard to their organization.
A corporation whose shares are held by a single shareholder or a closely-knit group of shareholders (such as a family) is known as a close corporation. The shares of stock are not traded publicly. Many of these types of corporations are small firms that in the past would have been operated as a sole proprietorship or partnership, but have been incorporated in order to obtain the advantages of limited liability or a tax benefit or both.
A corporation may be organized for the business of conducting a profession. These are known as professional corporations. Doctors, attorneys, engineers, and CPAs are the types of professionals who may form a professional corporation. Usually there is a designation P.A. or P.C. after the corporate name in order to show that this is a professional association or professional corporation.
A nonprofit corporation is one that is organized for charitable or benevolent purposes. These corporations include certain hospitals, universities, churches, and other religious organizations. A nonprofit entity does not have to be a nonprofit corporation, however. Nonprofit corporations do not have shareholders, but have members or a perpetual board of directors or board of trustees.
A Subchapter S corporation is a corporation in which the shareholders elect to be treated as partners for income tax purposes. Shareholders still have limited liability protection of a corporation, but income is treated like partnership income. Subchapter S refers to a particular subdivision of the Internal Revenue Code. The number of shareholders is limited to 75 shareholders and neither corporations nor partnerships can be shareholders in a Subchapter S corporation. Also, shareholders must be U.S. citizens or resident aliens.
CORPORATIONS AND GOVERNMENTS
Most States have a general corporation code that lists certain requirements, and anyone who satisfies these requirements and files the necessary papers with the government may automatically become a corporation. In 1950, the American Bar Association published a Model Business Corporation Act (MBCA) to assist State Legislatures in modernizing State corporation laws. In 1984, a revision of this Model Act was published (RMBCA). States have adopted various versions of the MBCA or the RMBCA with only slight variations. Mississippi has adopted the RMBCA.
For certain purposes, such as determining the right to bring a lawsuit in Federal Court, a corporation today is deemed a citizen of any State in which it has been incorporated and also of the State where it has its principal place of business. Therefore, a corporation can be a citizen of more than one State. For example, a corporation incorporated in New York is a New York corporation even though its shareholders are citizens of many other States. A Delaware corporation having its principal place of business in New York is deemed to be a citizen of New York as well as of Delaware.
Before doing business in another State, a foreign corporation generally must register with the Secretary of State of that State, file copies of its Articles of Incorporation, pay certain taxes, and appoint a resident agent for service of process.
IGNORING THE CORPORATE ENTITY
Ordinarily, a corporation will be regarded and treated as a separate legal person, and the law will not look beyond a corporation to see who owns it.
Piercing the Corporate Veil
A Court may disregard the corporate entity and pierce the corporate veil in exceptional circumstances. The decision whether to disregard the corporate entity and go directly against the shareholders is made on a case-by-case basis. Factors that may lead to piercing the corporate veil are:
- Failure to maintain adequate corporate records and the commingling of corporate and personal funds;
- Grossly inadequate capitalization (debt/equity ratio too high);
- The formation of a corporation to evade an existing obligation;
- The formation of a corporation to perpetrate a fraud;
- Improper diversion of corporate assets; and
- Injustice and inequitable circumstances would result if the corporate entity were recognized.
Courts generally will look to more than one factor.
Susan sued the Mobile Construction Company. Philip was the only shareholder of the corporation. Susan obtained a judgment against the corporation. Philip then dissolved the corporation and took over all its assets. He agreed to pay all outstanding debts of the corporation except the judgment in favor of Susan. She sued Philip on the ground that he was liable for the judgment against the corporation. He claimed that the judgment was only the liability of the corporation and that he was not liable because he was merely a shareholder and had not assumed the liability for the judgment. Is Philip liable on the judgment? YES. If the corporation alone were liable to Susan, an injustice would be done because the corporation had been stripped of all its assets and therefore could not pay the judgment. The timing of the dissolution of the corporation and assumption of all of its debts but Susan’s judgment showed that Philip maneuvered the corporate assets to his personal advantage. It would be unjust to allow him to keep the corporate assets after he had made it impossible for the corporation to pay the judgment to Susan. To prevent this injustice, the corporate entity would be ignored, and Philip would be liable on the judgment against the corporation.
It is extremely difficult to pierce a corporate veil in most situations. Some Courts use different terminology when disregarding the corporate entity. The Court may state that the corporation is the alter ego of the shareholders, and the shareholders should therefore be held liable.
The Court will not go behind the corporate identity merely because a corporation has been formed to obtain tax savings or to obtain limited liability for its shareholders. One-person, family, and other closely-held corporations are permissible and fully entitled to all of the advantages of corporate existence. However, factors that lead to piercing the corporate veil more commonly exist in these kinds of corporations.
PROMOTERS
Promoters are the people that bring the corporation into existence. They bring together other people interested in the company, solicit stock purchasers, and sometimes make contracts to be assigned later to the corporation. A corporation is not liable on a contract made by a promoter unless the corporation takes some sort of affirmative action to adopt the contract. The promoter still remains personally liable on the contract unless released by the other contracting party. The contract can provide that the promoter will be released from personal liability upon adoption of the contract by the corporation.
INCORPORATION
One or more natural persons or corporations may act as incorporators of a corporation by signing and filing Articles of Incorporation with the designated government official (usually the Secretary of State). These Articles are filed in duplicate, and the Secretary of State, when satisfied that the Articles conform to the State’s corporation statutes, stamps filed and the date on each copy. The Secretary of State then retains one copy and returns the other copy, along with a filing fee receipt, to the corporation.
The Articles of Incorporation must contain the following:
- The name of the corporation;
- The number of shares of stock the corporation is authorized to issue;
- The street address of the corporation’s initial registered office and the name of its initial registered agent; and
- The name and address of each incorporator.
The Articles may contain optional provisions such as the purpose for which the corporation is organized. However, if the Articles contain no purpose clause, the corporation will automatically have the purpose of engaging in any lawful business. Also, if no reference is made to the duration of the corporation in the Articles, it will automatically have a perpetual duration.
Under the RMBCA, corporate existence begins when the Articles are filed with the Secretary of State. Under the older practice still followed by many States, corporate existence begins upon the issuance of a Certificate of Incorporation by the Secretary of State.
FORFEITURE OF CHARTER
Under the RMBCA, the Secretary of State may administratively dissolve a corporation if:
- The corporation does not pay franchise taxes (these taxes are payable to the State, and the amount depends on the capital assets of the corporation);
- The corporation does not file its annual report within 60 days after it is due;
- the corporation is without a registered agent or a registered office for 60 days or more.
An annual report is a report filed with the Secretary of State which sets forth information such as the name of the corporation and the State where incorporated, the address of its registered office and name of its registered agent, the address of its principal office, the names and businesses addresses of its directors and principal officers, a brief description of the nature of the business, and information regarding the total number of authorized shares of stock.
Owners and officers of a dissolved corporation are not shielded from personal liability by using the corporate name in making contracts.
JUDICIAL DISSOLUTION
In some States, statutes provide that a judicial dissolution of a corporation may be implemented if the management of the corporation is deadlocked, and the deadlock cannot be broken by the shareholders.
CORPORATE POWERS
Corporations have some of the same powers as a natural person, such as the right to own property. If a corporation acts beyond the limits of its powers, the act is ultra vires. This is an act or contract that the corporation did not have authority to do or make. Modern corporation statutes give corporations broad powers, and the likelihood that a corporation will act beyond its powers is rare.
All corporations do not have the same powers. For example, corporations that operate banks, insurance companies, and railroads generally have special powers and are subject to special statutory restrictions.
As long as the Federal and State Constitutions are not violated, a State Legislature may give corporations any lawful powers. The RMBCA grants a corporation the same powers as an individual to do all things necessary or convenient to carry out its business and affairs. (§ 79-4-3.02 of the Mississippi Code).
PARTICULAR POWERS
Modern corporation statutes give corporations a wide range of powers. A corporation has perpetual succession or continuous life. In other words, it has the power to continue as a unit indefinitely or for a stated period of time regardless of any changes in the ownership of its stock. If no period of time is fixed for the duration of the corporation, the corporation will exist indefinitely until it is legally dissolved. If the period of existence is limited, the corporation can extend the period by meeting certain statutory requirements.
A corporation must have a name to identify it. Most States require that the corporate name contain some indication that it is a corporation, such as corporation, company, incorporated, limited, or an abbreviation of these words.
A corporation may have a seal which can be used to show that a contract or a document is being executed pursuant to valid corporate authority.
Bylaws are the rules and regulations of a corporation which govern its internal affairs. They are adopted by the shareholders, though in some States they may be adopted by the directors of the corporation. Of course the bylaws cannot conflict with the general corporate statutes of a State or the bylaws will be void.
A corporation may issue certificates representing corporate stock.
Corporations have the power to enter into contracts just like an individual.
Corporations have the power to borrow money in carrying out their business purposes.
A corporation can borrow money by issuing bonds. The bonds issued by a corporation are subject to Article 8 of the UCC (“Investment Securities”).
A corporation may sell or lease its property. However, in most States a corporation may not sell or mortgage all or substantially all of its assets without the consent of the majority of the shareholders.
Obviously a corporation has the power to incur debt and mortgage its property as security for debt.
Corporations may acquire the stock of another corporation and be a stockholder of another corporation. A corporation owning stock in another corporation can own such a large percentage of the stock that it controls the operations of the corporation. In such a case, the corporation owning the stock is commonly called a holding company. Sometimes a holding company is organized solely for the purpose of controlling other companies. These other companies are called subsidiary companies. Courts normally recognize the holding company and its subsidiary company as separate and distinct legal entities. A corporation does not have to be a holding company to own a subsidiary.
Generally, a corporation may purchase its own stock if it is solvent, and this stock will be known as treasury stock. Treasury stock maintains the status of outstanding stock, but is regarded as inactive and cannot be taken into consideration regarding votes by the shareholders. Also, dividends cannot be declared regarding treasury stock. The RMBCA eliminates the concept of treasury stock and calls this type of stock authorized, but unissued, stock.
A corporation has the power to do business in other States. However, by doing business in other States, the corporation may have to qualify as a foreign corporation to do business in that State which usually involves registering with the Secretary of State.
A corporation may be a member of a partnership and may be a limited or general partner of a limited partnership.
Corporations can pay pensions and establish pension plans for its employees.
The RMBCA even authorizes a corporation to make charitable contributions.
ULTRA VIRES ACTS
If a corporation acts beyond the scope of the powers granted by its charter and the statutes of the State under which it is governed, the corporation’s act is declared as ultra vires. However, modern corporation statutes give such a broad scope of powers that it is difficult to find an action that is ultra vires.
Nonprofit corporations have a more restricted range of powers thanusiness corporations, and it would be more likely to find an ultra vires act in a nonprofit corporation than a profit corporation.
CONSOLIDATIONS, MERGERS, AND CONGLOMERATES
DEFINITIONS
In a consolidation of two or more corporations, their separate existences cease, and a new corporation with the property and the assets of the old corporations comes into being.
A merger is different from a consolidation in that when two corporations merge, one absorbs the other. One corporation preserves its original charter and identity and continues to exist. The other corporation disappears, and its corporate existence terminates.
A conglomerate is the term describing the relationship of a parent corporation to subsidiary corporations engaged in diversified activities which are unrelated to the activity of the parent corporation. A subsidiary corporation is a corporation whose majority shareholder is another corporation (parent corporation). An example of a conglomerate could be a wire-manufacturing corporation that owns all of the stock of a newspaper corporation and of a drug-manufacturing corporation.
When the parent company is not engaged in production or rendering of services, it is customarily called a holding company.
LEGALITY
Consolidations, mergers, and asset acquisitions are sometimes prohibited by federal antitrust legislation on the grounds that the effect is to lessen competition in interstate commerce.
LIABILITY OF SUCCESSOR CORPORATIONS
When corporations are combined in any way, the question arises as to who is liable for the debts and obligations of the predecessor corporations.
Generally, the corporate entity which continues the business after a merger or a consolidation will succeed to all of the rights and property of the predecessors and will also be subject to all of the debts and liabilities of the predecessor corporations. For example, A merges into B. Suppose A had a contract with C. B did not. After the merger, B is liable to C on the contract.
A corporation may merely purchase the assets of another business. This would not be a merger or consolidation. In an acquisition situation, the purchaser does not become liable for the obligations of the business whose assets are being purchased.
