ADW Draft 9/25/11
ADW Draft 9/25/11
AP edits 2/19/12
Chapter 7. Forming the Corporation
Sources Used in this Chapter
MBCA §§ 2.01, 2.02, 2.04, 2.05, 3.01, 3.02, 4.01, 5.01, 5.02, 6.01, 8.03, 14.20, 14.22
DGCL §§ 102
Restatement (Third) of Agency §6.04
ABA Model Rules of Professional Conduct, Rules 1.4, 1.6, 1.7, 1.13
Concepts for this Chapter
• Process of incorporation
o Contents of articles
o Formalities
• Role of lawyers
o Who is the client?
o Client confidences
o Lawyer as director
• Defective incorporation
o Corporation not formed: parties aware /parties not aware
o Corporation formed: dissolved by state /misused by parties
A. Process of Incorporation
1. Formal Requirements
Question: Who forms a corporation?
Answer: The incorporators.
MBCA § 2.01. Incorporators
One or more persons may act as the incorporator or incorporators of a corporation by delivering article of incorporation to the secretary of state for filing.
Incorporation is available to multinational businesses and to individuals starting a business in a garage. The corporate form is used by businesses of all sizes and types.
Question: How is a corporation formed?
Answer: The process of incorporation is simple. States have made incorporation virtually painless and available to almost anyone seeking the advantages of the corporate form.
The incorporators file articles of incorporation with the state - typically, the state's "secretary of state" office. The articles of incorporation include information such as:
• the corporate name;
• the number of authorized shares, and
• the name and address of each incorporator.
MBCA§ 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 section 4.01;
(2) the number of shares the corporation is authorized to issue;
(3) the street address of the corporation's initial registered office and the name of its initial registered agent at that office; and
(4) the name and address of each incorporator.
The articles of incorporation may also information such as:
• the corporate purpose;
• provisions regulating the management of the corporation; and
• limitations on the power of the corporation and its shareholders, officers or directors.
MBCA § 2.02. Articles of Incorporation.
(b) The articles of incorporation may 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;
(3) any provision that under this Act is required or permitted to be set forth in the bylaws;
(4) a provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law; and
(5) a provision permitting or making obligatory indemnification of a director for liability (as defined in section 8.50(5)) to any person for any action taken, or any failure to take any action, as a director, except liability for (A) receipt of a financial benefit to which he is not entitled, (B) an intentional infliction of harm on the corporation or its shareholders, (C) a violation of section 8.33 or (D) an intentional violation of criminal law.
(c) The articles of incorporation need not set forth any of the corporate powers enumerated in this Act.
(d) Provisions of the articles of incorporation may be made dependent upon facts objectively ascertainable outside the articles of incorporation in accordance with section 1.20(k).
Delaware law includes similar provisions.
DGCL § 102. Contents of certificate of incorporation.
(a) The certificate of incorporation shall set forth:
(1) The name of the corporation
***
(2) The address . . . of the corporation's registered office in this State, and the name of its registered agent at such address;
(3) The nature of the business or purposes to be conducted or promoted. It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any;
(4) If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class.
* * *
(5) The name and mailing address of the incorporator or incorporators;
(6) If the powers of the incorporator or incorporators are to terminate upon the filing of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.
(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:
(1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation;
* * *
(3) Such provisions as may be desired granting to the holders of the stock of the corporation, or the holders of any class or series of a class thereof, the preemptive right to subscribe to any or all additional issues of stock of the corporation of any or all classes or series thereof, or to any securities of the corporation convertible into such stock. No stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation. * * *
(4) Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power, or a larger number of the directors, than is required by this chapter;
(5) A provision limiting the duration of the corporation's existence to a specified date; otherwise, the corporation shall have perpetual existence;
(6) A provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts;
(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. * * *
Example: Articles of Incorporation
ARTICLES OF INCORPORATION
1. Name. The name of corporation is Your Awesome Home, Inc.
2. Shares authorized. The corporation can issue 1,000 shares of stock.
3. Registered office and agent. The corporation’s registered office is 1301 Worrell Prof Bldg, WFU. Registered agent is AR Palmiter.
4. The incorporator is AR Palmiter, 3333 Worrell, W -S, NC 27109.
AR Palmiter
AR Palmiter, incorporator
Question: Are these articles of incorporation sufficient to form a corporation?
Answer: Yes. They satisfy the MBCA, which includes requirements relating to:
• Name of corporation
• Shares authorized
• Registered office/agent
• Incorporator
Question: What is required for the name of a corporation?
Answer: The articles must state the corporation’s complete name and a formal indication of its corporate status—a reference such as “Corporation,” “Incorporated,” or “Inc.” will suffice. The corporate name must also be different from the names of other corporations in the state.
States are split as to the degree corporate names must be different from previously incorporated firms of a similar name. One set of (newer) statutes require that the name must be “distinguishable upon the records” of the secretary of state from other corporate names already taken or reserved for future use.
MBCA § 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., or words or abbreviations of like import in another language; and
(2) may not contain language stating or implying that the corporation is organized for a purpose other than that permitted by section 3.01 and its articles of incorporation.
(b) Except as authorized by subsections (c) and (d), 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 section 4.02 or 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 not-for-profit corporation incorporated or authorized to transact business in this state.
(c) A corporation 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 applying corporation; 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.
(d) A corporation may use the name (including the fictitious name) of another domestic or foreign corporation that is used in this state if the other corporation is incorporated or authorized to transact business in this state and the proposed user corporation:
(1) has merged with the other corporation;
(2) has been formed by reorganization of the other corporation; or
(3) has acquired all or substantially all of the assets, including the corporate name, of the other corporation.
(e) This Act does not control the use of fictitious names.
Another group of (older) statutes further specify that the name not be “deceptively similar” to existing names.
Question: What must the articles of incorporation include regarding the capital structure of the corporation?
Answer: In addition to the corporate name and registered office and agent, the articles must also specify the securities the corporation will have authority to issue. The articles must express the various classes of authorized shares, the number of shares of each class, and the privileges, rights, limitations, and preferences of each class. MBCA §6.01.
MBCA § 6.01. Authorized Shares.
(a) The articles of incorporation must set forth any classes of shares and series of shares within a class, and the number of shares of each class and series, that the corporation is authorized to issue. If more than one class of shares or series of shares is authorized, the articles of incorporation must prescribe a distinguishing designation for each class or series and must describe, prior to the issuance of shares of a class or series, the terms, including the preferences, rights, and limitations, of that class or series. Except to the extent varied as permitted by this section, all shares of a class or series must have terms, including preferences, rights and limitations, that are identical with those of other shares of the same class or series.
(b) The articles of incorporation must authorize (1) one or more classes of shares that together have unlimited voting rights, and (2) one or more classes of shares (which may be the same class or classes as those with voting rights) that together are entitled to receive the net assets of the corporation upon dissolution.
(c) The articles of incorporation may authorize one or more classes or series of shares that:
(1) have special, conditional, or limited voting rights, or no right to vote, except to the extent otherwise provided by this Act;
(2) are redeemable or convertible as specified in the articles of incorporation:
(i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a specified event;
(ii) for cash, indebtedness, securities, or other property; and
(iii) at prices and in amounts specified, or determined in accordance with a formula;
(3) entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially cumulative;
(4) have preference over any other class of shares with respect to distributions, including dividends and distributions upon the dissolution of the corporation.
(d) Terms of shares may be made dependent upon facts objectively ascertainable outside the articles of incorporation in accordance with section 1.20(k).
(e) Any of the terms of shares may vary among holders of the same class or series so long as such variations are expressly set forth in the articles of incorporation.
(f) The description of the preferences, rights and limitations of classes or series of shares in subsection (c) is not exhaustive
Question: Why is disclosure regarding the corporation’s authorized shares required?
Answer: Disclosure of the kinds and quantities of shares to be authorized is important because it reveals the capital structure of the corporation—how a corporation plans to finance its existence. It also allows an investor to know what proportion of the shares that can be issued that the investor is buying. For example, in a corporation with 1000 authorized shares, an investor who acquires 501 shares is assured of majority control.
Question: Why do the articles of incorporation have to include the registered office and agent of the corporation?
Answer: The articles must state the corporation’s address for both service of
process and for sending official notices. MBCA §2.02. In addition to the registered office, often the articles must provide the name of a registered agent at that office on whom process can be served. MBCA §§2.02, 5.01. Changes in the registered office or registered agent must be filed with the secretary of state. MBCA § 5.02.
MBCA § 5.01. Registered Office and Registered Agent.
Each corporation must continuously maintain in this state:
(1) a registered office that may be the same as any of its places of business; and
(2) a registered agent, who may be:
(i) an individual who resides in this state and whose business office is identical with the registered office;
(ii) a domestic corporation or not-for-profit domestic corporation whose business office is identical with the registered office; or
(iii) a foreign corporation or not-for-profit foreign corporation authorized to transact business in this state whose business office is identical with the registered office.
MBCA § 5.02. Change of Registered Office or Registered Agent.
(a) A corporation may change its registered office or registered agent by delivering to the secretary of state for filing a statement of change that sets forth:
(1) the name of the corporation,
(2) the street address of its current registered office;
(3) if the current registered office is to be changed, the street address of the new registered office;
(4) the name of its current registered agent;
(5) if the current registered agent is to be changed, the name of the new registered agent and the new agent's written consent (either on the statement or attached to it) to the appointment; and
(6) that after the change or changes are made, the street addresses of its registered office and the business office of its registered agent will be identical.
(b) If a registered agent changes the street address of his business office, he may change the street address of the registered office of any corporation for which he is the registered agent by notifying the corporation in writing of the change and signing (either manually or in facsimile) and delivering to the secretary of state for filing a statement that complies with the requirements of subsection (a) and recites that the corporation has been notified of the change.
Question: Do the articles of incorporation require only that the incorporator(s) be named, or do they require that management, directors, or officers be named as well?
Answer: Most modern statutes have done away with earlier requirements that the articles of incorporation name and number the corporation’s initial directors. MBCA § 2.02 provides that articles may define and number its board of directors.
MBCA § 8.03. Number and Election of Directors.
(a) A board of directors must consist of one or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or bylaws.
(b) The number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws.
(c) Directors are elected at the first annual shareholders’ meeting and at each annual meeting thereafter unless their terms are staggered under section 8.06
Question: How many directors does a corporation have to have?
Answer: MBCA §8.03 (above) requires only that the board be composed of “one or more individuals”. Notice that corporations and other entities cannot be directors.
Question: In addition to the required information in the articles of incorporation, what other information can and should be included?
Answer: The articles may contain a wide variety of other provisions to “customize” the corporation. MBCA §2.02(b). These provisions can be particularly useful in closely held corporations where the participants seek specific protections and responsibilities. Such optional provisions can include:
• voting provisions,
• membership requirements,
• management provisions, and
• indemnification provisions.
Question: What are the requirements regarding a description of the corporation’s purpose in the articles of incorporation?
Answer: MBCA §2.02 includes information regarding the corporation’s purpose as information that may be included in the articles of incorporation. MBCA §3.01 sets out a default purpose of “any lawful purpose” unless the articles specify a more limited purpose.
MBCA § 3.01. Purposes.
(a) Every corporation incorporated under this Act has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.
Question: What can the articles of incorporation specify regarding the powers of the corporation?
Answer: The MBCA again sets out a broad default provision in §3.02:
MBCA § 3.02. General Powers.
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power:
(1) to sue and be sued, complain and defend in its corporate name;
(2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it;
(3) to make and amend bylaws, not inconsistent with its articles of incorporation or with the laws of this state, for managing the business and regulating the affairs of the corporation;
(4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located;
(5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
(6) to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity;
(7) to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income;
(8) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment;
(9) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
(10) to conduct its business, locate offices, and exercise the powers granted by this Act within or without this state;
(11) to elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their compensation, and lend them money and credit;
(12) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents;
(13) to make donations for the public welfare or for charitable, scientific, or educational purposes;
(14) to transact any lawful business that will aid governmental policy;
(15) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation
Question: What happens after incorporation?
Answer: After incorporation, an organizational meeting is required to begin the procedures necessary to get the corporation operational. In order for the corporation to function, the effective corporate planner must create a working structure. This takes place at an organizational meeting.
If the initial directors are named in the articles of incorporation, those directors hold the organizational meeting at the call of a majority vote. If the initial directors are not named in the articles, an organizational meeting is held at the call of a majority of the incorporators.
At the organizational meeting, the first act is to elect a board of directors unless the articles have named initial directors who are to remain in office. The board then proceeds to complete several necessary tasks in creating a functional business structure. Those tasks may include:
• approving bylaws,
• electing officers,
• adopting the contracts of pre-incorporation promoters,
• adopting a corporate seal,
• choosing a bank for deposit of corporate funds,
• authorizing the issuance of shares and setting the consideration for the shares, and
• approving shareholders’ agreements.
MBCA § 2.05. Organization of Corporation.
(a) After incorporation:
(1) if initial directors are named in the articles of incorporation, the initial directors shall hold an organizational meeting, at the call of a majority of the directors, to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting;
(2) if initial directors are not named in the articles, the incorporator or incorporators shall hold an organizational meeting at the call of a majority of the incorporators:
(i) to elect directors and complete the organization of the corporation; or
(ii) to elect a board of directors who shall complete the organization of the corporation.
(b) Action required or permitted by this Act to be taken by incorporators at an organizational meeting may be taken without a meeting if the action taken is evidenced by one or more written consents describing the action taken and signed by each incorporator.
(c) An organizational meeting may be held in or out of this state.
Question: How are the actions taken at the organizational meeting documented?
Answer: The minutes of the meeting document what happened. The meeting minutes are the principal paper trail of a corporation's early legal life.
2. Choice of the State of Incorporation
The choice of a state of incorporation may depend on where a company intends to operate. A company that expects to operate locally incorporates locally. A company that expects to operate nationally may incorporate more strategically, perhaps in Delaware. Remember that the internal affairs doctrine means that the state of incorporation may have a significant impact in future litigation.
Bonus Question: Find the most recent amended and restated articles of incorporation for PepsiCo, which was incorporated in North Carolina after the state legislature passed a version of the MBCA (with antitakeover provisions for public corporations) that suited Pepsi.
Answer: There are three ways to get this information.
(1) Information about all corporations is available from the secretary of state in the state in which the company is incorporated. In the case of PepsiCo, the North Carolina Secretary of State’s website has this information:
Students can type in “PepsiCo”, and then select the PepsiCo entity they want to know about. Once on the main PepsiCo page, they can select “view document filings” and then scroll down to find the most recent version of the articles of incorporation.
The articles of incorporation, as of their amendment and restatement on May 9, 2011, are available here:
The articles are also attached to this Teacher’s Manual as Appendix A.
(2) Public corporations (ones whose stock is traded on a stock exchange) must also comply with substantial federal disclosure rules. Detailed financial and business information about such corporations is available on EDGAR (the Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system).
Students can go to and select “Search for Company Filings.” They can then choose to search by company name. They will be given a chance to type in “PepsiCo,” which will yield a large list of documents that have been filed with the SEC.
If students look through the PepsiCo documents, they will find that on May 9, 2011, PepsiCo made a Form 8-K filing, which announced and attached the (same) amended and restated articles of incorporation:
(3) A third way to find out information about a company is through its own website. The website contains a lot of useful information, including the May 9, 2011 amended and restated articles of incorporation:
3. Multiple Parties in a Business Formation
Question: When you form a business for multiple parties, who is your client?
Answer: The role of the lawyer in the incorporation process may be that of corporate planner. If the corporate planner has done her job effectively, the organizational meeting is normally just a formality (sometimes not even attended, but handled by unanimous written consent) to put in place the plan laid out clearly by the parties.
The incorporation process, however, may also trigger trying legal situations—situations that may implicate professional ethics and an analysis of the lawyer-client relationship.
In simplest terms, the lawyer-client relationship is straightforward: the lawyer serves her client. But the corporate planner’s client relationships are not so readily defined. In the corporate context, the corporation as well as its individual participants may vie for possible status as “client.”
The potential for conflict between parties involved exists throughout the formation of the corporation. This is particularly true in closely held corporations, where the same parties serve double and triple-duty as officers, directors, and shareholders, each with different sets of expectations.
Hypothetical 7.1 – Part One (p. 171)
Question: Basil (whose divorce you handled) asks you to help him, along with Sybil and Gowan, form a corporation. Who do you represent?
Answer: The corporation is a legal person. However it is 1) not actually a "natural person" person and 2) comprised of various participants. Who does corporate counsel represent? The answer comes from corporate law and rules of professional responsibility.
The corporate lawyer represents the corporation – and even pre-incorporation the entity to-be. The entity theory is embodied in Model Rule 1.13 (p. 169), and many jurisdictions have adopted it.
ABA Model Rules of Professional Conduct. Rule 1.13 Organization as Client
(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
The corporate entity, and not the individuals that make up that entity, is the client.
Before incorporation, the lawyer often acts on behalf of multiple parties. In such an instance, that lawyer acts as a “lawyer for the situation.” No one client is exclusively represented, instead, all parties involved comprise the “situation” to be represented.
Question: Do people acting as a corporation know this?
Answer: Professional ethics rules require a lawyer acting in such a capacity to communicate to the parties the advantages and risks of multiple representation, and, under Rule 1.7, to get the consent of the represented parties to the arrangement.
The lawyer must make this fact clear to corporate participants at the outset of her service to the firm.
ABA Model Rules of Professional Conduct. Rule 1.7 Conflict of Interests: Current Clients
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
Hypothetical 7.1 – Part Two
You represented Basil in his divorce. Basil says, “As you know from your work for me on my divorce, there are some pretty personal things that I’ve told you. I assume you won’t be telling the others.” Under his breath he adds, “Like you know I’m really strapped for cash. What with child support and alimony, I’m not sure what to do. But with this new company I plan to get out as much cash as quickly as I can.”
Question: What should you do?
Answer: You have a potential conflict of interest and you will need to consult the ABA Model Rules of Professional Conduct.
Question: Do you still represent Basil?
Answer: Yes. Under Rule 1.6, his confidences to you during the divorce cannot be disclosed to others without his consent.
ABA Model Rules of Professional Conduct Rule 1.6 Confidentiality of Information
A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent . . .
Question: Can you represent the corporation?
Answer: No. There is a conflict – Basil’s interests seem to be at odds with the corporation (see Rule 1.7 above).
Question: What do you have to do to represent the corporation?
Answer: Under Rule 1.4, you would have to disclose to “it” (that is, to Gowan and Sybil) that Basil may be planning to loot the corporation.
ABA Model Rules of Professional Conduct. Rule 1.4 Communication
(a) A lawyer shall …
(1) promptly inform the client of any decision or circumstance with respect to which the client’s informed consent … is required.
Question: What is the likely outcome?
Answer: It looks like you would have to withdraw from representing the corporation. You cannot disclose exactly why. See again Rule 1.6. Sybil and Gowan will be flummoxed. You should tell them to look for another lawyer, who should explain what is happening.
Hypothetical 7.1 – Part Three
Gowan says, “Thanks for explaining that you will represent the corporation. As you know my son Gowan, Jr. is pretty unsure about his future. I’m investing in this company so there will be a place for him. I would like you to draft papers that give me voting control, though Basil and Sybil do not have to know. Please hold this in confidence and draft the papers as I want. As you know, I’m paying your bill.”
Question: What should you do? Who do you represent?
Answer: The assumption is that you’ve explained that a corporate lawyer represents the corporation, not any individuals. (see Rule 1.13(a)). Gowan – not a previous client-- has just given you personal instructions and highly relevant information about his plans. You owe it to the corporation not to carry them out.
What should you do? Say no. And if Gowan persists, you must tell him that you will have to tell the others about his plans, on behalf of the corporation. You should tell Gowan you are not acting on behalf of their his personal legal interests. Model Rule 1.13 states that “(i)n dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”
It is a hard thing. Even though Gowan will now see that you are fired or not paid, you assumed obligations to the “situation”
Hypothetical 7.1 – Part Four
Sybil says, “Thanks for forming the company. Now that you’re our lawyer, I thought you should know that I told the others I have an MBA and know accounting, but I don’t. Not to say I’m clueless – in my last job I actually got away with embezzling about $250,000. I really hope you won’t tell Basil or Gowan.”
Question: What should you do?
Answer: Sybil is not a client, nor is she asking for separate representation. She is simply revealing information that there is a risk that she will commit a crime against the corporation. You are obligated to give this information to corporate decision makers/overseers – that is, to Basil and Gowan if they are directors. This is up-the-ladder reporting. Rule 1.13(b).
If they do nothing, you may be allowed under the ethics rule to reveal this to outside
regulators. Rule 1.13(c).
ABA Model Rules of Professional Conduct. Rule 1.13 Organization as Client
(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
(b) If a lawyer for an organization knows of [someone intending to violate legal obligation or law], the lawyer shall refer the matter to higher authority in the organization [including the board of directors]
(c) .. If despite the lawyer’s efforts in (b) [the highest authority fails to act and the lawyer believes substantial injury is reasonably certain] the lawyer may reveal information relating to the representation
If it were a public corporation, you would have to follow the SEC’s up-the-ladder reporting rules for lawyers who do securities work for the corporation. Under the rules you must bring possible securities fraud and fiduciary breaches to the attention of the company’s general counsel (or both the general counsel and CEO), and then the board of directors or the board's compliance committee. You are not required, however, to bring it to the attention of the SEC and other authorities. But notice the Professional Conduct Rules permit you to do this if you believe "substantial injury is reasonably certain."
Hypothetical 7.1 – Part Five
Your law firm is asked to represent a client, Patty, who claims that she lost everything in a hurricane but has no insurance because Gowan committed insurance fraud.
Question: What do you say when the firm’s “conflicts” email reaches you?
Answer: This question brings up the issue of conflicts within a firm. You did not represent Gowan – you made that perfectly clear when he asked you to draft the corporate documents to suit his personal interests.
Must you tell the firm that there’s no way the firm can represent Patty since you represent Gowan’s corporation?
Under the entity theory you might simply conclude that you do not represent Gowan, but instead the corporation in which he is a shareholder. But Gowan might view things differently – particularly in a small three-person corporation.
Under the aggregate theory, courts say that you represent all the participants and the corporation.
Which theory applies here? It is a close question. You probably should not make the call without talking to others in the firm. That is, in response to the conflicts email – “we should discuss this.” Ultimately, whether the entity or aggregate theory applies may well turn on the reasonable expectations of the parties – how clear were you with Gowan that you did not represent him?
Hypothetical 7.1 – Part Six
You resolve all the possible conflicts, misunderstandings, tensions, and so on. You represent the “situation” – the corporation.
Basil, Sybil and Gowan recognize your wisdom and ask you to sit on the company’s board.
Question: Can you serve on the board of directors?
Answer: Lawyers are not prohibited from sitting on the boards of corporations they represent. This once used to be a common practice for public corporations, but much less so as new rules on “independent directors” would disqualify outside counsel from that status.
Having legal counsel on the board of directors can cause businesses great headache when lawyers are in a position where business judgment advises one course and legal judgment another. There is no clean way to resolve such a conundrum – it is best for a company to avoid putting itself in that position in the first place.
B. Corporate Powers (and the Ultra Vires Doctrine)
Under the common law doctrine of ultra vires, which means “beyond the power,” a corporation could not engage in activities outside the scope of its defined purpose.
Modern statutes typically provide that “[e]very corporation incorporated under this Act has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation” (MBCA§ 3.01(a) above) and include very broad provisions regarding corporate powers (MBCA §3.02 above). As a result, very little is ultra vires, and the discipline it used to provide is largely handled by expanded fiduciary duties.
C. Defective Incorporation
What happens if incorporation has not yet happened or somehow fails? Who is liable in dealings with outsiders? This question involves the concept of corporate limited liability. Whether or not the corporation has been formed also determines whether or not parties to the corporation are personally liable for debts incurred.
Question: What is corporate limited liability?
Answer: In this context, corporate limited liability refers to the limitation of liability on the part of the promoters of the corporation. Promoters can become liable for their actions during the formation of the business. Limited liability only arises upon formal incorporation. Promoters can become liable for both pre-incorporation contracts entered into before the business is incorporated as well as contracts they sign for an improperly incorporated firm (i.e., defective incorporation).
There are four permutations of defective incorporation that have implications for the liability of the promoters.
(1) Corporation Not Formed – Parties Aware
• Promoters and outside parties are aware of the lack of incorporation
• A creditor sues the promoters
Question: What are the consequences for promoters’ liability if the corporation has not yet been formed and the parties enter into a contract, aware that it has not been formed?
Answer: In the event the corporation is not formed, it does not exist under the laws of contract and agency and cannot be a principal or a party to a contract. This leaves only the question of liability for the promoters involved in the initial set-up.
When both parties know there is no corporation, there exists what is essentially a presumption of liability for the promoters. The Restatement (Second) of Agency §326 states that “Unless otherwise agreed, a person who, in dealing with another, purports to act as agent for a principal whom both know to be nonexistent or wholly incompetent, becomes a party to such a contract.” The Restatement (Third) of Agency §6.04 takes a slightly different approach:
Restatement (Third) of Agency §6.04 Principal Does Not Exist or Lacks Capacity
Unless the third party agrees otherwise, a person who makes a contract with a third party purportedly as an agent on behalf of a principal becomes a party to the contract if the purported agent knows or has reason to know that the purported principal does not exist or lacks capacity to be a party to the contract.
This default rule can be circumvented only by agreement.
Hypothetical Contract – Part One
RKO owns a chain of movie houses. It wants to sell one of its Philadelphia houses to Graziano, who plans to incorporate his new business.
RKO wants a deal now and presents a contract to your client Graziano.
Contract
Parties: Seller & Buyer
Buyer's obligations: […]
Seller's obligations: […]
Warranties: […]
Representations: […]
¶ 19. It is understood that it is the intention of the Purchaser to incorporate. Upon condition that such incorporation be completed by closing, all agreements, covenants, and warranties contained herein shall be construed to have been made between Seller and the resultant corporation ...
RKO (Seller)
Kent Enterprises, Inc. (Buyer)
[signed by Graziano]
Question: What is the impact of ¶ 19. Does this get Graziano off the hook?
Answer: Not according to the court. He remains liable as a promoter even after the corporation is formed and accepted the contract. There must be some indication of a novation (explained in the breakout box on p. 173) – that after incorporation and acceptance, RKO will no longer look to him, but only the corporation.
Graziano should have waited until the business was properly incorporated (and the contract approved by the board) before entering into the contract.
Hypothetical Contract – Part Two
Board Minutes
Kent Enterprises, Inc .
The organizational meeting of the Board of Directors of Kent Enterprises Inc. was duly convened in ____ on _____, at _____.
* * *
On motion duly made, seconded and unanimously adopted, it was RESOLVED, that the Corporation adopt all agreements, covenants and warranties of [Contract with RKO] dated _____ and cause all documents to reflect the same.
Question: Does this do the trick?
Answer: Not really. There is no indication from the contract itself that corporate adoption works as a novation. Even after adoption of the contract by the corporation, RKO can still look to Graziano for performance. He is not off the hook.
(2) Corporation Not Formed - Parties Not Aware
• Promoters believe (wrongly) that the business is incorporated
• Creditor believes (wrongly) that the business is incorporated
Question: What are the consequences for the promoter if the parties contract while they are unaware that the corporation has not been formed?
Answer: For there to be corporate limited liability, the firm must be validly incorporated, so failure to properly incorporate would result in liability for corporate participants. Courts are split on whether to limit limited liability to properly incorporated firms or extend some measure of leniency.
Traditionally, courts have implied limited liability when third parties believe they are dealing with a “nonrecourse” agent for a corporation. These courts have developed two concepts, the de facto corporation and corporation by estoppel, to ease the consequences of defective incorporation.
Whether or not a court elects to use one of these doctrines depends on two factors.
• First, the state corporate statute must permit imputation of limited liability by the courts when there has not been incorporation.
• Second, the circumstances must justify the court’s imputation of limited liability.
Hypothetical - Rental Agreement
Equipment Inc. rents equipment to Robert Bennett. However, there is no MyNew Corp. Bob thought the articles were filed, but they have not been.
Rental Agreement
[…..]
MyNew Corp.
Robert Bennett
By: [signed by Robert Bennett], President
Question: What is the result here?
Answer: The result depends whether this jurisdiction has developed doctrines of de facto corporation and/or corporation by estoppel. We also need more facts: was there an attempt to incorporate?
Question: What is the difference between de facto corporation and corporation by estoppel?
Answer: Under the doctrine of de facto corporation, courts infer limited liability if there has been a good faith attempt to incorporate, the promoter was unaware that incorporation had not happened, and the promoter used the corporate form with a third party.
Under the doctrine of corporation by estoppel, courts prevent a third party from asserting the promoter’s personal liability when there has been no attempt to incorporate but the third party assumes she is dealing with a corporation. In these cases, not recognizing limited liability would create a windfall for the third party.
|De Facto Corporation |Corporation by Estoppel |
|Good faith attempt |Third party assumes corporation |
|Promoter unaware | |
|Use corporate form | |
|Good faith attempt |Third party assumes corporation |
|Promoter unaware | |
|Use corporate form | |
A minority of courts interpret modern incorporation statutes—which greatly facilitate incorporation—as abolishing the de facto corporation and corporation by estoppel
doctrines. Given how convenient modern statutes have made incorporation, the reasoning runs, forgiving failure to incorporate and imputing liability may be overly lenient. These courts would refuse to impute limited liability and hold corporate insiders personally liable.
Question: Do statutes answer this question? How does the MBCA change these doctrines?
Answer: The current MBCA does not reject common law doctrines imputing limited liability. Instead, it stakes out a middle ground essentially saying that bad faith triggers promoter liability – and excuses good faith use of corporate form.
MBCA §2.04 Liability for Preincorporation Transactions
All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so doing.
The Official Comment to MBCA §2.04 clarifies that there is no liability for insiders who “erroneously but in good faith” believe articles to have been filed.
3. Corporation Formed - Contracting While Dissolved
• Participants fail to pay franchise taxes or file annual reports
• The corporation is dissolved, and then contracts with creditor
Pursuant to corporate statutes, corporations may be administratively dissolved if the corporation fails to pay state franchise taxes and fees, to report a change in registered agent, or to file a required annual report. See MBCA § 14.20.
MBCA § 14.20. Grounds for Administrative Dissolution.
The secretary of state may commence a proceeding under section 14.21 to administratively dissolve a corporation if:
(1) the corporation does not pay within 60 days after they are due any franchise taxes or penalties imposed by this Act or other law;
(2) the corporation does not deliver its annual report to the secretary of state within 60 days after it is due;
(3) the corporation is without a registered agent or registered office in this state for 60 days or more
(4) the corporation does not notify the secretary of state within 60 days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or
(5) the corporation's period of duration stated in its articles of incorporation expires.
Problems of liability can arise when corporate insiders engage in activities in the corporate name after the corporation is dissolved. If the corporation is not reinstated, modern statutes hold those who have knowingly acted on behalf of the nonexistent corporation personally liable. This is true even if creditors had not relied on personal assets in entering into the agreement. See MBCA § 2.04 (above).
If, however, the corporation is later reinstated, these statutes provide that reinstatement reaches back to the date of administrative dissolution. The effect is that the dissolution is treated as if it had never occurred. See MBCA § 14.22 (requiring that reinstatement occur within two years of administrative dissolution).
MBCA § 14.22. Reinstatement Following Administrative Dissolution.
(a) A corporation administratively dissolved under section 14.21 may apply to the secretary of state for reinstatement within two years after the effective date of dissolution. The application must:
(1) recite the name of the corporation and the effective date of its administrative dissolution;
(2) state that the ground or grounds for dissolution either did not exist or have been eliminated;
(3) state that the corporation's name satisfies the requirements of section 4.01; and
(4) contain a certificate from the [taxing authority] reciting that all taxes owed by the corporation have been paid.
(b) If the secretary of state determines that the application contains the information required by subsection (a) and that the information is correct, he shall cancel the certificate of dissolution and prepare a certificate of reinstatement that recites his determination and the effective date of reinstatement, file the original of the certificate, and serve a copy on the corporation under section 5.04.
(c) When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred.
Hypothetical – Reviving a Corporation
Dec. 2010 Corporation fails to pay its franchise taxes
State administratively dissolves the corporation
Sept. 2011 “Corporation” enters into a contract with an innocent third party
Dec. 2011 Corporation pays its taxes
State reinstates the corporation
Question: After the corporation has been formed, if it is later dissolved for failing to pay its franchise tax, are its insiders liable for entering into contracts while it is dissolved?
Answer: Because corporation paid its taxes, and the corporation was reinstated, the reinstatement relates back to the date of administrative dissolution. Corporate insiders will not be held liable under this set of facts.
Question: Why do states offer reinstatement?
Answer: It encourages late payment of taxes.
4. Corporation Formed - Corporation Misused
• Participants abuse the corporate form
• A creditor seeks to disregard limited liability
Question: What are the consequences for limited liability if corporate insiders abuse the corporate form after incorporation? Do creditors have any recourse?
Answer: This scenario brings up the all-important concept of piercing the corporate veil (PCV), which is the subject of Chapter 11.
Summary
The main points of this chapter are:
• Incorporation is a simple process
o Articles of incorporation need only name the corporation, the number of shares, the registered office/agent, and the name of the incorporator
o The organizational meeting is where the working structure happens (bylaws, issuance of shares, naming of directors)
• A lawyer can represent a corporation (or a situation)
o Participants should understand and give consent
o Confidences by participants are not necessarily protected
o Representation of the corporation does not necessarily create individual conflicts
• Defective incorporation can happen in different ways
o The parties are aware that no corporation has been formed, the promoter is presumed liable, unless agreed otherwise
o The parties are unaware that no corporation has been formed and act as though there is a corporation, corporate attributes through de facto corporation or corporation by estoppels
o A corporation is formed, but dissolved by the state for not paying franchise taxes; the corporation can be retroactively reinstated
o The corporation is formed, but misused; piercing the corporate veil is possible
Appendix A
Amended and Restated Articles of Incorporation of PepsiCo, Inc.
May 9, 2011
FIRST: The name of the corporation is PepsiCo, Inc., hereinafter referred to as the “Corporation”.
SECOND: The Corporation is to have perpetual existence.
THIRD: Intentionally omitted.
FOURTH: The purpose or purposes for which the Corporation is organized and the objects proposed to be transacted, promoted or carried on by it are as follows:
(1) To engage in the manufacture, purchase, sale, bottling and distribution, either at wholesale, retail or otherwise, of beverages, syrups, flavors and extracts, carbonated and aerated water, soda water, mineral waters, soft drinks and non-alcoholic beverages of every kind, and any and all other commodities, substances and products of every kind, nature and description;
(2) To purchase, lease, construct or otherwise acquire, and to hold, own, use, maintain, manage and operate, plants, factories, warehouses, stores, shops and other establishments, facilities and equipment, of every kind, nature and description, used or useful in the conduct of the business of the Corporation;
(3) To manufacture, purchase, sell and generally to trade and deal in and with goods, wares, products and merchandise of every kind, nature and description, and to engage or participate in any mercantile, manufacturing or trading business of any kind or character whatsoever;
(4) To build, erect, construct, purchase, hold or otherwise acquire, own, provide, maintain, establish, lease and operate, buy, sell, exchange or otherwise dispose of mills, factories, warehouses, agencies, buildings, structures, offices, works, plants and workshops, with suitable plant, engines, boilers, machinery and equipment, and all things of whatsoever kind and nature suitable, necessary, useful or advisable in connection with any or all of the objects herein set forth;
(5) To acquire by purchase, lease or otherwise, upon such terms and conditions and in such manner as the board of directors of the Corporation shall determine or agree to, and to the extent to which the same may be allowed by law, all or any part of the property, real and personal, tangible or intangible, of any nature whatsoever, including the good will, business and rights of all kinds, of any other corporation or of any person, firm or association, which may be useful or convenient in the business of the Corporation and to pay for the same in cash, stocks, bonds or in other securities of the Corporation, or partly in cash and partly in such stocks, bonds or other securities, or in such other manner as may be agreed, and to hold, possess and improve such properties, and to assume in connection with the acquisition of any such property any liabilities of any such corporation, person, firm or association, and to conduct in any legal
manner the whole or any part of any business so acquired, and to pledge, mortgage, sell or otherwise dispose of the same. To carry on the business of warehousing and all business incidental thereto, including the issue of warehouse receipts, negotiable or otherwise, and the making of advances or loans upon the security of goods warehoused; to maintain and conduct stores for the general sale of merchandise, both at wholesale and retail;
(6) To borrow money, and, from time to time, to make, accept, endorse, execute and issue bonds, debentures, promissory notes, bills of exchange and other obligations of the Corporation for moneys borrowed or in payment of property acquired or for any of the other objects or purposes of the Corporation or its business, and to secure the payment of any such obligations by mortgage, pledge, deed, indenture, agreement or other instrument of trust, or by other lien upon, assignment of, or agreement in regard to all or any part of the property, rights, privileges or franchises of the Corporation wheresoever situated, whether now owned or hereafter to be acquired;
(7) To apply for, obtain, register, purchase, lease, or otherwise acquire, and to hold, use, own, operate and introduce, and to sell, assign or otherwise dispose of, any trademarks, trade names, patents, inventions, improvements and processes used in connection with or acquired under letters patent of the United States or elsewhere, and to use, exercise, develop, grant licenses in respect of, or otherwise turn to account any such trademarks, patents, licenses, processes and the like;
(8) To guarantee and to acquire, by purchase, subscription or otherwise, and to hold and own and to sell, assign, transfer, pledge or otherwise dispose of the stock, or certificates of interest in shares of stock, bonds, debentures and other securities and obligations of any other corporation, domestic or foreign, and to issue in exchange therefor the stock, bonds, or other obligations of the Corporation, and while the owner of any such stock, certificates of interest in shares of stock, bonds, debentures, obligations and other evidences of indebtedness, to possess and exercise in respect thereof all of the rights, powers and privileges of ownership, including the right to vote thereon, and also in the manner, and to the extent now or hereafter authorized or permitted by the laws of the State of North Carolina, to purchase, acquire, own and hold and to dispose of the stock, bonds or other evidence of indebtedness of the Corporation;
(9) To guarantee the payment of dividends upon any shares of the capital stock of, or the performance of any contract by any other corporation or association in which the Corporation shall have an interest, and to endorse or otherwise guarantee the payment of the principal and interest, or either, of any bonds, debentures, notes, securities, or other evidences of indebtedness created or issued by any such other corporation or association or by individuals or partnerships, to aid in any manner any other corporation or association, any bonds or other securities or evidences of indebtedness of which, or shares of stock in which (or voting trust certificates therefor) are held by or for the Corporation, or in which, or in the welfare of which, the Corporation shall have any interest, and to do any acts or things designed to protect, preserve, improve or enhance the value of any such bonds or other securities or property of the Corporation, but nothing contained herein shall be construed to authorize the Corporation to engage in the business of a guaranty or trust company;
(10) In general, to do any or all of the things hereinbefore set forth, and such other things as are incidental or conducive to the attainment of the objects and purposes of the
Corporation, as principal, factor, agent, contractor or otherwise, either alone or in conjunction with any person, firm, association or corporation, and in carrying on its business, and for the purpose of attaining or furthering any of its objects, to make and perform contracts, and to do all such acts and things, and to exercise any and all such powers, to the same extent as a natural person might or could lawfully do to the extent allowed by law;
(11) To have one or more offices and to carry on its operations and transact its business within and without the State of North Carolina and in other states of the United States of America, and in the districts, territories or dependencies of the United States and in any and all foreign countries and, without restriction or limit as to the amount, to purchase or otherwise acquire, hold, own, mortgage, sell, convey or otherwise dispose of real and personal property of every class and description in any of the states, districts, territories or dependencies of the United States, and in any and all foreign countries, subject always to the laws of such state, district, territory, dependency or foreign country; and
(12) To do any or all of the things herein set forth, and such other things as are incidental or conducive to the attainment of the above objects, to the same extent a natural person might or could do, and in any part of the world, in so far as the same are not inconsistent with the laws of the State of North Carolina.
The purposes and powers specified in any clause contained in this Fourth Article shall, except where otherwise expressed in said articles, be in nowise limited or restricted by reference to or inferences from the terms of any other clause of this or any other article of these Articles of Incorporation, but the purposes and powers specified in each of the clauses of this article shall be regarded as independent purposes and powers.
In general, the Corporation shall have the authority to carry on any other business in connection with the foregoing, whether manufacturing or otherwise, and to have and to exercise all the powers conferred by the laws of the State of North Carolina upon corporations formed under the North Carolina Business Corporation Act.
FIFTH: The total number of shares of Common Stock which the Corporation shall have authority to issue is 3,600,000,000 of the par value of one and two-thirds cents (1-2/3(cent)) per share. The total number of shares of Convertible Preferred Stock which the Corporation shall have authority to issue is 3,000,000 of no par per share. The preferences, limitations and relative rights of the shares of the Convertible Preferred Stock are attached to these Amended and Restated Articles of Incorporation as “Exhibit A,” and made a part hereof as if set forth in full herein.
SIXTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever.
SEVENTH: No holder of the Corporation's Common Stock and no holder of the Corporation's Convertible Preferred Stock shall be entitled, as of right, to subscribe for, purchase or receive any part of any new or additional issue of its capital stock, of any class, whether now or hereafter authorized (including treasury stock), or of any bonds, debentures or other securities convertible into stock, or warrants or options to purchase stock of any class, but all such additional shares of stock or bonds, debentures or other securities convertible into stock,
including all stock now or hereafter authorized, may be issued and disposed of by the board of directors from time to time to such person or persons and upon such terms and for such consideration (so far as may be permitted by law) as the board of directors in their absolute discretion may from time to time fix and determine.
EIGHTH: The following provisions are intended for the regulation of the business and for the conduct of the internal affairs of the Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation of the powers conferred by statute:
(1) The number of directors of the Corporation shall be fixed and may be altered from time to time, as may be provided in the by-laws, but at no time is the number of directors to be less than three. The directors need not be stockholders. In case of any increase in the number of directors, the additional directors may be elected by the directors or by the stockholders entitled to vote therefor at an annual or special meeting, as shall be provided in the by-laws;
(2) The board of directors may, by resolution passed by a majority of the whole board, designate three or more of their number to constitute an executive committee, to the extent provided in said resolution or in the by-laws, shall have and exercise the powers of the board of directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. From time to time the by-laws, or the board of directors by resolution, may provide methods for the permanent or temporary filling of any vacancy in the executive committee or in any other committee appointed by the board;
(3) The board of directors shall have power to sell, assign, transfer, convey, exchange, or otherwise dispose of the property, effects, assets, franchises and good will of the Corporation as an entirety, for cash, for the securities of any other corporation, or for any other consideration, pursuant to the vote at the special meeting called for the purpose, of the holders of at least two-thirds of the issued and outstanding Common Stock and Convertible Preferred Stock of the Corporation voting as a single class.
(4) The board of directors may make by-laws from time to time, and may alter, amend or repeal any by-laws, but any by-laws made by the board of directors may be altered, amended or repealed by the stockholders entitled to vote;
(5) In case of any vacancy in the board of directors, through death, resignation, disqualification or other cause, the remaining directors by an affirmative vote of a majority thereof, may elect a successor to hold office for the unexpired portion of the term of the directors whose place shall be vacant, and until the election of a successor;
(6) The directors shall have power, from time to time, to determine whether and to what extent, and at what times and places and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of stockholders; and no stockholder shall have any right to inspect any books or account or document of the Corporation except as conferred by the statutes of the State of North Carolina, or authorized by the directors;
(7) The board of directors shall have power to appoint such standing committees as they may determine, with such powers as shall be conferred by them or as may be authorized by the by-laws;
(8) The board of directors shall elect a president and vice president and appoint a secretary and treasurer. Any two of such offices may be held by the same person, except that the president shall hold no other of such offices. The board of directors may also appoint one or more additional vice presidents, one or more assistant secretaries, and one or more assistant treasurers, and to the extent provided by the by-laws or by the board of directors by resolution from time to time, the persons so appointed shall have and exercise the powers of the president, secretary and treasurer, respectively. The board of directors may appoint other and additional officers, with such powers as the directors may deem advisable;
(9) Both stockholders and directors shall have power, if the by-laws so provide, to hold their meetings and have one or more offices without the State of North Carolina, and to keep the books of the Corporation (subject to the provisions of the statutes) outside of the State of North Carolina, at such places as may be from time to time designated;
(10) The Corporation may in its by-laws confer powers additional to the foregoing upon the directors, in addition to the powers and authorities expressly conferred upon them by the statutes;
(11) No contract or other transaction between the Corporation and any other corporation shall be affected or invalidated by the fact that any one or more of the directors of the Corporation is or are interested in, or is a director or officer, or are directors or officers of, such other corporation, and any director or directors, individually or jointly, may be a party or parties to, or may be interested in, any contract or transaction of the Corporation or in which the Corporation is interested; and no contract, act or transaction of the Corporation with any person or persons, firm or corporation, shall be affected or invalidated by the fact that any director or directors of the Corporation is a party, or are parties, to or interested in such contract, act or transaction, or in any way connected with such person or person, firm or corporation, and each and every such person or persons, firm or corporation, and each and every person who may become a director of the Corporation is hereby relieved from any liability that might otherwise exist from contracting with the Corporation for the benefit of himself or any firm, association or corporation in which he may be in any wise interested;
(12) The Corporation reserves the right to amend, alter, change, or repeal any provision herein contained, in the manner now or hereafter prescribed by law, and all the rights conferred on stockholders hereunder are granted and are to be held and enjoyed subject to such rights of amendment, alteration, change or repeal.
(13) Except as provided in Section (5) of this Article, each director shall be elected by a majority of the votes cast with respect to the director by the shares represented in person or by proxy and entitled to vote at any meeting for the election of directors at which a quorum is present; provided, however, that if the number of director nominees exceeds the number of directors to be elected, each director shall be elected by a vote of the plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election
of directors. For purposes of this Section, a majority of the votes cast means that the number of shares voted “for” a director must exceed the number of votes cast “against” that director.
|NINTH: The number of directors constituting the initial Board of |Address |
|Directors shall be twelve; and the names and addresses of the | |
|persons who are to serve as directors until the first meeting of | |
|stockholders, or until their successors are elected and qualified, | |
|are: | |
|Name | |
|D. Wayne Calloway |700 Anderson Hill Road Purchase, New York 10577 |
|Frank T. Cary |700 Anderson Hill Road Purchase, New York 10577 |
|William T. Coleman, Jr. |700 Anderson Hill Road Purchase, New York 10577 |
|Clifton C. Garvin, Jr. |700 Anderson Hill Road Purchase, New York 10577 |
|Michael H. Jordan |700 Anderson Hill Road Purchase, New York 10577 |
|Donald M. Kendall |700 Anderson Hill Road Purchase, New York 10577 |
|John J. Murphy |700 Anderson Hill Road Purchase, New York 10577 |
|Andrall E. Pearson |700 Anderson Hill Road Purchase, New York 10577 |
|Sharon Percy Rockefeller |700 Anderson Hill Road Purchase, New York 10577 |
|Robert H. Stewart, III |700 Anderson Hill Road Purchase, New York 10577 |
SOURCE:
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