How to Ace FYLSE/Corporations Outline

Pre-Incorporation Contract

Corporations are only liable for pre-incorporation contracts that they adopt. An incorporator is not relieved of liability of the pre-incorporation contract, until there has been a novation which is an agreement by all parties to relieve the incorporator of personal liability.

Prior to incorporation, Molly (partner) entered into a contract on behalf of Dryco with Equipment Company (“EC”) for the unsecured credit purchase of an environmentally safe dryer for $100,000. EC was aware that Dryco had not yet been formed. EC delivered the dryer one week after the incorporation, and Dryco used it thereafter and made monthly installment payments.

Dryco had been incorporated in compliance with all statutory requirements, and Molly and Ruth observed all corporate formalities during the period of Dryco’s existence. One year after incorporation, however, Dryco became insolvent and dissolved.

—F05Q3

Shareholder liability

Shareholders are not personally liable for the debts of the corporation.

SEC 16(b)

This rule prohibits a director, officer or 10% shareholder of a publicly traded corporation on a national stock exchange or with assets of over $10 million and 500 shareholders from purchasing and selling or selling and purchasing stock of the corporation in less than 6 months.

SEC 10b-5

1. Use of the instrumentalities of interstate commerce
2. misrepresentation of a material fact and insider trading
3. in connection with the purchase and sale of a security
4. scienter
5. reliance by the person on the other side

Duty of Care

An officer must act as a reasonably prudent person would in the situation.

Quorum

Board actions are valid only if a vote occurs when a quorum of the Board is present. A quorum is normally defined as more than half the directors – in this case, 4 out of 7. Only three directors were present, however. In its bylaws, a corporation can establish a smaller number for a quorum if it is more than 1/3 of directors.