Business associations \english\

organized without sufficient capital or liability insurance to meet obligations reasonably expected to arise, the corp veil may be pierced;

d)Domination and Control By Shareholder--the corp veil is often pierced when an individual or other corp owns most or all of the stock, so that it completely dominates policy or business decisions.

e)'Alter Ego,' 'Instrumentality,' 'Unity of Interest'--when no separate entity exists and the corp is merely the alter ego or instrumentality of its shs (could be a corporate shareholder), or when there is a unity of interest between the corp and its shs, the corp veil is often pierced. These terms are usually applied only if other grounds are present;

f)Fraud, Wrong, Dishonesty, or Injustice--generally, the veil will be pierced only if one of these elements is available, e.g., no piercing of veil if there is a lack of corp formalities without resultant injustice. Piercing the veil usually involves corps with a small number of shs.

2.PIERCING HAPPENS MOST OFTEN WHEN:

1)The number of shs is small--the chance of one sh dominating the corp is greater;

2)Deception--There is some kind of deception;

3)Agency--individual is a 'principal' and corp is his 'agent'

4)Estoppel--outsider was led to believe that he was dealing with an individual, while in fact he was dealing with the corporation.

5)Direct tort--individual and corp acted together and should be jointly/severally liable

6)Instrumentality requirement is satisfied:

I)control of a subsidiary by parent

ii)to commit fraud

iii)to cause loss or injury.

3.PIERCING THE WALL BETWEEN AFFILIATED CORPORATIONS--this occurs when a P with a claim against one corp attempts to satisfy the claim against the assets of an affiliated corp under common ownership. This type of aggregation is permitted only when each affiliated corp is NOT a free-standing enterprise but merely a fragment of an entity composed of affiliated corps.

4.USE OF CORPORATE FORM TO EVADE STATUTORY OR CONTRACT OBLIGATIONS--the corp form may be ignored when it is used to evade a statutory or contractual obligation. The issue is whether the contract or statute was intended to apply to the shs as well as the corporation. Only third parties, not the corp or its shs, are generally allowed to disregard the corp entity.

5.TWO EXTREMES TO AVOID IN PIERCING THE CORPORATE WALL:

a)Old model--Superman (sh) used corp as his puppet;

b)New Model--Superman (sh) and corp are inseparable (alter ego)

D.SUBORDINATION OF SHAREHOLDER DEBTS--'DEEP ROCK' DOCTRINE--if a corp goes into bankruptcy, debts to its controlling shs may be subordinated to claims of other creditors. When subordination occurs, shareholder loans are treated as if they were invested capital (stock). Major factors in determining whether to subordinate include fraud, mismanagement, undercapitalization, commingling, excessive control, etc.

II.ORGANIZING THE CORPORATION--generally, corps are created under and according to statutory provisions of the state in which formation is sought.

A.FORMALITIES IN ORGANIZING CORPORATION:

1.CERTIFICATE OR ARTICLES OF INCORPORATION--state law governs the content of the articles, which are filed with the secretary of the state. Usually, the articles must specify the corp name, number of shares and classes of stock authorized, address of the corp's initial registered office, name of initial registered agent, and the name and address of each incorporator.

a)Purpose Clause--under most statutes, no elaborate purpose clause is needed. It is sufficient to state that the purpose of the corp is to engage in any lawful business activity.

b)State of Incorporation--incorporators need to consider how flexible the state's corporate law is versus the costs associating with incorporating in that state

2.ORGANIZATIONAL MEETING--filling the articles in proper form creates the corporation, after which an organizational meeting is held by either the incorporators or dirs named in the articles. Matters determined at meeting:

1)Incorporators elect directors, if no dirs are named in the articles;

2)Directors choose officers;

3)Directors ratify pre-incorporation transactions;

4)Directors authorize issuance of shares

5)Directors adopt by-laws (if necessary), corporate seal and stock certificate

B.DEFECTS IN FORMATION PROCESS--'DE JURE' AND 'DE FACTO' CORPS--when there is a defect or irregularity in formation, the question is whether the corp exists 'de jure,' 'de facto,' 'by estoppel,' or not at all. This issue usually arises when a third party seeks to impose personal liability on would-be shs. Another method of challenging corporate status, used only by the state, is a quo warranto proceeding. Note: where there has not been compliance with the statute, we apply principles of de facto, de jure and corp by estoppel. Where there has been compliance with the statute, we apply principles of disregard of corporate fiction, a/k/a 'piercing the corporate veil,' which is an exception, rather than a rule.

1.DE JURE CORPORATION--this exists when the corp is organized in compliance with the statute. Its status cannot be attacked by anyone--not even the state. Most courts require only 'substantial compliance'; others require exact compliance with the mandatory requirements.

2.DE FACTO CORPORATION (substantially abolished)--this exists when there is insufficient compliance as to the state (i.e., state can attack in quo warranto proceeding), but the steps taken are sufficient to treat the enterprise as a corp with respect to its dealings with third parties. Requirements:

1)Colorable or apparent attempt;

2)Good faith;

3)Some use of corporate franchise; Then ct will recognize status as to all but state

3.CORPORATION BY ESTOPPEL

a)Definition--estoppel is an equitable evidentiary rule which prevents a party from denying the existence of a fact notwithstanding that he fact is not true. Thus, certain parties are estopped from asserting defective incorporation when they have dealt with the corp as though properly formed.

b)Example--shs who claimed corp status in an earlier transaction are estopped to deny that status in a suit brought against the corp. The estoppel theory normally does NOT apply to bar suits against would-be shs by tort claimants or other involuntary creditors.

c)Overlap With De Facto--many of the facts which we would point to support a claim of de facto status are the same ones we point for estoppel. However, substantial abolition of de facto concept doesn't necessarily abolish estoppel.

d)De Facto is For All; Estoppel is For One--estoppel depends on relationship between party and corp.

4.WHO MAY BE HELD LIABLE--when a would-be corp is not a de jure or de facto or a corp by estoppel, the modern trend imposes

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