Nc Articles of Incorporation Business - PowerPoint by dcy20846

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									Small Claims Cases Involving
       Corporations

   N.C. Magistrates’ Association
     Spring Conference 2005

     W. Mark C. Weidemaier
     Institute of Government
        UNC Chapel Hill
Jane Smith
                  •Dissolution
                    •Venue
                      •Shareholder liability
                        •Agent liability
100 % Stock
                          •Successor Liability

Smith Auto Body
Jane Smith

                  •Articles of incorporation
                    •Registered/principal office

100 % Stock            •Registered agent

Smith Auto Body        •Bylaws
                     •Election of Directors
                  •Appointment of Officers
           Dissolution

• Can a dissolved company sue
  and be sued?
           Dissolution

• Can a dissolved company sue
  and be sued?


           YES
        Venue: Basic principles
• Small claims actions may be referred if
  defendant resides in county where magistrate
  resides.
• Corporate residence (domestic corporations –
  G.S. 1-79(b)):
   • Where registered or principal office is
     located OR where defendant maintains a
     place of business
   • OR, if no registered/principal office and no
     place of business is maintained or can
     reasonably be found, anywhere where
     defendant is regularly engaged in carrying
     on business
     Venue: Basic principles
• Objections to venue and personal
  jurisdiction made by motion before
  answering, or in the answer.
• Objections waived if not made prior to
  the date set for trial.
• Objections heard by chief district
  judge (or designee).
• Assignment suspended until ruling.
  Clerk gives notice of suspension.
• Judgment not void for improper
  assignment (7A-212).
            Venue: Basic principles
• Objections to venue and         Example 1 (suit in Orange
  personal jurisdiction made      County):
  by motion before
  answering, or in the answer.     • SAB does not file an answer
• Objections waived if not           or motion objecting to venue
  made prior to the date set       • Jane appears at trial for SAB
  for trial.
                                   • Articles of Incorporation:
• Objections heard by chief          Wake County = registered
  district judge (or designee).
                                     office; moves to dismiss
• Assignment suspended until
  ruling. Clerk gives notice      Example 2 (suit in Orange
  of suspension.                  County)
• Judgment not void for            • SAB files answer raising
  improper assignment. (7A-          objection to venue; no
  212).                              hearing on objection
                                     scheduled
      Shareholder liability


•Shareholders generally not liable for
corporate debts (unless articles of
incorporation provide for liability)
•Shareholders may be personally
liable by reason of own acts/conduct
•One exception: “mere
instrumentality rule”
Jane Smith




100 % Stock

Smith Auto Body
Shareholder liability: “piercing the veil”
 • Mere instrumentality rule: A shareholder who
   exercises actual control over a corporation,
   operating it as a mere instrumentality, is liable
   for the debts of the controlled corporation.
 • 3 factors in applying “mere instrumentality
   rule”
    1. Control of the corporation – complete
       domination
    2. Use of control to commit fraud or legal
       wrong
    3. Proximate cause of injury
Shareholder liability: “piercing the veil”
   1. Inadequate capitalization.
   2. Failure to comply with corporate formalities.
   3. Complete domination and control of the
      corporation so that it has no independent
      existence.
   4. Excessive fragmentation of a single enterprise
      into separate corporations.
   5. History of paying dividends
   6. Insolvency of the corporation
   7. Whether the dominant shareholder has siphoned
      corporate funds
   8. Non-functioning of other officers or directors; and
   9. Absence of corporate records
Shareholder liability: “piercing the veil”
• Jane owns 100% of Smith Auto Body’s stock.
• Board = Jane and her 2 sons. Jane is chair.
• Board has met once in 3 years. No minutes kept.
• Jane negotiated and signed the contract with Joe.
• Jane is President/CEO; has complete mgmt.
  authority.
• No other officers were appointed to run the business.
• Smith Auto Body has no bylaws.
• Smith Auto Body has no assets to pay a judgment.
• Over the last 3 years, Smith Auto Body lent Jane
  $1500. Jane has not paid any of the $1500 back.
Shareholder liability: “piercing the veil”

   • Typically, there will be little if
     any evidence of any of this?
     What do you do?
Agent liability for corporate contracts

   • General Rule: Agents who enter
     contracts on behalf of the
     corporation are not parties to the
     contract and are not personally
     liable.
   • Distinction between disclosed and
     undisclosed (or partially disclosed)
     principals.
   • The contract may provide that the
     agent is liable for corporate debts.
Agent liability for corporate contracts
 • Jane negotiated the contract.
 • The only person Joe dealt with was Jane.
 • During negotiations, Jane told Joe she
   “needed someone to do maintenance work
   around my business.”
 • Contract is signed:


   Joe Jones



   Jane Smith
Agent liability for corporate contracts
 • Jane negotiated the contract.
 • The only person Joe dealt with was Jane.
 • During negotiations, Jane told Joe she
   “needed someone to do maintenance work
   around my business.”
 • Contract is signed:


   Joe Jones



   Jane Smith
•What if Joe was paid from Smith Auto Body’s account?
         Successor liability

• Issue: Liability of buyer of all or
  substantially all of seller’s assets
         Successor liability
Jane Smith                 Jane Smith




                            100%
100 % Stock                 Stock
Smith Auto Body   Assets   J&S Auto Body


                  $$$$
         Successor liability
Jane Smith
                         Mark W.     Joan B.

                            50%         50%
                            Stock       Stock
100 % Stock
Smith Auto Body   Assets        M&B Garage

                  $$$$
             Successor liability
• Buyer of all or substantially all another
  corp.’s assets is not liable for debts of the
  selling corporation.
• Exceptions:
   1.Express or implied agreement to assume
     debts.
   2.Transfer made for purpose of defrauding
     corporation’s creditors.
   3.Purchasing corporation is a “mere
     continuation” of the selling corporation:
     emphasis is on identity of ownership
     between buying/selling companies.
           Successor liability
• Smith Auto Body stops doing business &
  is dissolved; assets sold to third party to
  pay debt to Bank. Jane forms new corp.,
  Jane’s Car Shop, and engages in identical
  business.
• Smith’s Auto Body sells its assets for
  $50,000 to S&S Auto Body, a new
  company owned 50/50 by Jane Smith and
  her brother, Bob. Jane is President and
  Chair of the board.
         Successor liability

• Attempt to defraud creditors (actual
  intent or inadequate consideration)
• Identity of shareholders/directors
• Plaintiff has burden of proof.
            Dissolution
Key points:
  • Effect: corporation still exists but
    may not conduct business other than
    winding up/liquidation
  • Corp. may still sue and be sued, and
    claimants may enforce claims against
    it (and sometimes its shareholders)
    even after dissolution, but
  • Claims may be barred if dissolved
    corp. gave notice of dissolution and
    claimant failed to act
           Dissolution

•Claims may be asserted against
 dissolved corporation to the
 extent of its undistributed assets,
 including insurance coverage
•Claims may be asserted against
 shareholders to the extent of any
 distributions they received in
 liquidation

								
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