Business Law Study Set 13

Business

Quiz 44 :

Corporation Formation

Quiz 44 :

Corporation Formation

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Morris Gray leased waterfront property on the Ross Barnett Reservoir to a restaurant, Edgewater Landing, Inc., for a 10-year term. After a year and a half, Edgewater's original shareholder, Billy Stegall, sold all of his shares in the corporation to Tom Bradley and Bradley's bookkeeper, Sandra Martin. Gray visited the property in the ninth year of the lease and found many problems with the condition of the property. He claimed that the lease required the tenant to make necessary repairs. Gray sued Edgewater Landing, Inc., and Tom Bradley and Sandra Martin individually for breach of the lease. Bradley and Martin replied that they were not liable for the debt of the corporation. Decide. [Gray v Edgewater Landing, Inc., 541 So2d 1044 (Miss)]
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Facts to this case
• Plaintiff leased his property to a corporation.
• The lease required tenants maintain the premises with repairs.
• The owner of the corporation sold his corporation to B.
• The plaintiff later saw defects in his property and contended that the new owner B should be held personally liable for the lease terms.
Case Issue
The issue is whether the new owner can be personally liable for breach in the lease terms.
Relevant Terms, Laws, and Cases
Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners.
Piercing the corporate veil - a tactic courts use to hold owners of limited liability companies personally liable for the company's debts. Courts consider factors such as:
• Fraud by owners
• Lack of corporate formalities (lack of meetings, no bookkeeping)
• Mingling assets between company and the shareholder
• Undercapitalization of business, etc.
Analysis and Conclusion
The court held for the new owners. They argued that:
• The owners can only be held personally liable when the corporate veil is pierced.
• The plaintiff failed to show any reason to pierce the corporate veil, instead the contrary was shown.
• For example, plaintiff admitted he undoubtedly contracted with a corporate party.
• The new owners pertained to corporate formalities, and there was a lack of showing of fraud.
Thus, the new owners can't be held personally liable for their corporation's debt.

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Emmick was a director and shareholder of Colonial Manors, Inc. (CM). He organized another corporation named Oahe Enterprises, Inc. To obtain shares of the Oahe stock, Emmick transferred CM shares arbitrarily valued by him at $19 per share to Oahe. The CM shares had a book value of $.47 per share, but Emmick believed that the stock would increase to a value of $19. The directors of Oahe approved Emmick's payment with the valuation of $19 per share. Golden sued Emmick on the ground that he had fraudulently deceived Oahe Corp. about the value of the CM shares and thus had made a secret profit when he received the Oahe shares that had a much greater value than the CM shares he gave in exchange. Emmick contended that his firm opinion was that the future potential value of CM shares would surely reach $19 per share. Decide. [Golden v Oahe Enterprises, Inc., 295 NW2d 160 (SD)]
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Facts to this case
• A shareholder of corporation C opened a new corporation O.
• The shareholder proposed the directors of corporation O to purchase C 's stocks at $19, when the value was only at $0.47.
Case Issue
The issue is whether the purchase is legitimate.
Relevant Terms, Laws, and Cases
Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners.
Analysis and Conclusion
Judgment against the shareholder, the court found a lack of fiduciary duty by the shareholder:
• The shareholder made an arbitrary high offer of $19 to C.
• The court found that when the shareholder was informed that C 's stock price was later to be reduced to less than $10.
• The shareholder did not inform O 's other owners of this information.
• Furthermore, the shareholder was a president at O and had a duty to disclose these pertinent information.
Thus, the court found that he had a conflict of interest and the purchase price of $19 had "no basis in fact".

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Graham and Black were each 50 percent shareholders of a building supply business. When Graham filed a petition to dissolve the corporation under RMBCA § 14.30, the court appointed a custodian with full powers to run the corporation's day-to-day operations. Subsequently, the court concluded that Black and Graham functioned as directors, they were deadlocked within the meaning of RMBCA § 14.30 (2)(1), and adequate grounds existed to dissolve the corporation because of the lack of cooperation between Black and Graham and its probable irreparable harm to the business. The court entered an order directing that within one week of receiving an expected appraisal, each would submit a sealed bid in writing for the other's stock. The custodian was to accept the high bid, and the purchaser was to immediately tender the purchase price. In the event that neither stockholder made a bona fide offer, the custodian would be redesignated the receiver and proceed to dissolve the corporation (RMBCA § 14.32 [c]-[e]). The sale was unsuccessful, and by subsequent order, the court converted the custodianship into a receivership, directing that the receiver wind up and liquidate the business affairs of the corporation. Black did not believe that the successful business should be liquidated, and he directed his attorney to appeal. Decide. [Black v Graham, 464 SE2d 814 (Ga)]
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Facts to this case
• Two owners with equal share of their corporation wishes to dissolve it.
• The owners had a deadlock with disagreement on the business's management.
• Based on procedure set forth by the Revised Model Business Corporation Act (RMBCA) the court was unable to sell the corporation.
• The court proceeded to liquidate the corporation based on procedures of the RMBCA.
• One of the owners appealed to stop the liquidation of the corporation.
Case Issue
The issue is whether the corporation can be prevented from liquidation.
Relevant Terms, Laws, and Cases
Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners.
Piercing the corporate veil - a tactic courts use to hold owners of limited liability companies personally liable for the company's debts. Courts consider factors such as:
• Fraud by owners
• Lack of corporate formalities (lack of meetings, no bookkeeping)
• Mingling assets between company and the shareholder
• Undercapitalization of business, etc.
Revised Model Business Corporation Act (RMBCA) - a set of laws adopted by some states in the U.S. concerning corporations.
RMBCA Section 14.30 - concerns the dissolution of a corporation.
Analysis and Conclusion
The court affirmed the liquidation procedures. They argued that:
• The owners were in a deadlocked position with both having equal shares in the company.
• The procedure set by their state's RMBCA allowed sale of the company to the highest bidder.
• However, this sale failed.
• Then, the proper procedure was for the court to commence liquidation.
Liquidation of the business w as affirmed.

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August 19, 1980, Joan Ioviero injured her hand when she slipped and fell while leaving the dining room at the Hotel Excelsior in Venice, Italy. This hotel was owned by an Italian corporation, Cigahotels, S.p.A. (The designation S.p.A. stands for Societa per Azionean, the Italian term for corporation.) In 1973, a firm called Ciga Hotels, Inc., was incorporated in New York. Its certificate of incorporation was amended in 1979, changing the name of the firm to Landia International Services, Inc. This New York corporation was employed by the Italian corporation Cigahotels, S.p.A., to provide sales and promotional services in the United States and Canada. Ioviero sought to hold the New York corporation liable for her hand injury at the Venice hotel. She pointed to the similarity of the first corporate name used by the New York firm to the name Cigahotels, S.p.A., and the fact that the New York firm represented the interests of the Italian firm in the United States as clear evidence that the two firms were the same single legal entity. She asked that the court disregard the separate corporate entities. The New York corporation moved that the case be dismissed because it was duly incorporated in New York and did not own the Excelsior Hotel in which Ioviero was injured. Decide. [Ioviero v CigaHotel, Inc., aka Landia I.S., Inc., 475 NYS2d 880 (App Div)]
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Adams and two other persons were promoters for a new corporation, Aldrehn Theaters Co. The promoters retained Kridelbaugh to perform legal services in connection with the incorporation of the new business and promised to pay him $1,500. Aldrehn was incorporated through Kridelbaugh's services, and the promoters became its only directors. Kridelbaugh attended a meeting of the board of directors at which he was told that he should obtain a permit for the corporation to sell stock because the directors wished to pay him for his previous services. The promoters failed to pay Kridelbaugh, and he sued the corporation. Was the corporation liable? [Kridelbaugh v Aldrehn Theaters Co., 191 NW 803 (Iowa)]
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Richard Ramlall was hired by CloseCall (MD) Inc. to negotiate a billing dispute with Verizon involving some $2 million in asserted overcharges. CloseCall (MD) agreed to a contingent fee "bonus" for its negotiators of 10 percent of the refund. The negotiations were successful. However, before he could collect his fee CloseCall (MD) merged with MVCC Acquisition Corp., a wholly owned subsidiary of MobilePro Corp., which was created for the express purpose of merging with CloseCall (MD). MVCC survived and CloseCall (MD) dissolved. MVCC then changed its name to CloseCall (DE). The merger agreement between CloseCall and MVCC referenced the 10 percent bonus due on the Verizon billing dispute. The surviving Delaware corporation created by the merger of CloseCall (MD) into MVCC is CloseCall (DE). Ramlall sued CloseCall (DE) for the bonus as the successor corporation of CloseCall (MD). CloseCall (DE) contends that after the merger CloseCall (DE) did not owe any money to Ramlall. Is CloseCall (DE) a successor corporation? Is it liable to Ramlall for the "bonus fee"? [ Ramlall v. Mobile Pro Corp. , 30 A.2d 1003 (Md. App.)]
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Compare and contrast consolidations, mergers, and conglomerates.
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North Pole, Inc., approved a plan to merge with its subsidiary, Santa's Workshop, Inc. The merger plan provided that certain of Workshop's shareholders would receive $3.50 per share. The highest independent appraisal of the stock was $4.04 per share. Hirschfeld, Inc., a shareholder, claimed the fair value was $16.80 per share. Workshop offered to make its corporate books and records available to Hirschfeld to assess the validity of the $16.80 demand. This offer was declined. Hirschfeld did not attempt to base the $16.80 demand on any recognizable method of stock valuation. Hirschfeld contended it had a right to get the asking price. Refer to RMBCA §§ 13.02, 13.28, and 13.31. Could Hirschfeld have blocked the merger until Workshop paid the $16.80? Decide. [Santa's Workshop v Hirschfeld, Inc., 851 P2d 264 (Colo App)]
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William Sullivan was ousted from the presidency of the New England Patriots Football Club, Inc. Later, he borrowed $5,348,000 to buy 100 percent control of the voting shares of the corporation. A condition of the loan was that he reorganize the Patriots so that the income from the corporation could be devoted to repayment of the personal loan and the team's assets could be used as collateral. Sullivan, therefore, arranged for a cash freeze-out merger of the holders of the 120,000 shares of nonvoting stock. David Coggins, who owned 10 shares of nonvoting stock and took special pride in the fact that he was an owner of the team, refused the $15-a-share buyout and challenged the merger in court. He contended that the merger was not for a legitimate corporate purpose but to enable Sullivan to satisfy his personal loan. Sullivan contended that legitimate business purposes were given in the merger proxy statement, such as the National Football League's policy of discouraging public ownership of teams. Coggins responded that before the merger, Sullivan had 100 percent control of the voting stock and thus control of the franchise, and that no legal basis existed to eliminate public ownership. Decide. [Coggins v New England Patriots Football Club, 492 NE2d 1112 (Mass)]
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Seabrook Island Property Owners Association, Inc., is a nonprofit corporation organized under state law to maintain streets and open spaces owned by property owners of Seabrook Island. Seabrook Island Co. is the developer of Seabrook Island and has majority control of the board of directors of the association. The association's bylaws empower the board of directors to levy an annual maintenance charge. Neither the association's charter nor its bylaws authorize the board to assess any other charges. When the board levied, in addition to the annual maintenance charge, an emergency budget assessment on all members to rebuild certain bridges and to revitalize the beach, the Loverings and other property owners challenged in court the association's power to impose the assessment. Decide. [Lovering v Seabrook Island Property Owners Ass'n, 344 SE2d 862 (SC App)]
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Madison Associates purchased control of the majority of shares of 79 Realty Corp. from the Kimmelmans and the Zauders, who then resigned as directors. The Alpert group, which owned the remaining 26 percent of 79 Realty refused to sell their shares. Partners of Madison Associates replaced the Kimmelmans and Zauders as directors of 79 Realty Corp., and as controlling directors, they approved a plan to merge 79 Realty Corp. with the Williams Street Corp., which was owned by Madison Associates. A shareholders' meeting was called, and the merger was approved by two-thirds of the shareholders. The Alpert group's shares were then forcibly canceled, with the price paid for these shares determined at their fair market value. The Alpert group brought suit contending the merger was unlawful because the sole purpose was to benefit the Madison Associates. Decide. [Alpert v 28 Williams Street Corp., 473 NE2d 19 (NY)]
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January 27, 1982, Joe Walker purchased a wheel-loader machine from Thompson Green Machinery Co. (T G). Walker signed a promissory note for $37,886.30 on behalf of "Music City Sawmill, Inc., by Joe Walker, President." When Sawmill was unable to make payments on the loader, the machine was returned to T G. T G brought suit against Sawmill and subsequently discovered that Sawmill had not been incorporated on January 27, 1982, when the machine was purchased but had been incorporated the next day. T G then sued Walker individually. The lawsuit was Walker's first notice that Sawmill was not incorporated on the date of the sale. Walker's defense was that T G dealt with Sawmill as a corporation and did not intend to bind him personally on the note and therefore was estopped to deny Sawmill's corporate existence. Decide based on the 1969 MBCA. What would be the result if the RMBCA applied? [Thompson Green Machinery Co. v Music City Lumber Co., Inc., Music City Sawmill Co., Inc., 683 SW2d 340 (Tenn App)]
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Edwin Edwards and Karen Davis owned EEE, Inc., which owned three convenience stores, all of which sold gasoline. Reid Ellis delivered to the three convenience stores $26,675.02 worth of gasoline for which he was not paid. Ellis proved that Edwards and Davis owned the business, ran it, and in fact personally ordered the gasoline. He claimed that they were personally liable for the debt owed him by EEE, Inc. Decide. [Ellis v Edwards, 348 SE2d 764 (Ga App)]
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