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ARTICLES OF ASSOCIATION – U. S.

COMPANY LAW

SUBJECT: CORPORATE LAW - I

Submitted To: Prof. K. V. S. Sarma

Submitted By: Tarun Kovvali

4th Year, 7th Semester

ID No. 2007-71

NALSAR University of Law, Justice City, Shameerpet, Hyderabad


TABLE OF CONTENTS

Table of Contents...................................................................................................2

1. Introduction....................................................................................................... 1

1.1 Research Methodology and Scheme.............................................................4

2. Articles of Association........................................................................................4

2.1 Mandatory Provisions....................................................................................5

2.2 Legal status after filing incorporation documents........................................8

2.3 Bylaws.......................................................................................................... 8

2.4 Alteration of the Articles.............................................................................10

3. Legal Framework.............................................................................................12

3.1 Model Business Corporation Act.................................................................12

3.2 Delaware General Corporation Act.............................................................13

4. Conclusion....................................................................................................... 17

Bibliography............................................................................................................i
1. INTRODUCTION
The roots of American corporate law lie in English law. At the time of the American
Revolution, corporations came into existence by a special Act of the legislature. After the
revolution, individual American states adopted this procedure of incorporation. Because of
the difficulties in this form of incorporation, the most common form of company was the
joint-stock company. It was similar to a partnership in many respects except that the legal
title to the assets of the company was held by trustees and the partner’s shares were
transferrable. During the 1800s, the individual states enacted statues to govern the process of
incorporation. Early laws, such as the one enacted in New York in 1811, were restrictive and
the number of corporations created were small. The growth of the American economy and
various corruption scandals led to the development of statues that made it easier to form a
corporation without resorting to a special charter of the legislature. 1 Economic reforms and
competition between states then became factors in the development of corporation law in the
United States. To prevent concentration of economic power and a free and fair capitalistic
economy, incorporation was made easier. However, the size, period of existence and amount
of capital that a company could raise was limited by early statutes. For example, New York’s
statute set limits between $50,000 and $100,000 depending on the kind of corporation. 20, 30
and 50 years were common limits that were set for the existence of corporations. In the 20th
century, limits on capital and duration of existence were removed.

Initially, corporations were used to carry out well-defined public functions. This
tradition was followed by early statutes that required individuals to specify the purpose for
incorporation and kind of business in the governing document of the corporation, beyond
merely stating a profit motive. The doctrine of ultra vires created by the judiciary prevents
those in charge of the corporations affairs from deviating from the purposes mentioned in the
governing documents. It means “beyond the powers”. A corporation is an entity recognized
by the State, having certain powers and duties. Since it was created only to further the
purpose in its charter, it lacks the power to engage in activities that are not in furtherance of
that purpose. The Court used this doctrine to control activities of corporations. In the 19 th and
20th century, the Courts began to take an expansive interpretation of the purposes of
corporations. For instance, it was held that running a hotel along a railway route furthered the
purposes of the railway.2 Second, Courts also reduced the penalties for ultra vires conduct.

1
F. A. GEVURTZ, CORPORATION LAW 21 (Hornbook Series, 2000).
2
Jacksonville, M. P. Ry. & Nav. Co. v. Hooper, 160 US 514.
1
For example, they did not invalidate contracts that had been already executed, even if they
were beyond the purposes of the corporation.3 Third, legislatures allowed for broader
statements of purpose in the governing documents of the company. The documents could list
purposes that the company did not have immediate business plans for. The next stage was
allowing for a company to carry on “any lawful business”. This led to the governing
documents listing a wide range of activities that the corporation might carry out in the future.
The liberalization of corporation law was primarily caused by competition between states for
incorporation within their territory.4

In the United States, there is no national or federal corporation statute. The major
source of corporate law is state statute. These statutes vary from state to state, and the
variation is considerably more than that found in statutes governing partnerships.5 Two
federal statutes – the Securities Act of 1933 and the Securities Exchange Act of 1934 – are
exceptions. All states have adopted laws that regulate the sale of corporate securities. Any
uniformity of corporation law may be traced to the Model Business Corporation Act drafted
by the American Bar Association and the principles developed by the state of Delaware.
Every corporation in the United States is incorporated under the statute of a State. In case of
large corporations, this is usually the state of Delaware. It has introduced an innovative in the
legislation on of company formation.6 Corporations, unincorporated associations, and
partnerships, as well as individuals, can incorporate a company. One or more incorporators
may form a Corporation by filing articles of incorporation ("articles" with the appropriate
institution of the incorporating State). Usually, a company comes into legal existence upon
the issuance of a certificate of incorporation. Due to its progressive laws, almost half of all
publicly held companies in the United States are incorporated in the state of Delaware. The
General Corporation Law of the state is in effect almost a national legislation for publicly
held companies.7

State statutes deal with matters of formation, purposes and powers, the roles of
various parties, securities that may be issued, mergers and consolidations, foreign
corporations and dissolution. States also have monitoring mechanisms that include

3
Whitney Arms Co. v. Barlow, 63 NY 62 (1875).
4
F. A. GEVURTZ, CORPORATION LAW 23 (Hornbook Series, 2000).
5
R. HAMILTON & R. BOOTH, BUSINESS BASICS FOR LAW STUDENTS 256 (3rd ed., 2002).
6
Enrico Furia, Introduction to U. S. A. – E. U. Comparative Company Law, http://www.iim-
edu.org/executivejournal/WhitePaper_EU_Vs.US_ComparativeCompanyLaw.pdf (last accessed on 6th August,
2010).
7
R. HAMILTON & R. BOOTH, BUSINESS BASICS FOR LAW STUDENTS 258 (3rd ed., 2002).
2
submission of annual reports, franchise tax returns and such like. These statutes mostly deal
with the internal relationships within a corporation. They are largely technical in nature and
therefore there is not much debate on them in state legislatures.8 Committees of the state bar
associations also develop proposed amendments to these statutes that then must be passed
like any other amendment in the legislature.

Most United States corporations are formed (“incorporated”) under the laws of a
single state by filing articles of incorporation with the appropriate state official (very few
exceptions are formed under federal law.) The state in which the articles of incorporation are
filed is known as the “state of incorporation.” Selecting a state of incorporation has important
consequences, because of the so-called “internal affairs doctrine”—a conflicts of law rule
holding that corporate governance matters are controlled by the law of the state of
incorporation. Virtually all U.S. jurisdictions follow the internal affairs doctrine, even if the
corporation in question has virtually no ties to the state of incorporation other than the mere
fact of incorporation.

The internal affairs doctrine takes on particular transactional significance when


considered in conjunction with the constitutional restrictions on a state’s ability to exclude
foreign corporations. With rare exceptions, states have always allowed foreign and pseudo-
foreign corporations to do business within their borders. As early as 1839, for example, the
U.S. Supreme Court held that federal courts should presume a state would recognize foreign
corporations in the absence of an express statement to the contrary by the legislature. A
subsequent Supreme Court decision implied that states could not exclude foreign
corporations from doing business within the state provided that the business constituted
interstate commerce under the Commerce Clause of the U.S. Constitution. These decisions
effectively created a common market for corporate charters. If Illinois, for example, adopts a
restrictive corporation law, its businesses are free to incorporate in a less restrictive state,
such as Delaware, while continuing to conduct business within Illinois.
Throughout the nineteenth century state corporation laws gradually moved in the direction of
increased liberality, making the incorporation process simpler on the one hand, while at the
same time abandoning any effort to regulate the substantive conduct of corporations through
the chartering process. In later years, this process became known as the “race to the bottom.”
Corporate and social reformers believed that the states competed in granting corporate
charters. After all, the more charters (certificates of incorporation) the state grants, the more
8
Ibid.
3
franchise and other taxes it collects. According to this view, because it is corporate managers
who decide on the state of incorporation, states compete by adopting statutes allowing
corporate managers to exploit shareholders.

Many legal scholars reject the race to the bottom hypothesis. According to a standard
account, investors will not purchase, or at least not pay as much for, securities of firms
incorporated in states that cater too excessively to management. Lenders will not make loans
to such firms without compensation for the risks posed by management’s lack of
accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall.
Among other things, such firms thereby become more vulnerable to a hostile takeover and
subsequent management purges. Corporate managers therefore have strong incentives to
incorporate the business in a state offering rules preferred by investors. Competition for
corporate charters thus should deter states from adopting excessively pro-management
statutes. The empirical research appears to bear out this view of state competition, suggesting
that efficient solutions to corporate law problems win out over time.
Whether state competition is a race to the bottom or the top, there is no question that
Delaware is the runaway winner in this competition. More than half of the corporations listed
for trading on the New York Stock Exchange and nearly 60% of the Fortune 500 corporations
are incorporated in Delaware.9

1.1 Research Methodology and Scheme


The doctrinaire method of research was used in making this project. Books, journals
and resources available on the internet were used in order to give a comprehensive and
contemporary understanding of the law relating to the articles of incorporation. The
introduction gives a brief overview of the development of corporate law in the United States
of America after the English rule and the various sources of law (state statutes) that are
analysed in the project. The second part gives an overview of the general requirements under
statute for incorporation. The third analyses statutes and case-law relating to incorporation.

2. ARTICLES OF ASSOCIATION
The articles and memorandum of association are the governing documents of
a corporation. They constitute a contract between the company and its members. The
memorandum indicates the nationality of the corporation and the nature of its business and

9
Bainbridge, Delaware’s Competition, last accessed at
http://www.professorbainbridge.com/professorbainbridgecom/2009/11/delawares-competition.html on August
14, 2010.
4
capital. The articles govern internal relations and management of a company. They deal with
the issue and transfer of shares, alteration of share capital, general meetings, voting rights,
appointment, powers and duties of directors, accounts and their auditing and winding up. As
per the common law, in case of a conflict between the memorandum and articles of
association, the former will prevail.10

In the United States, the Articles of Association are known as the Articles of
Incorporation or Agreement (for non-profit entities), charter of the corporation or even
certificate of incorporation. Also known as a corporate charter, it generally includes the
purpose of the corporation, the type and number of shares and the rights associated with each
type, and the process of electing a board of directors. The articles of incorporation must be
filed with the State Government at the time of incorporation, and may be amended or
repealed as permitted by law and the articles themselves.

The relationship that binds the parties in a company is stated in the "Articles of
Incorporation", a set of rules, which requires only a few provisions - the name of the
company, number of shares the corporation is authorized to issue (share capital), name and
address of the company's initial registered agent or representative. However, the articles may
contain any optional provision not inconsistent with law, including provisions that may be set
forth in the bylaws, as well as provisions defining, limiting and regulating the powers of the
company, its directors and shareholders. Every company may engage in any lawful business
unless the articles specify a more limited purpose. Likewise, every company can have
perpetual duration and the same powers, similarly to an individual, to do all things necessary
or convenient to carry business, unless the articles provide otherwise.

In Edward Hines Western Pine Co. v. First Nat. Bank of Chicago 11, the court
found that the "power" expressed in the articles of incorporation was not an "object" of
the corporation and that its exercise was therefore governed by the statute incorporating
the common-law rule that a corporation's powers are limited to those necessary to attain
its objects.

2.1 Mandatory Provisions


Mandatory provisions are those a statute requires in the articles of association before a
corporation is incorporated. Optional provisions may be those that can be omitted because the
10
Re Duncan Gilmour & Co. Ltd., [1952] 2 All ER 871.
11
6i F. (2d) 503 (C. C. A. 7th, 1932). See Corporations. Ultra Vires. Distinction between Powers and Objects
in Articles of Incorporation, Harvard Law Review, Vol. 46, No. 8 (Jun., 1933), pp. 1337-1338.
5
parties do not want them to be included in the articles of association or those that may be
included in other documents instead, like the bylaws of the corporation. For example, in
Delaware, either articles or bylaws can provide for staggered terms for board members (like
in the United States Senate).12 A provision that is optional but can only be included in the
articles of association is one limiting the liability of directors for their breach of duty of
care.13 Section 102 (a) of the Delaware General Corporation Law provides that the certificate
of incorporation shall have certain details. Section 102 (b) provides what may be included in
this certificate of incorporation. Section 102 (c) provides that it shall not be necessary to set
forth in the certificate of incorporation any of the powers conferred on corporations by the
statute. The mandatory provisions are as follows.

(1) The corporation’s name –

Statutes require the corporation to contain a term like “incorporated” (“inc.”), “corporation”
(“corp.”) or “company” (“co.”). The name must be distinguished from names already taken
by corporations or those already doing business in the state. The state agency that accepts
filings of the articles of association maintains a list of names of all the corporations in the
state. Some states require that a corporation’s name cannot be “deceptively similar” to
another one. This is a term of art taken from the law of trademark and unfair competition. 14 It
prohibits the use of a name that is different from another, but sufficiently similar to cause
confusion among consumers. In some states, it is possible to reserve a name before
incorporation. For example, § 2.03 of the MBCA provides that corporations may reserve a
name for upto 90 or 180 days with the payment of a fee.

(2) Agent name and office address

The articles must contain the name of the corporation’s registered agent and the address of
the corporation’s registered office in the state. This is mandatory so that public records exist
and people may use the information to know where to serve notices and legal documents, for
example, complaints, summons or tax notices from the state. This need not be the place
where the company does business. Usually, an attorney’s office or the office of a corporation
service company can be used as the registered address.

(3) The purpose of incorporation

12
Delaware General Corporation Law, S. 141 (d).
13
Delaware General Corporation Law, S. 102 (b) (7).
14
F. A. GEVURTZ, CORPORATION LAW 55 (Hornbook Series, 2000).
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States originally granted charters (passed legislations) to create corporations for a well-
defined purpose (usually a public service). This tradition has been passed down to the statutes
governing incorporation as well. They also hoped to prevent concentration of economic
power by limiting the activities of a corporation in this way. However, after the Courts began
to permit corporation to create a large list of activities it may take part in and began to
interpret these broadly, the exercise became futile. Modern statues, like that of Delaware,
allow the articles to state simply that they will carry on any lawful business. An even more
progressive statute, the Revised Model Act does not insist upon a purpose clause unless the
corporation wishes to restrain its business activities in the future.

(4) Authorised stock

The articles specify the total number of shares that a company can issue. If the corporation
may issue different kinds of stock, the articles specify what rights will be associated with
each type or class. In many jurisdictions, the articles also specify the “par value” of the stock.

(5) The name and addresses of incorporators

The incorporators must provide their names and addresses in the articles of association and
sign them. Some statutes require that the signature be notarised, something usually done by
an attorney. Some statues, like Delaware law, allow any person – whether a corporation and
wherever resident – to be an incorporator of the company. There may even be a single
incorporator.15

Under the pre-1984 Model Act, some states required the corporation to state the
duration of the company’s existence. Therefore, some states require such a statement and
allow for a perpetual existence. These documents must then be filed with the state agency,16
which is usually the office of the Secretary of State. The degree of scrutiny varies from state
to state and depends on the extent of the powers conferred by the statute and the practices of
the particular state. A few states also require filing with the county recorder’s office or the
publication of the articles of incorporation. Under S. 103 (c) (5), Delaware requires the filing
of the articles with the county recorder in the place where the company was incorporated.
However, not filing does not prevent the existence of the corporation.

15
Delaware General Corporation Law, S. 101 (a).
16
M. B. C. A., S. 2.01; Delaware General Corporation Law, S. 101 (a).
7
2.2 Legal status after filing incorporation documents
Under a statute such as the Delaware Act or the Revised Model Act, a corporation
comes into existence legally upon filing of the articles of association. The corporation has
become a legal entity. However, no owners (shareholders) or individuals who run the
corporation (officers and directors) have been identified. Only the incorporators have been
identified. Normally, shareholders elect directors. However, the directors themselves must
issue shares in order for shareholders to exist. Statutes solve this problem in two ways. In
certain states, the articles of incorporation may specify the initial directors. For example, S.
2.02 (b) (1), M.B.C.A and S. 102 (a) (6) of the D.G.C.L. provide for this. Otherwise,
incorporators have the power to appoint the initial directors. They also have the power to
create bylaws under S. 2.05 (a) (2) and S. 2.06 of the M.B.C.A and S. 107 of D.G.C.L. The
statutes usually provide that the incorporators or initial directors named in the articles of
incorporation call for an organisational meeting or enter into a written agreement to decide
the initial directors (if not specified) and create bylaws, approve a corporate seal to stamp or
imprint on all official corporation documents and a stock certificate form, etc. The bylaws
provide for some basic rules. For example, with regard to meetings, the bylaws may provide
who may call general and special meetings, what matters are to be discussed, what the
quorum and notice is necessary for the meeting to be held, etc. It can also outline rules for
appointment and exercise of powers of directors, shareholders and officers of the company.
Unlike articles, the bylaws need not be filed in any office that maintains public records. § 108
of the DGCL provides for an organization meeting of incorporators or directors named in
certificate of incorporation who will pass bylaws and electing directors (if the meeting is of
the incorporators) or officers (if the meeting is of directors named in the articles) to serve or
hold office until the first annual meeting of stockholders or until their successors are elected
and qualify.

2.3 Bylaws
The documents that govern the internal affairs of the company include the memorandum and
articles of association and its bylaws. The bylaws are a set of rules for the corporation. They
usually deal with matters related to elections, notices, size of the board of directors,
restrictions on transfer of shares, etc. Provisions for internal affairs of the company may be
included either in the bylaws or the articles of association. The management or incorporators
may choose this. There are some differences between the two. Bylaws may be amended by
the board of directors themselves or the shareholders. Second, the articles of association are

8
public records, whereas bylaws may not be made public. Where the number of shareholders
is large, it becomes difficult to amend the articles of association. Such matters may be
included in the bylaws of the corporation instead. Corporations also prefer to include special,
important and unusual provisions in the articles of association so that they may be more
accessible to the public.

Amendment of the bylaws is one of the few corporate actions the shareholders are entitled to
initiate. Unlike the articles of incorporation, where an amendment must first be recommended
by the board, no prior board action is required on a bylaw amendment. The concurrent power
of both shareholders and boards to amend the bylaws raises the prospect of cycling
amendments and counter-amendments. Suppose the shareholders adopted a bylaw limiting
the number of terms a board member can serve. Disliking that limitation, the board repeals
the new bylaw provision using its concurrent power to amend the bylaws. The M.B.C.A.
(Model Business Corporation Act) allows the shareholders to forestall such an event. § 109 of
the DGCL and § 10.20 (b) (2) of the M.B.C.A. authorize the board to adopt, amend, and
repeal bylaws unless “the shareholders in amending, repealing, or adopting a bylaw expressly
provide that the board of directors may not amend, repeal, or reinstate that bylaw.” In the
absence of such a restriction, however, the board apparently retains its power to amend or
even repeal the bylaw. If the board does so, the shareholders’ remedies presumably are
limited to readopting the term limit amendment, this time incorporating the necessary
restriction, and/or electing a more compliant board.

Delaware § 109 is more problematic, as it lacks any comparable grant of power to the
shareholders. Worse yet, because the board only has power to adopt or amend bylaws if that
power is granted to it in the articles of incorporation, a bylaw prohibiting board amendment
would be inconsistent with the articles and, therefore, invalid. In American Int’l Rent a Car,
Inc. v. Cross17, the Delaware chancery court suggested that, as part of a bylaw amendment,
the shareholders “could remove from the Board the power to further amend the provision in
question.” Dicta in several other Delaware precedents, however, are to the contrary. In
General DataComm Industries, Inc. v. State of Wisconsin Investment Board18, for example,
Vice Chancellor Strine noted the “significant legal uncertainty” as to “whether, in the absence
of an explicitly controlling statute, a stockholder-adopted bylaw can be made immune from
repeal or modification by the board of directors.” In Centaur Partners, IV v. National

17
1984 WL 8204 (Del. Ch. 1984).
18
731 A.2d 818, 821.
9
Intergroup, Inc.19, the Delaware Supreme Court addressed a shareholder-proposed bylaw
limiting the number of directors. As proposed, the bylaw contained a provision prohibiting
the board from amending or repealing it. Noting that the corporation’s articles gave the board
authority to fix the number of directors through adoption of bylaws, the Supreme Court
opined that the proposed by law “would be a nullity if adopted.” Consequently, it seems
doubtful that restrictions on the board’s power over the bylaws will pass muster in Delaware
or other states likewise lacking a MBCA-style provision.

On the other hand, board amendments to bylaws adopted by the shareholders may run afoul
of the Delaware Supreme Court’s famous holding in Schnell v. Chris-Craft Industries,
Inc.20, that “inequitable action does not become permissible merely because it is legally
possible.” To be sure, Schnell dealt with a slightly different problem. The board had amended
the bylaws to change the date of the corporation’s annual meeting, which was a legally
permissible amendment, for the equitably impermissible purpose of defeating a proxy contest
in which insurgent shareholders sought to oust the incumbent board. Yet, many courts have
applied the principle in a variety of contexts. Under Schnell, a court thus likely would
examine the purpose for which the board amended or repealed the shareholder-adopted
bylaw. If the board did so to disenfranchise shareholders and/or entrench itself in office, for
example, the action likely would not pass muster.

2.4 Alteration of the Articles


A company may add to or alter its articles of incorporation subject to statutory provisions and
conditions laid down in the memorandum. A provision in the articles of incorporation
depriving the company from amending them is void.21 For example, a provision in the articles
that no alteration of them shall be possible without the consent of a particular person, or one
that gives only shareholders opposing the alteration an opportunity to vote on the amendment
is void. In general, an alteration of the articles must be done with a special majority of the
shareholders and in a way prescribed by the articles themselves. The alteration cannot
contradict the memorandum and must be done in good faith for the benefit of the corporation
as a whole.

19
582 A.2d 923, 929 (Del. 1990).
20
285 A.2d 437, 439 (Del. 1971).
21
Malleson v. National Insurance Corporation, [1984] 1 Ch. 200.
10
In Allen v. Gold Reefs of West Africa Ltd.22, it was held that the power conferred on
companies to amend the articles must, like all other powers, be exercised subject to the
general principles of law and equity which are applicable to all powers conferred on the
majority to bind the minority.

In Hopkins v. The Vizcayans,23 a non-profit corporation and two of its trustees sued
remaining trustees, claiming that procedure for amending articles of incorporation was
improper. The District Court of Appeal held that, (1) statute required
that articles of incorporation be amended as provided in statute, rather than
in articles of incorporation, and (2) even though statute was enacted after corporation was
formed, statute did not constitutionally impair contract rights of corporation.

In Lain v. Credit Bureau of Baton Rouge, Inc.,24 the


corporation's articles of incorporation did not sufficiently set forth “method” to be utilized in
amending corporate charter and, therefore, statute setting forth requirements for meetings
called for special purpose of amending articles of incorporation was applicable, where
provision contained in corporation's articles of incorporation was silent regarding timeliness
of notice of special meeting, information to be specified in notice, percentage of votes
required for resolution to pass, and percentage of members required to be present to
constitute quorum.

22
[1900] 1 Ch. 656, CA.
23
582 So.2d 689.
24
637 So.2d 1080, La.App. 1 Cir., 1994.
11
3. LEGAL FRAMEWORK

3.1 Model Business Corporation Act


The Model Business Corporation Act (MBCA) is a model set of law prepared by the
Committee on Corporate Laws of the Section of Business Law of the American Bar
Association and is followed by twenty four states, some of which include Arizona, Florida,
Illinois, Washington, Georgia, North Carolina and South Carolina. It was created due to
variation in how states defined corporations after World War II, in 1950. The variation and
uncertainty resulted in many lawsuits in which a promoter was sued personally for
obligations ostensibly made in the name of a nascent corporation. The widespread adoption
of the MBCA brought some clarity to this and other corporations law issues. Most states are
now guided by a revised version of MBCA called Revised Model Business Corporation Act
(RMBCA).

Chapter 2 deals with incorporation. Under § 2.01, one or more persons may act as the
incorporator or incorporators of a corporation by delivering articles of incorporation to the
secretary of state for filing. § 2.02 provides for the contents of the articles of incorporation.
Sub-section (a) provides for the mandatory requirements in the articles –

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.

Sub-section (b) provides for the optional entries in the 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:


12
(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;

§ 2.03 (a) provides that a corporation comes into existence after the filing of the articles of
incorporation unless a delayed date is specified. § 2.03 (b) provides that the secretary of
state’s filing of the articles of incorporation is conclusive proof that the incorporators
satisfied all conditions precedent to incorporation except in a proceeding by the state to
cancel or revoke the incorporation or involuntarily dissolve the corporation.

3.2 Delaware General Corporation Act


Delaware is the most popular state for incorporation of publicly traded companies.
About 300 of the 500 largest companies25 and around half of all the 1500 corporations listed
on the New York Stock Exchange are incorporated in Delaware. It is also the most popular
state for private companies incorporated outside their home state. Around 6% of 4.7 million
private companies in the United States are incorporated in Delaware even though it contains
only 0.3% of the population of the country. There are three reasons for this – first, Delaware
law is known by most corporate lawyers in the country. Second, an established body of case-
law provides a measure of certainty and predictability for corporations. Third, the state has a
specialised court, the Court of Chancery, to handle corporate law matters. The Chancellor and
Vice-Chancellors handle cases and dispose of them with the much needed expediency.

§ 101 of Delaware General Corporation Law provides for incorporators and how a
corporation is formed and for what purposes it may be formed. Clause (a) states -

25
Fortune 500 ranks corporations in the world by sales. Most of these were incorporated in the United States of
America.
13
“(a) Any person, partnership, association or corporation, singly or jointly
with others, and without regard to such person's or entity's residence, domicile or
state of incorporation, may incorporate or organize a corporation under this chapter
by filing with the Division of Corporations in the Department of State a certificate of
incorporation which shall be executed, acknowledged and filed in accordance with §
103 of this title.”

§ 102 (a) of the D.G.C.L provides what the contents of certificate of incorporation must be in
great detail. § 102 (a) (1) provides that “The certificate of incorporation shall set forth: (1)
The name of the corporation, which (i) shall contain 1 of the words "association,"
"company," "corporation," "club," "foundation," "fund," "incorporated," "institute,"
"society," "union," "syndicate," or "limited," (or abbreviations thereof, with or without
punctuation), or words” and also goes on to provide for declaration of the assets of the
corporation. § 102 (a) (2) provides that the address (which shall include the street, number,
city and county) of the corporation's registered office in this State, and the name of its
registered agent at such address must be included in the articles of incorporation. As per §
102 (a) (3), the articles must also state 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. As per §
102 (a) (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. It shall also
set forth a statement of the designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions, which are permitted by § 151 in respect of any class
or classes of stock. § 102 (a) (5) provides that the name and mailing address of the
incorporator or incorporators must be included. § 102 (a) (6) provides that 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
14
until the first annual meeting of stockholders or until their successors are elected and qualify
must be mentioned.

§ 102 (b) provides that 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 - (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 non-
stock corporation and (2) provisions in respect of non-stock corporations. § 102 (b) (5)
provides for a period of existence or perpetual existence. § 102 (b) (6) limits liability of the
stock-holders in the company to the extent of their shares. § 102 (b) (7) provides that a
certificate may contain a provision for limited liability of the director unless he breaches a
duty to the corporation or shareholders and only for acts done in good faith.

§ 102 (e) provides that the exclusive right to the use of a name (of a corporation) that
is available for use by a domestic or foreign corporation may be reserved by or on behalf of
(1) Any person intending to incorporate or organize a corporation with that name under this
chapter, (2) Any domestic corporation or any foreign corporation qualified to do business in
the State of Delaware, intending or contemplating a change in its name, (3) Any foreign
corporation intending to qualify to do business in the State of Delaware and (4) Any person
intending to organize a foreign corporation and have it qualify to do business in the State of
Delaware.

In MCG Capital Corporation v. Maginn26, the Delaware Court of Chancery granted


in part and denied in part the defendants’ motion to dismiss plaintiff preferred stockholder’s
complaint alleging both derivative and direct claims. In doing so, the court, for the first time,
set forth a rule allowing preferred stockholders to bring derivative suits absent an express
limitation in the company’s articles of incorporation or other appropriate document.

In Quickturn Design Sys., Inc. v. Mentor Graphics Corp.27, the Delaware Supreme Court
invalidated a so-called “no hand poison pill”. According to the court’s opinion, Delaware law
requires that any limitation on the board’s authority be set out in the articles of incorporation.
The no hand pill limited a newly elected board’s authority by precluding redemption of the

26
Civil Action No. 4521-CC, 2010 Del. Ch. LEXIS 87 (Del. Ch. May 5, 2010)
27
721 A.2d 1281 (Del. 1998).
15
pill and thereby precluding an acquisition of the corporation for six months. Consequently,
the no hand pill tended to limit in a substantial way the freedom of [newly elected] directors’
decisions on matters of management policy? Accordingly, it violated the duty of each [newly
elected] director to exercise his own best judgment on matters coming before the
board. Notice that there are two distinct doctrines at play here. First, as in Quickturn, a claim
that § 141 (a) of Delaware General Corporation Law requires that any limitation on the
board’s authority be set out in the articles of incorporation. Second, as implied in Quickturn
and confirmed in Omnicare, Inc. v. NCS Healthcare, Inc.28, the Supreme Court has imposed
on directors "a continuing fiduciary obligation," in that case with respect to a sale of the
company. Hence, the court explained, the board must discharge its fiduciary duties at all
times, even if circumstances change. In dissent, Justice Steele aptly criticized the majority for
adopting proscriptive rules that invalidate or render unenforceable pre-commitment strategies
negotiated between two parties to a contract who will presumably, in the absence of
conflicted interest, bargain intensely over every meaningful provision of a contract after
careful cost benefit analysis.

In Baron v. Allied Artists Pictures Corp.29, Allied’s articles of incorporation provided that if
six or more quarterly dividends were missed the preferred shareholders, voting as a class,
would have the right to elect a majority of the board of directors. Allied missed the requisite
number of preferred dividends, triggering the preferred shares' contingent voting rights. The
idea behind contingent voting rights, of course, is that the preferred shareholders' board
representatives will change corporate policy so that the firm can begin paying dividends on
the preferred. Once the missed dividends are caught up, the preferred shareholders'
representatives step down and control returns to the common. Allied's case, however, the
board failed to begin paying dividends on the preferred stock. As a result, the preferred
retained their right to elect a majority of the board - for a period of ten years.
Plaintiff was a common shareholder who sued, in effect, to compel the board to declare such
dividends as would be necessary to return control to directors elected by the common. The
Chancery Court rejected plaintiff's claim, holding that the directors have discretion to declare
dividends or to refrain from doing so. The exercise of that discretion is not unbounded, of
course. A board elected by the preferred does have a fiduciary duty to see that the preferred
dividends are brought up to date as soon as possible in keeping with prudent business
management. The appeal was dismissed.
28
818 A.2d 914 (Del. 2003).
29
365 A.2d 136 (Del. 1976).
16
4. CONCLUSION
American corporation law faces many challenges, one of which is creating a uniform
body of law with regard to incorporation and all other aspects of corporation and securities
law. First, it is argued by some that the federal government must come up with a law to be
followed in order to perform its Constitutional duty of regulation of trade and commerce.30
The National Government also has exclusive power to control interstate commerce. The
unprecedented growth of corporate power, corporations and their capacity to engage in
interstate commerce means that there must be a national legislation. By the common law a
corporation was considered a person within the law, and though perhaps it could not migrate
itself, it might, through its agents, do business away from home. The common law had
recognized the right to bring a suit in a country other than the one in which it was
incorporated.31 Such a right was recognized in the Supreme Court of the United States as
early as 180932, and by the New York courts in 182033, although such rights had
undoubtedly long-been exercised before. Therefore, the Congress must regulate such
commerce.

Second, in the competition between various states in liberalising corporation law,


some states have been left behind, while others such as Delaware are home to a
disproportionately large number of corporations (compared to their share of the population).
However, some others argue that since the general incorporation laws of the several
states are as a rule drawn upon substantially the same general plan, it makes little
difference whether the law of one state or another is taken up. 34 Incorporation has
undoubtedly been and now is an important means of economic progress. The articles of
incorporation are part of the core or governing documents of a corporation. It contains the
identity (the name of the company has a distinctive, descriptive and legal element), purpose
(which now may be “to engage in any lawful act or activity”) and the management of rights
and liabilities (as a contract between the shareholders and the corporation).

30
H. L. Wilgus, Need of a National Incorporation Law, Michigan Law Review, Vol. 2, No. 5 (Feb., 1904), p.
359.
31
Henriques v. Dutch West India Co. 2d Ld. Raym. 1532 (1729). See Ibid at p. 364.
32
Bank of U. S. v. Deveaux, 6 Cranch 61. See infra n. 30 at p. 364.
33
Silver Lake Bank v. North, 4 Johns. Ch. 370. See infra n. 30 at p. 364.
34
Thomas Thacher, Incorporation, The Yale Law Journal, Vol. 9, No. 2 (Nov., 1899), at p. 84.
17
BIBLIOGRAPHY
Books

• F. A. GEVURTZ, CORPORATION LAW (Hornbook Series, 2000).

• R. HAMILTON & R. BOOTH, BUSINESS BASICS FOR LAW STUDENTS 258


(3rd ed., 2002).

Journals

• Harvard Law Review

• Michigan Law Review

• The Yale Law Journal

Statutes

• Delaware General Corporation Law

• Model Business Corporation Act

Websites

• www.iim-edu.org

• www.jstor.org

• www.professorbainbridge.com

• www.westlaw.com