92. When Corporate Existence Commences. The states generally provide by statute, for the organization of corporations. At present, corporations seldom are created by special grant of the legislatures. Most states, by constitutional provisions, limit the power of the legislatures to create corporations by special act. Persons desiring to organize a corporation, must comply with the general laws regulating their formation. As was pointed out in the section on creation of corporations, several steps must be taken to complete the organization of a corporation. The question often arises as to when the legal existence of a corporation commences. It is quite generally held that a corporation's legal existence dates from the filing of the articles of incorporation with the designated state office. After that time the corporation cannot deny its legal existence. Neither can third persons dealing with the corporation deny the legal existence of the corporation. If the corporation fails to fulfil the remaining statutory provisions relating to the completion of the corporation, the state, through its officers, may revoke the corporation's right to continue as a corporation. A corporation does not have the right to transact business, until its organization is completed. It may have a legal existence before that time.
93. Estoppel from Denying Corporate Existence. An association of persons pretending, innocently or otherwise, to be a corporation, not having complied with the legal requirements for creating a corporation, is not permitted to deny its corporate existence, for the purpose of avoiding its obligations. Such an association is liable as a corporation for its obligations, and if there is no corporate property, the members of the association are liable personally.
On the other hand, persons who deal with an association of persons which claims either by name, or by express statement, to be a corporation, cannot evade their liability to the association on the ground that the corporation has not been legally organized.
As between the corporation and the state, which alone can give it power to exist as a corporation, no valid corporation exists until all the legal requirements are complied with. The state, through its proper officers, may deny corporate right to any association of persons who have not fully complied with the statutes regulating the creation of corporations. To create a corporation by estoppel, there must be an organization assuming to act as a corporation. If A trades in his own name, a person dealing with him cannot claim that A is a corporation by estoppel. But if A trades as "The Cook County Lumber Co.," and enters into a contract with B in the name of The Cook County Lumber Co., and signs his name as president of the company, he cannot deny its corporate existence. If B purchases material of The Cook County Lumber Co., he cannot refuse to pay for it on the ground that The Cook County Lumber Co., is not a legally incorporated company.
94. Corporate Charter a Contract. Originally in this country, the right to exist as a corporation was granted by special act of the legislature. It was early decided that this grant by a legislature could not be revoked or changed by subsequent act of the legislature. It was regarded as a contract. By reason of the fact that corporate charters are contracts, giving corporations the right to a continuous existence under the terms of the original grant, many states now have constitutional provisions, limiting the right of legislatures to grant irrevocable charters. Those states having no such constitutional limitations, have a provision in their statutes authorizing the creation of corporations, and providing that all corporate charters or franchises be revocable or changeable at the will of the legislature. At the present time in most, if not all of the states, a corporation cannot obtain an irrevocable charter. Their charters are granted with the reservation, or upon the condition, that the terms may be changed or revoked at any time.
95. De Facto Corporations. In connection with corporations, the terms de facto and de jure are often used. By de jure corporation is meant a corporation that has a perfectly legal existence; one that has complied with all the laws relating to its creation; one that cannot have its right to exist as a corporation denied by the state under whose laws it was created, on the ground that it has not complied with all the laws relating to its creation. By de facto corporation is meant a corporation that has performed some of the functions of a corporation without having complied with all the legal requirements relating to its incorporation. To constitute a corporation de facto, it is usually conceded that there must have been laws under which the pretended corporation might lawfully have been organized, followed by some kind of an attempt to organize under these laws, and by a use of corporate functions. As between the corporation and the state, the state may stop the corporation from exercising corporate functions. As between the corporation and third persons dealing with it as such, in the absence of fraud, corporate existence of a de facto corporation cannot be denied.
96. Promoters. Persons who undertake the organization of corporations are called promoters. The promoter of a corporation need not be one of the incorporators, but he is the active man who engineers the enterprise. He is the one who interests capital, who induces persons to take the required amount of stock, who assembles the parties desiring or induced to organize the corporation. In short, he is the one who manages the organizing and starting of the corporation. Oftimes much work must be done, many contracts made, and liabilities incurred before a corporation has any legal existence. Just what connection the promoter has with the corporation, whether he may bind the future corporation, or make it liable for his acts of necessity, or by adoption, is often a close question. It must be borne in mind that before a corporation has a legal existence, it can incur no obligations as a corporation. Before a corporation's legal existence commences it can have no authorized agents. If A, knowing where valuable undeveloped stone quarries are located, obtains options on the lands, interests men of means to promise to take stock in a future organization, performs all the preliminary work to the creation of a corporation, organized for the purpose of purchasing and operating said lands, and incurs debts in connection therewith in the name of the proposed company, the corporation, when completed, cannot be compelled to pay such obligations. It did not incur them. It had no power to incur them since its legal existence did not commence until a subsequent time. The obligation belongs to the promoter, or to those persons, if any, who authorized him to incur the debts. If, however, recurring to the former example, "The Cuyahoga Stone Co.," is organized by A to develop and operate such stone lands, and after the organization is completed with full knowledge of the obligations of A, it, as a corporation, agrees to pay said obligations, and to purchase A's options on the lands for a specified amount, the obligations now become the obligations of the corporation. The corporation may be sued thereon, and its property subjected. This is called the adoption of a promoter's obligation by a corporation.
A corporation is liable on its express, as well as on its implied contracts, and if it accepts valuable services of a promoter after it becomes a corporation, it is liable on an implied contract to pay for the same. Services rendered by a promoter for a future corporation do not render a corporation liable therefor, unless adopted by the corporation after its legal existence commences. The states generally provide by statute, the time when a corporation's existence commences. These statutes vary somewhat, but in general provide that the corporation's existence commences when the proper articles of incorporation are filed with the Secretary of State.
97. Reorganization of Corporations. The right to exist as a corporation is a special privilege which cannot be sold or transferred to another. Any property acquired by a corporation may be mortgaged, sold or transferred at the will of the corporation. The right to exist as a corporation, however, is a special privilege granted by the state, and cannot be transferred. Any association of persons desiring to exercise the rights and privileges of a corporation must obtain such rights from the state. They cannot purchase such a right from an existing corporation. Many of the states provide by statute for the organization of a corporation by those persons purchasing the property of public service corporations at a foreclosure sale. A common example is in case of a foreclosure of a mortgage on a railway. Statutes of some states provide that the purchasers of such property at foreclosure sale may, and shall organize a corporation which shall carry out the purposes of the original corporation.
Where a corporation is organized and purchases the assets of the former corporation, the new corporation is not liable for the obligations of the old. Sometimes the new corporation takes over the assets of the old corporation, and expressly assumes the obligations of the old. In this event, the new corporation is liable for its predecessor's debts. If the new corporation, in purchasing the assets of the old, uses unfair or fraudulent methods, the transfer will be set aside at the instance of creditors of the old corporation, or the new corporation will be deemed liable for the debts of the old corporation. In carrying out reorganization schemes, a transfer of assets must be fair and bonâ fide, or the sale will either be set aside as fraudulent, or the new organization will be deemed a continuation of the old, and liable for its debts.