Exam 36: Corporate Formation and Financing

A novation is frequently used to transfer liability on contracts from promoters to the corporation that they have formed and to release the promoter from liability.

Acorn Corporation was formed 2 years ago at which time it issued 1,000 shares of stock in various quantities to 130 different shareholders.Three shareholders each hold 200 shares; the remaining 127 shareholders hold the other 400 shares of stock.The stated purpose of Acorn Corporation is to "purchase new computers for resale to consumers and to conduct all business incident to the purchase and resale of new computers." Justin,Jessica,and Jeremy,the three shareholders of 200 shares each,were the promoters of the corporation and were intended to be the initial board of directors.The articles of corporation were properly filed,and a certificate of incorporation was received a short time later.Justin was named as the registered agent in the articles of incorporation.Justin,Jessica,and Jeremy assumed the duties of running the corporation,but never held an organizational meeting.They have run the corporation for 3 years,and none of the other shareholders has objected to the fact that the organizational meeting was not held.The business had been quite successful until the last year.In the last year,Justin,Jessica,and Jeremy have made some changes in the business.They have begun accepting used computers as trade-ins,and have begun offering computer-training classes.In addition,they have been offering word-processing services and have also begun buying and selling used office equipment other than computers.All of these additional operations have been unprofitable thus far.A group of the other shareholders has sued in an effort to stop the carrying on of these other businesses.Do they have a basis for such a suit,and if so,what remedies would they have?

Under certain circumstances,a corporation can elect to be taxed similarly to a partnership.