THE FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION. 9. Who May Form a Private Corporation. 10. Fortuitous Association of Individuals. 11. Definition of Promoter, and the Promoter's Functions. 12. Promoters' Profits. 13. Fiduciary Relation of Promoter to Prospective Corporation. 14. Responsibility of Fiduciary Relation and Recovery for Breach. 15. Promoter's Fraudulent Representations or Concealment, and Liability Therefor. 16. Failure of Organization of the Corporation and Promoter's Liability. 17. Corporation's Liability for Services Rendered by Promoter. 18. Promoter's Lack of Agency. 19. Contracts Made with Promoter. 20. Inter-relation of Promoters. 21. Aiders and Abettors of a Fraudulent Promoter. 22. Where to Incorporate. 23. Special Advantages and Disadvantages in the Corporation Laws of the Liberal Commonwealths. 24. Relation to the Creating State of a Corporation Whose Principal Office and Business are Located in a Foreign State. 25. 26. A Corporation's Relation to Foreign States. 27. Determining the Amount of Capitalization. 28. 29. More Things in Regard to Stocks and Bonds to be Considered Capitalizing at Less Than Real Value. 30. Placing Stocks and Bonds. 30a. Financial Banking and Trust Organization. 31. The Stock Exchange. 32. The Sale Price of Stocks and Bonds With Reference to Time of Issue. 33. Changing a One-Man Business or Partnership into a Corpora tion. 34. Proper Valuation of Private Business or Partnership Assets, Patents, and Other Property to Safely Constitute Stock Exchanged for Them Full-Paid. 35. Stock Subscriptions. THE FORMATION OF A PRIVATE CORPORATION. $9. Who May Form a Private Corporation. Three or more natural persons (the expression "natural persons" means men or women, in contradistinction to "artificial persons," such as corporations) of legal age may come together for the formation of a corporation. Sometimes one or more of the number must have citizenship in the state under whose laws the corporation organizes. Married women may be corporators if the statutes of the state in which the corporation is organized have removed the common law disabilities of married women. Any natural person capable of contracting may be a corporator. Partnerships, corporations, minors, persons mentally incompetent, may not be original subscribers to stock, though, by transference, they may come into possession of stock and may hold it. The personality, previous business success, and reputation for integrity of the corporators often have much to do with the sale of stock after a company has been incorporated, so that a promoter should usually look beyond the mere ability of a person to furnish money for his enterprise. § 10. Fortuitous Association of Individuals. It may be desirable that a partnership concern be changed into a corporation, in which case the partners alone, or with friends or other investors, become the corporators. Or a person may have a plan for business which he communicates to his friends, or to any persons having sufficient means to take stock, who may agree to join him in the formation of a corporation. Bankers and capitalists have frequent opportunity to know of desirable manufacturing businesses, or transportation or development schemes, and, when satisfied of the comparative safety and of the reasonable prospects for good returns, choose a few of their friends and acquaintances and offer them the opportunity to put in money to furnish the funds necessary to start the company. Usually the banker or capitalist does not make any commission or profit because of his little work in getting the necessary capital in addition to what he puts in. He does not go far out of his way to get the additional money. The association of himself and the other incorporators is largely fortuitous. He knows several people with money to invest, and he sets before them the plans of the company. They invest or do not invest as they choose, without having been especially sought out and having had applied to them the particular and enthusiastic persuasion that the professional former of corporations would use. Formation by Promoters. § 11. Definition of "Promoter," and the Promoter's Functions. The word "promoter" has not yet a legal definition, but is a business term familiar in corporate finance. A promoter, in business practice, is one who seeks fields for investment in new enterprises or in the extension or diversification of established industries, and, for a consideration, forms and organizes a corporation to develop the particular field he has chosen. The promoter commonly attends to everything connected with the floating of an enterprise. In the first place he finds an enterprise with prospects of good returns on the money to be invested; he employs technical experts in the line of industry to prepare the figures of cost and prospective returns, so he and those to be interested with him may know as exactly as may be what they have and what they may expect; he prepares a prospectus based on the expert's figures; he secures legislation, where that is necessary; he secures options and leases, where they must be secured. In short, he "assembles" the proposition. Then he employs a corporation lawyer to prepare the articles of incorporation, and secures the necessary subscribers to the articles, sees that the articles are recorded and filed, that the certificate of incorporation is issued, and pays the incorporation costs; he sells the stock of the company directly to the public, or to bankers or other underwriters whom he has usually provided for before organizing the corporation, and ordinarily he takes his own profit out in stock. His relation to the corporation is fiduciary. § 12. Promoters' Profits. The promoter has to create value to entitle him to profit. He provides a new or original means of making money, and makes the means productive through the development of a "going" concern for the utilization of that means. His profit, though large, is legitimate profit. It is arrived at usually as follows. From the figures of the technical expert on the proposition, the promoter arrives at a conclusion as to the total net profits of the business when it has been developed. If he is a conservative man, he capitalizes his business on the basis of its average earning capacity with only enough "water" to provide for increased earnings. If the proposition was one worth his efforts, it was a proposition which could be capitalized at a figure greatly in excess of what he paid for it in its undeveloped condition, and also in excess of this cost price and the development cost combined. The difference between these costs and the sum which he receives for the stock represents his profit. If options have been paid for before the property has been bought, their cost usually comes out of the promoter's profit. As a rule, the earning capacity of his proposition is such that the promoter can capitalize so as to provide sufficient working capital and sell the common stock at from fifty to seventy-five cents on the dollar, which is desirable to facilitate the sale, and still have for himself a margin of profit of from fifteen to thirty per cent of the capital stock. He is perhaps offering stock that will some time net the investor six to twenty per cent. The promoter is equipped for his work by his resourcefulness in finding new and worthy enterprises, and ability to harmonize interests and handle men, by his financial connections, and his business experience generally. To combine the original resources for wealth and the money to develop them, he works according to system, going out to find the resources, perhaps, and making definite and extensive effort to secure the funds for operation. The association of individuals in the promoter's corporation is not fortuitous, but is the result of the work of a trained business agent, the promoter, who is working for his own profit, and is earning his profit by assembling the business proposition and by securing the incorporators and other investors. |