3.68 Corporations and Company Authority

3.68.1

Concept And Main Characteristics Of Corporations

A corporation is an artificial person or legal entity created under state law. Its corporate life begins and expires in accordance with the laws of its state of incorporation and the provisions of its charter or articles of incorporation. Within the state of incorporation, it is a domestic corporation. To all other states it is a foreign corporation.

The corporation has an existence separate and distinct from those of the stockholders or shareholders. Corporate stockholders are not, merely by reason of being stockholders, personally liable for corporate debts and liabilities. Thus, each stockholder has at stake only the amount of his capital used to purchase the subject shares.

Since a corporation is a legal entity which exists separate and apart from its stockholders, it remains insulated from the effect of taxes, liens, judgments, and debts affecting the stockholders. By statute, a corporation has legal capacity to hold and deal in real property and to sue and be sued in its own name consistent with the powers given in its charter or articles of incorporation. Its powers, scope of activities, duration of existence, and dissolution are governed by the charter or articles of incorporation of the corporation, unless limited or otherwise provided by statute.

The board of directors of the corporation, not the share- holders, is responsible for the management of the corporation and the conduct of its affairs. The board acts according to the vote of a majority of its members for most matters. The directors are responsible to the stockholders of the corporation and must account to them for their acts or conduct. They can be held answerable for mismanagement and for acts outside the scope of their charter powers or acts that are otherwise improper or unlawful.

Corporate officers can exercise only such authority as is delegated to them under the corporate charter, certificate of incorporation by the Board of Directors and bylaws. They can bind the corporation by acts or conduct that are within the scope of their actual or apparent authority; they are answerable to the board of directors and must account to the board for their activities.

Acts, contracts, or deeds beyond the scope of the articles of incorporation are ultra vires and may be invalid. Responsible officers and directors may be personally liable for losses due to ultra vires activities.

3.68.2

Classification In General (Corporations)

In general, corporations are classified as follows:

Business Corporations

Business corporations are organized to carry on a business for profit.

Nonprofit Corporations

Nonprofit corporations are organized for a nonprofit purpose such as: charitable, political, fraternal, scientific, civic, religious, educational, and health. These organizations are sometimes referred to as eleemosynary corporations. Such corporations do not have any shareholders. Unlike profit-making corporations, their main objective is to provide a service or a function.

Public Corporations

Normally based on statutes, public corporations are governmental subdivisions or agencies thereof. Except for the United States and the several states, these corporations are generally lumped together as municipal corporations.

Quasi-Public Corporations

Quasi-public corporations are created, owned and controlled by a public corporation, for public purposes, such as: operating a toll bridge, a canal, a turnpike, a municipal power or water plant, and also, in some cases, for the purpose of maintaining public cemeteries.

Public Utility Corporations

Public utility corporations are corporations which are created to supply the public with a type of commodity or service, such as: electricity, gas, water, telephone, telegraph, or transportation. These corporations enjoy certain monopolistic advantages but are strictly regulated and supervised by several governmental agencies.

Financial Corporations

Financial corporations basically include commercial banks, savings banks, savings and loan associations, and credit unions. They may be organized under federal laws or state laws.

Insurance Corporations

Insurance corporations are organized for the purpose of providing a line of insurance (life, casualty, fire, title, surety, etc.).

Religious Or Charitable Corporations

Religious or charitable corporations are organized under statutory authority for religious, benevolent, or charitable purposes.

Farming Corporations

Farming corporations are organized under statutory authority for the purpose of cultivating the land or for the maintenance of domestic/agricultural animals, or to produce dairy products.

Industrial Development Corporations

Industrial development corporations are organized under statutory authority for the promotion of commercial and industrial development.

Corporation Sole

A corporation sole is an entity formed by a religious denomination, church, or society empowering a single official or officer to administer business affairs as a corporation. The existence of these corporations must be authorized either by statute or judicial fiat.

3.68.3

Classification By The Place Of Incorporation

Domestic Corporation

A domestic corporation is created by or organized under the laws of a particular state. However, when used in connection with federal statutes, a domestic corporation refers to a corporation created or organized in the United States.

Foreign Corporation

A foreign corporation is created by or organized under the laws of a sister state. However, when used in connection with federal statutes, foreign corporation refers to a corporation created or organized outside the United States.

States universally require a foreign corporation to qualify before doing business in their state. Qualification usually consists of the filing of certain forms, payment of a fee, and appointment of a resident agent for service of process. Local law must be researched to ascertain the necessary requirements with which a corporation needs to comply.

Alien Corporation

An alien corporation, sometimes referred to as a non-American corporation or foreign corporation, is a corporation formed under the laws of a foreign country, but doing business in and holding property in a particular state in the United States. See Aliens and Alien's Investments (1.52).

In connection with any transaction involving an alien corporation, the following matters must be considered:

  • whether the state where the land is located has restrictions on alien individuals or corporations owning land in the state;
  • whether the corporation is properly formed in the foreign jurisdiction;
  • whether the corporation must qualify to do business under the state law; and,
  • whether the corporation's charter gives it power to own U.S. land.

In connection with the creation, existence, and good standing of the alien corporation, the following items must be considered:

  • a copy of the certificate of incorporation, articles of incorporation or association or equivalent agreement authenticated by a foreign official authorized to attest in that country. If these documents or any others are in a foreign language, a certified translation in English must be provided;

  • a resolution of the Board of Directors (or comparable body) of the corporation authorizing the purchase or sale and the execution of the note and mortgage in connection with the mortgage loan, if any;

  • proof that the corporation is in good standing in the jurisdiction where incorporated;

  • if the corporation is to act through a power of attorney, a resolution of the Board of Directors (or a comparable body) of the corporation authorizing the corporation to act by an attorney-in-fact is required;

  • it is common to require an opinion of counsel with respect to the major conveyancing elements of the transaction;

  • some corporations such as Liechtenstein and Netherland Antilles corporations do not have officers such as president, vice president, secretary or treasurer. Their affairs are run by directors, usually led by a managing director. It is, therefore, advisable to accompany any instrument to be recorded with a certified copy of the bylaws of the corporation or other instrument conferring the powers to be exercised by the managing director;

  • acknowledgments made in foreign countries should comply with specific state law requirements. The safest method of foreign acknowledgment is one taken before a U.S. consul;

  • when the foreign corporation does not have a seal, state law must be considered in this regard; and,

  • all the state and local taxes which can become a lien either on the corporation or in any property owned by the corporation.

Federal Corporation

A federal corporation is one created by an act of Congress. It is not considered as a foreign corporation in any state of the United States unless Congress created the corporation by reason of its authority to legislate for a particular territory, in which case, a corporation would be a foreign one in a state or territory other than that for which it was created. Examples of federal corporations include the Homeowners' Loan Corporation, the Federal Deposit Insurance Corporation and the Federal National Mortgage Association.

3.68.4

Formation Or Creation Of Corporation

The law of the jurisdiction in which a corporation is organized governs who may form a corporation, how it is formed, and the powers it will have after it is formed. Basically, a corporation is formed by the act of incorporators who execute articles of incorporation and file them in the office of the Secretary of State. Upon payment of taxes or fees, the secretary of state issues a certificate of incorporation, or in some states, a charter.

Additional requirements are established by some states; e.g., filing certified copies of the above documents in the county clerk's office of the county in which the corporation has its principal office or in the office of the register or recorder of deeds, etc. The articles of incorporation are subject to amendment and modification.

3.68.5

Good Standing Of Corporation

A corporation is said to be in "good standing" in the state of its origin when it has been duly formed in accordance with the laws of the state and its right to conduct its affairs has not been revoked or impaired.

The main obligations to be fulfilled by a corporation in order to be in good standing are related to:

  • Acting within the powers granted by statute;
  • Filing certain annual reports and affidavits; and,
  • Paying its franchise taxes.

Inquiries in regard to the good standing of a corporation need to be addressed to the Secretary of State in the state in which the corporation is incorporated.

3.68.6

Powers Of A Corporation - During Its Existence - Ultra Vires Acts

A corporation has only such powers as are expressly granted in its charter or in the statutes under which it is created. Ultra vires means "beyond the power." An ultra vires act is one that is beyond the powers expressly or impliedly conferred upon a corporation. No attempt should be made to insure any transaction arising from an ultra vires act of a corporation.

3.68.7

Authority To Execute Instruments

In connection with the execution of a real estate transaction, and after having determined the legal existence and the good standing of the corporation, it is essential to ascertain the power or authority of the officer of the corporation who executes the instrument(s) on its behalf.

Title examiners or closers must seek answers to the following questions:

  • Is the person who executes the instrument an officer of the corporation?
  • And, if that is the case, is the officer duly authorized by the corporation to execute the instrument?

Normally, the authority of the officer of the corporation has two distinct sources of origin:

(1) the articles of incorporation; or,

(2) a specific resolution of the board of directors of the corporation.

In order to make this determination it will be necessary to require:

  • A certified copy of the articles of incorporation.
  • A certified copy of the resolution of the board of directors of the corporation authorizing the execution of the particular transaction.

3.68.8

Seal Of A Corporation

As a general rule, a corporation has the power to use and adopt any seal.

A corporate seal is not always an essential corporate attribute, and in the absence of a charter or statute to the contrary, a corporation may bind itself by a writing not under seal to the same extent as an individual.

Although in some states the use of the seal is not necessary, it is very convenient for the corporation to attest all its contracts and documents with the corporate seal. The attachment of a seal to an instrument signed by corporate officers generally is prima facie evidence that it is the act of the corporation.

3.68.9

Summary Of Items To Consider When Examining A Corporation And Its Transactions From The Title Insurance Point Of View

  • That the corporation has been duly organized in accordance with applicable statutes.

  • The exact and precise name of the corporation.

  • The date of commencement of the corporate existence.

  • That the corporate duration has not expired.

  • That the documents under which it operates do not contain any provisions affecting the corporation's power to acquire, hold, convey, mortgage, or otherwise deal in real property.

  • That there are no statutory limitations to the power of the corporation to act or operate in real estate transactions.

  • That, at the present time, the corporation is in good standing in the state of its incorporation.

  • That the consent or approval of a regulatory agency is not necessary.

  • That, if a foreign corporation, it has been duly authorized to do business in the state where the land is located.

  • That there is a resolution of the Board of Directors of the corporation, duly certified by its secretary, authorizing the transaction and execution of the pertinent real estate documents, or if any officer is empowered by the articles of incorporation, charter, or any other corporate document, that there is a certificate issued by the secretary of the corporation stating the name of the person acting in this capacity and certifying that this person's authority to execute transactions on behalf of the corporation has not been amended, modified, or revoked.

  • That approval or consent of the shareholders when involving all or substantially all of the assets of the corporation has been obtained.

  • That the transaction does not prejudice the rights of the creditors of the corporation (conveyance to an insider; upstream or downstream situations).

  • That the seal of the corporation has been properly affixed (the possibility of no seal being required by statute must be considered).

  • That any corporate instrument is properly acknowledged in accordance with the relative statutory provisions.

3.68.10

Consolidations, Mergers, Reorganizations, And Acquisitions Of Corporations

A consolidation occurs when two combining corporations are dissolved and lose their identity in a new corporate entity. As the term is correctly and strictly used, there can never be a consolidation of corporations except when all the constituent companies cease to exist as separate corporations and a new corporation, the consolidated corporation, comes into being.

A merger of corporations consists of a combination of corporations whereby one of the constituent companies remains in being, absorbing or merging into itself all the other constituent corporations. The absorbing corporation is also referred to as the surviving corporation.

Reorganization of a corporation means the act or process of organizing again, and indicates a corporate readjustment of an existing interest.

Acquisition of a corporation means the act or process by which the controlling corporate stock is acquired.

3.68.11

Termination Of Corporate Existence

The dissolution of a corporation is the termination of its corporate existence in any manner provided by law or by the will of the stockholders.

Automatic Dissolution

A corporation is automatically dissolved upon the expiration of the period for which it was created without any direct action on the part of the state or the members of the corporation.

Voluntary Dissolution

Voluntary dissolution occurs when the shareholders of a corporation agree to effectuate the dissolution of the corporation.

Involuntary Dissolution

Involuntary dissolution occurs when the dissolution of the corporation takes place under the provisions of general dissolution statutes or under statutes permitting judicial dissolutions.

Liquidation

Liquidation and dissolution are not synonymous. Dissolution is the formal termination of the corporate existence. Liquidation is the process of paying off or making provisions for the corporate debts and obligations and then disposing of all of the corporation's assets, either by sale with distribution of the proceeds to the shareholders, or by direct distribution in kind to the shareholders.

Forfeiture Of The Charter

Forfeiture of the corporation's charter is the penalty imposed by the state against corporations that do not comply with the duties and obligations that the granting of the charter imposed on them.

The grounds or causes for the forfeiture of corporate charters are found in the statutes of the jurisdiction in which the corporations are organized; viz., failure to pay franchise taxes or file annual reports.

3.68.12

Reinstatement Or Revival

Reinstatement or revival is the restoration of corporate life to a corporation which has become dissolved, ordinarily through statutory time limitations or charter forfeiture due to the failure to pay taxes, file reports and other matters.

The provisions and conditions for the reinstatement or revival of a corporation are based on state law.

A foreign corporation that has lost its registration and right to do business in a state must follow the statutory requirements of the state in which it seeks to do business for reinstatement of its registration and the authority to do business in that state.

3.68.13

Powers Of A Corporation After It Ceases To Exist

In the absence of statutory law to the contrary, the dissolution of a corporation terminates the power of a corporation to hold property, and thereafter, it cannot receive a grant of property or purchase, lease, or mortgage the property.

In most jurisdictions, statutes have been enacted prolonging the capacity of a dissolved corporation for certain specific purposes such as winding up its business during the period of liquidation or for a period after the dissolution.

When a corporation has effected a dissolution but has not disposed of all its property,one must follow resort must be made to the laws of its state of incorporation to determine the proper vesting. Usually, title will remain in the corporation for a limited period. Upon the expiration of this period, the title may vest in the Board of Directors last in office, in the board of directors as trustees for the shareholders, in the Board of Directors as trustees for shareholders and creditors, or in the shareholders. After a dissolution has been effected, a conveyance should contain recitals as to the purpose of the conveyance and should also make specific reference to the fact that the conveyance is executed and delivered for the purpose of winding up the corporate affairs.

3.68.14

Corporations Vesting Of Title

Examples:

  • ABC Corporation, a (State of Incorporation) corporation.
  • ABC Corporation, a not-for-profit (State of Incorporation) corporation.
  • ABC Corporation, a (Type of Corporation) (State of Incorporation) corporation.
  • ABC Corporation, a defunct or dissolved (State of Incorporation) corporation.
  • The shareholders of ABC Corporation, a defunct or dissolved (State of Incorporation) corporation.
  • The Statutory trustees of ABC Corporation, a defunct or dissolved (State of Incorporation) corporation.

3.68.15

Creditors' Rights Against The Corporation

Transactions that may prejudice the creditors of a corporation include the following:  

  • The level of adequacy of the consideration received by the corporation.
  • Whether the proceeds of the sale or loan are being disbursed to the corporation or are being diverted to a third party.
  • Whether the transaction is a gift of corporate property.
  • Whether the transaction is a transfer to an insider.
  • Whether the transaction is in payment of an antecedent debt of the corporation.

 

3.68.16

Insuring Purchasers Of Corporate Stock

Insuring purchasers of corporate stock of a corporation as to the corporation's estate or interest in the land insured can be accomplished as follows:

  • The owner's policy should show the stockholders as the insureds and the corporation as being vested with the title.

  • Since the acquisition price of the stock may bear no relationship to the value of the land, the policy amount should reflect the present value of the land and not the equity of stockholders therein.

3.68.17

Conveyances Before Inception Of Corporate Existence

In the absence of a curative statute, any conveyance purportedly made to a corporation prior to its legal creation would require that, after the completion of the corporate organization, a confirmatory deed from the original grantor to the corporation be executed and filed for record.

3.68.18

Conveyances After Expiration Of Corporate Existence - Some Statutory Possibilities

Within the statutory period of time, if there is any, to revive the corporation or reinstate the charter:

(a) Prior corporation acts are validated after reinstatement.

(b) Prior corporation acts are not validated after reinstatement.

In the case of (a), any conveyance is automatically validated and no action is required.

In the case of (b), any conveyance is void.

Beyond the statutory period of revival or reinstatement, if there is any, corporation acts are void.

Note: In many states, statutes provide that the title to property of a corporation passes to its shareholders or to its directors as trustees immediately upon termination of its charter. In such states, the attempted conveyance by the corporation after the expiration of its legal existence will be of no effect. Title should be found to be vested in the directors, as trustees, or in the shareholders of the defunct corporation and proper conveyances from the parties need to be obtained.

3.68.19

Corporation Conveying To An Insider

At common law, a transaction between a corporation and one of its officers or directors was said to be voidable at the option of the corporation.

Nowadays, any transaction between a corporation and one of its officers or directors may be voidable either under state law or under the provisions of the Bankruptcy Act if it is unfair to the corporation or if the officer or director acted in bad faith.

In this type of situation, it is not only sufficient to determine that the contemplated transaction was authorized, but also necessary to establish that the transaction is not taking place to the prejudice of creditors of the corporation.

Insuring transfers to insiders (officers or directors) can be extrahazardous--extreme care should be exercised and the following must be required:

  • A certified copy of the resolution adopted by the legal majority of the stockholders authorizing the conveyance.
  • Proof that an adequate consideration has been paid to the corporation (e.g., a canceled check).

In the event the above requirements are not met, approval must be obtained by a Senior Underwriter.

3.68.20

Transfer Of All Assets Of Corporation By Sale Or Mortgage

As a general rule, a corporation may not sell, convey, lease, mortgage, exchange, or otherwise dispose of all or substantially all of its assets except on the authority of a resolution adopted by its Board of Directors, which has the approval, either before or after the adoption of such resolution, of the shareholders entitled to exercise a majority of voting power or if the articles of incorporation or state statutes so require, by a larger proportion of the shareholders.

3.68.21

Use Of Corporate Assets To Finance The Purchase Of Stock Of The Corporate Mortgagor

There is an enormous risk involved when insuring the lien of a mortgage given by a corporation, the proceeds of which are to be used to finance the purchase of stock of the corporation either by a third party stockholder or by the corporation itself.

This type of transaction is subject to be declared INVALID under the provisions of the Federal Bankruptcy Act, and also in certain states, under the provisions of several statutory provisions. See Leveraged Buyouts (11.16).

3.68.90

Company Authority

Stewart Title Guaranty Company may act through its duly authorized employees, designees or named limited agents to perform any act allowed or required by its contracts or by law.