It is assumed that all Corporations are formed for any lawful business purpose unless the articles define a limited, specific purpose.
❌ Ultra Vires acts: If a Corporation has a limited stated purpose and it acts outside its stated business purpose, it is acting "ultra vires".
At common law, an "ultra vires" contract could be voided.
Modernly, "ultra vires" acts are generally enforceable as to 3rd parties.
Ultra vires acts may be raised when:
1️⃣ The "ultra vires" act causes the State to seek dissolution;
2️⃣ The Corporation sues an Officer/s or responsible manager/s or employee/s (presumably who has purported to act on behalf of the Corporation in committing the ultra vires act) for losses caused by the ultra vires act; or
3️⃣ A Shareholder sues to enjoin (or urgently stop - usually via an injunction) the proposed ultra vires act.
Corporations may borrow funds from outside sources to pursue the corporate purpose.
Lenders do not acquire an ownership interest in the Corporation.
Debts may be secured (a bond) or unsecured (a debenture).
A Stock Subscription Agreement is a contract where a subscriber makes a written promise agreeing to buy a specified number of shares of stock.
A post-incorporation subscription creates a contract between the subscriber and the Corporation.
The contract is formed when the Board accepts the offer, therefore:
✅ A post-incorporation subscription is revocable until acceptance by the Board.
A pre-incorporation subscription is irrevocable for 6 months unless:
✅ Otherwise stated in the agreement; or
✅ All subscribers agree to revocation.
Shares of Stock are equity securities that give the shareholder an ownership interest in the Corporation.
Quantity of shares available: The articles of incorporation authorise the number of shares available to be sold.
Shares that are sold are issued and outstanding.
Shares that have yet to be sold are authorised but unissued.
Types of Shares: The Articles of Incorporation can provide that different classes of stock shares are available (common or preferred).
Preferred shares must state:
✅ The number of shares in each class;
✅ A distinguishing name/classification for each class; and
✅ The rights, preferences, limitations, etc., of each class.
Consideration is required in exchange for stock shares and can include any tangible or intangible property or benefit to the Corporation, such as cash, property, an exchange for past services rendered, or cancellation of a debt owed, etc.
The Board determines the value of the property, past services, etc.
The Board's valuation is conclusive, so long as it was made in good faith.
Jurisdictions are split as to whether to include the exchange for future services or promissory notes, that is, unsecured debt (e.g., the Revised Model Business Corporation Act (RMBCA) does allow these; *CA does not).
💡 Purporting to use invalid forms of consideration results in “unpaid stock” (meaning it is treated as water).
The Corporation will seek recovery for the value of the unpaid stock or water from:
✅ The Directors if they knowingly authorised the issuance of stock for invalid consideration; and potentially
✅ The purchaser of the stock (if they had notice that their consideration was invalid, or have not yet performed the future services, etc).
Traditional par value approach means the price is the stated minimum issuance price. Stock may not be sold by the Corporation for less than par value.
💡 Whenever a par price has been set, watch for watered stock.
The Corporation will seek recovery for the value of the unpaid stock or "water" from:
✅ The Directors, if they knowingly authorised the issue of stock for less than the par value.
✅ The purchaser of the stock (there is no defence; the purchaser is charged with notice of the par value.)
❌ If the purchaser transfers the shares to a third-party (TP). TP is not liable if they did not know about the water.
Board's good faith: No par approach means there is no minimum issuance price for the stock; generally the board of directors' good faith determination of the price is conclusive.
Treasury Stock: is the stock that was previously issued and had been reacquired by the Corporation. It can be resold for less than par value and is treated like no par stock.
This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.
This FAQ is intended for general interest + information only.
It is not legal advice, nor should it be relied upon or used as such.
We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.