Opinion ID: 523161
Heading Depth: 2
Heading Rank: 1

Heading: de facto corporate status

Text: 10 Mississippi law recognizes the concept of de facto corporations. 3 In Allen v. Thompson, 248 Miss. 544, 158 So.2d 503 (1963), the Mississippi Supreme Court established three necessary conditions for de facto corporate status: (1) a valid law under which the entity could be incorporated, (2) a bona fide attempt to organize a corporation under the law, and (3) an actual exercise of corporate powers. 4 Peculiarly, neither the bankruptcy court nor the district court applied Mississippi's test for de facto status to the facts of this case. The issue was not waived. Since the facts are undisputed, we may undertake the task ourselves in the interest of judicial economy. 5 11 Sections 79-3-101 through 79-3-113 of the Mississippi Code, Miss.Code Ann. (1972), satisfy the first requirement, 6 that there be a law enabling the company to incorporate. At the time of Whatley Farms's incorporation, section 79-3-109 provided that: 12 Upon the issuance of the certificate of incorporation, the corporate existence shall begin, and such certificate of incorporation shall be conclusive evidence that all conditions precedent required to be performed by the incorporators have been complied with and that the corporation has been incorporated under this chapter, except as against this state in a proceeding to cancel or revoke the certificate of incorporation or for involuntary dissolution of the corporation. 13 The record also reflects a bona fide attempt to organize the corporation. No simple or talismanic test exists to determine whether a corporation has satisfied this condition. See 8 Fletcher, supra n. 3, Sec. 3796; 18A Am.Jur. 2D Corporations, Secs. 243-48. Rather, we must examine all of the pertinent facts. The test is neither complete performance nor even substantial compliance; however, there must be evidence of at least a colorable attempt to comply with the statutory requirements by taking some of the statutory steps toward incorporation. See 18A Am.Jur. 2D Corporations Sec. 244. 14 The bank argues that the following undisputed facts preclude a finding of de facto corporate status: (1) the failure to pay $1,000.00 into the corporation as initial paid-in capital and the related failure to issue any stock, as required by Miss.Code Ann. Sec. 79-3-111, (2) the failure to hold an initial organizational meeting of the board of directors, as required by Miss.Code Ann. Sec. 79-3-113, (3) the failure to adopt bylaws, and (4) the failure to hold annual shareholders' meetings. To this list may be added the absence of corporate bylaws or of signed minutes for any directors or shareholders' meetings. 15 On the other hand, Whatley Farms had corporate officers. John W. Whatley was president, Ruby Whatley held the dual positions of secretary and treasurer, and the Whatleys' son John served as vice-president. Whatley Farms also filed a certificate of incorporation with the proper authority, the Office of the Chancery Clerk for Humphreys County. Section 79-3-109, quoted above, indicates the critical significance of this fact. Under Mississippi law, such a filing is conclusive evidence that the necessary conditions precedent have been complied with, except as against a challenge brought by the state in a direct proceeding. 7 16 Although there appears to be no Mississippi case precisely on point, we are confident that Mississippi would find a bona fide attempt to organize Whatley Farms, Inc. The facts relied upon by the bank, taken individually or collectively, do not refute our conclusion. First, the Mississippi statutes do not require that a corporation adopt bylaws. Section 79-3-51 states: 17 The initial bylaws of a corporation shall be adopted by its board of directors. The power to alter, amend or repeal the bylaws or adopt new bylaws shall be vested in the board of directors unless reserved for the shareholders by the articles of incorporation. The bylaws may contain any provisions for the regulation and management of the affairs of the corporation not inconsistent with law or the articles of incorporation. 18 Thus, section 79-3-51 authorizes the board of directors to adopt the initial set of corporate bylaws, but the statute does not require their adoption or indicate any penalty for this failure. 19 Likewise, Mississippi courts have held on several occasions that failure to comply with the paid-in capital requirement does not, of itself, preclude a finding of de facto corporate status. In Quinn v. Woods, 134 Miss. 621, 99 So. 510 (1924), the Home Securities Company began operating before twenty-five percent (25%) of the authorized capital stock had been issued and the monies paid into the corporate treasury. 8 At that time Mississippi law provided that [a]ny corporation hereafter chartered ... is hereby authorized to begin business when so much as twenty-five (25%) per centum of the authorized capital stock shall have been paid into the treasury of the corporation.... The evidence indicated that a charter had been granted to the Home Securities Company, and a proper report was made to the secretary of state. The charter, however, was never filed for record in the county. The Mississippi Supreme Court held that the payment of twenty-five percent (25%) of the capital stock was a condition subsequent to the formation of the corporation and thus did not invalidate the corporate status of the Home Securities Company. Quinn drew a sharp distinction between conditions precedent and conditions subsequent. Where a statutory requirement for incorporation is a condition subsequent, failure to comply is less fatal to a finding of de facto status. Quinn v. Woods, 99 So. at 511. Accord Skarda v. Commissioner of Internal Revenue, 250 F.2d 429 (10th Cir.1957). This position was reaffirmed in Allen v. Thompson, 158 So.2d 503, and In re Estate of Hardin, 218 So.2d 889 (Miss.1969). 20 In a similar vein, the Mississippi Supreme Court has held that a corporation's failure to comply with its own bylaws does not necessarily imperil the corporate existence. In Smith v. Natchez Steamboat Co., 1 How. (2 Miss.) 479 (1837), the court held that neither the failure to hold shareholders' meetings as required in the bylaws, nor the additional failure to elect officers at times specified in the bylaws, would require the dissolution of the corporation. In fact, Miss.Code Ann. Sec. 79-3-53 (1972) specifically states that [f]ailure to hold the annual meeting at the designated time shall not work a forfeiture or dissolution of the corporation. 21 In analyzing the facts of this case, we are mindful that 22 [s]ubstantial compliance with the [incorporation] statutes is not necessarily required for de facto corporate existence. There must, however, be at least a colorable compliance with statutory requirements by taking some of the statutory steps. 23