Enforcing Informal Promises In Corporate Formation Disputes
Informal preincorporation equity promises fail against statutory board authorization requirements, converting ungrounded ownership claims into cash restitution.
Section 152
Meaning
A statutory provision in corporate law governs the authority of the board of directors to issue shares of stock and determine the consideration received for them. Adhering to Section 152 ensures that the corporation receives sufficient value before shares are legally issued. This regulation protects the equity structure of the venture from unauthorized dilution.
Board Valuation
Directors must formally evaluate the adequacy of any non-cash assets received in exchange for equity. Under Section 152, the judgment of the board of directors regarding the value of such consideration is conclusive in the absence of actual fraud. This protection gives the board the legal authority to accept intellectual property or equipment as payment for stock.
Investor Protection
Securing the company against the issuance of unpaid shares minimizes future capitalization disputes. Compliance with Section 152 guarantees that all outstanding equity is fully paid and non-assessable, providing confidence to subsequent venture capitalists. This status is verified during institutional funding rounds.
Compliance Cost
Documenting these board decisions demands precise administrative hours and legal fees. If a startup issues equity without the necessary board resolution under Section 152, the issued shares may be deemed void or voidable, which requires expensive retroactive corporate actions to correct. This operational demand consumes the attention of founders who must maintain pristine corporate records to avoid jeopardizing future capitalization events and investor relations.