Reference no: EM133207201

Peter decided to form a corporation that would manufacture and sell disposable hand warmers for sale in cold-weather environments. Before filing articles of incorporation, Peter entered into a contract with XYZ Corporation for the purchase of equipment that would manufacture the hand warmers. The contract provided that the purchase price of $250,000 would be paid in five annual installments, with each installment due on the anniversary of signing. Peter signed the contract "Peter" without any reference to the to-be-formed corporation. Peter thereafter delivered properly prepared articles of incorporation to the Secretary of State. The articles of incorporation identified the name of the corporation as "ABC Corporation". Due to a clerical error in the Secretary of State's office, the articles of incorporation were not filed for an additional thirty days. Before the articles of incorporation were actually filed, the following occurred:

Peter held an organizational meeting at which he and Pritchard and Polly were elected as directors and by-laws were adopted. The three directors then appointed Peter as President; Pritchard as Vice-President; and Polly as Secretary.

Peter leased a manufacturing facility and signed the lease "ABC Corporation, by and through its President, Peter"

ABC Corporation issued 1,000 shares of stock to Peter, 500 shares of stock to Pritchard and 250 shares to Polly. The board of directors decided that the value of each share was $100 and accepted the following consideration from each of the directors for their shares: Peter's patent for the chemical formula that would be used to ignite the hand warmers; a promissory note from Pritchard in the amount of $50,000 payable in annual installments over five years at 5% interest; and a promise from Polly to provide legal services to the corporation in the amount of $25,000 on an as-need basis.

Shortly after the articles of incorporation were filed, Peter realized the articles of incorporation did not provide for pre-emptive rights and proposed an amendment to the articles of incorporation that would give these rights to each of the shareholders. Peter and Polly, in their capacity as directors and also in their capacity of shareholders, voted in favor of the amendment but Pritchard, in his capacity as a director and also in his capacity as a shareholder, voted against the amendment. Although Peter attended the board and shareholder meetings at which the votes were taken, and actually voted at each such meeting, he objected prior to each such meeting that the corporation did not provide the required notice for the meeting.

Four months later, Pritchard realized that the articles of incorporation and by-laws did not place any restriction on the ability of a shareholder to sell his or her stock in the ABC Corporation to an "outsider." Pritchard therefore drafted an agreement, which all three shareholders subsequently signed, which provided that, in the event a shareholder was interested in selling his or her shares to someone else, the shareholder would offer the shares to the other shareholders at the same price. Despite the agreement, Pritchard subsequently sold his shares to Ormond without first offering them to Peter or Polly. Ormond was unaware of the prior agreement between the shareholders regarding the right of first refusal and there was nothing on the share certificates that he received that would alert him to the agreement.

Please discuss the rights and liabilities of the parties to the various events and transactions described above.