An anticipatory breach of contract is an action that shows one party’s intention to fail to fulfill its contractual obligations to another party. An anticipatory breach can end the counterparty’s responsibility to perform its duties.
Demonstrating the other party’s intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory repudiation.
Key Takeaways
An anticipatory breach, or repudiation, preempts a failure of a party to meet its contractual obligations to another party.
Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court.
The intent to break the contract must be an absolute refusal to fulfill the terms in order for it to qualify as an anticipatory breach.
Understanding Anticipatory Breaches
An anticipatory breach occurs when a party demonstrates its intention to break a contract. However, vocal or written confirmation is not required, and failure to perform any obligation in a timely matter can result in a breach.
By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken.
Compensation Considerations
Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract.
Requirements for an Anticipatory Breach
The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations.
If the anticipatory breach involves the sale of goods, then section 2-609 of the Uniform Commercial Code (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the contract is officially breached.
The requirements for an anticipatory breach can vary. It is a good idea to consult an attorney before taking any action.
Example of an Anticipatory Breach
Let’s say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken.
If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract.
Allocational efficiency, also known as allocative efficiency, is a characteristic of an efficient market where capital is assigned in a way that is most beneficial to the parties involved.
Allocational efficiency represents an optimal distribution of goods and services to consumers in an economy and an optimal distribution of financial capital to firms or projects among investors. Under allocational efficiency, all goods, services, and capital are allotted and distributed to their very best use under allocational efficiency.
Key Takeaways
Allocational or allocative, efficiency is a property of an efficient market whereby all goods and services are optimally distributed among buyers in an economy.
It occurs when parties are able to use the accurate and readily available data reflected in the market to make decisions about how to utilize their resources.
In economics, the point of allocational efficiency for a product or service occurs at the price and quantity defined by the intersection of the supply and demand curves.
Allocational efficiency only holds if markets themselves are efficient, both informationally and transactionally.
An efficient market is always reflected in market prices of goods and services.
Understanding Allocational Efficiency
Allocational efficiency occurs when organizations in public and private sectors spend their resources on projects that will be the most profitable and do the most good for the population, thereby promoting economic growth. This is made possible when parties are able to use the accurate and readily available data reflected in the market to make decisions about how to utilize their resources.
When all of the data affecting a market is accessible, companies can make accurate decisions about what projects might be most profitable, and manufacturers can concentrate on producing products most desired by the general population.
In economics, allocative efficiency materializes at the intersection of the supply and demand curves. At this equilibrium point, the price offered for a given supply exactly matches the demand for that supply at that price, and so all products are sold.
By definition, efficiency means that capital is put to its optimal use and that there is no other distribution of capital that exists which would produce better outcomes.
Requirements for Allocational Efficiency
In order to be allocationally efficient, a market must be efficient overall. An efficient market is one in which all pertinent data regarding the market and its activities is readily available to all market participants and is always reflected in market prices.
For the market to be efficient, it must be both informationally efficient and transactionally or operationally efficient. When a market is informationally efficient, all necessary and pertinent information about the market is readily available to all parties involved in the market. In other words, no parties have an informational advantage over any other parties.
Meanwhile, all transaction costs are reasonable and fair when a market is transactionally efficient. This ensures that all transactions are equally executable by all parties and not prohibitively expensive to anyone. If these conditions of fairness are met, and the market is efficient, capital flows will direct themselves to the places where they will be the most effective, providing an optimal risk/reward scenario for investors.
What Does Allocational Efficiency Mean?
Allocational efficiency is one way to describe the best distribution of goods and services to buyers in a market.
What Is Allocative Efficiency?
Allocative efficiency means the same thing as allocational efficiency, which comes about when services and goods marketed to consumers are distributed in a way that is beneficial not only to the sellers but also to the buyers.
When Does Allocative Efficiency Happen?
The state of allocative efficiency happens when supply and demand are balanced such that the cost for a particular supply exactly lines up with the demand for the product.
Articles of incorporation are a set of formal documents filed with a government body to legally document the creation of a corporation. Articles of incorporation generally contain pertinent information such as the firm’s name, street address, agent for service of process, and the amount and type of stock to be issued. The articles of incorporation are used to legally form the corporation.
Key Takeaways
Articles of incorporation is the documents filed with a government body (usually the state) that signifies the creation of a corporation.
In the U.S., articles of incorporation are filed with the Office of the Secretary of State where the business chooses to incorporate.
Broadly speaking, articles of incorporation include the company’s name, type of corporate structure, and number and type of authorized shares.
While the articles of incorporation are used almost exclusively outside of the company, other documents such as bylaws, operating agreements, or business plans are more useful internally.
By filing articles of incorporation, corporations may gain favorable tax advantages, the ability to issue stock and raise capital, or shield owners from liability.
Understanding Articles of Incorporation
Many businesses in the U.S. and Canada are formed as a corporation, which is a type of business operation that is formed in the state where the company carries out its operations. To be recognized legally as a corporation, a business must incorporate by taking certain steps and making certain decisions required under corporate law. One such step is filing a document known as articles of incorporation.
Articles of incorporation are in the document necessary to register a corporation with a state and acts as a charter to recognize the establishment of a corporation. The document outlines the basic information needed to form a corporation, the governance of a corporation, and the corporate statutes in the state where the articles of incorporation are filed.
Articles of incorporation are also referred to as the “corporate charter,” “articles of association,” or “certificate of incorporation.”
Where to File Articles of Incorporation
In the U.S., articles of incorporation are filed with the Office of the Secretary of State in the state where the business chooses to incorporate. Some states offer more favorable regulatory and tax environments and, as a result, attract a greater proportion of firms seeking incorporation.
For example, Delaware and Nevada attract about half of the public corporations in the U.S., in part because of the state laws that protect their corporations. Once established, the articles become a public record and provide important information about the corporation.
Many states charge filing fees for a business that incorporates in the state, whether the business operates there or not. A business that is incorporated in one state and is physically located or doing business in another state must register in the other state as well, which involves paying that state’s filing fees and taxes.
Depending on the state of incorporation, a company may pay filing fees ranging from $50 (as in Iowa, Arkansas, and Michigan) to $275 (as in Massachusetts) as of 2020. The fees can vary depending on whether the articles of incorporation were filed online or by mail.
Articles of Incorporation Document Requirements
The articles in the document vary by state, but the following items (i.e. “articles” are typically included:
Name of corporation
Name and address of the registered agent
Type of corporate structure (e.g., profit corporation, nonprofit corporation, non-stock corporation, professional corporation, etc.)
Names and addresses of the initial board of directors
Number and type of authorized shares
Duration of the corporation, if it wasn’t established to exist perpetually
Name, signature, and address of the incorporator, who is the person in charge of setting up a corporation
Most states also require the articles to state the firm’s purpose, though the corporation may define its purpose very broadly to maintain flexibility in its operations. Amazon’s certificate of incorporation, for example, states that the corporation’s purpose is “to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.”
Other provisions outlined in a company’s articles of incorporation may include the limitation of the directors’ liability, actions by stockholders without a meeting, and the authority to call special meetings of stockholders. Each state has certain mandatory provisions that must be contained in the articles of incorporation and other optional provisions that the company can decide whether to include.
While domestic companies will submit an article of incorporation, foreign corporate entities must file a certificate of registration to operate in a given state.
Articles of Incorporation vs. Other Documents
Articles of Incorporation vs. Bylaws
While the articles of incorporation are externally-filed formation documents, bylaws are more of use to a company when used internally. Bylaws set the internal processes and organization of how the company should be run. Bylaws outline the rules and procedures for the management of a company. Not all states require a company to maintain bylaws, though many require a company to formally memorialize the bylaws.
Articles of Incorporation vs. LLC Operating Agreement
Articles of incorporation are required state filings to form a corporation, while LLC operating agreements are used exclusively for LLCs. In addition, the articles of incorporation outline the information structure of the company. Meanwhile, operating agreements often outline how internal disputes will be resolved between members or owners. An LLC operating agreement acts more of a personal protection document than the articles of incorporation.
Articles of Incorporation vs. Business License
A business license often permits a company to operate within a specific jurisdiction or industry. It gives the holder the right to start and run a business in the designed geographical location that issues the license. The rights granted by a business license are often more specific and niche than the articles of incorporation; though similar information may be required for both, the articles of incorporation simply legally form an organization and is the highest governing document for a corporation.
Articles of Incorporation vs. Business Plan
A business plan is an internal document that may be shared with major customers, investors, or lending institutions that communicates the formal operating plan of a company. Often a strategic document, a business plan is mainly used by internal management as a roadmap for decision-making. This is in stark contrast of the articles of incorporation which are information-only, non-strategic requirements for legal reasons.
A company should internally maintain a copy of its articles of incorporation request.
Importance of Articles of Incorporation
A corporation should take care when filings its articles of incorporation as these formation documents carry great significance. For starters, they are legally required to structure a new business or company. The corporation can not form and be recognized by the state as a legal business entity until the forms are registered.
Once a business is incorporated, it often has a greater ability to raise capital via stock issuances. A corporation cannot sell stock until is incorporated via the filing of its articles of incorporation. Corporations may also receive more favorable tax treatment compared to individual or personal tax rates.
In addition, there are personal liability considerations for companies being formed. Individuals are often held liable for a company’s obligations until it is incorporated. By forming a legal corporation, business owners may be shielded from some personal liability for the company’s debts. This liability protection cannot occur until the articles of incorporation have been filed.
Example of Articles of Incorporation
The image below captures the first few requirements from the Secretary of State form required by the state of Washington. This form is to be completed and returned to the government agency for review.
Articles of Incorporation, Sample (WA State).
Some sections simply require a check mark for applicability or a ‘yes/no’ mutually exclusive selection. Other areas (such as the purpose of the corporation) require written response. As designated by the top of the form, this specific article of incorporation document template is for specific use for the formation of non-profit corporations.
The Washington State Articles of Incorporation form ends with the certification section in which an incorporator must certify the information given is correct to the best of their knowledge. The incorporator is also required to provide some personal information along with their signature.
Articles of Incorporation, Certification Section (WA State).
The form above had been filed by Parrot Foundation, a Washington nonprofit organization. A snipped of Parrot Foundation’s articles of incorporation has been provided below as an example of the dates, structure, and business purpose a company may request when filing its articles of incorporation.
Parrot Foundation, Articles of Incorporation.
What Is the Purpose of the Articles of Incorporation?
The purpose of the articles of incorporation is to legally form a corporation. The filing submits information to a state agency, and the state agency officially determines whether the corporation can be recognized as a formal company. Once incorporated, the business may receive a number of different benefits (mentioned below) via its status as a corporation.
What Are the Benefits of Filing Articles of Incorporation?
By filing articles of incorporation, a company can officially become incorporated. Once incorporated, the company may receive favorable tax benefits and have the ability to raise capital by issuing stock. In addition, the owners of the corporation have different liability over company debts once a corporation is formed.
How Do You Write Articles of Incorporation?
Articles of incorporation are filed with your state’s Secretary of State office. That department provides a form that requests a variety of information about your newly forming corporation. Upon completing the required fields, the form is submit back to the Secretary of State for review. The state agency that reviews the form will contact you should they have any clarifying questions regarding your information.
Can One Person Submit Articles of Incorporation?
Yes, it is possible to incorporate a business with just one employee. That single owner will be responsible for all aspects of the company. In addition, that sole individual will be the only shareholder. However, they may be listed as the only member on the articles of incorporation.
The Bottom Line
If a company wants to become a corporation, it must file articles of incorporation with its appropriate state agency. This formation document is required as part of the incorporation process, and the articles provide the state a variety of information about the company and its incorporators. Different from other legal documents that outline how a company will operate internally, the article of incorporation is intended to help external parties evaluate and form a corporation.
The 3(c)(7) exemption refers to a portion of the Investment Company Act of 1940 that allows private investment companies an exemption from some Securities and Exchange Commission (SEC) regulation, providing that they meet certain criteria. 3C7 is shorthand for the 3(c)(7) exemption.
Key Takeaways
The 3(c)(7) exemption refers to the Investment Company Act of 1940’s section permitting qualifying private funds an exemption from certain SEC regulations.
Private funds must not plan to issue an IPO and their investors must be qualified purchases to qualify for the 3C7 exemption.
There is no maximum limit for the number of purchasers of 3C7 funds.
In contrast to 3C7, 3C1 funds deal with no more than 100 accredited investors.
Understanding the 3(c)(7) Exemption
The exemption, found in section three of the act, reads in part:
Section 3 (3)(c) Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title: (7)(A) Any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities.
To qualify for the 3C7 exemption, the private investment company must show that they have no plans of making an initial public offering (IPO) and that their investors are qualified purchasers. A qualified purchaser is a higher standard than an accredited investor; it requires that the investor owns not less than $5 million in investments. The term “qualified purchaser” is defined in Section 2(a)(51) of the Investment Company Act.
3C7 funds are not required to go through Securities and Exchange Commission registration or provide ongoing disclosure. They are also exempt from issuing a prospectus that would outline investment positions publicly. 3C7 funds are also referred to as 3C7 companies or 3(c)(7) funds.
The Investment Company Act of 1940 defines an “investment company” as an issuer that “holds itself out as being engaged primarily or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.” 3C7 is one of two exemptions in the Investment Company Act of 1940 that hedge funds, venture capital funds, and other private equity funds use to avoid SEC restrictions.
This frees up these funds to use tools like leverage and derivatives to an extent that most publicly traded funds cannot. The vast majority of new hedge funds, private equity funds, venture capital funds, and other private investment vehicles are organized so as to fall outside the purview of the Investment Company Act of 1940.
That said, 3C7 funds must maintain their compliance to continue utilizing this exemption from the 1940 Act. If a fund were to fall out of compliance by taking in investments from non-qualified purchasers, for example, it would open itself to SEC enforcement actions as well as litigation from its investors and any other parties it has contracts with.
3C7 Funds vs. 3C1 Funds
Both 3C7 and 3C1 funds are exempted from the requirements imposed on “investment companies” under the Investment Company Act of 1940 (the “Act”). However, there are important differences between them. 3C7 funds, as noted, take investments from qualified purchasers, whereas 3C1 funds work with accredited investors.
Investors in 3C7 funds are held to a higher wealth measure than those in 3C1 funds, which can limit the investor pool that a fund is hoping to raise money from. That said, 3C1 funds are capped at 100 investors total, limiting the number of investors the fund can take in from the wider pool they are allowed to pull from.
3C7 funds don’t have a set cap. However, 3C7 funds will fall under the regulation that is stipulated in the Securities Exchange Act of 1934 when they reach 2,000 investors. At this point, private funds are subject to increased SEC scrutiny and have more in common with public companies.
