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238 Cards in this Set

  • Front
  • Back
What are the 3 general formation requirements for a New York Corporation?
People, Paper, and Acts
Who can be an incorporator?
Only flesh and blood human beings
Required number of incorporators
1 or more
What do incorporators do?
(1) Execute the certificate and deliver it to the Department of State
(2) Hold an organizational meeting
What's the effect of a certificate of incorporation?
(1) Acts as a contract between corporation and shareholders
(2) Acts as a contract between corporation and state
What information must the certificate of incorporation include?
(1) Name and Address
(2) Statement of Duration
(3) Corporate Purpose
(4) Capital Structure (Stock)
What words must the corporate name include?
Corp., Inc., or Ltd.
What address must be included in the certificate?
The County in New york of the office of corporation.
Does the office of corporation need to be a place of business?
No
Who must be designated as the corporation's agent for service of process?
The New York Secretary of State
Must the corporate address also be provided for service of process purposes?
Yes
Does the corporation have to name an additional registered agent for service of purpose?
Does not have to, but it can
What information regarding the incorporators should the certificate contain?
The name and address of each incorporator
Does the corporation have to include a statement of duration in the certificate?
No. But if silent, the corporation has perpetual existence
What is the effect of an ultra vires contract?
(1) Ultra vires contracts are valid
(2) Shareholders can seek injunctions
(3) Responsible managers are liable to the corporation for ultra vires losses
What is authorized stock?
The maximum number of shares the corporation can sell
What is issued stock?
Number of shares the corporation actually sells
What is outstanding stock?
Stock that the corporation has sold and has not reacquired
What information regarding a corporation's capital structure is required in the certificate?
(1) Authorized stock
(2) Number of shares per class
(3) Information on par value, rights, preferences, and limitations of each class
(4) Information on any series of preferred shares
What are the requirements of a corporation's capital structure?
At least one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights
What are the steps necessary to establish a de jure corporation?
(1) Each incorporator must sign and acknowledge the certificate before a notary
(2) Certificate must be delivered to the NY Department of State
(3) Certificate will be filed by the Department if it conforms to the law and fees are paid.
What is the effect of the filing of the certificate of incorporation?
Acts as conclusive evidence of valid formation
When is the organizational meeting held?
After filing of the certificate
What is the purpose of a corporation's organizational meeting?
(1) To adopt any bylaws
(2) To elect the initial directors
What happens after the initial directors are elected?
The board takes over the management of the corporation
What law governs the internal affairs of a New York corporation?
New York State Law. Even if the corporation does business internationally
What are the powers of a corporation?
(1) Enter contracts, transfer property, buy and sell securities, and sue or be sued
(2) Corporations can make political contributions, but no more than $5,000 per year, per candidate or organization
(3) Corporations can make charitable contributions
(4) Corporations can guaranty a loan that is not in furtherance of corporate business BUT O
Y if approved by 2/3 of voting shares
Who is liable for a corporation's actions?
The corporation
What kind of liability do shareholders have for a corporation's actions?
Limited liability, and liable only for the price of their stock.
Are directors and officers personally liable for the corporation's actions?
No
What are the requirements for a de facto corporation?
(1) There must be a relevant incorporation statute
(2) Parties made a good faith, colorable attempt to comply with the statute, and
(3) The business is being run as a corporation
Does New York Business and Corporation Law recognize de facto corporations?
No.
Exception: Where Department of State fails to file without rejecting the certificate
What is a corporation by estoppel?
Where one dealing with a business as a corporation, treating it as a corporation, may be estopped from denying the business' corporate status.
This is abolished in New York
Are corporate bylaws required for a corporation?
No, but they are indispensable
What are corporate bylaws?
They are internal documents and outsiders are not bound by them
Which governs if the bylaws are inconsistent with the certificate of incorporation?
The certificate
Who initially adopts the bylaws?
The incorporators at the organizational meeting
Who can amend the bylaws?
(1) Shareholders can amend, repeal, or adopt new bylaws
(2) The board can amend bylaws only if the certificate or a shareholder bylaw allows it
Who is a promoter?
A person acting on behalf of a corporation not yet formed
What can a promoter do?
Enter into contracts with a 3rd party on behalf of the corporation-not-yet-formed
When is a corporation liable for pre-incorporation contracts?
Only if the corporation adopts the contract after formation
How can a corporation adopt a pre-incorporation contract?
(1) Express Adoption: via board action
(2) Implied Adoption: if the corporation knowingly accepts a benefit of the contract
When is a promoter's liability for a pre-incorporation contract extinguished?
Only when there is a novation of the contract and the corporation replaces the promoter.
What happens to the promoter in regards to a pre-incorporation contract if the corporation does not form?
The promoter remains liable for the contract
What happens if the corporation adopts a pre-incorporation contract but does not replace the promoter via novation?
Both promoter and the corporation are liable
What is the Secret Profit Rule?
A promoter cannot make a secret profit on her dealings with the corporation
What happens if the promoter violates the Secret Profit Rule?
Promoter is liable, and must account for the profit and return it to the corporation
How is the profit calculated if a promoter sells property to the corporation that he/she acquired prior to becoming a promoter?
Profit = Price Paid by Corporation – Fair Market Value
How is the profit calculated if a promoter sells property to the corporation that he/she acquired after becoming a promoter?
Profit = Price Paid by Corporation – Price Paid by Promoter
What must foreign corporations do to qualify to do business in New York?
Must apply and pay fees to the New York Department of State and designate the Secretary of State as agent for service of process
What information must a foreign corporation submit in order to qualify in New York?
(1) Information from its home state certificate and
(2) Proof of good standing in its home state
What is an unqualified foreign business not allowed to do in New York?
Cannot sue until it qualifies
What is the definition of issuance of stock?
When a corporation sells its own stock
What is the consequence of an investor owning stock?
The investor becomes an owner of the corporation, and a holder of an equity security
What is the consequence of an investor acquiring a corporate bond?
The investor becomes a creditor and holds a debt security
What is a debenture?
A loan the repayment of which is not secured by corporate assets
What is a subscription?
A written, signed offer to buy stock from the corporation
Can a pre-incorporation subscription be revoked?
If written and signed prior to incorporation, it is irrevocable for 3 months.
Exception: subscription provides otherwise or all subscribers agree to allow revocation
Can a post-incorporation subscription be revoked?
Yes, it can be revoked until it is accepted by the corporation's board
Can a corporation discriminate its sale of subscriptions?
No. Sale has to be uniform within each class or series of stock.
What happens if a corporation accepts the offer, but subscriber defaults on the payment?
(1) If less than half of purchase price has been paid and failure to pay within 30 days of written demand, the corporation can retain the money paid and cancel shares. Then the stock becomes authorized and unissued.
(2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, corporation must try to sell stock to someone else for cash.
What happens if the corporation seeks to sell stock to another person for cash due to a subscriber's default after paying half or more of the stock price?
If the corporation finds someone to pay for the remaining balance, the stock becomes authorized and unissued.
If someone purchases for more than the remaining balance, the defaulting subscriber recovers any excess over what she agreed to pay.
What form of consideration can a corporation receive when issuing stock?
(1) Money
(2) Tangible or Intangible Property
(3) Services already performed for the corporation, including services performed in forming the corporation
(4) Binding obligation to pay in the future in money or property (a note)
(5) Binding obligation to perform future services having an agreed value
What is the consequence of paying an issuance of stock with improper form of consideration?
The stock becomes unpaid, and is treat like water
What is the proper amount of consideration that must be paid for par value stock?
The value of consideration must at least meet the par value.
Who determines the value of consideration for purposes of payment for stock?
The board
What is the proper amount of consideration that must be paid for no par value?
There is no minimum issuance price. It can sell for any amount
What is treasury stock?
Stock previously issued that has been reacquired by the corporation.
It is treated as no par value stock
What is watered stock?
Stock that is issued for less than par value
What are the consequences of issuing watered stock?
(1) Director is liable for the water if there was knowing authorization of the issuance
(2) Stock purchaser is strictly liable for buying watered stock
(3) A bona fide third party purchaser of water stock is not liable
What is a shareholder's pre-emptive right?
It is an existing shareholder's right to maintain the same percentage of ownership whenever there is new issuance of common stock for MONEY
Is there an inherent pre-emptive right for shareholders?
No, the certificate must explicitly grant the pre-emptive rights, otherwise it is nonexistent.
Does new issuance include sale of treasury stock?
Only if the certificate explicitly states so
Does new issuance include sale of shares authorized by the original certificate and sold within 2 years of formation?
Only if the certificate explicitly states so
How are the number of directors established?
(1) In the bylaws
(2) By a shareholder act (3) By the board if a shareholder bylaw allows.
NOTE: if the number is not set in any way, there will only be one director
Who elects the initial directors?
The incorporators
Who elects the directors after the initial election?
The shareholders at the annual meeting
Do new directors have to be elected each year?
No. A certificate or shareholder bylaw can establish a classified board of directors with 2, 3, or 4 classes of directors, with one class elected each year.
How can shareholders remove a director prior to the expiration of his term?
By showing cause
How can the board remove a director prior to the expiration of his term?
By showing cause and only if the certificate or shareholder bylaw allows it.
Can the board ever remove a director prior to the expiration of his term?
Only if the certificate or shareholder bylaw allows it.
What is the rule regarding the filling of board vacancies?
If there is a vacancy on the board, generally the board selects the person who will serve the remainder of the term
Exception: If director is removed by shareholders without cause, then shareholders select person to serve remainder of term
When is a board's action valid?
Only by unanimous written consent, or a meeting
Invalid acts are void unless ratified by a valid act
Does a meeting need to be in New York or in person?
No, and no. Can be anywhere, even by conference call
Are there notice requirements for regular board meetings?
No notice requirements if the time and place are set in the bylaws
Are there notice requirements for special board meetings?
Yes, must state time and place. However, no need to state purpose.
What is the effect of a notice defect for board meetings?
Any action taken at the meeting is void unless the director that was no given notice waives the notice defect.
How can a director waive the notice defect of a meeting?
(1) In writing and signed at any time; or
(2) By attending the meeting without objection
Are proxies allowed for director voting in a meeting?
No. This is void as against public policy.
Can directors enter into agreements on how they will vote as directors?
No. Voting agreements are not allowed
What is a quorum?
The minimum number of members of the board that need to be present to do business.
The quorum requires a majority of the entire board to be present, and the board constitutes all of the available directorship positions
Can the quorum be modified?
(1) Corporation can decrease quorum by certificate or bylaws, but never fewer than 1/3 of the entire board;
(2) Corporation can increase the quorum to greater than majority but only if the certificate allows it
Can a corporation decrease the voting requirement for board action?
Never
Can the corporation increase voting requirement to a supermajority to pass a resolution?
Only if the certificate allows it
What is the general role of the Board of Directors?
To manage the business of the corporation
Can the board delegate substantial management functions to a committee of directors?
Yes. If allowed by certificate or bylaws, a majority of the entire board can delegate substantial management functions to a committee of one or more directors.
Limitation: Cannot delegate all powers and responsibilities
What are the limitations of a committee of directors?
(1) Cannot set director compensation
(2) Cannot fill a board vacancy
(3) Cannot submit a fundamental change to shareholders
(4) Cannot amend bylaws
What is the standard for the duty of care?
A director must discharge her duties in good faith and with the degree of diligence, care, and skill, that an ordinarily prudent person would exercise under similar circumstances in a like position
Is a director subject to the duty of care standard for nonfeasance?
Yes, but he is only liable if his breach caused a loss to the corporation
What is required for a business decision to escape scrutiny from a court?
The Business Judgment Rule states that a court will not second-guess business decisions if they were made:
(1) In good faith
(2) Reasonably informed, and
(3) Under a rational basis.
Essentially: directors must show that there was analysis and deliberation behind the decision
What is the standard for the duty of loyalty?
A director must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries.
When is the duty of loyalty usually implicated?
In a conflict of interest issue
What is an interested director transaction?
Any transaction between a corporation and one of its directors
When is an interested director transaction valid?
(1) Deal was fair and reasonable to the corporation when approved; OR
(2) The material facts and her interest were disclosed or known; and the deal was approved by any of the following:
a. Shareholder action
b. Board approval by a sufficient role not counting the votes of interested directors
c. Unanimous vote of disinterested directors if disinterested directors are insufficient to take an act of the board
Do interested directors count toward a quorum of the board?
Yes
Can the board set the compensation of directors?
Yes, but the compensation must be reasonable and in good faith. If excessive, it is deemed a waste of corporate assets.
Can stock options be offered to people in the company as incentive to service?
Yes, but if the stock is unlisted on a stock exchange, it must be approved by shareholders.
Can a director compete with her corporation?
No. If she does, the corporation gets a constructive trust on the director's profits.
What must the director do if she encounters a corporate opportunity?
She cannot usurp it.
She must inform the board and wait for the board to reject the opportunity for her to take it
What happens if the director usurps a corporate opportunity?
The corporation gets a constructive trust on the director's profits
When is the only time a board can loan a director corporate funds or guaranty a director's personal obligation?
If the board finds that it benefits the corporation
General Rule: A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records
How must a director express her dissent in the corporate records?
(1) In writing in the minutes,
(2) In writing to the corporate secretary at the meeting; or
(3) A registered letter to the secretary promptly after adjournment
What are some exceptions to the director dissent rule?
(1) If director was absent due to illness, she may register written dissent within a reasonable time of learning of the action;
(2) Good faith reliance on information, opinions, reports, or statements by:
a. Officers or employees of the corporation whom the director or officer believes competent and reliable,
b. Lawyers or public accountants whom the director or officer believes are acting within their competence, or
c. A committee of which the person relying is not a member, as to matters within its designated authority
What duties do officers owe to the corporation?
Duties of care and loyalty
Can officers bind the corporation?
Officers are agents of the corporation, and they can bind it if they have authority
Who selects/removes officers?
The board, unless the certificate allows shareholders to elect them.
If the shareholders are allowed to elect, then the shareholders are allowed to remove.
Generally, who hires and fires directors?
The shareholders, but they do not hire and fire officers unless the certificate allows it.
When is an officer or director that was sued prohibited from being reimbursed by the corporation?
If the officer or director was held liable to the corporation
When is an officer or director that was sued entitled to reimbursement from the corporation?
If the case was successfully defended on the merits or otherwise.
What can the officer or director do if the corporation refuses to reimburse the director or officer for rightfully entitled to reimbursement?
He can sue, but the legal fees are not reimbursable.
What is permissive reimbursement of legal fees to a director or officer?
Corporation may still reimburse director or officer as long as he can show that (1) he acted in good faith; and (2) for a purpose reasonably believed to be in a corporation's best interest.
Can permissive reimbursement include settlement amount expenses and attorney's fees?
Yes
Who determines the eligibility of permissive reimbursement for legal costs?
(1) The Board (with a quorum of non-party directors); or, if there is no such quorum,
(2) Shareholders or a quorum of those directors who are disinterested; or
(3) The Board pursuant to report from independent legal counsel.
Can a court order reimbursement of a director or officer?
Yes
Can a corporation advance litigation expenses to a director or officer?
Yes, but officer or director must repay if not entitled to reimbursement
Can the certificate eliminate director liability to the corporation or shareholders for damages for breach of duty?
Yes. Exceptions:
(1) Acted in bad faith,
(2) With intentional misconduct,
(3) Received an improper financial benefit,
(4) Approved an unlawful distribution or loan
Can shareholders manage the corporation?
Generally no, but there are two exceptions:
(1) In a close or closely held corporation; or
(2) In a professional service corporation
What is a close corporation?
1. A corporation that has few shareholders; and
(2) Stock not publicly traded
How is management established in a close corporation?
(1) Provision or certificate restricting or transferring board power to shareholders;
(2) All incorporators or shareholders must approve it;
(3) It is conspicuously noted on front and back of all shares;
(4) All subsequent shareholders have notice; and
(5) Shares are not listed on an exchange or regularly quoted over-the-counter
Who owes the duties of care and loyalty in a corporation run by shareholders?
The shareholders themselves. Especially to minority shareholders
How can members of a licensed profession practice the profession through a corporation?
They cannot practice through a general business corporation, so they must form a professional service corporation, abbreviated as P.C.
Are shareholders liable for corporate acts?
Generally no.
When can a court pierce the corporate veil and find shareholders personally liable for corporate acts?
In a close corporation, where:
(1) Shareholders abused the privilege of incorporating; and
(2) Fairness requires holding them liable
What are some examples where the corporate veil can be pierced?
(1) Alter Egos: where a managing shareholder commingles personal and corporate funds.
(2) Undercapitalization / Underinsuring: Shareholders fail to invest enough to cover prospective liability
Who is personally liable for wages and benefits of a close corporation's employees?
The top ten largest shareholders
What is a shareholder derivative suit?
A suit brought by a shareholder in order to enforce the corporation's claim, not her own.
What are some examples of shareholder derivative suits?
Usurping of corporate opportunities
Waste of corporate assets
Generally any breach of the duty of loyalty
What are the consequences of a successful shareholder derivative suit?
(1) Corporation receives damages;
(2) Shareholder who brought suit receives costs and attorney's fees;
Shareholder might recover if granting damages to the corporation might reward those who harmed it in the first place
What are the consequences of an unsuccessful shareholder derivative suit?
(1) Shareholder cannot recover costs and expenses;
(2) Shareholder might be liable to defendant for their costs;
(3) Other shareholders are precluded from suing the same defendants on the same transaction
What are the requirements to bring a shareholder derivative suit?
(1) Stock ownership when the claim arose and when the action is brought;
(2) Shareholder must adequately represent the interests of the corporation and the shareholders;
(3) Shareholder can be required to post a bond for the defendant's costs;
(4) Shareholder must make a demand on directors that the corporation sue, unless that demand would be futile;
(5) Plaintiff must plead with particularity her efforts to get the board to sue, or why that demand was futile;
(6) Corporation must be joined in the litigation as a defendant
When would a demand on directors that the corporation sue be deemed futile?
(1) If the majority of the board is interested or under the control of interested directors; or
(2) The board did not inform itself of the transaction to the extent reasonable under the circumstances; or
(3) The transaction is so egregious on its face that it could not be the result of sound business judgment
Can a corporation move to dismiss a shareholder derivative suit?
Yes
How can a corporation move to dismiss a shareholder derivative suit?
Based on a finding by independent directors, or a committee of independent directors (AKA a special litigation committee) that the suit is not in the corporation's best interests
What factors will the court consider to determine whether to dismiss a shareholder derivative suit?
(1) The independence of those investigating; and
(2) The sufficiency of their investigation
What do the parties need in order to dismiss or settle a shareholder derivative suit?
Court approval
Do directors or officers need to meet the derivative requirements in order to sue?
No, they may sue in their own name
In regards to shareholder voting, who has the right to vote?
The record owner as of the record date
Who is the record owner?
The person shown as the owner in the corporate records
What is the record date?
A voter eligibility cut-off that is set to no fewer than 10 and no more than 60 days before a meeting
Example: Corporation sets annual meeting for July 7 and record date for June 6. If S sells B her stock on June 25, S is still entitled to vote the shares at the meeting because she owned it on June 6
EXCEPTIONS:
If corporation reacquires stock prior to record date, it cannot vote treasury stock.
If record owner dies after the record date, record owner's executor votes the shares.
Proxies are allowed for shareholder voting
What are the requirements for a shareholder voting proxy?
(1) A writing,
(2) Signed by record shareholder or authorized agent,
(3) Directed to secretary of corporation,
(4) Authorizing another to vote the shares
How long does a shareholder voting proxy last?
11 months unless otherwise stated
Can shareholder voting proxies be revoked?
Generally, at any time
Can a shareholder voting proxy be revoked if it says it is irrevocable?
Yes, even if it says it is irrevocable, a shareholder voting proxy is revocable.
When is the only time a shareholder voting proxy can be irrevocable
Only when it states that it's irrevocable, and proxy-holder has some interest in the shares other than voting
What are the requirements to establish a voting trust?
(1) Written trust agreement controlling how the shares will be voted;
(2) Copy to corporation;
(3) Transfer of legal title of shares to voting trustee; and
(4) Original shareholders receive voting trust certificates and retain all shareholder rights except for voting
What is the time limit on voting trusts?
10 year maximum
What are the requirements to establish a voting agreement?
(1) Shareholders can enter into agreements (but not directors);
(2) Must be in writing and signed;
(3) Voting agreements are not specifically enforceable;
(4) Proxies given subject to a voting agreement are not revocable
What are the only two ways in which shareholders can take a valid act?
(1) Written consent signed by the holders of all voting shares; or
(2) In a meeting
What the kinds of shareholder meetings available?
(1) Annual Meeting
(2) Special Meeting
How many votes are required at an annual shareholder meeting to elect a director?
A plurality of votes.
Who can call a special shareholder meeting?
The Board, or anyone specified in the certificate or bylaws
What are the general notice requirements for a shareholder meeting?
Written notice required to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting.
Must contain time and place of meeting
Is there a notice requirement if a proposed shareholder meeting would implicate shareholder appraisal rights?
Yes, it must be stated in the notice.
What must be stated in the notice of a special shareholder meeting?
The person who called it, and the purpose of the meeting.
What can be done at a special shareholder meeting?
Only the purpose stated in the notice. Nothing else is allowed.
What is the effect of a notice deficiency for a shareholder meeting?
The meeting is void.
EXCEPTION: If those who didn't receive the notice waive the notice defect
(1) Expressly in writing and signed at any time; or
(2) Impliedly by attending the meeting without objection
What is a requirement for shareholder voting at a meeting?
A quorum must be represented at the meeting
How is a quorum calculated for a shareholder voting meeting?
Determined by the number of shares represented, not the number of shareholders.
A majority of the outstanding shares is required.
After a quorum is met in a shareholder voting meeting, how many votes are required in order to bind the corporation?
A majority of the shares ACTUALLY voting
Can the certificate or a bylaw modify quorum requirements for shareholder meetings?
The certificate or bylaw can reduce quorum to less than majority, but never fewer than 1/3 of the shares entitled to vote.
HOWEVER, the requirement of majority approval can never be reduced
What are two shareholder meeting requirements that can only be modified by the certificate?
(1) Certificate can require a supermajority of the shares entitled to vote to be represented to constitute a quorum.
(2) Certificate can require a supermajority of the vote of the shares at the meeting to pass a resolution
Can a quorum be lost at a shareholders' meeting if people leave the meeting?
If it was established, quorum is not lost even if people leave
Is cumulative voting allowed at shareholder meetings?
Only if the certificate grants it.
If it is allowed, when is cumulative voting available?
Only when shareholders are voting to elect directors.
What is cumulative voting?
It is a device available to help small shareholders get representation on the board.
The shareholder essentially gets a total number of voting shares equal to the number of shares she owns multiplied by the number of directors to be elected.
This total can be used by the shareholder as seen fit.
What's the proper amount of consideration if a shareholder wants to sell stock?
Shareholder can sell stock for less than par value because par value is an issuance rule.
How are stock transfer restrictions set?
Restrictions can be set in the certificate, bylaws, or by agreement
What's the key limitation to setting stock transfer restrictions?
Undue restraints on alienation are not allowed. Otherwise, reasonable stock transfer restrictions will be upheld.
Is a corporation's right of first refusal a reasonable stock transfer restriction?
Acceptable as long as the price offered is reasonable.
Even if a stock transfer restriction is valid, when can it not be invoked against the transferee?
(1) If it is not conspicuously noted on the stock certificate; or
(2) The transferee did not have actual knowledge of the restriction
Can a shareholder demand access to the minutes of shareholder proceedings and the record of shareholders?
Yes, upon 5 days' written demand.
However, Corporation can demand the shareholder to give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders. The corporation cannot demand more detail than that in the affidavit.
If shareholder refuses to furnish the affidavit, access can be denied.
Can a shareholder demand a list of current directors and officers?
Yes, on 2 days' written demand.
No affidavit necessary
Can a shareholder demand the latest annual balance sheet, profit and loss statement, and latest interim statement distributed to shareholders or the public?
Yes, must make a written request. Corporation must provide documents (mail is acceptable)
What is a shareholder's common law right to inspect?
Unclear what documents the right covers.
However, all shareholders should have a right to inspect records at a reasonable time and proper place for a proper purpose which is related to her role as a shareholder.
Does a director have a right to inspect?
Yes, the director has unfettered access to corporate books and records
What are the types of payments that a corporation can provide for shareholders?
(1) Dividends;
(2) Payment to repurchase shares; or
(3) To redeem shares (forced sale to corporation at price set in certificate)
Does a shareholder have a right to distribution?
No such right until it is declared in the Board's discretion
When will the court interfere with a Board's discretion to order distribution?
Only on a showing of the corporation's bad faith or dishonest purpose. Otherwise, there will not be an interference
How is a distribution different from a stock split?
Stock split will give shareholders more shares, but lessen the value of each share proportionally
List the order of payment according to the stock dividend hierarchy
(1) Preferred Stock
(2) Preferred stock that is participating gets pooled in with the Common Stock
(3) Cumulative stock gets paid for the years where dividend was not paid, including the current year
(4) Common stock gets paid last
Can surplus be used for distributions?
Yes.
Surplus = Assets – Liabilities – Stated Capital
Can the stated capital be used for distributions?
No.
Par value x Number of Shares goes to Stated Capital. Any remainder above that goes to surplus
How is consideration allocated for a no par issuance?
It is allocated within 60 days of issuance, and the Board can allocate any part, but not all to surplus
When can a corporation not make distributions?
If it is insolvent or if distribution would render it insolvent
What is the definition of insolvency?
When a corporation is unable to pay its debts as they come due in the ordinary course of business
Who is personally liable for an unlawful distribution?
(1) Directors, and
(2) Shareholders who knew the distribution was unlawful upon receipt
Can an unlawful distribution give rise to a shareholder derivative suit?
Yes, since it harms the corporation.
What's a possible director defense against an unlawful distribution claim?
That there was good faith reliance
Where are redemptions set?
In the certificate, and must be done proportionately within each class of stock.
Can corporations discriminate in repurchases?
Yes, they are negotiated individually.
EXCEPTIONS: In close corporations. They may have to give equal opportunity to shareholders
What are fundamental corporate changes?
Changes that are so fundamental that most of them require both that the directors and shareholders approve.
The Department of State must also be notified by delivering a document.
What is a shareholder's right of appraisal?
It is a shareholder's right to force the corporation to buy their stock at fair value
When does a dissenting shareholder's right of appraisal attach?
(1) Amendment to certificate
(2) Consolidation
(3) Corporation merges into another corporation
(4) Corporation transfers substantially all of its assets, or
(5) Corporation's shares are acquired in a share exchange
What happens to the right of appraisal if the corporation's stock is publicly traded?
It is nonexistent.
How is the right of appraisal perfect?
(1) Before a shareholder vote, file a written objection and inform the corporation about the intent to demand payment;
(2) Abstain or vote against proposed change; and
(3) After vote, make a written demand to be bought out
Is there such a thing as a minority discount in New York for a shareholder's right of appraisal?
No. So the court will not discount value to reflect that minority shares may be less than controlling shares
Who can make minor amendments to the certificate of incorporation?
The Board can do it alone
What's required to make non-minor amendments to the certificate of incorporation?
Approval by (1) Director action, and (2) Majority of the shares entitled to vote
What is required if an amendment will change or strike a supermajority quorum or voting requirement for shareholder voting?
(1) Director approval; and
(2) 2/3 of the shares entitled to vote
When does a dissenting shareholder's right of appraisal attach in relation to amendments to the certificate of incorporation?
(1) Alteration or abolition of a preference;
(2) Changing of Redemption Rights;
(3) Alteration or abolition of a preemptive right, or
(4) Limiting voting rights
What's the difference between a merger and a consolidation?
Merger means one corporation is absorbed into another one.
Consolidation is when two corporations form a third one.
What are the general requirements for a merger or a consolidation?
Each company's board of directors adopts a plan of merger or consolidation; and
Each corporation's shareholders must approve
What is a short-form merger?
Where a parent corporation owns 90% or more of each class of stock of a subsidiary, and that subsidiary is then merged into the parent company.
No shareholder approval is required for such a merger.
Does a dissenting shareholder's right of appraisal exist in a merger or consolidation?
Only for shareholders of the disappearing corporation. Even in short-form mergers
What happens to corporate liability after a merger or consolidation?
The surviving corporation succeeds to all rights and liabilities of the disappearing corporation
What's the effect of a complete or near-complete transfer of shares not in the ordinary course of business or during a share exchange?
They are fundamental corporate changes for the selling corporation only.
What are the requirements for a complete or near-complete transfer of shares not in the ordinary course of business or during a share exchange?
(1) Each corporation's board of directors authorizes the deal, and
(2) Approval by selling corporation's shareholders (a majority
Is there a filing requirement with the Department of State for a transfer of assets?
No
Will a company buying most or all of the shares of another company be liable for the torts of the selling company?
No.
EXCEPTIONS:
(1) Deal provides otherwise;
(2) Purchasing company is a mere continuation of the seller;
(3) Deal was entered fraudulently
Does a voluntary dissolution of a company require a vote by the board?
No. However, a majority of the shares entitled to vote must approve.
How can an involuntary dissolution come about?
(1) By board resolution or resolution of majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders.
(2) ½ or more of shares entitled to vote may petition if directors too divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders.
(3) Any shareholder entitled to vote may petition if shareholders unable to elect directors for two consecutive annual meetings
(4) 20% or more of voting shares in a close corporation may petition on either of these grounds: (a) Management's illegal, oppressive, or fraudulent acts toward the shareholders; (b) Management's wasting, diverting, diluting, or looting of assets
When can a court deny an involuntary dissolution?
If alternative means exist for complaining shareholder to obtain a fair return on his investment
How can a corporation avoid an involuntary dissolution?
By within 90 days of petition, buying petitioner's stock at fair value by terms approved by the court
Does dissolution end a corporation's existence?
No
Can shareholders ever be paid before creditors?
Never
What's the procedure to winding up?
(1) Gather all assets
(2) Convert to cash
(3) Pay creditors (they had been given notice earlier), and
(4) Distribute remainder to shareholders, pro-rata, by share unless there's a dissolution preference
How do dissolution preferences work?
Just like dividend preferences.
Should be stated on the stock.
Do shareholders owe fiduciary duties to each other or the corporation?
Generally no, unless in a close corporation.
Can the controlling shareholder sell shares at a premium?
Yes, and he may keep the premium
When can court impose liability upon a controlling shareholder who is selling his shares?
(1) Controlling shareholder sold to looters without making a reasonable investigation
(2) Controlling shareholder de facto sells a corporate asset
(3) Controlling shareholder sells a position on the board
What is a freezeout?
A merger where minority shareholders are cashed out unfairly.
Happens when majority shareholders cause their corporation to merge with another corporation which they own. Minority shareholders' shares are purchased for cash, since they have no interest in either corporation.
What is required for a merger to not be an invalid freezeout?
A legitimate corporate purpose.
What factors will a court look at to determine the fairness of a merger?
In general the price and course of dealing should be fair.
Courts will look at
(1) Whether the deal is tainted by self-dealing or fraud;
(2) Whether minority shareholders are dealt with fairly;
(3) Whether there is a legitimate business reason for the merger
Can a director or officer trade on his corporation's stock based upon inside information from the corporation?
No, this is insider trading, and by doing so, the director or officer breaches a duty to the corporation.
What can the corporation do if an officer or director engages in insider trading?
Corporation can sue to disgorge profits
What are director and officer duties in regards to special facts?
Cannot trade on special facts in a securities transaction with a non-insider.
Cannot trade on secrets.
What is a “special fact”?
A fact a reasonable investor would consider important in making an investment decision