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113 Cards in this Set

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Incorporators:
what do they do?
how many do you need?
They: 1) execute the certificate and deliver it to the department of state and 2) hold the organizational meeting

You only need one or more incorporators, but have to be adult human beings only (no entities)
Information in Certificate of Incorporation
1) Names and adresses (name must indicate it is a corp; address is county in NY where office of corp is located; MUST designate NY secretary of state for service of process, must include an address for forwarding service of process to corporation; name and address of each incorporator)
2) may state duration (if not, it's perpetual)
3) purpose (general or specific)
4) capital structure (authorized stock, #shares per class, par value rights, info on any series of preferred shares)
What is authorized stock?
The maximum number of shares the corporation can sell
What is outstanding stock?
shares that have been issued and not reqcquired by the corporation
Required Acts to create a corporation:
1) each incorporator signs certificate and acknowledges it before a notary
2) deliver to NY Dept of State (if it conforms with law, fees paid, Dept FILES the certificate, making it legal)
3) incorporators hold an organizational meeting where they a) adopt bylaws b) elect initial Board
Can a corporation guaranty a loan that is not in the furtherance of corp. business?
Yes, if it's approved by 2/3 of the shares entitled to vote
Who is liable for corporate debts and obligations?
the corp itself is liable

owners (shareholders) have "limited liability" meaning SH only has to pay for her stock, no corporate liability
What is a de facto corporation?
fails to achieve legal corporate status but still treated as a corp for all purposes except in an action by the state.
Formed when:
1) there is a relevant incorporation statute
2) the parties made a good faith effort to comply with it
3) some exercise of corporate privileges
alive in limted circumstances in NY
What is corporation by estoppel?
theory that one dealing with a business as a corp may be estopped from denying the business's corporate status (ie, can't sue individuals)

ABOLISHED IN NY
If bylaws are inconsistent with the certificate, which controls?
The certificate (that is a contract with the state)
Who adopts the initial bylaws?
the incorporators (these have the status of shareholder bylaws)
Who can amend or repeal the bylaws or adopt new ones?
the shareholders

board of directors ONLY gets to amend/repeal/adopt bylaws when the certificate or a shareholder bylaw allows
What is a promoter?
A person acting on behalf of a corporation not yet formed (can enter into contracts on behalf of not yet formed corp)
When is a corporation liable on a pre-incorporation contract?
corporation not liable on pre-incorporation contracts until it ADOPTS the contract

express adoption or
implied: corps knowingly accepting a benefit of the K
When is a promotor liable on a pre-incorporation K
generally the promoter remains liable until there has been a NOVATION (an agreement of the promoter, the corp. the other party saying that the corp will now replace promoter under the K)
adoption is NOT novation
To determine if promoter made a profit, how do you determine the profit?
if sale to corp. of property that was acquired BEFORE becoming a promoter, profit equals: price paid by corp minus fair market value

if sale to corp. of property that was acquired AFTER becoming a promoter, profit equals: price paid by corp minus price paid by promoter
is promoter liable to the corp. for making a profit?
only if the profit was a secret
How does a foreign corp doing business in NY qualify?
must apply to the NY Dept. of State and designate the secretary of state as agent for service of process; gives the Dept. of State info from its certificate, proof of good standing in home state
what happens if a foreign corp does business in NY without qualifying?
1) penalty when the corp does qualify
2) until it qualifes, cannot sue in NY
What is issuance?
a corporation sells its own stock
What is a subscription?
a written, signed offer to buy stock from the corporation
Can a pre-incorporation offer for a subscription be revoked?
no, a pre-incorporation subscription is irrevocable for three months; unless it says others or all subscribers agree
if the corp accepts an offer for subscription and the subscriber defaults on payment, what happens?
if he has paid LESS than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corp can keep the money paid and cancel the shares. The shares then become authorized and unissued.

if subscriber has paid HALF OR MORE and fails to pay the rest within 30 days of written demand, the corp must try to sell the stock for cash. If no one else will pay, defaulting subscriber forfeits what he has paid and shares are cancelled. If someone does pay the balance, the defaulter recovers the excess over what he agreed to pay.
What are the five permitted forms of consideration for an issuance?
1. Money (cash or it's equivalent)
2. Tangible or intangible property
3. labor or services lareday performed for the corp.
4. a binding obligation to pay in the future in cash or property (a note)
5. a binding obligation to perform future services having an agreed value
What does par mean?

What does no par mean?
PAR means minimum issuance price (the board sets the consideration)

NO PAR means there is no minmum issuance price. Can sell for any price. (the board sets the price unless the certificate allows shareholders to do so)
What is treasury stock?
stock that was previously issued and had been reqacquired by the corporation. The corp may then sell the treasury stock.

there is no minimum here; always treated as no par
What happens if par stock is issued for less than par value (watered stock)?
the directors are liable for the water if they knowingly authorized

the purchaser/shareholder is liable (charged with notice of the par value)
What are preemptive rights?
Right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a NEW ISSUANCE of common stock for MONEY

if certificate is silent, does not apply to treasury stock or sale of shares authorized by teh original certificate and sold within two years of formation
If the certificate is silent as to preemptive rights, do they exist?
Depends. If corp formed:

Before Feb 22, 1998, yes

On or After Feb. 22, 1998, no; only if certificate says so
Incorporators elect the initial directors. after that, who elects the directors?
the shareholders at the annual meeting
How many directors are required?
One or more

the number set:
in bylaws or by shareholder action or by the board if a shareholder adopted bylaw is allowed
do directors have to be elected each year?
no, can have a classified board; one class elected each year. must have at least 3 directors per class
Can a director be removed before term expires?
Shareholders can remove a director for cause any time

Board can remove a director for cause only if the certificate or bylaws allow

Only shareholders can remove a director without cause, and only if certificate or bylaws allow
How does the board take a valid act?
1) UNANIMOUS WRITTEN consent to act without a meeting

2) a meeting
Is notice required for board meetings? for special board meetings?
notice not required for regular meetings; time and place set in bylaws

notice IS required for special meetings (method set in bylaws); if a director does not receive notice of a special meeting, anything that happened at that meeting is void unless the director waives the notice defect (with a signed writing or by attending meeting without objection)
Can a director give a proxy for voting?
No, void against public policy
What is the number of directors needed at a meeting to do business?
Need a quorum, which is a majority of the "entire board" (the number of positions if no vacancies). Once there is a quorum, passing a resolution requires majority vote of only those PRESENT
can the corporation decrease the quorum to less than a majority?

Can a corp. decrease requirement that passing a resolution requires a majority of directors present?
YES, by certificate or bylaw (not less than 1/3)


No
Duty of Care Standard
a director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily PRUDENT person would exercise under similar circumstances in like position

Includes misfeasance and nonfeasance
when is a director liable for breaching the duty of care
only when the breach causes a loss to the corp and the business judgment rule is NOT MET
Business Judgment Rule:
a court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis (relevant for duty of care)
Duty of Loyalty Standard is...
a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries

ex: can't go into competition with corp; can't usurp a corporate opportunity
is a transaction between a corporation and one of its directors okay (called an interested director transaction)?
interested director transactions will be set aside UNLESS the director shows EITHER 1) that the deal was fair and reasonable to the corp when approved OR 2) the material facts and her interest were disclosed or known AND the deal was approved by a) shareholder action, b) board approval by sufficient vote of non-interested directors or c) unanimous vote of disinterested directors
Can a corporation lend a director corporate funds or guarantee a director's personal obligation?
Depends on when corp formed:

ON OR BEFORE Feb. 22, 1998: shareholder vote needed to approve, unless certificate allows board to decide that a loan benefits the corp

AFTER Feb 22, 1998: need board's conclusion that loan benefits corp (no need for board approval
If board action improper, which directors are liable?
a D is presumed to have concurred with Bd action unless her dissent is noted IN WRITING in corp records. 1) in the minutes; 2) in writing to the corp secretary at the meeting; 3) registered letter to the corp promptly after adjournment

if D had to miss the meeting, not liable if he registers dissent w/in a reasonable time after learning of the action

D not liable if he reasonably relied in good faith on info/reports by Os of corp, lawyers or accoutnants, committee he is not member of
Who selects and removes the officers of a corp?
the directors; unless the certificate allows shareholders to do so
When, if ever, can an officer or director who is sued by or on behalf of the corp seek reimbursement from the corporation?
PROHIBITED: Reimbursement prohibited if the O or D was held liable to the corp.

OF RIGHT: the corp must reimuburse if the O/D was successful in defending the case on the merits or otherwise

PERMISSIVE: the corp may reimburse the O/D if shown she acted in good faith and for a purpose reasonably believed to be the corp's best interest (but cannot reimburse a judgment)
The certificate may provide for elimination fo director liability to the corp. or shareholders for damages for breach of duty EXCEPT:
when the director:
1) acted in bad faith or 2) with intentional misconduct or 3) received an improper financial benefit or 4) approved an unlawful distribution or loan
can a certificate of incorporation limit the liability of directors to shareholders for breaches of duty?
Yes, but only when the breach is NOT found to be 1) in bad faith; 2) due to intentional misconduct or knowin gviolation of the law 3) result in a financial profit or other advantage to which the director was not legally entitled or 4) violate statutory liabilities of directors
when, if ever, are shareholders liable for the debts or acts of a corporation?
generally, a shareholder is not liable for the debts or acts of a corporation

a court maay "pierce the corporate veil" if shareholders 1) have abused the privilege of incorporating and if 2) fairness demands that the SH not have limited liability
when might courts pierce the corporate veil?
to prevent fraud or to achieve equity or to prevent the use of the corp a sa cloak for illegality

ex: alter ego, undercapitalization with excessive domination or fraud or illegality
as a general rule, is a court more likely to pierce the corp. veil in a tort or contract suit?
tort--in contract case, the other side could investigate in advance
are shareholders ever liable for wages and benefits of corporation employees?
yes, ten largest shareholders are personally liable in a close corporation
in a close corporation, the ten largest shareholders are personally liable for what?
the wages and benefits to the corporation's employees
what is a close (or closely held) corp
few shareholders and stock is not publicly traded

can either have a board of directors or the shareholders can manage it
how is power vested in the SH to manage a close corp?
a provision in the certificate can restrict or transfer Board power to SH or others. This is okay if:
1. all incorporators or SH (voting and nonvoting) approve it
2. all subsequent SH have notice
3. it is conspiculously noted on front and back of all shares AND
4. shares are not listed on an exchange or regularly quoted over the counter
in a close corporation run by shareholders, who owes the duties of care and loyalty?
the managing shareholders
if members of a licensed profession form a professional service corp, are the professionals liable for their own malpractice?
yes, but not for others in the group
if members of a licensed profession form a professional service corp, are the professionals liable for contracts entered into by the entity or for rent due on leases in the PC name?
no, the entity is liable
what happens if a shareholder of a professional service corp dies or is disqualified from practicing?
the PC must purchase his shares
What is a shareholder derivative suit?
shareholder is suing to enforce the CORPORATION'S claim (not her own personal claim). It's a case in which the corp is not pursuing its own claim, so a SH steps in to prosecute the claim

ask: could corp have brought this suit? if yes, SH derivative suit
SH sues to compel declaration of dividend. What kind of suit?
probably not derivative

NOT derivative if SH trying to get money

MAYBE derivative if it could be based on a breach of duty to the corp (mismanagement by the directors)
Who gets the recovery in a successful derivative suit?
the corporation
If a SH brings a derivative suit and wins, what does SH get?
costs and attys fees, usually from the judgment won for the corp
If a SH derivative suit is UNSUCCESSFUL:

can the SH still recover costs and expenses?

is SH liable to the defendants for its costs?

can other SH later sue the same D on the same transaction?
no

probably

no
Suppose a SH brings a derivative suit and corp moves to have it dismissed. What does a court look at in deciding whether to dismiss?
1. independence of those making the investigation that the suit is not in the corps best interest
2. the sufficiency of the investigation
what are the requirements for bringing a SH derivative suit
1. stock ownership when the claim AROSE OR have gotten it by operation of law from someone who owned it when claim arose (inheritence, divorce)
2. stock ownership when the ACTION IS BROUGHT
3. SH must adequately REPRESENT THE INTERESTS of the corp and the other SH
4. Must make a demand the directors bring suit unless it would be futile (ex, if majority of Bd is interested or under control of interested directors)
5. plaintiff must PLEAD WITH PARTICULARITY her efforts to get the Bd to sue OR why her demand was excused
6. may be required to post security for costs
In a derivative suit, the corp must be joined as a party, but on what side?
as a defendant, because the corp did not sue
can the parties dismiss or settle a derivative suit?
only with court approval

the court may notify SH who will be substantially affected by the discontinuence of the action
Can an officer or director bring a derivate suit?
an O or D can bring an action against ANOTHER O or D on behalf of the corp to compel her to account for violating duties
For SH voting, the general rule is that the record owner as of the record date has the right to vote. What does this mean?
The record owner is the person shown as the owner in the corporate records. The record date is a voter eligiblity cut-off, set no fewer than 10 and no more than 60 days before the meeting.
For SH voting, the general rule is that the record owner as of the record date has the right to vote. What are the exceptions?
1. even if it is the record owner on the record date, the corporation does not vote treasury stock
2. death of the SH (but executor can vote the shares)
3. PROXIES OKAY
What is a proxy?
1) a writing (fax/email ok)
2) signed by record shareholder or authorized agent
3. directed to secretary of corp
4. authorizing another to vote the shares

good for 11 months unless it says otherwise
SH sells B her shares after the record date but before the annual meeting. SH gives B an "irrevocable proxy" to vote the shares at the annual meeting. Can SH revoke this proxy?
No--IRREVOCABLE

because 1) it says it's irrevocable and 2) the proxyholder has some interest in the shares other than voting

Called: A PROXY COUPLED WITH AN INTEREST
Can an officer or director bring a derivate suit?
an O or D can bring an action against ANOTHER O or D on behalf of the corp to compel her to account for violating duties
For SH voting, the general rule is that the record owner as of the record date has the right to vote. What does this mean?
The record owner is the person shown as the owner in the corporate records. The record date is a voter eligiblity cut-off, set no fewer than 10 and no more than 60 days before the meeting.
For SH voting, the general rule is that the record owner as of the record date has the right to vote. What are the exceptions?
1. even if it is the record owner on the record date, the corporation does not vote treasury stock
2. death of the SH (but executor can vote the shares)
3. PROXIES OKAY
What is a proxy?
1) a writing (fax/email ok)
2) signed by record shareholder or authorized agent
3. directed to secretary of corp
4. authorizing another to vote the shares

good for 11 months unless it says otherwise
SH sells B her shares after the record date but before the annual meeting. SH gives B an "irrevocable proxy" to vote the shares at the annual meeting. Can SH revoke this proxy?
No--IRREVOCABLE

because 1) it says it's irrevocable and 2) the proxyholder has some interest in the shares other than voting

Called: A PROXY COUPLED WITH AN INTEREST
What are the requirements for a VOTING TRUST?
1) written trust agreement controlling how the shares will be voted
2) a copy to the corporation
3. transfer legal title of shares to voting trustee
4. original SHs receive voting trust certificates adn retain all SH rights except for voting

TEN YEAR MAX on voting trusts
What are hte requiremetns for VOTING AGREEMENTS?
1. in writing
2. signed

IN NY voting agreemetns are not specifically enforceable
Two SH agree to vote to elect each other as directors. What if they then agree about what actions they will take once they are directors? Okay?
This violates the rule against voting agreements by directors
BUT
would be okay if these are the only two SH in the corp
it is okay to agree to use best efforts to cause the corp. to act in a particular way
How can the SH take a valid act?
1. with written consent signed by the holders of all voting shares to act without a meeting OR
2. a meeting

If the certificate allows, SH can take action without a meeting if there is agreement in writing of the holders of enough shares to pass a resolution if all voting shares were present and voting
Describe the notice requirement for SH meetings?
Must give written notice (email okay) to every SH entitled to vote for every meeting (annual or special) between 10 and 60 days before the meeting. Notice needs to include:
--WHEN AND WHERE
--if the proposed action would entitle SH to appraisal rights and why
--notice of a special meeting must state who called it and the statement of purpose of the meeting

*if not proper notice to all SH, action taken at meeting is void unless those not receiving notice waive the defect (express or implied waiver ok)
X Corp has 120,000 shares outstanding. X Corp has 700 shareholders. What's a quorum?
at least 60,001 shares

generally a quorum requires a majority of outstanding shares
Can the certificate or bylaws reduce a SH quorum to less than a majority?
YES, but it can never be fewer than 1/3 of the shares entitled to vote
Is it possible to require a supermajority of the shares entitled to vote:

a) be represented to constitute a quorum?

b) vote to pass a resolution?
a) Yes, can be done in the certificate, but not the bylaws

b) Yes, but it must be done in the certificate, not the bylaws
X Corp has 120,000 shares outstanding. 62,000 shares are represented at the meeting, but only 50,000 shares vote on a particulare proposal. How many shares must vote for the proposal for it to pass?
at least 25,001

Need a majority of the number of shares that actually voted
You own 1,000 shares of stock in C Corp. C Corp has 9 directorships open for election. You want to vote for John. Under CUMULATIVE VOTING how many votes can you cast for John?
9,000

(# shares) x (# directors to be elected)

Cumulative voting allows you to divide them however you want
S has 100 shares of $4 par stock. Can S sell her shares for less than $4 a share?
Yes, par is an issuance rule
she can sell for any price she wants
Stock transfer restrictions will be upheld if what?
they are reasonable under hte circumstances (not an undue restraint on alienation)
What are the rights of SH to inspect and copy the books/records of a corp?
1. SH can inspect and copy a) minutes of shareholder proceedings and b) the record of SHs
- any SH can demand on 5 days written notice
- corp can demand an affidavit that SH purpose is not other than in interest of the corp

2. A SH can make a written requrest for the corp's latest balance sheet, profit and loss statement, interim statemetns
- corp must provide these

3. SH can demand to inspect and copy a list of the current directors and officers
- SH can demand on two days written notice

4. common law right to inspect: for all SH to inspect records at a reasonable time and proper place for a proper purpose
Who declares distributions?
Distributions are at the Board's discretion; court will only interfere and order if there's a showing of bad faith or dishonest purpose
C-corp declares a dividend of $400,000

there are 100,000 shares of common and 20,000 shares of $2 preferred that is participating.

Who gets paid what?
Participating means pay again. Pay $2 first because they are preferred, equals $40,000. That leaves $360,000 divided by 120,000 shares.

$3/share for common stock
$5/share for preferred participating
C-corp declares a dividend of $400,000

There are 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative. There have been no dividends paid in the last three years.

Who gets paid what?
Cumulative means add them up--corporation owes cumulative holders for years when there were no dividends, plus, there is this year.

(4 years)x($2 preference)=$8/cumulative preferred share

($8)x(20,000)=$160,000 This is paid first

Leaves $240,000 for common. So, $2.40/share
What is surplus? Can these funds be used for a distribution?
Surplus is: (assets)-(liabilities)-(stated capital)

Surplus CAN BE used for distributions
What is stated capital? Can these funds be used for a distribution?
On PAR STOCK, stated capital is the par value.

On the NO-PAR stock, within 60 days after issuance the board can allocate any part to surplus. If the board does nothing, it goes to stated capital

Stated capital CAN NEVER be used for distributions
Corporation can make distributions even though it lost money last year. Corp. CANNOT make distributions if it is insolvent or if the distribution would render it insolvent. A corp is insolvent when:
Corp is unable to pay its debts as they come do in the ordinary course of business
Who is liable for an unlawful distribution?
Directors are personally liable

Shareholders are personally liable if they knew the distribution was unlawful when they received it
What is a right of appraisal and what actions trigger it?
A SH's right of appraisal is the right of a SH to force the corp to buy her shares at fair value. SH is DISSENTING.

Triggered by:
1) some amendments to the certificate (ex: limits voting rights)
2) consolidation
3) your corporation merges into another corporation (NOT if you're the surviving corp)
4) your corporation transfers sustantially all of its assets or
5) your corporation's shares are acquired in a share exchange

NO RIGHT OF APPRAISAL if the corp is LISTED on a national securities exchange
What actions are taken by the SH to get appraisal rights?
1. Before the shareholder vote, file written objection and intent to demand payment
2. Abstain or vote against the proposed change AND
3. after the vote, make a written demand to be bought out
If amendment will change or strike a supermajority quorum or voting requirement for BOARD OF DIRECTOR voting or will strike a provision restricting BOARD authority, in addition to board approval, need:
Corp formed:

ON or BEFORE Feb 22, 1998: Board approval and approval by two thirds of the shares entitled to vote

AFTER Feb. 22, 1998: Board approval and approval by a majority of the shares entitled to vote
If amendment will change or strike a supermajority quorum or voting requirement for SHAREHOLDER voting, in ADDITION to board approval, also need:
two thirds of the shares entitled to vote
A corp has 6,000 outstanding shares entitled to vote. How many shares must vote for merger of A Corp. into B Corp?
Corp formed:

ON OR BEFORE Feb. 22, 1998: need at least 4,000 shares (two thirds of the shares entitled to vote)

AFTER Feb. 22, 1998: at least 3,001 shares (a majority)
S Corp. wants to sell all of its assets to B. Inc. What approval is needed?
This is a Transfer of all or substantially all of the assets. Need:
- each corp's board to authorize deal AND
- approval by SELLING corp's SH. If corp formed:

ON OR BEFORE Feb. 22, 1998, need at least 2/3 of shares entitled to vote

AFTER Feb 22, 1998: need a majority of the shares entitled to vote
What vote is necessary for a VOLUNTARY DISSOLUTION?
No board vote necessary.
For corps formed:

ON OR BEFORE Feb. 22, 1998, need 2/3 shares enttiled to vote

AFTER Feb. 22, 1998: need a majority of the shares
How is an INVOLUNTARY DISSOLUTION approved?
1) by board resolution or resolution of majority of shares enttiled to vote
2) one half or more of shares entitled to vote may petition if directors too divided to manage...
3) any shareholder entitled to vote may petition if shareholders unable to elect directors for two annual meetings
4) twenty percent or more of voting shares in corp. whose shares are not traded on a securities market on following grounds a) maangement's illegal, oppressive, or fraudulent acts toward complaining SH or b) management's wasting, diverting, or looting assets
How can the corp. or non-complainting shareholders try to avoid dissolution?
1. within 90 days of the petition, buy the petitioner's share at fair value
2. buy the complaining SH out
The terms must be approved by the court
After dissolution, what are the steps a corp. must take to wind up?
1. gather all assets
2. convert to cash
3. pay CREDITORS
4. distribute remainder to shareholders pro-rata by share unless there's a dissolution preference
Because of her control, a controlling shareholder may be able to sell her shares at a premium. Can she? Does she have any obligations regarding the sale?
Yes, can sell at a premium and she can keep the money

BUT, courts may impose liability if controlling shareholder sells to looters without making a REASONABLE INVESTIGATION (we will disallow her profits, seller is probably liable for all damage done to the corp)
What is a freeze-out merger?
A merger aimed soley at cashing out minority shareholders unfairly (if majority SH cause the corp to merge with another corp that they own)

Factors:
- wehther deal is tained by self-dealing or fraud
- whether minority SHs dealt with fairly
- whthere there is a legitimate business reason for the merger
Director or officer trades on inside info and makes a profit. Legal?
In NY, the D or O has breached a duty to the CORPORATION by doign this; corp can sue to recover this.
All directors and officers (and controlling SH) owe an affirmative duty not to trade on special facts in a securities transaction with a non-insider. What are special facts?
Who can sue?
What damages?
Special Facts: Those that a reasonable investor would consider important in making an investment decision.

A shareholder with whom the director or officer deals with and violates special facts doctrine

Damages are the difference btw price paid and value of stock a reasonable time after public disclosure.