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367 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What are the 6 'fact patterns' tested?
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1) organization of corps; 2) issuance of stock; 3) directors and officers; 4) shareholders; 5) fundamental corporate changes; 6) controlling shareholders (and related topics)
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directors and officers, and shareholders are the TOP subjects tested!
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What is the statute in NY for corporations?
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statutory BCL: Business Corporations Law
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What are the formation reqs for a NY corp?
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need 1) people, 2) paper, 3) acts
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Discuss the "PEOPLE" req for formation of a corp
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people=Incorporators: they 1. execute the certificate, 2. deliver it to the Department of State, and 3. hold the Organizational Meeting
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How many Incorporators do you need to incorporate?
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1 or more
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Who can be an Incorporator?
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only adult humans (natural persons) need legal capacity; this means NO entities
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Discuss the "PAPER" req for formation of a corp
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you need to file a Certificate of Incorporation (called "articles of incorporation" in other states); this is a k b/t a) the corporation and the SHs, AND b) b/t the corporation and the state
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What info needs to go in the certificate?
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1) names and addresses; 2) may make a statement of duration; 3) corporate purpose; 4) capital structure
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Discuss the names/addresses in the certificate
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a) corporate name: this MUST have either the word "corporation", "incorporated", or "limited" (abbreviations ok); this shows the world that you're incorporated, b) address: give the county in NY of the office of the corporation (the office does NOT have to be the place where the corp actually does business!), c) must designate the corporation's agent for service of process, which is the NY Secretary of State, (and MAY also name a registered agent), d) must designate an address for forwarding service of process to the corp (so that Secretary can send it to precise location), e) name and address of each incorporator.
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Discuss the statement of duration in the certificate
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you MAY make a statement of duration; if no statement of duration, the corporation has perpetual existence
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Discuss the statement of corporate purpose in the certificate
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this is REQUIRED; at minimum, can state that purpose is to "engage in all lawful activity, after first obtaining necessary state agency approval"; but more likely dealing on exam with an ULTRA VIRES act (beyond the scope of the certificate)
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ex. ultra vires: certificate says purpose is to make t-shirts, but the corp started manufacturing refrigerators
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What happens with an Ultra Vires act?
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at common law, would mean the contract is voided; but today: a) ultra vires ks are valid and not void, b) SHs can seek an injunction if they don't want the corp to do acts beyond the scope of the certificate, and c) responsible managers are liable to the corp for ultra vires losses
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Discuss the capital structure in the certificate
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3 types of stock: 1) authorized=max number of shares the corp can sell; 2) issued=number of shares the corp ACTUALLY sells; 3) outstanding=stock corp has sold and NOT reacquired (later we discuss treasury stock)
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What must be included in the certificate about the corp's stock?
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1. authorized stock; 2. # of shares per class; 3. info on par value, preferences, rights and limitations of each class; 4. info on any series of preferred shares (series=subclass). NOTE: at least 1 class of stock or bonds must have unlimited VOTING rights, and at least 1 class must have unlimited DIVIDEND rights
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Discuss the "ACTS" req for forming a corp
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First, each incorporator SIGNS the certificate and acknowledges it before a notary; Second, they deliver it to the NY Dept. of State, and if it conforms with the law, and filing fees paid, the Dept. files the certificate; Third, the incorporators hold an "organizational meeting" (or can do it by written consent)
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What is the effect of the NY Dept of State filing the certificate?
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it is conclusive evidence of valid formation! have "de jure" corp=legal corp
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What occurs at an "organizational meeting"?
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they 1. adopt any bylaws, 2. elect the initial board of directors, and 3. the board then takes over management
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If a NY corp only does business in France, are they still governed by NY law?
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yes! "internal affairs" (duties, relationship among directors, officers, SHs, etc) of a NY corp are governed by NY law, BCL governs all internal affairs
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What is a corporation and what powers does it have?
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it is a separate legal person: has broad powers by statute, like to enter into ks, transfer property, buy/sell securities, sue or be sued
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Can a corp make political contributions?
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yes, but no more than $5k per year per candidate or organization (election law)
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Can a corp make charitable contributions?
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yes, NO statutory ceiling: want to encourage corps to be responsible members of the community (although remember that corps are for-profit so can't give away too much)
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Can a corp guarantee a loan that is not in the furtherance of the corporate business?
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yes, if approved by 2/3 of SHARES entitled to vote (not shareholders!)
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MC possibility!
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What if the corp does something like incur a debt, breach a k, or commit a tort, are the people who run the corp (directors and officers) liable for what the corp does? What about the SHs (who own the corp), are they liable
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no, directors/officers not liable; no, SHs not liable, they have limited liability, ONLY liable for the price of their stock (this is the point of incorporating, to limit liability! better than partnership law!)
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Who is liable for what the corp does?
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the corp itself! it has entity status!
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What is de facto corp doctrine?
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proprietors fail to form a de jure corporation, so just a partnership and worried about personal liability; BUT can be treated as a corp if you show defenses: 1. there is a relevant incorporation statute (in NY there is, it's the BCL), 2. the parties made a good faith, colorable attempt to comply with it, and 3. the business is being run as a corp. if meet these reqs, treated as a corp for all purposes EXCEPT in an action by the STATE!
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How does NY treat the de facto corp doctrine?
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in NY, it is viewed as abolished, but case law suggests it may be alive, in LIMITED circumstances: only applies when there is a problem with the incorporation, like the incorporators filed properly but the Dept of State failed to file it
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prob wont work outside of that one example
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What is corp by estoppel?
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if someone is dealing with a business like it's a corp, treating it as a corp, then may be estopped from denying the business's corp status; so such a person could not sue the individual proprietors (retain the limited liability of a de jure corp)
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How does NY treat corp by estoppel?
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abolished! so even if dealing with a business as though it's a corp, the proprietors will still be personally liable if it's not a de jure corp
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Can you have a corp without bylaws?
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yes, can form a corp without bylaws (remember, only need people, papers, acts and form a corp with the certificate! didnt need bylaws to form!) BUT: most corps do have them to set up procedures/responsibilities of ppl like officers, notice req for meetings, etc
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What happens if the bylaws are inconsistent with the certificate?
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the certificate controls! remember it's a k b/t the corp and the state, so more important!
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Are bylaws filed with the state?
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no
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Are outsiders bound by the bylaws?
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no, b/c this is an INTERNAL doc (can only bind officers, directors, SHs, etc)
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Who adopts the initial bylaws?
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incorporators at the organizational meeting (these have the status of a SH bylaw)
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Who can amend/repeal bylaws or adopt new ones?
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SHs
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When does the board of directors ever get to amend/repeal the bylaws, or adopt new ones?
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only if the certificate or a SH bylaw allows!
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remember for exam: usually the certificate is silent about who can amend/repeal/create bylaws, so will usually always be the SHs that do this!
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Can there be pre-incorporation contracts?
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YES: this is the MOST important topic in fact pattern 1
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What is a promoter?
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a person acting on behalf of a corporation NOT YET FORMED (maybe enter into a k with a 3rd party on behalf of the corporation-not-yet-formed)
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What about liability on pre-incorporation contracts?
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must ask whether 1) the corporation is liable on pre-incorp ks, and 2. whether the promoter is liable on pre-incorp ks
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Is the CORP liable on pre-incorporation contracts?
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the corp is only liable if it ADOPTS the k (the corp is NEVER auto liable); adoption can be 1) EXPRESS (via board action), or 2) IMPLIED (arises if corp knowingly accepts a benefit of the k)
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the implied adoption is more likely on the exam!
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Is the PROMOTER liable on pre-incorporation contracts?
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UNLESS the contract clearly says otherwise, the promoter IS liable on pre-incorp ks UNTIL there is a NOVATION=agreement among the promoter, the corp, and other contracting party that the corp will replaced the promoter under the k
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What happens if the promoter enters into a pre-incorp k, but the business never ends up incorporating?
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then the promoter is stuck! liable on the k!
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What about promoter's liability up until the point of novation?
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liable until the novation happens...the corp first incorporates, then adopts the contract, and there is a period of time up until the novation where promoter still liable; basically--the adoption of the k just makes the corp now liable, but the promoter is not yet relieved of liability until the novation!
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this is a classic exam topic!
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What is the "secret profit rule"?
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the promoter can't make a SECRET profit on her dealings with the corp; if she does, she is liable (and will have to account for the profit, meaning return it to the corp!); remember a profit that is not secret can be fine!
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In what types of sales could the promoter be liable on for a secret profit?
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1) a sale to the corp of property that the promoter had acquired/bought BEFORE becoming the promoter; 2) a sale to the corp of property the promoter acquired/bought AFTER becoming the promoter
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What is the calculation of profit for the sale of property the promoter acquired BEFORE becoming the promoter?
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Profit = Price Paid by the corp - FMV of the property NOW (don't care how much promoter paid for the property back when he first bought it!)
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What is the calculation of profit for the sale of property the promoter acquired AFTER becoming the promoter?
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Profit = Price Paid by the corp - Price Paid by the promoter (now we DO care how much promoter paid for the property back when he first bought it!)
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What are foreign corps?
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any corp that is not incorporated in NY (so can be corps in another state)
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What is a NY corp called?
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a domestic corp
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What must a foreign corp that is "doing business" in NY do?
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must "qualify" to do business!
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rarely tested
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What does "doing business" mean?
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the regular course of INTRA-state business activity
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How does a foreign corp qualify?
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applying to the NY Dept of State and designating the Sec of State as agent for service of process; must pay fees to NY for privilege of doing business there
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What needs to be in the application?
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1) info from its certificate, 2) proof of good standing in the home state
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What happens if a foreign corp does business in NY w/o qualifying?
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it CANNOT SUE in NY until it qualifies and pays fees, taxes, penalties and interest accrued (it CAN be sued!)
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Fact pattern 2: issuance of stock; what is issuance?
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issuance of stock (term of art) occurs when a corp sells its own stock
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What is the purpose of issuance of stock?
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one way to raise capital, where investors buy stock and thereby become holders of an "equity security", so they are OWNERS of the corp; equity interests give SHs various rights!
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How is an issuance of stock diff than issuance of bonds?
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the investor makes a LOAN to the corp (doesnt buy stock) which is repaid (usually with interest) as agreed in the k; the holder of the bond is a CREDITOR, not an owner, and holds a "debt security"
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What is a debenture?
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a loan where the repayment is NOT secured by corp assets
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What is a subscription?
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written, signed OFFER to buy stock from the corp; important to determine whether the subscription can be REVOKED: depends on whether it's a a) pre-incorp subscription, or b) a post-incorp subscription
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Discuss pre-incorp subscriptions
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a pre-incorp subscription is IRREVOCABLE for 3 months, UNLESS a) the subscription provides otherwise, or b) all the subscribers agree to let you revoke; policy=those forming the corp can rely on having the $ there
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it's more unlikely that youll see the subscription explicitly allow for revocation on the exam!
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Discuss post-incorp subscriptions
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these ARE REVOCABLE, UNTIL accepted by the corp (the board) meaning that the corp and the subscriber become obligated under a subscription when the board accepts the offer
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Can the corp decide to sell only to some subscribers and not others?
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no, must be uniform w/in each class or series of stock (if 5 SHs subscribed, can't only sell to 2 of them, must sell to all!)
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What happens if the corp accepts the offer and the subscriber defaults on payment?
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depends on if the SH has paid a) LESS than half of the purchase price and fails to pay rest w/in 30 days of written demand, or b) HALF OR MORE of the purchase price and fails to pay rest w/in 30 days
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these are good MC questions
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What happens if the SH has paid LESS than half of the purchase price and fails to pay rest w/in 30 days of written demand
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the corp can keep the $ paid and cancel the shares...the stock becomes authorized and un-issued, then corp can sell it
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What happens if the Sh has paid HALF OR MORE of the purchase price and fails to pay rest w/in 30 days of written demand
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the corp must try to sell the stock to someone else for cash (or a binding obligation to pay cash, like a promissory note); BUT if no one will pay the remaining balance, then what? can do same as if the SH had paid less than half, you just keep the $, becomes authorized stock and then can issue it later
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What happens if someone pays MORE than the remaining balance due?
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the defaulting subscriber recovers any excess over what she agreed to pay, but deduct the corp's expenses in selling to the new guy
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H enters into a subscription agreement to buy $5k worth of stock; H pays only $3k and then defaults; the corp spends $50 to get a new buyer, and the new buyer agrees to pay $2.5k; so the corp collects $5.5k which is $500 more than H agree to pay; what happens?
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H gets the $500 excess of what he would have paid vs. what the new buyer actually paid, but minus the expenses to the corp of finding the new buyer, which is $50 here
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What must a corp receive when it issues stock?
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consideration!
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What are the forms of PERMITTED consideration in NY?
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5 types: 1) $, cash or equivalent (check); 2) tangible or intangible property; 3) services already performed for the corp; 4) binding obligation to pay in the future in $ or property (promissory note probably); 5) binding obligation to perform future services having an agreed value
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the binding future obligations shows how liberal ny is about consideration; most anything qualifies as consideration, whereas in other states these would NOT qualify
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Can the corp issue stock to someone for performing services in FORMING the corp?
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yes, this counts as 'services already performed' category of permitted consideration
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again in most states, this would not qualify as consideration
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What are the forms of PROHIBITED consideration in NY?
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basically anything other than the 5 permitted forms of consideration!
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What happens if someone 'pays' for an issuance with a prohibited form of consideration?
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this is called UNPAID STOCK: it's all treated as "water" (but remember, it's nearly impossible to have prohibited consideration in NY)
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For the amount of consideration what do you discuss?
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a) par; b) no par; c) treasury stock; d) acquiring property with par value stock; e) consequences of issuing par value stock at below par value "watered stock"
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What is par?
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means minimum issuance price
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If a corp issues 10,000 shares of $3 par stock, it must receive at least
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$30k
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Can a corp issue par stock for more than par value?
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yes! par is only the min!
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What is no par?
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means there is no minimum issuance price, can sell for any price
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Who sets the price at which to sell no par stock?
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the board, UNLESS the certificate lets SHs do it
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on exam will most likely be silent on this!
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What is treasury stock?
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stock that was previously issued and has been reacquired by the corporation; the corp may then sell the treasury stock
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What is the minimum issuance price of treasury stock?
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there IS NO MIN issuance price, you always treat treasury stock as NO PAR!
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remember this one!
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Can the corp acquire property with par value stock?
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yes! the corp can issue par stock to acquire property, like real estate because the property is adequate consideration in form b/c it's tangible property; must ensure that the stock is adequate consideration amount by determining the FMV of the property and how much stock you would have to issue to purchase it
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When the board determines the value of consideration for an issuance, is its determination of the value conclusive?
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yes, IF it's made without fraud
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Corp issues $1mil worth of stock to pay a director's son for sweeping up the office for one week, is this a conclusive determination of value?
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NO, this is fraudulent! it's a waste of corp assets, directors will be liable!
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What are the conseqs of issuing stock at less than par value?
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this is considered "watered stock": the directors are liable if they KNOWINGLY authorized the issuance; the person who bought the stock is liable b/c he's charged with notice of the par value; a third party that the buyer transfers the stock to is NOT liable if he acts in good faith (meaning didnt know about the water)
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yeah my sense is that X is supposed to have had constructive notice because the certificate of incorporation sets the par value. so he could just look to the certificate for the par price before making the deal. and then the third party is liable only if he had reason to know that the prior transaction was invalid. but unlike X (who had constructive notice of the minimum price), the third party doesn't have notice (constructive or otherwise) unless he's told that the prior transaction was invalid because there's no minimum price for reselling stock.
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What are preemptive rights?
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the right of existing SH to maintain her % of ownership by buying stock whenever there is a NEW ISSUANCE of common stock for MONEY (cash/checks)
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this is the most important topic in the fact pattern 2, issuance of stock! tested in DETAIL
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If the certificate is silent, does "new issuance" include sale of treasury stock?
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NO, treasury stock was reacquired after it had been issued, then if it is later resold, this isn't technically a 'new issuance'
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If the certificate is silent, does "new issuance" include sale of shares authorized by the original certificate and sold within 2 years of formation?
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no
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S owns 1,000 shares of Corp. There are 5,000 shares outstanding. Corp is planning to issue an additional 3,000 shares. If S has preemptive rights, then S has the right to do what?
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this means that out of 5,000 shares that have been issued (meaning outstanding) S owns 1,000 of those shares, which=20%; therefore S has preemptive right to buy 20% of the new issuance, which would be 20% of 3,000=600 shares
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What if the certificate is silent on preemptive rights, do they exist?
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no, only if certificate says so: preemptive rights are NOT a default, not automatica
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What if Corp wants to buy Greenacre and is planning a new issuance to purchase it, can S exert her preemptive rights?
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no, this is real property! the issuance must be for money only! (remember it's fungible!)
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Describe fact pattern 3: directors and officers
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this is very important and heavily tested!
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What are the statutory reqs for the number of directors?
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must be one or more adult natural persons; the number is set a) in the bylaws, or b) by SH act, or c) by board if a SH bylaw allows
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What if no number of directors is set in any way?
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the default is that there's only 1 director
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Who elects the initial directors, and then after that who elects directors from that point on?
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initially, the incorporators elect them; then after that the SHs elect directors at annual meeting
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important!
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Does the corp have to elect all new directors every year?
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no, the certificate or SH bylaw can establish 2, 3, 4 classes of directors, with one class elected each year: this is called a CLASSIFIED BOARD (so if we had 9 directors, we could elect all 9 each year and they would have 1 year terms; or could have 3 classes of 3 directors each, and each year would elect 3 directors which would serve 3 year terms)
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on exam they would have to tell you this!
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Can SHs remove directors before the expiration of their term, FOR CAUSE?
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yes
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Can the BOARD remove directors before the expiration of their term, FOR CAUSE?
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ONLY if the certificate or a SH bylaw allows!
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Can anyone remove a director WITHOUT CAUSE?
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SHs only, and ONLY if the certificate or bylaws allow
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ny is restrictive on this compared to other states
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Who selects the person who will fill a director vacancy for the remainder of the director's term if the director dies, resigns, or is removed?
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the BOARD! remember they deal with the management!
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BUT special rule: what if the rare case where a director is removed by SHs happens, then who decides the person who will fill the vacancy?
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the SHs! again, can only do this if the certificate says so or allowed in the bylaws
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How can the board "take an act"?
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only 2 ways to take a valid act: 1) unanimous written consent, or 2) a meeting; MUST act as a group, individual directors can't act!
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What if the directors try to take an act in some other way, like via individual conversation?
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the effect of that act is VOID, UNLESS ratified by a valid act
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If the board decides to act via meeting, does it have to be in NY?
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no; it can also be by conference call assuming all can hear each other
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Are there notice requirements for board meetings?
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yes, and they differ depending on the type of meeting: a) notice required for REGULAR meetings: not needed if the time and place are set out in the bylaws or by the board; b) notice required for SPECIAL meetings: yes, notice is required, MUST state the time and place, but NO NEED to state the purpose
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the special meetings rule is testable!!
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What happens if required notice for a special meeting is not given to a director?
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any action taken at the meeting is VOID, UNLESS the un-notified director waives the notice defect
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How can the un-notified director waive notice defect?
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2 diff ways: 1) can waive by writing signed anytime, or 2) by attending the meeting without objection
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Can a director give a proxy for director voting?
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no, that's VOID! against public policy
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Can directors enter into voting agreements?
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no, that's VOID! against public policy
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Can SHs vote by proxy and enter into voting agreements?
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yes, but directors can't. so watch out for the hypo where one person is both a director AND a SH, it all depends on what meeting she is going to! what 'hat' she is wearing on that specific occasion governs what rules apply to her
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What is a quorum for a meeting?
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to do business, must have a majority of the ENTIRE BOARD (the duly constituted board: total number of positions if there were no vacancies); once you have a quorum, passing a resolution (which is how the board takes an act at a meeting) requires a majority vote of those PRESENT
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If there are 9 directorship positions on the board, at least how many must attend to constitute a quorum? How many votes must there be to pass a resolution?
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must be at least 5 directors attending; to vote for a resolution, need a majority of the directors present, so that would be 3 out of 5
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What if you have a majority of directors present, but then one leaves and you don't have a majority anymore?
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not allowed, then the quorum is BROKEN and board can't act now
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this is diff than a SH quorum, which can be broken
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What if there are 9 directorship positions, but 2 resigned and their seats are still vacant; how many must show up to get a quorum?
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still the majority of POSITIONS possible, so still out of 9! only 5 need to show up to get a quorum
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Can the corp decrease a quorum to less than a majority of directors?
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yes, in the certificate or bylaws, BUT: can never be fewer than 1/3 of the entire board (don't want 1 or 2 people making all the decisions!)
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Can the corp decrease the req that passing a resolution reqs a majority of directors present?
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NO, always must be a majority of directors present to vote to pass a resolution
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Can the corp increase a quorum to greater than a majority of directors (like that 90% of the entire board must be present to do business)?
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yes, but must be in the certificate ONLY; not in the bylaws!
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Can the corp req a supermajority vote to pass a resolution (like 60% of the directors present must approve the resolution)?
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yes, but must be in the certificate ONLY; not in the bylaws!
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So for quorums, what's the basic rule for decreases of quorum size and quorum voting vs. increases of quorum size and quorum voting?
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for increases, can only make changes if it's allowed in the CERTIFICATE, not in the bylaws!
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What does the board of directors do?
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manages business of corporation, sets policy, monitors/supervises officers, declares distributions, when to issue stock, recommends fundamental corp changes, etc
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Can the board delegate authority over management functions?
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if the certificate or bylaws allow, yes: can delegate substantial management functions to a COMMITTEE of 1+ directors, but CANNOT delegate ALL power to a committee
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What can a committee NOT do?
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1) set director compensation; 2) fill a board vacancy; 3) submit fundamental change to SHs; 4) amend bylaws
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Can a committee recommend any of the things they can't decide to the board?
|
yes!
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What is an important area in which committees are used?
|
in SH derivative suits
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What are the fiduciary duties that directors owe to the corp?
|
1) duty of care; 2) duty of loyalty
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What is the standard for duty of care?
|
"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"
|
put this in an essay
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What are the types of liability for failure to comply with duty of care?
|
1) nonfeasance, and 2) misfeasance
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What is nonfeasance?
|
director does nothing (ex. not show up to board meetings) BUT only liable if his breach CAUSED a loss to the corp; the P must show CAUSATION, not enough just to show the breach itself
|
this is difficult to show b/c the corp probably would have lost $ anyway, regardless of the nonfeasance; easier to show if the director had some expertise and was not present to give needed advice, which led to a decision that caused a loss to the corp
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What is misfeasance?
|
board does something that hurts the corp; this involves the Business Judgment Rule (BJR); causation is always clear here, unlike nonfeasance; if there is a loss of $, the director is not auto liable; she can meet the BJR test, and show that she was still prudent. prudent people do the appropriate hw before they make business decisions, so whether there is misfeasance depends on the facts and whether the director DELIBERATED and ANALYZED the decision in advance
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What effect does the BJR have on liability?
|
it means that the court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis; the directors are not guarantors of success!
|
put this in an essay!
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What is the standard for duty of loyalty?
|
"a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries"
|
put this in an essay!
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Does the BJR apply in duty of loyalty situations?
|
no, BJR cannot apply when theres a conflict of interest, b/c ppl are automatically tempted to do something in their own best interests
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What is an "interested director transaction"?
|
any deal b/t the corp and one of its directors; or b/t the corp and another business that the director is on the board of or an officer of, or in which he has a substantial financial interest
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What happens to an interested director transaction?
|
it will be set aside, UNLESS the director shows either 1) 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 any of these: 1. SH action, or 2. board approval by a sufficient vote NOT counting votes of the interested directors, or 3. unanimous vote of disinterested directors IF disinterested directors are insufficient to take an act of the board
|
when not enough disinterested present, stricter standard, need unanimity
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Do interested directors count toward a quorum of the board?
|
yes, can participate in the meeting but the VOTE doesnt count
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Say corp has 9 directors, 5 are interested, and all 9 attend the meeting to approve of the interested directors' deal; after disclosure, what vote could approve the deal?
|
since there are more interested directors than disinterested, so not enough disinterested directors to take an act of the board (meaning couldnt have a majority vote), so here you need all of the disinterested to vote unanimously to sign off on the deal
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In loyalty situations, the board can set the compensation of the directors, so does that create a conflict of interest?
|
it's an inherent conflict, but still OK! compensation must be reasonable and in good faith; if excessive, it is waste of corporate assets
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If a corp wants to give a director/officer/employee stock options as incentive, what must happen to ensure no conflict of interest?
|
if the stock is listed on a stock exchange, the use of the options as compensation/incentive must be authorized under exchange policy; if the stock is NOT listed on a stock exchange, then use of the stock this way must be APPROVED by the SHs
|
this could be a MC q!
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What is the conflict of 'competing ventures'?
|
first state the duty of loyalty standard, then say that if a director is a fiduciary of the corp, can't compete with the corp! if the director DOES go into competition against the corp, the corp gets a constructive trust on the director's profits, meaning the director must "account" for her profits (classic remedy)
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What is the conflict of 'corporate opportunity'?
|
state the duty of loyalty standard, then say that a director cannot USURP a corporate opportunity: can't take the opportunity until the director tells the board about it and waits for the board to reject it
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What is a corporate opportunity?
|
something the corp needs, has an interest or tangible expectation in, or that is logically related to its business
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What if the corp couldnt afford the opportunity?
|
probably not a defense for a director who usurps, because a fiduciary should help the corp get the financing for it
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What is the remedy for a director who usurps an opportunity?
|
constructive trust, meaning the director must "account" for his profits; if the director still has the opportunity in his possession, he must sell it to the corp at his COST (so no profit for him); if the director sold the opportunity to a third party, the corporation gets the profits
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What if a corp lends $ to a director from corp funds, or guarantee a director's personal obligation?
|
this is OK, ONLY IF the board finds that it benefits the corp (like paying for a director's tuition to learn more about business)
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What is the general rule on liability of a director regarding board actions taken?
|
a director is presumed to have concurred with board action UNLESS her dissent is noted IN WRITING in corp records
|
strict rule, very important!
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How does a director get her dissent in writing?
|
1) in the minutes, or 2) in writing to the corp secretary at the meeting, or 3) registered letter to secretary promptly after adjournment of the meeting; REMEMBER: ORAL DISSENT ALONE IS NOT GOOD ENOUGH
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What happens if a director voted for the resolution at the meeting but wants to dissent?
|
too bad, can't dissent if voted for the resolution at the meeting!
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Are there exceptions to the general rule of directors being presumed to have concurred with the board action?
|
a) if the director wasn't present at the meeting: he wont be liable if he registers written dissent w/in reasonable time of learning of the action at the meeting; b) GOOD FAITH RELIANCE: can show reliance on info, opinions, reports, or statements by 1. officers or employees of the corp who is believed to be reliable and competent, 2. lawyers/public accountants believed to be acting in their competence, or 3. a committee of which the director relying upon the committee is not a member, as to matters w/in its designated authority
|
this most likely occurs in the case of improper distributions
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|
What duties do officers owe to the corp?
|
same duty of care/loyalty as directors; officers=agents of the corp
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|
As agents, what can officers do?
|
can bind the corp to acts that they take on the corps behalf IF they have authority to do so (compare this with agency/partnership unit!)
|
ex: president has inherent authority to sue on behalf of the corp and to bind the corp to contracts entered in the ordinary course of business
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|
Can more than 1 person hold multiple offices simultaneously?
|
yes, no limit
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|
Who selects and removes the officers?
|
the board, UNLESS the certificate lets SHs elect them (but usually the certif is silent so the board will do this)
|
very very important!
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|
What happens if the SHs are allowed to elect officers?
|
they are also the only ones allowed to fire them! BUT, for cause, directors can suspend an officer's authority to act
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|
What happens if the corp appoints a Pres, and later the board fires him?
|
the corp may be liable for breach of k damages (crossover with k law!)
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|
So what is the hierarchy of who hires/fires whom?
|
SHs hire/fire directors; board of directors hire/fire officers (BUT SHs could hire/fire officers if certificate allows)
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|
Another way to remove an officer is?
|
through a judicial action
|
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|
What is a judicial action?
|
the AG or holders of 10% of all shares may sue for a judgment removing an officer for cause; the court can bar reappointment of a person so removed from office (so basically SHs can't vote out officers, but can go to court)
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|
Who determines compensation for officers?
|
the board (they monitor officers)
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|
If a person is sued in her capacity as an officer/director, by or on behalf of the corp, and incurs costs of litigation; if she seeks reimbursement (indemnification) from the corp, what happens?
|
there are 3 categories of reimbursement: 1) prohibited, 2) of right, 3) permissive
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|
Describe the prohibited reimbursement
|
this is where the director was HELD liable to the corp: must be a holding, not just accused
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Describe the of right reimbursement
|
the director won a judgment on the merits or otherwise
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What if a director won her judgment so is entitled to reimbursement 'of right', but the corp refuses to reimburse her, then she decides to sue the corp for the money? can she recover attorney's fees of this separate suit?
|
no, she must pay own attorneys fees in this case (controversial)
|
ripe for testing!
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|
Describe the permissive reimbursement
|
if not prohibited or of right, then the corp MAY reimburse the officer or director (ex. the case against her settles); so the reimbursement can include a settlement amount, expenses and attorney's fees (BUT NOT ANY JUDGMENT)
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What must the director show to get permissive reimbursement?
|
she acted in good faith AND for a purpose reasonably believed to be in the corp's best interests: then can get indemnification
|
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|
Who determines eligibility for a director receiving permissive reimbursement?
|
a) the board, with a quorum of directors being non-parties; or if no such quorum, b) SHs or a quorum of those directors who are disinterested; or c) the board pursuant to report from independent legal counsel
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|
Notwithstanding the 3 types of reimbursement, can the court where the director was sued order the corp to reimburse her for litigation/attny fees?
|
yes, if it finds that she is reasonably entitled to reimbursement
|
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|
Can the corp advance litigation expenses to the director/officer?
|
yes, but must be repaid if turns out shes not entitled to reimbursement
|
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|
Can the corp buy insurance to cover director/officer liability?
|
yes
|
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|
can the certif/bylaws provide for indemnification by resolution of the board or SHs or by agreement?
|
yes, UNLESS the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited
|
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|
Any time in the essays that you see a director arguably breaching a duty, what should you say? (even if it doesnt mention anything about what's in the certificate?)
|
the certificate may eliminate director liability, to the corp or SHs, 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
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|
Fact pattern 3: shareholders; can SHs manage the corp?
|
generally no, because the board is supposed to manage
|
stuff on SHs is tested on HEAVILY
|
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|
When can the SHs actually manage the business directly, departing from the general rule?
|
in a closely held corp
|
|
|
|
What is a closely held corp?
|
a) it has few SHs, and b) stock is not publicly traded (think mom and pop); BUT: do not HAVE to have shareholder management, and you CAN have a board of directors
|
it's always a closed corp on the exam!
|
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|
What do you need in a closely held corp to allow SHs to manage?
|
have a provision in the certificate restricting or transferring board power to SHs (or others); AND need 4 things: 1) all incorporators or SHs (voting and nonvoting) approve it, 2) it's conspicuously noted on front and back of all shares, 3) all subsequent SHs have notice, and 4) shares are not listed on an exchange or regularly quoted over-the counter
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|
In a close corp run by SHs, who owes the duties of care/loyalty?
|
the managing SHs, owe the duties to the corp!
|
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|
In close corps, what is the judicial trend regarding fiduciary duties of SHs?
|
trend toward imposing fiduciary duties on SHs in their dealings with each other: controlling SHs cannot: a) use power for personal gain at expense of minority SHs or the corp, or b) oppress minority SHs or the corp; SHs owe duty of utmost good faith
|
ripe! watch out for oppression in all questions!
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|
Why are courts more inclined to protect minority SHs in a close corp?
|
give remedy for when victims of oppression, which defeats the SHs' reasonable expectations
|
ripe! watch out for oppression in all questions!
|
|
|
What are professional service corps?
|
members of licensed professions (doctors, lawyers) can form a professional service corp, usually P.C., but CANNOT practice the profession through a general business corp
|
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|
Do SHs in professional service corps need to be licensed too?
|
yes, and so must officers and directors (can hire non-licensed employees)
|
|
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|
Are the professionals liable for their own malpractice?
|
yes, but not for that of others (advantage over partnerships)
|
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|
Are the professionals liable for the contracts entered by the entity or rent due on leases in the P.C.'s name?
|
no, the entity is liable
|
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|
Are P.C.s governed by the same rules as business corps?
|
generally yes; certificate must meet the gen corps reqs except for use of P.C.; and must indicate the profession to be practiced; include the names and addresses of the original SHs, directors, officers; must be certification that each SH, director, and officer is licensed to practice the profession
|
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|
What happens if a SH in a P.C. dies or is disqualified from the practice?
|
P.C. must buy back his stock
|
|
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|
Generally, are the SH's personally liable for what the corp does?
|
generally no, the corp is liable for its own debts or acts
|
always state this on essay first!
|
|
|
When can a SH be liable personally for what the corp does?
|
when the court PIERCES THE CORP VIEL (PCV)
|
|
|
|
When can you PCV?
|
only in a close corp; and the SHs 1) must have ABUSED the privilege of incorporating, and 2) FAIRNESS must require holding them liable
|
|
|
|
Why is fairness a requirement for PCV?
|
if the SH exercises COMPLETE DOMINATION over the corp, and abuses the corp form, to perpetrate a fraud, wrong, or injustice
|
|
|
|
What is a classic case of abuse of the corp?
|
ALTER EGO: (identity of interests, agency, excessive domination):
|
|
|
|
X and Y are SHs of Corp. X is also CEO. X commingles personal and corp funds, uses corp car as his own, and corp credit card for personal expenses: can creditor of the corp who has been unable to collect its claim from the corp collect from either X or Y?
|
1) did the SHs abuse the corp? yes, X treated corp assets as his own, but in NY, there is NO PCV IF the corp has any mind, will, or existence of its own--tough to show that the SH had COMPLETE DOMINATION over the corp; 2) does fairness req PCV? maybe, bc the creditors arent being paid, so looks like perpetrating injustice, but lay out the elements to come to a conclusion
|
|
|
|
who would be liable if PCV occurred in hypo, X or Y, or both?
|
probably just x, b/c he was the one who abused the corp
|
|
|
|
Are SHs only people?
|
no, they can be corporations, like the parent corp is a SH of the subsidiary corp
|
|
|
|
What is undercapitalization?
|
if a corp is undercapitalized when it formed, this could be part of the analysis when determining whether to PCV; BUT, undercapitalization ALONE is NOT enough by itself to PCV, also need to show the excessive domination or fraud, or illegality
|
state general rule about PCV first!
|
|
|
What is a good example of undercapitalization?
|
if a corp doesnt carry insurance during the stage of initial capitalization; if someone injured on the job, that injured person could sue based on undercapitalization b/c if the SHs failed to invest enough to cover prospective liabilities, that's clearly an abuse of the privilege of incorporating (meaning they are trying to shield themselves from liability), BUT NOT ALONE! must also show the domination/fraud/illegality
|
|
|
|
When do we expect more willingness to PCV?
|
in torts (over ks)
|
|
|
|
In a close corp, what is the law on wages?
|
the ten largest SHs are personally liable for wages and benefits to the corp's employees
|
this could come up on the essay! remember this one!
|
|
|
What is a derivative suit?
|
a SH is suing to enforce the CORP'S CLAM, NOT her own personal claim; the corp is not pursuing its own claim so SH steps in to prosecute
|
|
|
|
What must you always ask to determine whether there's a derivative suit?
|
ask: could the corp have brought this suit? if yes, it's derivative b/c the SH is suing on the corp's behalf
|
|
|
|
What will derivative suits usually be about?
|
usually will be due to a breach of duty of care or loyalty, like: usurping corp opportunities, waste of corp assets (which is breach of loyalty)
|
|
|
|
What if a SH sues the board of directors of Corp for issuing new stock without honoring her preemptive rights?
|
this is NOT derivative, it's a "direct suit" for the SH's personal claim
|
|
|
|
What if a Sh sues the board of directors of Corp to declare a dividend?
|
probably not derivative, but MAYBE if you argue that it's based on a breach of duty to the corp--meaning part of overall mismanagement by the directors
|
|
|
|
If the SH wins the derivative suit, who gets the recovery?
|
the corp gets the judgment
|
|
|
|
What does the SH receive if successful?
|
costs and attny's fees, paid out of the corp's judgment (SH conferred the benefit on the corp so deserves something)
|
|
|
|
Is it possible for SH to ever get any of the recovery personally?
|
maybe if recovery by the corp would return $ to the 'bad guys', meaning for ex: in a close corp, 1 of 3 SHs breached duty of loyalty; if sue and win, recovery would go 1/3 to bad guy! so the court may let other SHs recover directly even though it's a derivative
|
|
|
|
What if SH loses the suit? can she recover anything? is she liable to anyone?
|
no, can't get costs or expenses; probably liable to the ds for costs, b/c winner usually gets costs from the loser
|
|
|
|
Can other SHs later sue the same ds on the same transaction?
|
no, claim preclusion! res judicata
|
|
|
|
What are the reqs for bringing a SH derivative suit?
|
1. stock ownership when claim arose, 2. adequate representation of corp's and SH's interests, 3. may have to post a bond, 4. make a demand on the directors, unless futile, 5. special pleading req, 6. corp joined as a defendant
|
|
|
|
Discuss req 1, stock ownership when claim arose
|
the person bringing suit must 1. have owned stock (or held a voting trust certificate) at the time the claim arose, OR have gotten it by operation of law from someone who owned the stock when the claim arose--this means via a) inheritance, or b) divorce decree; AND 2. the person must own stock when the action is brought and through the time leading up to the entry of the judgment
|
this is all about timing! if your uncle owned shares at the time the claim arose (meaning injury) then if you inherit the stock, you can bring a derivative suit
|
|
|
Discuss req 2, posting a bond
|
SH may be required to post a bond for the d's costs; does NOT HAVE TO, IF a) the SH owns 5% or more of the stock, OR b) her stock is worth more than $50k
|
|
|
|
Discuss req 3, making a demand on the directors that the corp sue
|
does NOT have to make demand if doing so would be FUTILE
|
|
|
|
When is a demand possibly futile?
|
a) if a majority of the board is interested or under the control of interested directors, OR b) the board didnt inform itself (research) of the transaction to the extent reasonable under the circs, OR c) the transaction is so egregious on its face that it could not be the result of sound business judgment
|
|
|
|
Which of the 3 possible futile situations is most likely?
|
the first: watch out for facts showing that the sitting directors will be defendants in the case
|
|
|
|
Discuss req 4, special pleading req
|
p must plead with PARTICULARITY her efforts to get the board to sue or why the demand was futile
|
|
|
|
Discuss req 5, the board being joined as a d
|
even if makes no sense, you still join the corp as a d (even though the claim is technically the corp's claim!)
|
|
|
|
What if SH makes demand on board to sue, but they refuse? Can SH bring suit anyway?
|
ONLY IF the SH shows that the majority of the board is interested, OR its procedure was incomplete or inadequate
|
|
|
|
What is a corporation's possible response if it opposes the suit?
|
it can file a motion to dismiss
|
|
|
|
What can the motion to dismiss be based on?
|
a finding by independent directors, or a committee of indep directors sometimes called "special litigation committee", that the suit is NOT in the corp's BEST INTERESTS
|
|
|
|
What are reasons the corp may think a suit is not in its best interests?
|
maybe if the case has a low chance of recovery, or the costs of the suit will exceed recovery
|
|
|
|
What does the court look to when deciding a corp's motion to dismiss?
|
1) the independence of those making the investigation, AND 2) the sufficiency of the investigation; if show BOTH, then the court AUTO DISMISSES (no need for further evaluation)
|
|
|
|
Can parties dismiss or settle a derivative suit?
|
must get court approval
|
|
|
|
Other than a SH, can a director or officer bring a derivative suit?
|
and D or an O can sue another D or O to compel her to account for breach of duities, or misaprops of corp assets (they can police each other!) BUT it's not called a derivative suit!
|
|
|
|
When a D or O brings a case, does she have to meet the reqs for a derivative suit?
|
NO, Ds and Os sue in their own name, BUT recovery DOES go to the corp
|
remember, only SHs bring derivative suits!
|
|
|
Who of the SHs vote?
|
general rule is that the RECORD OWNER as of the RECORD DATE has the right to vote
|
|
|
|
What is the record owner, and what is the record date?
|
the record owner is person shown as owner in the corp records; the record date is the voter eligibility cutoff, set no fewer than 10 days before the meeting and no more than 60 days before the meeting; this is true even if the record owner sold her stock--she can still vote
|
|
|
|
What are the exceptions to the general rule that the record owner on the record date votes at the next meeting?
|
a) the corp reacquires its stock prior to the record date--this does NOT mean the corp itself can vote this treasury stock, NO ONE gets to vote treasury stock; b) death of a SH--the SH's executor can vote the SH's shares; c) proxies
|
|
|
|
What are proxies?
|
it's a 1) writing, 2) signed by the record SH or authorized agent, 3) directed to the secretary of the corp, 4) authorizing another to vote the shares
|
|
|
|
Can a proxy be a fax or email?
|
yes
|
|
|
|
Can a SH vote by proxy in any annual meeting?
|
the proxy is only good for 11 month, UNLESS it says otherwise (which it wont on the exam!)
|
|
|
|
Can a SH revoke her proxy?
|
yes, can revoke by either 1) in writing, or 2) attending the meeting and voting herself
|
|
|
|
What if the proxy says it's irrevocable?
|
SH can still revoke!
|
|
|
|
What if a SH sells her shares to B after the record date but before the meeting, and gives B an "irrevocable proxy" to vote the shares; can SH revoke this proxy?
|
no, b/c it 1) says irrevocable, and 2) the proxy-holder has some interest in the shares other than voting; this is called a proxy coupled with an interest, which in this case is ownership (remember, if SH still owned the shares after the record date, then only SH can vote in the upcoming meeting)
|
|
|
|
What is a voting trust?
|
usually minority SHs want to team up to increase their influence on corp policy by "block voting", meaning voting alike
|
|
|
|
What are the reqs for a voting trust?
|
1. written trust agreement controlling how the shares will be voted; 2. copy to the corp; 3. transfer legal title of shares to voting trustee; and 4. original SHs receive voting trust certificates and retain all SH rights, EXCEPT for voting
|
|
|
|
Is there a time limit on voting trusts?
|
yes, under the BCL it's a 10 year max
|
|
|
|
Can you extend the time limit?
|
yes, within 6 months of expiration, can extend for another term of up to 10 years
|
|
|
|
What is req for SHs to enter into a voting agreement?
|
must be in writing, and signed
|
|
|
|
Are voting agreements specifically enforceable?
|
no! not in NY! no case law allowing this
|
|
|
|
What is special about a proxy given in the context of a voting agreement?
|
it can be irrevocable if it says so
|
|
|
|
Is a voting trust specifically enforceable?
|
yes, b/c the trustee is a fiduciary, has duty to vote a certain way
|
|
|
|
Can 2 SHs agree to vote to elect each other as directors?
|
yes, b/c electing directors is what SHs do!
|
|
|
|
What if 2 SHs agree to vote to elect each other as directors, but they then agree about what actions they will take once becoming directors?
|
VOID: no voting agreements are allowed among directors; UNLESS: these SHs were the only 2 SHs in the corp (then we can let them do what they want)
|
|
|
|
How can SHs take a valid act (vote?)
|
1) written consent signed by the holders of ALL voting shares (need unanimity), OR 2) a meeting
|
this is same as directors; this is important!
|
|
|
What kinds of SH meetings are there?
|
2 types: 1) annual; 2) special
|
|
|
|
Must SH meetings be in NY?
|
no, same as the board, can be anywhere
|
|
|
|
What is done at the ANNUAL meeting?
|
SHs elect directors
|
|
|
|
Who wins the vote?
|
the highest vote-getter for each seat on the board wins, even if she did not get a majority: it's plurality voting
|
|
|
|
What happens if the annual meeting is not held?
|
the court can order one! must have an annual meeting
|
|
|
|
Who can call a SPECIAL meeting?
|
the board, or anyone provided in the certificate/bylaws
|
|
|
|
Is there a notice req for the meetings?
|
yes, must give written notice (email ok) to EVERY SH entitled to vote, for EVERY meeting (annual or special) b/t 10 and 60 days before the meeting; it must tell them the TIME and PLACE
|
|
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What must a notice of a special meeting include in it?
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a) who called the meeting, AND b) the PURPOSE of the meeting
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Why is the statement of the purpose so important?
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b/c at the meeting, you CANNOT discuss anything other than the stated purpose
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What happens if the action proposed at the meeting is something that would affect appraisal rights?
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the notice must say so and say why (even include the statute about appraisal rights to inform them)
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What if a proper person calls a special meeting of the shareholders, and stated purpose is to remove a particular officer?
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not allowed, meeting must be for a PROPER SH purpose: SHs dont remove officers, only directors do! SHs can remove directors!
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What happens if the corp doesnt give everyone who is entitled to vote notice of the meeting?
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any action taken at the meeting is VOID, UNLESS the un-notified director waives the notice defect
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same as for director meetings!
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How can the un-notified SHs waive notice defect?
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express: in writing and signed anytime; implied: if she attends the meeting without objection
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same as for director meetings!
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How do SHs vote?
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must be a quorum, based on # of SHARES, NOT # of shareholders; a quorum requires a majority of outstanding shares
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Corp has 120,000 shares outstanding, and 700 shareholders; what's a quorum?
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60,001 SHARES (b/c count based on the # of outstanding shares)
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Can the certif/bylaws reduce a quorum to less than a majority in SH meetings?
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yes, but can never be reduced to fewer than 1/3 of shares entitled to vote (remember, can be in certif or bylaws)
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Can the corp reduce the requirement of majority approval (meaning less than a majority of votes to decide on a deal?)
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no; basically this means you can have less total shares represented at the meeting to constitute a quorum than a majority of shares (less shares to make a quorum), but of those shares actually voting, still need a majority of those shares to vote in favor of approving something
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Can the corp req a supermajority of the SHARES to be represented to constitute a quorum?
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yes, in the certificate but NOT in the bylaws
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Can the corp req a supermajority vote of the shares to pass a resolution (like 60% of the shares voting, rather than 51% must approve the resolution)?
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yes, in the certificate ONLY, NOT in the bylaws
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same as for director meetings
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If a quorum is met, what does a majority vote to act to bind the corp actually mean?
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it's the majority of the shares ACTUALLY VOTING (so a majority of those in the quorum who are actually voting--some shares represented at the quorum will not even vote!)
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Corp has 120,000 shares outstanding, and 62,000 shares are represented at the meeting, but only 50,000 shares vote on a particular proposal; how many shares must vote for the proposal for it to be accepted by the shareholders?
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25,001--this is the majority of the shares that actually VOTED, NOT the majority of the shares represented at the quorum
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Once a quorum is established at a SH meeting, can it be lost if ppl leave?
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no! this is DIFF than a director's meeting!
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Can SHs use cumulative voting?
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yes, ONLY available when SHs are voting to elect directors--helps minority SHs get representation on the board
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rarely tested
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What's the formula for calculating cumulative voting?
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multiply the # shares times the # of directors to be elected
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You own 1,000 shares of stock in Corp. Corp has 9 directorships open for election, and you want 1 person in particular to get a slot; how many votes can you cast for that 1 person?
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1,000 shares X 9 directors=9,000 votes! but you can divide your votes any way that you want
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Can you do cumulative voting if the certificate is silent on it?
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no, can only have that right if it's in the certificate
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What is the formula to elect one director?
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you need 1 share MORE than this percentage: 100/X+1 (the X=# of directors being elected)
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Can a SH sell her shares at below par?
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yes! par is only what the CORP must use when ISSUING shares; it's an issuance rule
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can the corp impose restrictions on stock transfers?
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yes, especially in close corps to keep outsiders out;
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where are the stock transfer restrictions set?
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in the certificate, bylaws or by agreement
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When will stock transfer restrictions be upheld?
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if they are not an undue restraint on alienation
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Is subjecting SH's stock to a right of first refusal to the corp itself valid?
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yes, it's acceptable as long as the price offered is reasonable, like if the corp offered to match an outsider's offer
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Can the corp req the SH to get its approval before selling his stock if the right of first refusal is not governed by any rules?
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probably not b/c if the corp can refuse for any reason, then its probably an undue restriction if there are no rules for how he can sell
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Can you have a restriction requiring sale of one's stock to the corp when the SH dies or retires from working for the corp?
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yes, common in close corps!
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What happens to the transferee of the stock (the third party that the SH sold his stock to) if she bought the stock from a SH who violated the restrictions on sale, and the corp now wants to sue the transferee?
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look for the transferee's KNOWLEDGE and NOTICE: even if there is a valid restriction on sale of stock, cannot be invoked against the transferee UNLESS either 1) it is conspicuously noted on the stock certificate, OR 2) the transferee had actual knowledge of the restriction
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Who can demand access to records regarding 1) the minutes of the SH proceedings, and 2) the record of SHs?
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any SH on 5 DAY'S WRITTEN demand
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Can the corp demand anything when a SH demands access?
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can demand that the SH give an AFFIDAVIT that 1) his purpose is not other than in interest of the corp, and 2) he has not within 5 years tried to sell any list of SHs
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Can the corp demand more detail in the affidavit?
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NEVER! the SH is only required to swear to those 2 things
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What happens if a SH refuses to write an affidavit?
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corp can deny access to the records
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What if the SH wants access to the list of directors and officers?
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SH must give 2 day's written demand to access list of current directors and officers; no affidavit needed
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What are the records where the SH need only make a written request and the corp must provide the records, even by mail?
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records regarding: 1) the corp's latest annual balance sheet, 2) the profit and loss statement, and 3) the latest interim statements distributed to SHs or public
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What is the common law right to inspect, and what docs does it cover?
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for all SHs, they have right to inspect records at a reasonable time and proper place for a PROPER PURPOSE (related to her role as SH); the docs this covers is unclear!
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throw this in every essay!
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Can a director inspect corporate books and records?
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yes, unfettered access b/c directors are managers: to discharge duties, need to be able to look at records
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Can agents of the SH inspect the books and records too?
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yes
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Can the SHs and agents get copies of the records?
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yes
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What are the types of distributions?
|
distributions are payments by the corp to SHs, 3 types: 1) dividend, 2) payment to repurchase shares, or 3) payment to redeem shares (forced sale to corp at a price set in the corp)
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How are distributions paid out?
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they are declared in the Board's discretion
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Do SHs have a right to distributions?
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no, not until it is DECLARED; once it's declared, then the SHs have a right to collect the distribution
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Will a court interfere with the board's discretion and order a distribution?
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only on a showing of bad faith or dishonest purpose
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What should you NOT confuse a distribution with?
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stock splits
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Which shareholders get dividends?
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there's a) common stock; b) preferred stock; c) preferred that are participating; d) preferred that is cumulative
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If a $400,000 dividend is declared, what do 100,000 shares of outstanding common stock get?
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you divide $400,000 by 100,000 to get $4 per share
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If a $400,000 dividend is declared, what do 100,000 shares of outstanding common stock get and 20,000 shares of PREFERRED with $2 dividend preference?
|
preferred=pay first (not more!); so those 20,000 preferred shares must be paid $2 per share first, which is $40,000 total. That means that out of 400,000 shares, we subtract the $40,000 and we are left with $360,000; then you divide that number by the number of common shares, which is 100,000, so you end up with $3.6 a share
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If a $400,000 dividend is declared, what do 100,000 shares of outstanding common stock get and 20,000 shares of PREFERRED with $2 dividend preference, that is PARTICIPATING too?
|
participating=pay again; so the 20,000 shares get paid twice, first as preferred, then with the common b/c participating; so you get the same number as the hypo before, where the 20,000 preferred shares get paid $40,000, then subtract that from the total and you're left with $360,000; BUT, this time you don't just divide by the 100,000 common shares, you put in the preferred shares AGAIN, so this time it's 100,000 common + 20,000 preferred=120,000 total; then you divide the $360,000 by THAT total, so that=$3 per share
|
common hates this b/c they get less $, since preferred gets paid twice!
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If a $400,000 dividend is declared, what do 100,000 shares of outstanding common stock get and 20,000 shares of PREFERRED with $2 dividend preference, that is CUMULATIVE? and the preferred haven't been paid for 3 years...
|
cumulative=add them up for the years that havent been paid out; here the corp owes the cumulative shares for 3 years unpaid dividends, PLUS this year! So the corp owes the 20,000 preferred for 4 years of their $2 preference. you do 4 years X $2 preference=$8 per share; then you do 20,000 shares X $8=$160,000--this is what you pay out first to preferred stock. then, you subtract the $160,000 from the total $400,000 declared dividend, left with $240,000--this goes to the common stock, so you divide this among the 100,000 common shares=$2.40
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What funds can you use for any distribution (dividend, repurchase, redemption?)
|
surplus
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How is surplus computed?
|
Assets-Liabilities-Stated capital
|
they tell you assets and liabilities, you determine stated capital
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Can stated capital be used for distributions?
|
NEVER!
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How is stated capital computed?
|
you look at the par value, and then multiply by the number of shares being issued
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What is the surplus if there are 10,000 shares of $2 par stock for $50,000?
|
the stated capital would be 10,000 X $2=$20,000; if selling for $50,000, then do $50,000-$20,000=$30,000 surplus (it's $30,000 excess over par)
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What if there was no-par issuance, how would the consideration be allocated?
|
w/in 60 days of the issuance, the board can allocate ANY PART but NOT ALL to surplus; this means that you just multiply the number of shares issued by whatever the board decides to make stated capital of those shares
|
just state this rule, no need to do math
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Can the corp make distributions even though it lost money last year?
|
yes
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What does insolvent mean?
|
the corp is unable to pay its debts as they come due in ordinary course of business
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What happens if the corp is insolvent or a distribution would make it insolvent?
|
can't make a distribution; if make a distribution it would be UNLAWFUL
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Who is liable for unlawful distributions?
|
directors are personally liable for unlawful distributions; so are SHs who knew the distribution was unlawful when they received it
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Who would sue to recover for unlawful distributions?
|
the corporation itself, since it's the corp's claim...can be a derivative suit
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Are there any defenses to unlawful distributions?
|
yes, think back to director's 'good faith reliance' defense to unlawful decisions of the corp: can provide evidence of reliance upon the competence of professionals (like attorneys, accountants, etc)
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What is the difference b/t redemptions and repurchases?
|
redemptions are set in the certificate and done proportionately within each class of stock, while repurchases are negotiated individually
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Can the corp discriminate in repurchases?
|
yes, except might have to give equal opportunity to all SHs in a close corp b/c otherwise they get no return on their investment
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|
What are fundamental corp changes?
|
so fundamental that they req BOTH the directors and SHs to approve; most corps must notify the Dept. of State a doc that the Dept files
|
this is extraordinary b/c usually SHs have no voice in management, so this is an exception
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What right do the dissenting SHs have in response to a fundamental corp change?
|
right of appraisal, which is right to force corp to buy your stock at FAIR VALUE; NOTE--this ONLY exists in CLOSE CORPS!
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|
What corp actions trigger the SH's right of appraisal?
|
a) some amendments to the certificate; b) consolidation; c)**your corp merges into another corp; d)**your corp transfers substantially all of its assets, e) your corp's shares are acquired in a share exchange (never see this!)
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When is there NO right to appraisal even when those triggering actions occur?
|
if the corp is listed on a national securities exchange or NADAQ
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Why is the right to appraisal usually in close corps?
|
b/c if theres a public market for your stock, then you don't need a right of appraisal b/c you can get out of your stock by selling it on the open market
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|
What actions can the SH take to "perfect the right" of appraisal?
|
must do all 3: 1) before the vote: first file written objection and intent to demand payment, 2) at the vote: second you abstain from the vote or vote against the proposed change, 3) after the vote: last, make a written demand to be bought out
|
timing of these things will help you remember
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What happens if the SH and the corp can't agree on a fair value?
|
the corp can sue and the court determines the value
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|
Can the court discount the value of minority stock in setting the value for an appraisal, reflecting that minority stock may be worth less than controlling shares?
|
no, no minority discount; fair value is fair value no matter what!
|
just b/c in the minority doesnt mean you get screwed!
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|
When amending the certificate, what needs to be done for minor changes?
|
for changes relating to office location, registered agent, etc, can be made by the BOARD alone
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When amending the certificate, what needs to be done for major changes?
|
must be approved by first 1) director action, and then they recommend it to the SHs, AND second 2) approved by a majority of the shares ENTITLED to vote
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Lets say that the directors approve an amendment to the certif, and then recommends it to the SHs; if there are 4,000 outstanding shares ENTITLED to vote, how many must vote for the amendment?
|
at least 2,001
|
remember: this is NOT based on how many shares ACTUALLY VOTE, it must be a majority of those shares ENTITLED to vote, regardless of how many ppl show up at the meeting
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|
What is the "weird" deal about a particular amendment?
|
if the amendment will change or strike a supermajority quorum or voting req for SH (not director) voting, you need 1) director approval, PLUS 2) 2/3 of shares entitled to vote
|
prob MC q!
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|
What happens once an amendment is approved?
|
deliver the certificate of amendment to the Dept of State for its filing
|
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|
Do dissenting SHs have rights of appraisal?
|
yes, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right, or limits voting rights
|
rarely tested
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|
|
What is a merger, and what is a consolidation?
|
merger=A Corp merges into B Corp; consolidation=A Corp and B Corp form C Corp
|
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|
What does the corp need to do a merger or consolidation?
|
each co's board of directors adopts a plan of merger (or consolidation), AND SH approval, from EACH CORP
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|
A Corp has 6,000 outstanding shares entitled to vote; how many shares must vote for the proposed merger of A Corp into B, Inc?
|
at least 3,001 (this is the majority of shares entitled to vote)
|
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|
|
Is SH approval necessary in a parent-subsidiary situation?
|
not if the parent corp owns 90% or more of each class of stock of the sub that is merged into the parent
|
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|
|
What is a merger b/t parent that owns 90% or more of the sub called?
|
short-form merger (SHs dont vote even tho fundamental change; no point, if parent owns 90%!)
|
rarely tested
|
|
|
After completing the merger certificate, what do you do?
|
deliver certificate of merger to the Dept of State for filing
|
|
|
|
Are there dissenting SHs right of appraisal?
|
yes, but ONLY for the disappearing corp (not the surviving)
|
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|
Do the dissenting SHs of the sub in a short-form merger have right of appraisal?
|
yes, even tho they didnt vote
|
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|
|
What is the effect of a merger or consolidation?
|
successor liability--the SURVIVING corp succeeds to all RIGHTS and LIABILITIES of the disappearing co.; this makes sense b/c the disappearing corp can't just avoid its creditors: the creditors need to be able to sue the surviving corp
|
very testable
|
|
|
What is a transfer (not just mortgage) of all or substantially all of the assets not in the ordinary course of business or share exchange?
|
transfer: fundamental corporate changes for the SELLING corp ONLY, not the buying corp; exchange: one company acquires all the outstanding shares of one or more classes of another company (never tested)
|
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|
|
What happens if Seller Corp wants to sell all of its ASSETS to Buyer Corp, or B Corp wants to acquire all of the SHARES of Seller Corp
|
each corp's board of directors must authorize the deal, AND approval by the SELLING corp's SHs
|
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|
How many shares of the selling corp must approve of the sale?
|
majority of the shares entitled to vote
|
|
|
|
How many shares of the buying corp must approve of the sale?
|
NONE: this isnt a fundamental change for the buying corp; the corp expects to purchase assets/shares of other corps
|
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|
|
Are there dissenting SHs right of appraisal?
|
only for the SELLING corp's SHs
|
|
|
|
What are the final steps in a share exchange or in a transfer of assets?
|
share exchange: deliver plan of exchange to the Dept of State; transfer of assets: no filing required
|
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|
What is the general rule on liability of the BUYING corp in an acquisition of assets?
|
will not be liable for the torts of the company whose assets being acquired UNLESS: 1) the deal provides otherwise, OR 2) the purchasing company is a mere continuation of the seller, OR 3) the deal was entered fraudulently in order to escape liability
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|
How is the rule on liability for buying assets compared to liability in a merger?
|
for buying assets it's diff b/c do not expect successor liability, b/c the Corp that's selling the assets STILL EXISTS! creditors can still sue the selling corp b/c no one has disappeared; even if sold all of its assets, not gone b/c now they just have a ton of $!
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|
What types of dissolution are there?
|
voluntary and involuntary
|
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|
What approval is needed for a voluntary dissolution?
|
no board vote necessary; SH vote must be majority of shares entitled to vote (then certificate of dissolution delivered to the Dept of State for filing)
|
|
|
|
What is involuntary dissolution?
|
it's judicial: someone is asking for a court order of dissolution
|
more likely tested on
|
|
|
How can you effect an involuntary dissolution?
|
4 ways: 1) by board resolution OR resolution of maj shares entitled to vote, stating that the corp has insufficient assets to discharge liabilities OR dissolution would be beneficial to SHs; 2) 1/2 or more of shares entitled to vote may petition if directors too divided to manage or SHs too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to SHs; 3) any SH entitled to vote may petition if SHs unable to elect directors for 2 annual meetings (big prob!); 4)**20% or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds: (look to next slide)
|
20% one tested on!!
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|
|
For involuntary dissolution #4: **20% or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds:
|
a) the management's illegal, oppressive, or fraudulent acts toward the complaining SHs; OR b) management's wasting, diverting or looting assets
|
this is in close corps only
|
|
|
Who is the 'management' conducting these harmful acts?
|
the board or the managing SHs
|
|
|
|
Can the court deny dissolution?
|
yes, if there's some other way the complaining SH can obtain a fair return on investment (like ordering a buyout); court will consider whether liquidation is necessary to protection petitioners and is only way for them to get fair return on investment
|
dissolution is a serious remedy!
|
|
|
How can the corp or non-complaining SHs try to avoid dissolution here?
|
w/in 90 days of the petition, buy the petitioner's stock at fair value on terms approved by the court
|
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|
Does dissolution end the corp's existence?
|
no, the corp stays in existence to WIND UP: steps of winding up/liquidating--1) gather all assets, 2) convert to cash (sell them), 3)**pay creditors (they had been given notice earlier), and 4) distribute remainder to SHs, pro-rata by share UNLESS there is a dissolution preference
|
creditors are FIRST IN LINE
|
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|
What is a dissolution preference?
|
those shares get paid out first, works same as dividend preference (can have labels in the certificate, like: $2 dividend preferred, or $2 DISSOLUTION preferred)
|
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|
Can SHs agree that they will be paid before creditors?
|
no! creditors always paid first
|
|
|
|
When do controlling SHs owe duties to the corp and to other SHs?
|
just in close corps; generally the controlling SHs in public corps do not owe fiduciary duties to each other or the corp; can act in their own self interests
|
|
|
|
What type of controlling SH owes a duty, and what duties?
|
a SH who has a control position (like director) or whose ownership is such that she has a WORKING CONTROL OVER THE CORP, owes a fiduciary duty to minority SHs and sometimes to others, including the corp; can't use dominant position at expense of minority or corp (usually a prob in a close corp, but CAN happen in public)
|
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|
Can a controlling SH sell her shares?
|
yes, at a premium (maybe)
|
|
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|
If the controlling SH sells her shares, can she keep the $?
|
generally yes, it's called a "control preimum"=more than econ value of stock (ex. SH owns 60% of stock that's in a corp of $1mil, can sell for more than $60k)
|
|
|
|
Can courts impose liability in the situation of a control premium?
|
IF something else happened too: if the controlling SH sold to looters w/o making reas investigation (look for facts that should have put her ON NOTICE, like an anonymous buyer)
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|
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|
What happens if controlling SH sells w/on reas investigation to a looter?
|
disgorge seller's profits AND seller prob liable for all damage done to the corp
|
|
|
|
What if a controlling SH de facto sells a corporate asset?
|
all SHs should share in the premium paid by the buyer (say someone bought controlling interests NOT to run the corp but to get hands on assets, like looting, selling off corp assets, you don't have right to do that, only the corp does!)
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|
Can controlling SHs sell their position?
|
no; fiduciaries cant sell their position: ex. controlling SH sells controlling interest and agrees that she and 'her' directors will resign from the board...can elect new directors, but NOT sell seats! remedy=disgorge profits
|
|
|
|
What are freeze-outs?
|
the general rule is that all mergers must have LEGIT CORPORATE purposes, even though approved by the requisite number of shares. a freeze-out merger is aimed solely at cashing out minority SHs unfairly (usually happens when maj SHs have corp merge with a company they already own); then the minority SHs shares are purchased for cash, so theyre left with no interest in either corp
|
|
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|
What will the court do in a freeze-out situation?
|
the court will look to the transaction as a whole, need for fair price AND fair course of dealing; factors=1) whether the deal was tainted by self-dealing/fraud; 2) whether the minority SHs are dealt with fairly; 3) whether there is a legit business reason for the merger
|
|
|
|
What are diff types of insider trading?
|
2 ways to raise the issue: 1) Market trading on inside information; 2) Nondisclosure of "special facts" (or special circumstances)
|
the exam has hit both!
|
|
|
What is market trading on inside info?
|
this happens in a public corp usually: a director/officer trades her corp's stock on the market based on inside info from the corp, and makes a profit; in NY the director/officer has breached the duty to the CORP
|
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|
What is the remedy for market trading on inside info?
|
the corp can sue to recover the officer's profit, could be derivative
|
|
|
|
What is nondisclosure of "special facts"?
|
all directors/officers/controlling SHs owe duty not to trade with a non-insider on special inside knowledge; only 2 options: 1. abstain from doing so, OR 2. ensure disclosure so others on same footing (this is considered COMMON LAW INSIDER TRADING)
|
this is a face to face deal, not on market (often the insider knows of something that will increase the value of the stock significantly (like the release of a new technology) and a SH will want to sell her shares, not knowing of this new event, and the insider will offer a price at higher than market value; then the stock will skyrocket and make a ton of profits, while the SH got screwed)
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|
What are 'special facts'?
|
those a reasonable investor would consider important in making an investment decision
|
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|
Who can sue when this happens?
|
a SH who was the one who dealt with the directors/officer after he violated the special facts doctrine; this is an individual SH claim, NOT DERIV
|
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|
How do you measure the damage?
|
(the SH gets recovery, not corp): diff b/t Price Paid and Value of stock at a reasonable time after public disclosure of the secret
|
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