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67 Cards in this Set

  • Front
  • Back
People, Paper, Acts
Incorporators (people):
1) Execute the certificate and deliver to sec. of state.
2) Hold the organizational meeting.
o 1 or more needed.
o Any adult human (no entities) can be incorporator.
Cert. of Inc. (paper):
Purpose of the certificate
1) K b/t corp. and s/hs
2) K b/t corp. and state.

Information on certificate
o Signing and acknowledging: Each incorporator signs certificate and acknowledges it before a notary, Deliver to NY Dept. of State, pay fees; If conforming w/ law, Dept. files the certificate, which is conclusive evidence of valid formation; now a de jure corp..

o Organizational meeting: Then Incorporators hold organizational meeting, at which they
1) Adopt any bylaws.
2) Elect initial Bd. of dir.(not named in certificate)
3) Bd. takes over mgmt.
FORMATION REQUIREMENTS: Paper (contents of cert. of incorporation)
1) Names and addresses.
-Corporate name: Must have “corp,” “incorporated,” “llc,” etc. & may abbreviate.
-Address: give county in NY where have “office of the corp.s,” which doesn’t have to be a place where the corp. actually does business.
-Designate NY Sec of State as the corp.’s agent for service of process (you can also give another one) and give address for forwarding process to the corp..
-Name and address of each incorporator.

2) Statement of duration: If no such statement, corp. has perpetual existence.
3) Corporate purpose. Could be general (e.g. purpose is to “engage in all lawful activity, after first obtaining necessary state agency approval”) or specific purpose.
-Engaging in acts beyond the scope of statement of purpose is ultra vires act; at common law, K voidable; Today, these K are enforceable, but s/h can seek injunction if they hear about ultra vires action; Resp. O & D are liable to corp. for ultra vires losses.

4) Capital structure (stock); must include info:
-Authorized stock (max # shares corp. can sell)
-# shares per class.
-Info on par value, rights, preferences, and limitations of each class.
-Info on any series (i.e. subclass) of preferred shares.

NOTE: at least one class of stock or bonds must have unlimited voting rights and at least one class must have unlimited dividend rights.
Authorized stock: Max # set down in Cert. of Inc.

Issued stock: shares actually sold

Outstanding stock: Issued stock less shares repurchased
● Internal affairs of NY corp. (duties, relationships among D, O, and s/h, etc.) are governed by NY law.
● Corp. is a separate legal person w/ broad powers
● Liability: b/c it’s separate entity, generally the people who run it are not liable, and owners (s/h) enjoy “limited liability,”
Has broad powers by statute, including
- power to enter into K, transfer property, buy and sell securities (its own or others) and sue or be sued.
- Political contributions: up to $5K per year per candidate or organization.
- Charitable contributions: yes, no stat. ceiling
- Guarantees of loans not in furtherance of corp. biz: yes, if approved by 2/3 of shares entitled to vote.
b/c it’s separate entity, generally the people who run it are not liable. And the owners (s/h) enjoy “limited liability,” meaning that they only have to pay for her stock, and not corporate liability.
Ways that business failing to achieve de jure corp...status is still treated as corp. (s/h not personally liable):

De Facto Corp.: (a) there is relevant incorp. statute; (b) parties made good faith, colorable attempt to comply w/ it;
(c) some exercise of corporate privileges --> same as corp. for all purposes except state action
- In NY: thought to be abolished, but caselaw suggests ltd. existence

Corp. by Estoppel: Theory is that one dealing w/ biz as corp. may be estopped from later denying the business’s corporate status.
- In NY: abolished.
● Not necessary, and not filed w/ the state. But can establish internal procedures and resp. of officers etc. and set forth notice required for mtgs
● Force: Certificate always trumps bylaws.
● Adoption: Adopted by incorporators at organizational meeting.
● Amendment: s/h can amend; Bd. of directors can only amend or repeal if certificate or bylaws allow
● Promoter person acting for of corp. not yet formed.
● Liability:
- Corp.: generally not liable on pre-incorp. K unless it adopts the K. Can be through express adoption (D action) or implied adoption (corp’s knowing acceptance of benefit of K)
- Promoter: unless K says otherwise, promoter remains liable until there has been a novation, meaning an agreement of the promoter, corp, and contracting party that corp. replaces promoter

Note: adoption of the K by corp. doesn't shift liability; need novation

● Secret Profit Rule: promoter cannot make SECRET profit on dealings w/ corp; OK if corp. knows about it
- Sale to corp. of property acquired before becoming promoter: profit = price paid by corp. minus FMV; NOT measured against what the promoter paid for something he got years ago & sold.
- Sale to corp. of property acquired after becoming promoter: profit = price paid by corp. minus price paid by promoter.
Foreign Corporations
Def'n: inc. outside NY

Foreign corp. doing business in NY must qualify.
- “Doing business” means regular course of intra-state biz activities; NOT occasional or sporadic biz
- To qualify, apply to NY Dept. of state and designate Sec of State as agent for service of process, pay fees; give info from certificate and proof of good standing in home state
- Corp. doing biz in NY w/o qualifying:
o Pay penalty when the corp. does qualify.
o Until it qualifies, it cannot sue in NY.
● Def'n: when corp. sells its own stock.
● What it does: way to raise capital. Investors buy stock and thereby become holders of an “equity security”; they are owners of the corp. and have various rights.
● Distinguish from issuance of bonds: With bond, investor makes loan to corp., to be repaid (usually w/ interest) as agreed in K.
NOTE: holder of a bond is a creditor (not owner) of corp; has a “debt security.”
o “Debenture”: loan, the repayment of which is not secured by corp. assets.
ISSUANCE OF STOCK: subscription def'n, revocation
Def'n: written, signed offer to buy stock from the corp..
Revocation (big issue):
- Pre-incorp. subscription is irrevocable for 3 mo. unless says otherwise or all subscribers agree
- Post-incorp. subscriptions are revocable until acceptance.

Point of obligation: for both corp. and subscribers, it’s when Bd. accepts offer Then there's agreement to sell to this subscriber. NOTE: corp. can’t decide to sell to some subscribers and not others.
ISSUANCE OF STOCK: Subscription, default of subscriber
- If he has paid < 1/2 purchase price and fails to pay the rest w/in 30 days: corp. can keep $ paid & cancel shares; shares are then authorized and unissued.

- If he has paid 1/2 or more and fails to pay the rest w/in 30 days of written demand, corp. must try to sell stock to someone else for cash (or binding obligation to pay cash).
- If no one will pay the remaining balance, defaulting subscriber forfeits what he has paid and shares are canceled.
- If someone will pay more than remaining balance due, defaulting subscriber recovers excess over what he agreed to pay. But deduct from that the corp’s expenses in selling.
ISSUANCE OF STOCK: Consideration for issuance
Permitted forms
- Money:Cash or equiv (check)
- Tangible or intangible property.
- Labor or services already performed for corp.
- Binding obligation to pay in future in cash or prop.
- Binding obligation to perform future services having agreed value
- someone performing services in forming the corp—meets labor or services req.(even though there’s no corp. as yet).
- If someone “pays” for issuance w/ improper form of payment, it’s called unpaid stock and treated as water.
ISSUANCE OF STOCK: Amount of Consideration for issuance
Par is “minimum issuance price.” Corp. can always issue stock for more than par.

“No par” means no min. issuance price.

Treasury stock: stock previously issued and had been reacquired by the corp, corp may then sell the treasury stock; always treated as no par stock.

Acquiring property w/ par value stock: ok if the FMV of the property is enough as consideration for the par of the shares. Bd. is the group that values the consideration in a par issuance; in no-par usually the board, but could be s/h if certificate allows.
ISSUANCE OF STOCK: “Watered stock”
Def'n: issuing stock for less than par value.
o Corp. (or creditors) can sue for the difference.
o Directors: directors are liable for the water if they knowingly auth. issuance
o The guy who bought the watered stock: he is also liable—you are charged w/ notice of par value. Note: this is the first time we’ve seen a s/h liable.
o Third party purchaser of watered stock: TP not liable if acts in good faith, i.e. didn’t know about the water
What it is: right of existing s/h to maintain % of ownership by buying stock whenever there's (1) new issuance (2) of common stock (3) for money; the right not to be diluted w/r/t outstanding shares
- Inc. prior to Feb 22, 1998: rights read into cert., even if silent
- Inc. after Feb 22, 1998: preemptive rights only exist if explicit in cert.

What a “new issuance” includes, if cert. is silent:
- No treasury stock.
- No shares auth. by original cert. and sold w/in 2 years of formation.
DIRECTORS: Statutory Requirements
● must be adult natural persons
● can wear several hats (e.g. as dir. & in capacity as s/h)
● Min. # is 1, but any # can be set in the bylaws, by s/h, or by Bd.if s/h have adopted bylaw giving D this power; 1 will be default #
● Election: incorporators elect initial directors; then s/h at annual meeting.
- don’t have to elect all new directors every year; can be “classified board” (aka “staggered board” w/ 2, 3, or 4 classes of directors, 1 class elected per year; least 3 directors must be in a class
Removal before expiry of term:
- S/h can remove anytime for cause.
- Bd can remove D only if certificate or bylaws allow.
- S/h only can remove D without cause if certificate or bylaws allow.

Filling vacancy on board:
- General rule: remaining directors select the person to serve term's remainder
- Special rule: s/h select the person who will serve the remainder of the term in the rare case when D is removed by s/h w/o cause.
DIRECTORS: How they act
ONLY valid action by:
1) Unanimous written consent to act w/out a meeting.
2) A meeting.
If neither met, “act” is void unless later ratified by a valid act (harsh rule)

Mtg. doesn’t need to be in NY—can be anywhere; by conference call ok.
Generally, bd. manages biz of corp -- Sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc.

Committees: majority of the “entire board” can delegate substantial mgmt functions to committee of one or more Ds; BUT bd cannot delegate all powers and resp. to a committee
- Committee cannot:
1.Change bylaws.
2.Submit fund. change to s/h.
3.Fill bd. vacancy.
4.Set D compensation.
BUT Committee can recommend any of these things for full bd action (esp. compensation)
- s/h derivative suits is part. imp. area 4 committees
DIRECTORS: Liability generally
(1) Duty of Care (fiduciary duty)
(2) Duty of Loyalty
(3) Other State law bases of director liability (Improper loans of corporate funds; improper distributions)
(4) Gen. presumption of D's complicity w/ Bd action
Notice requirements:
- not required for regular meeting, as time & place usually set out in bylaws.
- required for special meetings & method of giving notice can be set in bylaws.

Waiver: If notice required for special meeting is not given to director, any action taken at the meeting is void unless director not given notice waives; waiver can be in writing and signed at any time, or waiver by attending mtg. w/o obj.

Proxies: Director cannot give proxy for dir. voting—void as against pub. policy

Voting agreements: D cannot enter voting agreements on how they will vote as Ds.

Meeting quorum: To do biz, we must have majority of “entire board” (duly constituted board—means # of positions if no vacancies)
- Quorum can be decreased to less than majority of directors if certificate and bylaws say it but can never be < 1/3 of directors
- Quorum can be increased in cert., not in bylaws.
- Once we have quorum, passing resolution requires majority vote of those present; This cannot be decreased; Corp. can require supermajority vote to pass resolution (e.g. 60%), but only in cert., not in bylaws
DIRECTORS: Liability under Duty of Care (fiduciary duty)
Standard: "D must discharge her duties in good faith and with that degree of diligence, care, and skill that ordinarily prudent person would exercise under similar circumstances in like position."
- Nonfeasance: director does nothing.
- Misfeasance: board does something to hurt corp.
- Loss: D only liable if his breach caused a loss.
- Business judgment rule (BJR): court will not second-guess biz decision if made in good faith, was reasonably informed, and had rational basis; D only in trouble if acted irrational or grossly negligent.

How to approach question:
1) State the duty of care.
2) State how it applies to the misfeasance/nonfeasance at issue.
3) State whether there was loss to the corp. (D only liable for this.)
DIRECTORS: Liability under Duty of Loyalty
Standard: "D must act in good faith & with the conscientiousness, fairness, morality, and honesty that L requires of fiduciaries."
- breached when D puts own interest above corp. int.

Interested D transaction: any deal b/t corp. and one of its D (or biz of which D is also D or O or has stake)
- transactions set aside unless D shows (1) deal was fair and reasonable to corp. when approved; or (2) material facts and interest were disclosed/known and deal approved by:
1)s/h action;
2)Bd approval (vote w/o D, though counts for quorum)OR 3)Unanimous vote of disinterested D insufficient to constitute act of the Bd.

Compensation: Bd can set compensation of D in any capacity, unless cert. or bylaw says they can’t; must be reasonable and in good faith, else waste of assets; stock option okay -- If stock listed on stock exchange, must be auth. under exchange polities; If not listed, options must be approved by s/h vote.

Competing Ventures: D cannot enter competition w/ corp.; violation results in constructive trust on profits of competing entity

D cannot usurp it CORP. OPPORTUNITY, meaning cannot take it until he tells Bd about it and BD rejects it.
- Corp. opportunity is something corp.: needs; has an interest or tangible expectency in; that is logically related to its biz
- Remedy: const. trust
DIRECTORS: State statutory liability
Improper loans of corporate funds. E.g. when Bd votes to lend D $100K of corporate funds or to guarantee D’s personal obligation.
- Approval required depends on when corp. formed:
Prior to Feb 22, 1998: need s/h vote (in which a quorum is majority of disinterested shares), unless cert. allows Bd to decide that loan benefits corp.
Post Feb 22, 1998: need Bd’s conclusion that loan benefits the corp. S/h approval not needed.
- Sarbanes Oxley (federal law about accounting, hasn’t been tested): restricts loans to executives in registered corps.

Improper distributions. D personally liable for unlawful distributions, plus s/h who knew distribution was unlawful when they received it; corp.’s claim, so could be derivative suit
DIRECTORS: Presumption of D complicity w BD action
Presumption applies unless dissent noted in writing in corporate records, done...
- In minutes.
- In writing to corp. sec. at mtg.
- Registered letter to corp. promptly after adjournment.

Exceptions to general rule:

Not liable say if missed mtg b/c he was sick if he registers written dissent w/in reasonable time after learning of the action.

Good faith reliance on info, opinions, reports, or statements from
- officers or employees of the corp. whom D or O believes competent & reliable,
- lawyers or CPAs whom D or O believes acting w/in competence, or
- committee of which person relying is not member.
Good faith exception esp. likely in case of improper distributions.
Duties: owe care & loyalty

Status: Os are agents of corp.; can bind corp. to deals if they have agency authority to do so. (Watch for cross-over w/ agency)

Bd selects president, one or move VPs, Sec, Treasurer, and any others Bd determines or 4 which bylaws provide (one person can be two Os)
- cert. may allow s/h to select (but likely silent); if s/h DO elect them, only s/h can fire them.

Remember the hierarchy:
- Who hires and fires directors: s/h
- Who hires and fires officers: directors

Judicial action: attorney general or holders of 10% of shares may sue for judgment removing officer for cause. Court can also bar reappointment removed person

Note: whenever we have s/h voting, it’s always counted by number of shares, not by number of s/h.

Compensation: D set Os'
Possibilities when D or O is sued in capacity as D or O by or on behalf of corp.:
1) Prohibited: reimbursement if O/D found liable to corp.
2) Of right: Corp. must reimburse if D/O successful in defending the case on the merits or otherwise.
3) Permissive: in situation not 1) or 2), corp. may reimburse O/D upon showing that acted in good faith & for purpose reasonably believed in corp’s best interest (can include settlement amount, expenses & atty’s fees); determined by
a. Bd, w/ quorum of D being non-parties; or, if there is no such quorum....
b. S/h or quorum of those disinterested Ds; or...
c. Bd pursuant to report from ind. legal counsel

Other situations:
-Ct can order corp. to reimburse O/D for lit. expenses and atty’s fees if found reasonably entitled; NOT incl. judgment against.
-Corp. can advance lit. expenses to D/O, but must be repaid if turns out she’s not entitled to it.
-Corp. can buy insurance to cover D/O liability.
-Cert. or bylaws can provide for indemnification by resolution of board or s/h or by agreement, unless D/O acted in bad faith, was deliberate and dishonest in way material to case or wrongfully profited.
-Cert. may provide for elimination of D liability to corp. or s/h for damages for breach of duty, except
1. When D acted in bad faith; or
2. With intentional misconduct; or
3. Received improper financial benefit; or
4. Approved unlawful distribution or loan.
SHAREHOLDERS: liability for debts of corp. generally, PCV
Generally s/h not liable for debts or acts of corp

Vourt may “pierce the corporate veil” (PCV) & hold s/h personally liable if:
1)They've abused privilege of incorporating; and
2)Fairness demands s/h not have limited liability.
-PCV is extraordinary remedy (corp. gen. liable for acts)

NY courts PCV:
- Prevent fraud or to achieve equity.
- Prevent use of corp. as cloak of illegality.

Approach on the bar: state general rule of s/h not being liable, then analyze and say whether you think PCV would happen and, if so, what consequences would be.
SHAREHOLDERS: liability for debts of corp. PCV examples
Alter ego (identity of interests, agency, excessive domination): If creditor who has been unable to collect its claim from corp. tries to PCV to get at CEO for bad things, no PCV if corp. has any mind, existence, or will of its own. E.g. NOT found if: dummy corp., where s/h carry on biz in personal capacity or parent corp. completely dominating sub.
Note: if Ct did PCV here, makes CEO liable for abuse of corp, not general s/h

Undercapitalization: where corp. has capitalization that won’t cover unforeseen situations of liability or debt; alone not enough in NY for PCV; need excessive domination, fraud or illegality.

As general rule, PCV much more likely in tort than in contract cases.

Wages: In close corp., 10 largest s/h liable for wages & benefits for employees.
SHAREHOLDERS: S/H management of Corp.
Traditional public policy in favor of Bd exercising management power and s/h not encroaching on it. There is, however, trend away from this policy in some instances.
- Close corp.
- Professional Serv. Corp.
s/h can manage biz directly in close (or “closely held”) corp. This is one that has few s/h and stock is not publicly traded.
o How power is vested in s/h to run close corp.—provision in certificate can restrict or transfer Bd power to s/h or others. Ok if:
1) all incorporators or s/h (voting and nonvoting) approve it.
2) all subsequent s/h have notice;
3) it is conspicuously noted on front and back of shares; and
4) shares are not listed on an exchange or regularly quoted over the counter.
o Managing s/h owe duties of care and loyalty.
o Trend towards imposing fiduciary duties on s/h in their dealings w/ each other. Especially, controlling s/h cannot use power for personal gain at expense of minority s/h or the corp.
SHAREHOLDERS: Professional Service Corp.
Members of licensed profession (like doctors and lawyer) cannot practice profession through general biz corp, but can form professional service corp, usually “P.C.”
- All s/h, all O/D in P.C. must be licensed pros.
- Pros liable for own malpractice but not those of others in the group.
- Pros not liable for K entered by entity or for rent due on leases in P.C.’s name— entity is liable
- P.C. governed by rules of biz corp; cert. must meet biz requirements, ALSO indicate profession to be practiced and include names and addresses of the original s/h, D and O, along with certification that each is professionally licensed
- If one s/h dies or is disqualified from practice, P.C. must purchase shares.
(S as plaintiff)

What it is: S/h is suing to enforce corp.’s claim, not her own; where corp. is not pursuing its own claim, so s/h steps in to prosecute it;
-S/h usurping corp. opportunities is der. suit.
-S/h suing to compel declaration of dividend probably ISN'T der. suit; BUT might be if could be arguably based on breach of duty to the corp, such as mismanagement by D; not derivative if s/h is trying to get $ into own hands
-Suits regarding corporate waste are derivative suits.

-Corp. is joined as defendant (b/c corp. did not sue, tho' suit in its int.)
-Parties can only settle w/ court approval. Ct may notify s/h substantially affected by discontinuance of the action.
-D or O can bring action against another D or O on behalf of the corp. to compel her to account for violating duties.
If successful der. suit: corp. gets recovery, and s/h gets atty’s fees.
- S/h can sometimes maybe recover damages if recovery by corp. would return $ to the bad guys. (just know that we can argue this.)

If unsuccessful der. suit:
- S cannot recover costs and expenses.
- S may be liable to D for costs b/c winner usually recovers costs from loser.
- Other s/h cannot sue same D on same transaction b/c of res judicata.
SHAREHOLDERS: Requirements for bringing S/H DERIVATIVE SUITS
Stock ownership when claim arose: S/H bringing suit must have owned stock (or held voting trust cert.) when claim arose, or have gotten it by operation of law from someone who owned the stock when claim arose.
- Examples of op. by law: (1) inheritance;
(2) divorce decree.

Stock ownership when action is brought and through entry of judgment.

Adequately represent interests of the corp. and s/hs.

Must first demand Ds bring suit unless futile; might be futile if
(1) maj. of Bd interested; (2) Bd didn’t self-inform re transaction to reasonable extent;
(3) transaction so egregious that could not be sound BJ.
- Of these, (1) is most likely, b/c s/h would usually be suing corp. b/c D aren’t acting in interests of corp.
- Special pleading requirement: D must plead w/ particularity efforts to get BD to sue or why demand excused.
- If demand is made and refused, s/h can sue only if she shows that majority of Bd is interested or its procedure was incomplete or inadequate (tough to show).
- P s/h can be required to post security for costs unless P owns 5% or more of any class of stock or her stock worth more than $50K.
If corp. faces derivative suit and Bd doesn’t think it’s in best interests, can move for dismissal based on finding by independent Ds (or “special litigation committee,”...comm. of ind. D) that suit is not in corp’s best interests.
- Examples include where low chance of recovery or suit cost exceeds recovery.

In deciding whether to dismiss, ct looks at:
- independence of those making the investigation.
- sufficiency of the investigation.
General rule is that record owner as of record date has the right to vote.
-Record owner: person listed as owner in corp. records
-Record date: voter eligibility cut-off, set no fewer than 10 and no more than 60 days before mtg.
a)Treasury stock: Even if rec. owner on rec. date, corp. doesn't vote this
b)Death of s/h. Executor of dead S can vote S’s shares.
c) Proxies. Ok for s/h voting (though NOT ok for D)
- Req.: writing, signed by record s/h or auth. agent directed to sec of corp. authorizing another to vote; Fax or email counts
- Normally S/h can revoke a proxy even if it states that it is irrevocable; BUT s/h cannot revoke “irrevocable proxy” if additionally the proxy holder has some interest in the shares other than voting -- that's proxy coupled w/ an interest.
SHAREHOLDERS: Voting trust
Written agreement of s/h under which their shares are transferred to “trustee” who votes the shares according to the agreement.
In NY, cannot exceed 10 years’ duration but can be extended for another 10
1) Written trust agreement controlling how the shares will be voted.
2) Copy to corp.
3) Transfer legal title of shares to voting trustee.
4) Original s/h receive voting trust certificates and retain all s/h rights except for voting.
SHAREHOLDERS: Voting agreement
(aka “pooling agreement”)

2 or more s/h, by signed agreement, can agree their shares will be voted as per that agreement or as they agree to do in future or as determined by procedure they agree upon.
- aren’t specifically enforceable (i.e. can’t get specific performance of K)
- Proxy given subject to voting agreement is irrevocable if says so.
- Note: s/hs can agree to vote to elect each other as D, BUT cannot agree about what actions they will take as D; this would be ok if there were only 2 s/h in corp. b/c no one to be hurt
SHAREHOLDERS: Voting execution
Only two ways 4 valid act: (1) written consent, signed by holders of all voting shares to act w/o a meeting; (2) meeting.

Annual meeting: held anywhere; Ct can order if not held; where s/h elect D.

Special or s/h meeting: held anywhere; Can be called by
1) Bd or
2) anyone provided in the certificate.
Special meeting MUST be called if insufficient # of Ds to conduct corp. biz; special meeting biz limited by its purpose; mtg must be for proper s/h purpose

Notice requirements: Written notice must be given to every s/h entitled to vote, for every meeting b/t 10 and 60 days before the meeting; Must state when & where the meeting will be and, in case of special meeting, who called it and its purpose.
- Must inform if proposed action would entitle s/h to appraisal rights and tell why.
- Consequence of failure to do proper notice: action taken is void unless those not receiving notice waive the defect. Waiver is express or implied, like D.
SHAREHOLDER: voting at meeting
Quorum of shares required at mtg.; Determination focuses on # of shares represented, not # of shareholders; gen. quorum is maj. of outstanding shares; cert. can reduce quorum to less than majority, but never fewer than 1/3 of shares entitled to vote; can NEVER reduce requirement of majority approval. Cert. can also require supermajority of shares to be quorum, BUT must be in certificate (not bylaws).

Note: once quorum is established at s/h meeting, cannot be lost if people leave the meeting.

Majority required for action. So, once quorum is met, majority must act to bind corp., and this means maj. of shares actually voting (doesn’t include abstentions).
SHAREHOLDERS: Cumulative voting
(not tested much):

o Only available in voting for D.
o It’s device to help small s/h get representation on the board.
o To do it, you multiply # shares you have times # D to be elected. You have that number of shares to play with and to place however you want—so can put all behind one D if you want.
o If certificate is silent, no cumulative voting.
SHAREHOLDERS: Sale of stock by s/h
Free transferability of ownership interest. You can give stock away or sell it

Consideration: Don’t have to sell for par. That's merely an issuance rule.

Transfer restrictions:
- Set by certificate, bylaws, or by agreement.
- Will be upheld if reasonable under the circumstances. Can’t be undue restraint on alienation.
- “Right of first refusal” (where you have to offer to corp. to buy back before sell to someone else) is ok if price offered is reasonable (matching offer)
- Even if restriction is reasonable and thus valid, can’t be invoked against TRANSFEREE unless either:
(1) conspicuously noted on stock certificate; or
(2) transferee had actual knowledge of the restriction
Right belongs to s/h in person or her agent.

Statute gives right to inspect and copy the following on 5 days written demand:
1) Minutes of s/h proceedings; and
2) The record of s/hs.
(Corp. can demand that s/h give affadavit that his purpose is not other than interest of corp. and that he has not w/in 5 years tried to sell any list of s/h; BUT corp. can never demand more detail in the affadavit; corp. can deny access if no aff.)

Financial records: S/h can make written request for corp’s latest annual balance sheet, profit and loss stmt and latest interim statements distributed to s/h or public; Corp. must provide these, by mail OK.

List of current D & O: s/h has statutory right to inspect and copy such a list on 2 days written demand.

Common law right to inspect (additional to statutory rights): right of s/hs to inspect records at reasonable time & proper place for proper purpose (i.e. related to role as s/h); Unclear how broad
SHAREHOLDERS: Distributions
Payment to s/h that can be:
1. Dividend.
2. Payment to repurchase shares.
3. Payment to redeem shares (forced sale to corp. at price set in certificate).

How it comes about: distributions declared at Bd’s discretion; no s/h “right” to distribution until declared, then yes
- Ct will only interfere w/ Bd’s discretion upon showing of bad faith or dishonesty
- Don’t confuse w/ stock split (rarely on exam)

Which s/h get dividends (rarely tested): before common stock, goes to pref. stock and pref. participating stock (means you “pay again”); cumulative stock gets backlog of divs.

Funds used for distribution:
- Surplus: assets minus liabilities minus stated capital (i.e. net assets minus stated capital); Can be used for distribution, but up to Bd to decide.
- Stated capital: If C corp. has issued 10K shares of $2 par stock for $50 K and 4K shares of no par stock for $70K, on the par stock $20 K goes into stated capital and $30K into surplus, and on the no par stock, the board can allocate any part, but not all, to surplus; Can never be used for distribution.

Distributions when Corp. in bad shape: Corp. can make distributions even though it lost money in the previous year, but corp. cannot make distributions if it is insolvent or if distribution would render it insolvent (meaning unable to pay the debts that come due in ordinary course of biz).

Liability: Directors are personally liable for unlawful distributions, as are s/h who knew it was unlawful when they took it; corp’s claim, so could be derivative suit (though D have possible good faith reliance defense).

Redemptions (unlikely to be tested). Are set in cert., and must be done proportionally w/in each class of stick. Repurchases individually negotiated, and can discriminate except in close corp, where must give equal opportunity to all s/h.
Most require both D and s/hs to approve; corp. must usually notify and file change w/ Dept. of State
right of a dissenting s/h to force corp. to buy her shares at fair value; actions that trigger the s/h right:
- some amendments to the certificate;
- consolidation;
- merger INTO another corp.
- corp. transfers subst. all of its assets; or
- corp’s shares are acquired in share exchange

NOTE: these only trigger the right if corp. is not listed on exchange or NASDAQ b/c public market gives disgruntled s/h chance to sell their shares

What actions s/h can take to perfect the right:
1) Before s/h votes, file written objection and your intent to demand payment; AND
2) Abstain or vote against the proposed change; AND
3) After vote, make written demand to be bought out.

Determining value: if s/h and corp. cannot agree on fair value, corp. sues and Ct determines the value.

Minority discount (to reflect the fact that they carry no control over corporate affairs) is not allowed in NY.
FUNDAMENTAL CORPORATE CHANGE: Amendments to the certificate
Minor changes are made by the board.

Other amendments (e.g. change of name, purpose, duration; increase or decrease of shares or par)must be approved by
1) Director action; and
2) Majority of the shares ENTITLED to vote (harder than s/h voting which is maj. of shares at MEETING)

Amendments to change or strike a supermajority quorum or voting requirements or to strike a provision restricting Bd auth. requires D approval. If amendment will change or strike supermajority quorum or voting requirement for BOARD voting or will strike provision restricting board authority, we need:
1) For corp. formed on or before Feb 22, 1998: 2/3 shares entitled to vote.
2) For corp. formed after Feb 22, 1998: Bd approval and approval by majority of shares entitled to vote.
BUT, if amendment will change or strike supermajority quorum or voting requirement for s/h (NOT director) voting, in addition to director approval the amendment must be approved by 2/3 shares entitled to vote for both old and new corp.

If amendment approved, certificate must be delivered to Dept. of state for filing.

Dissenting s/h rights of appraisal if amendment alters or abolishes preference, changes redemption rights, alters or abolishes preemptive right or limits voting rights.
FUNDAMENTAL CORPORATE CHANGE: Mergers and consolidations
Merger is where A corp. merges into B corp; Consolidation is where A corp. and B corp. become C corp.

- Each company’s Bd of directors adopts plan of merger (or consolidation); AND
- s/h approval of each corp.

For corp. formed on or before Feb 22, 1998: at least 2/3 shares.
For corp. formed after Feb 22, 1998: at least 1/2 shares.
- No s/h approval required in “short-form” merger where parent corp. owns 90% or more of each class of stock of subsidiary that is merged into parent corp (rarely tested).
- Must deliver certificate of merger (or consolidation) to Dept. of state for filing.
- Dissenting s/h rights of appraisal: yes for s/h of corp. that disappeared. No for s/h of surviving corp.
- Effect of merger or consolidation: surviving corp. succeeds to all rights and liabilities; This is successor liability.
FUNDAMENTAL CORPORATE CHANGE: Transfer of all or substantially all of assets not in ordinary course of biz or share exchange
(i.e. one company acquires all outstanding shares of one or more classes of another corp; means more than mortgage)

Fundamental corp. change for selling corp., not buying
- For corp. formed on or before feb 22, 1998, at least 2/3 shares of S corp. entitled to vote must approve the sale.
- For corp. formed after Feb 22, 1998, at least 1/2 shares of S corp. entitled to vote must approve.

Note: no shares of B must approve sale—they don’t vote b/c not fundamental corp. change as to B.

In the share exchange, corp. delivers plan of exchange to Dept. of State for filing; In transfer of assets, no such filing required.

Dissenting s/h rights of appraisal: for s/h of selling corp. only.

Company acquiring assets will not be liable for torts of company whose assets it acquired unless
(1) deal provides otherwise;
(2) purchasing co. is mere continuation of seller; or
(3) deal was entered fraudulently to escape such obligations.
Voluntary: no Bd vote necessary but s/h vote required as follows (w/ delivery of cert. to D of S):
- Corp. formed on or before Feb 22, 1998: 2/3 of shares entitled to vote.
- Corp. formed after Feb 22, 1998: majority of shares entitled to vote.

Involuntary (judicial—someone asks for court order of dissolution). Court can deny it if there is some other way the complaining s/h can obtain fair return on his investment, e.g. by ordering a buy out. The requirements for asking for it:
- By BD resolution or resolution of majority of shares entitled to vote, stating that corp. has insufficient assets to discharge liabilities or that dissolution would be beneficial to s/h.
- 1/2 or more of shares entitled to vote may petition if directors are too divided to manage or s/h are too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to s/h.
- Any s/h entitled to vote may petition if s/h unable to elect D for 2 annual meetings.
- ** 20% of more of voting shares in corp. whose shares are not traded on securities market may petition on either of the following grounds:
1) Management’s illegal, oppressive or fraudulent acts toward the complaining s/h; OR
2) Management’s wasting, diverting, or looting assets. (“management” here means directors or managing s/h in closely held corp.)
does not end corp’s existence (it’s the beginning of the end). Corp. stays in existence to wind up. Steps in winding up:
1) gather all assets;
2) convert to cash;
3) pay creditors; (But s/h can not agree that they will be paid before creditors).
4) distribute remainder to s/hs, pro rata by share unless there’s dissolution preference. “Dissolution preference” means “pay first”—works like dividend preference; it just comes up at different time.
SHAREHOLDERS: Duties to others
Traditionally: Outside close corp, s/hs do not owe fiduc. duties to each other or corp; self-interested OK

CONTROLLING S/H: who also occupies control position (such as D) or whose ownership gives her working control over corp. owes fiduciary duty to minority s/h and, sometimes, to others (including corp); cannot use dominant position for individual advantage; Most likely in close corp.
CONTROLLING SHAREHOLDER: Potential liability for selling control
Selling her controlling s/h interest gets extra premium, liable if spec. factors:
1) Sells to looters w/o reasonable investigation; Watch for facts putting reasonable person on notice of problem, e.g. agent approaches controlling s/h on behalf of undisclosed principal; REMEDY: disgorge seller’s profit and seller is probably liable for all damage done to corp.
2) Controlling s/h de facto sells corp. assets; If so, all s/h should share in premium paid by buyer b/c buyer is buying control not just to run corp. but to get his hands on assets.
3) Controlling s/h sells position on the Bd.; Fiduciaries cannot sell their position; REMEDY disgorge profit
CONTROLLING SHAREHOLDER: Potential liability for Freeze-out mergers
All mergers must have legit. corp. purpose, even if approved by requisite # of shares; “Freeze-out” merger aims solely at cashing out minority s/hs unfairly.

Usually majority s/hs cause their corp. to merge with another corp. they own—and the minority s/h shares are purchased for cash, so they have no interest in either corp.

Courts will probably look at transaction as a whole—will look at price and course of dealing. Factors:
1) Whether deal is tainted by self-dealing or fraud;
2) Whether minority s/hs are dealt w/ fairly.
3) Whether there is legitimate biz reason for the merger.
Market trading on inside information:
- In NY, D/O has breached duty to corp. by doing this; Corp. can sue to recover D/O’s profit; maybe derivative suit.

Nondisclosure of “special facts” or “special circumstances”: All D/Os (and probably controlling s/h) owe aff. duty not to trade on these in securities transaction w/ non-insider; must disclose or abstain from dealing; common law insider trading.
- Special facts: those a reasonable investor would consider impt. in making investment decision.
- Who can sue: s/h with whom D or O deals with and violates special facts doctrine.
- Measure of damage: difference b/t price paid and value of stock at reasonable time after public disclosure.
General principal: post 1998 rules make decisions/transactions easier, so choose rule with less red tape.
o Formed before Feb 22, 1998: Yes.
o Formed on or after Feb 22, 1998: No.
RULES DEPENDING ON DATE OF FORMATION OF CORP.: Loan of corp. funds to directors
If certificate is silent, what approval?
o Formed on or before Feb 22, 1998: s/h vote.
o Formed after Feb 22, 1998: Bd finding that loan benefits the corp.
RULES DEPENDING ON DATE OF FORMATION OF CORP.: Amend certificate to change or strike supermajority quorum or voting requirement for D voting (or to strike provision restricting Bd authority)
If certificate is silent, in addition to board approval, what vote is needed?
- Formed on or before Feb 22, 1998: 2/3 shares entitled to vote.
- Formed after Feb 22, 1998: majority of shares entitled to vote.
RULES DEPENDING ON DATE OF FORMATION OF CORP.: Merger, consolidation, or transfer of substantially all assets or share exchange
If certificate is silent, in addition to board approval, what vote is needed?
o Formed on or before Feb 22, 1998: 2/3 shares entitled to vote.
o Formed after Feb 22, 1998: majority of shares entitled to vote.
If certificate is silent, what s/h approval required?
o Formed on or before Feb 22, 1998: 2/3 shares entitled to vote.
o Formed after Feb 22, 1998: majority of shares entitled to vote.