Corporations

Front 1

WHhy Partnerships?

Back 1

Partnerships are favored by inexperienced business people, because
1. They are inexpensive to form
2. Partnership income is passed through to partners without a double taxation, as with corporations.
3. There is no filing requirement.
4. No documentation.

Front 2

Are partnerships good?

Back 2

Partnerships are bad primarily because of the vicarious liability of parterns, who are jointly and severally liable for partnership torts and contracts, and, if it is a partnership at will, it can be dissolved at the whim of any partner.

Front 3

Professional Corporations (PCs)

Back 3

Lawyers, accountants, Doctors, and other professionals can form a PC, which shields shareholders from personal liability from PC creditors except if a shareholder or someone under her control negligently renders "PROFESSIONAL SERVICES" to a client (malpractice).

A PC shareholder is not personally liable for PC breaches of contract (a PS lease or employment contract with a third party) (and is not vicariously liable for the torts of other PC employees or shareholders) NYAA 303.

Front 4

LLCs

Back 4

Another popular way to limit personal liability is to form a limited liability company, or, for preossionals, a professional service limited liability company. It functions under an operating agreement, or, if such an agreement is not drawn, it operates under its articles of organization filed with the secretary of state. THese documents define the rights and obligations of its members. It is managed either by a manger or by members of the LLC. It has the advantages of the corporation for limiting tort and contract personal liability, but its tax on income is just like a partnership, and is not double-taxed, like a corporation.

For corps, declare a dividend, pay tax on the profit first, then distribute dividends, then shareholders pay tax on that. Not true on distribution of LLC profits.

Front 5

accounting action

Back 5

An LLC member is personally liable to other llc members in an accounting action seeking restitution for an llc member wrongfully diverting llc funds, and for breach of fiduciary duty owed among the members.

Front 6

LLC publication requirement

Back 6

Once the LLC papers are filed with the secretary of state, 120 days to publish notice once a week in both a daily newspaper and a weekly newspaper for six weeks. In the county where the LLC is located. Failure to file an affidavit of publication shall suspend the llcs authority to carry on, conduct, or transact any business.

Front 7

WHen can an LLC dissolve

Back 7

Absent contrary language in the operating agreement, the LLC can dissolve only where
1. Continuing it is financially unfeasible, or 2. Management is unable or unwilling to permit or promote the purpose for which it was formed.

Front 8

Can you move to expel an llc member?

Back 8

Absent language in an operating agreement, courts cannot expel an LLC member even for cause, because there is no statutory provision authorizing such an expulsion.

Front 9

What abbreviations represent corporations?

Back 9

A business name with the suffix Inc, Corp, or Ltd., indicates the existence of a corporation, but a business name with a suffix "and co.", or "and associates, indicates the existence of a partnership.

Front 10

Corporation independent of shareholders?

Back 10

A corporation exists independently of its shareholders (its owners), who are not personally liable for corporate debts.

Corporations are formed primarily to escape personal liability. In return for their investment in the entity, shareholders receive shares of stock in the corporation, and they share in the profits of the corporation without having to personally assume corporate liability, and are not vicariously liable for other's torts beyond the money invested in that entity.

Front 11

First factor required for courts to pierce the corporate veil

Back 11

Courts will pierce the corporate veil to impose personal liability, but only if it finds

1. The shareholder completely dominated the corporation for his own personal interest (such as neglecting corporate formalities, treating corporate assets as personal assets, and using corporate funds to pay personal expenses)

Front 12

Second factor for courts to pierce the corporate veil.

Back 12

2. This DOmination by the shareholder was used to commit fraud, constructive fraud, or some other wrong against the plaintiff (usually a corporate creditor, resulting in the plaintiff's financial loss). E.G> where a sholder stripped the corp. of its assets before going out of business, leaving nothing for corporate creditors, then this allowed the court to pierce the corporate veil and find the shareholders personally liable to corporate creditors. (Essay 1 July 2005)

Front 13

Exception, Courts pierce the veil for TWIST

The T

Back 13

Courts will also pierce the corporate veil for TWIST.

T- NY holds the ten largest shareholders of a New York closed coropration for unpaid wages, sick pay, or vacation pay, provided corporation stock is not sold on any exhange.

Within 180 days from termination of employmnet, unpaid employee must give written notice to each shareholder she intends to holds personally liable, and then sue the nY corporation, and if/when the judgment is returned unsatisfied by the sheriff, the shareholder must commence an action within 90 days against the shareholders

Front 14

The W

Back 14

Corporate Officers are criminally strictly liable if the corp. failed to obtain WORKERS comp insurance, and an employee is injured

Front 15

The I

Back 15

Illegal Conduct committed by a shareholder, or by a corporate fiduciary, essay 1, February 2005.

Front 16

The S in Twist

Back 16

Sales taxes or corporate income taxes not paid by the corp. official who is responsible for corporate finances.

Front 17

The T in Twist

Back 17

A corporate official actively participating in Tortious conduct. This requires an affirmative act of negligence, and not just a negligent failure to act.

Front 18

Corporate Formation - PRomtoer

Back 18

A promoter is the person who originates the business idea for the corporation.

A promoter contracting int he name of a corporation that has not yet been formed is personally liable on that contract, because an agent who assumes to act for a non-existent principal is personally liable on that contract. The corporation become liable on the contract if it knowingly accepts the benefits of the contract.

Front 19

selling shraes for future consideration

Back 19

Once a corp is formed, it can issue shares of stock for cash, real or personal property, or for the payment for services performed in its benefit or in its formation. It can sell stock on credit in exchange for future services or future payment. but the corporation should note the corporate lien on the face of the stock, or alternatively hold the shares in escrow (a possessory security lien) until the future consideration is fully paid, because if the indebted shareholder sells those shares to a bfp, then the buyer takes the stock free from the shareholders debt owed to the corporation.

Front 20

Contract of Incorpotaion

Back 20

The C of I is different from corporate bilaws: Bilaws are contract between shareholders and the corporation. ANy conflict or inconsistency between bilaws and the C of I will always be settled accoridng to the C of I

Front 21

WHo adopts the bilaws?

Back 21

Shareholders generally adopt bilaws, but can give this authority to directors either in the C of I or in a shareholder Bilaw.

Front 22

3rd party notice of C of I

Back 22

Third parties who deal with the corp are deemed to have contructive notice of the C of I since it is a public document open for public inspection. This is not true of bilaws, which regulate coroprate internal affairs and are not open for public inspection. However existing shareholders are chargable with notice of bilaws, and are contractually bound by corporate bilaws.

Front 23

WHen does corporate existence commence.

Back 23

An incorporator signs and files the C of I who NY Sec. of State, and when that is filed, Corp. existence commences.

Front 24

de facto corporations

Back 24

A good faith bonified attempt to file to C of I with the secretary of state may result in a de facto corporation if the papers are never filed. However, if it is executed but is never filed, and there is no bonified attempt to do so, then it is not a de facto corporation, and the benefits and the protections of a corp. do not arise.

Front 25

Old and New Corps.

Back 25

Corporations filed prior to 2/22/98 are referred to old, but those formed after then are referred to as new. Old corps. can now amend their C of I to be expressly treated as new.

Front 26

Purposes stated in the C of I.

Back 26

The corporate purpose in the C of I an be generally stated "to conduct any lawful activity", but if it states a limited purpose, as it had to with an old corp, then it can only contract in furtherance of that purpose

Front 27

Ultra Vires

Back 27

The doctrine of ultra vires (beyond the authority granted) can be asserted by a shareholder to enjoin the corporation from an unauthorized transaction. If the contract is still executory, hen the shareholder can seek to enjoin it, and if the court agrees, then the other contracting party can sue for breach of contract, but can only recover reliance and/or restitution damages.

The shareholder can also sue the directors in a derivative action to recover on the corporations behalf damages resulting to the corporation from the ultra vires activity.

Front 28

Service of Process

Back 28

The C of I must expressly appoint the secretary of state to accept service of process on behalf of the corp, and the C of I must provide an address for the Sec. to forward a copy of process.

Front 29

What must be placed in C of I?

Back 29

In order to be binding on new shareholders who subsequently buy corporate stock, the following must be placed in the C of I, and is insufficient, does not bind, if only placed in bilaws:

PVT MCLAW

Front 30

The P in PVT McCLAW

Back 30

P- Preemptive rights, which are a shareholders right of first refusal to buy corporate stock issued by the corporation. Shareholders in new corporations have no preemptive rights unless those rights are expressly granted in the C of I.

In Old corps, shareholders are assumed to have preemptive rights unless expressly precluded in the C of I.

Front 31

The V in PVT MCCLAW

Back 31

V- If the value of no-par shares is to be fixed sharehodlers instead of directors, then this shareholder right must be placed in the C of I.

The C of I states the authorized # of shares to be issued by the corp, usually 200, and whether those shares are to be par value (a stated value) (or are to be no par).

If par is fixed in the C of I, then the corp cannot sell those shares for less than par value. PAr value can be reduced by amending the C of I by a majority vote of shares.

Front 32

The T in PVTMCCLAW

Back 32

Transfer Restrictions on the stock must be placed in the C of I as well as on the face of the shares

Front 33

The M in MCClaw is

Back 33

Maximajority voting or quorum requirements (aka supermajority requirements), which simply increase the BCL requirements for a quorum, or voting, at a SH or BD meeting.

Front 34

what is a quaorum

Back 34

Under the BCL, a quorum constues a majority of the entire board of directors for a BD, or a majority of all the outstanding shares for a shareholders meeting. A quorum in a condition precedent before a meeting can go forward.

Front 35

Requirement to change the maximajority requirement.

Back 35

Whenever a provision or either old or new corp. C of I require a greater percentage for quorum or voting at shareholders meetings, then it must be placed in both the C of I, and that same maxi-majority vote will be required to subsequently change that maxi-majority requirement.

Front 36

How to

Back 36

Whenever the C of I has a maximajority requirement for quorum or voting at directors meetings, then it can be amended or repealed by
1. A simple majority vote of outstanding shares for new corps
2. A two-thirds vote of outstanding shares in old coroproations

Front 37

Reducing the quorum requirement

Back 37

iF THE CORP DEICED TO REDUCE THE bcl VOTING Quorum requiments or voting for shareholder meetings, it can be placed either in the C of I or bilaws, but it cannot be reduced to less than 1/3.

Front 38

The C

Back 38

Cumulative voting by shareholders to elect directors

Front 39

L

Back 39

Limiting personal liability of officers or directors

Front 40

L

Back 40

Providing for a vote for less than two thirds of the shares of old corps or less than a majority of the shares in new corporations in order to voluntarily dissolve the corporation, or to allow less than 10% of the shares to call a shareholders meeting to discuss and vote on a judicial dissolution.

Front 41

A-

Back 41

An agreement by shareholders to
1. Act without a meeting by submitting shareholder votes by mail fax, or email, but the voting must be complete within sixty days from the date the corporation received the first shareholder's vote.

2. To vote in a predetermined way, e.g. where shareholders agree to vote eachother in as directors

3. To limit or restrict the power of directors. E.G. by requiring a unanimous vote of directors, or by agreeing for direct management by shareholders (no board of directors).

Front 42

W-

Back 42

Allowing a corporate dissolution at WILL, or upon a specific event.

Front 43

How to

Back 43

Whenever the C of I has a maximajority requirement for quorum or voting at directors meetings, then it can be amended or repealed by
1. A simple majority vote of outstanding shares for new corps
2. A two-thirds vote of outstanding shares in old coroproations

Front 44

Reducing the quorum requirement

Back 44

iF THE CORP DEICED TO REDUCE THE bcl VOTING Quorum requiments or voting for shareholder meetings, it can be placed either in the C of I or bilaws, but it cannot be reduced to less than 1/3.

Front 45

The C

Back 45

Cumulative voting by shareholders to elect directors

Front 46

L

Back 46

Limiting personal liability of officers or directors

Front 47

L

Back 47

Providing for a vote for LESS than two thirds of the shares of old corps or less than a majority of the shares in new corporations in order to voluntarily dissolve the corporation, or to allow less than 10% of the shares to call a shareholders meeting to discuss and vote on a judicial dissolution.

Front 48

What if a PCTMCLLAW restriction (maximajority voting requirement) is NOT placed in teh C of I

Back 48

It is nevertheless valid and enforcable as to existing shareholders who entered a shareholder agreement or voted in favor of a pvt McClaw provision, because such a shareholder would be estopped from asserting that it was not also placed in the C of I. However a New Shareholder who subsequently purchased shares is not bound by that pvt mccllaw limitation because it was not placed in the C of I and the regular rules in the BCL will then govern the corporation.

Front 49

Shareholders DDD

Back 49

Shareholders should always execute a shareholders agreement to provide for DDD: - Death, Disability, or Disagreement of Shareholders

Front 50

Electing Directors

Back 50

Shareholders elect directors by a plurality of the votes cast for each vacancy on the board by a majority vote, or a plurality vote if there is no majority.

Front 51

COntorlling share, freeze out

Back 51

A shareholder controlling a controlling share of the stock can elect each vacancy, freezing out other shareholders from having any say in the BD.

Front 52

Cumulative Voting

Back 52

An alternative method for electing directors is to provide in the C of I

(MC) for cumulative voting, which allows minority shraeholders to concentrate their votes, buy casting the entire number of shares held by the shareholder by the total number of directors to be elected.

Front 53

Repealing Cumulative Voting

Back 53

A simple majority of shares can repeal cumulative voting, but this would give the dissenting shareholder appraisal rights (CAMP) to sell the sahres back, and if you don;t offer, the supreme court sets the price.

Front 54

What is DAMSLAPPLAN?

Back 54

Although the BD and corporate officers manage the corporations day to day activities, the following DAMSLAP corporate decisions, once adopted by the board of directors must also be approved by shareholders.

Front 55

D

Back 55

D- A voluntary dissolution of the corporation.

New Corporation, majority vote of shares, old corps, two-thirds vote of shares.

Front 56

A

Back 56

For the Crop to sell, lease, or exchange substantially ll of the corps assets, which is not done in the regular course of the corporations business.

New maj. vote, old corps 2/3 vote.

If shareholder approval is not first obtained for this transaction, then it can be set aside within twelve months

Front 57

M

Back 57

To amend the C of I to change maximajority voting or quorum requirements at shareholder or director meetings.

Front 58

M

Back 58

Merger or consolidation with another business entity. Merger is where one corp merges into anotehrm and the absorbed corp ceases to exist as a separate entity.
Consolidation is where two or more corporations combine to form an entirely new third corporation.

Front 59

S

Back 59

Board can bind the corp. as a surety for a directors debt or a corporate loan to a director, but a majority vote of disinterested shares is required.

In New corps, the BD can approve a loan to a director, or a guarantee a directors loan if a disinterested majority of Ds vote that such a transaction would benefit the corp, or the corp. previously adopted a plan for making loans to directors or guaranteeing their debts.

Front 60

L (can be either BD or SH)

Back 60

A change in the C of I for the location of the corporate office, or

Front 61

A (can be either BD or SH, need not be both as in the rest of DAMSLAPPALN

Back 61

To appoint a new agent on whom service can be mailed by the decretary of state, but these two changes can be done by either a majority of BD or a maj. vote of shares.

Front 62

P

Back 62

To change or enlarge fthe limited corporate purpose (majority vote)

Front 63

P

Back 63

To amend the C of I to create or abolish preemptive rights (majority vote), but any shareholder who dissents on this vote is entitled to appraisal rights (*CAMP)

Front 64

L

Back 64

Corporate Loan to Directors

(sLap)

Front 65

A

Back 65

To amend the C of I to abolish ir limit director liability for negligence

Front 66

N

Back 66

To amend the C of I to change to corporate name. As simple majority vote

Front 67

Appraisal Rights

Back 67

ARs are rights of dissenting shareholders who oppose an organic fundamental change in the corporations structure to have her shares appraised and purchased back by the corporation, rather than continue in the corp. that is now run differently than the corp in which the shareholder originally invested.


The procedure is to file an objection with corporate officials before the shareholder vote on CAMP activity

Front 68

CAMP activites giving rise to appraisal rights.

Back 68

C - abolish Cumulative Voting

A- Sale, lease or exhange of substanitally all of the corporations assets

M - Merger or consolidation

P- A vote to abolish preemptive Rights

Front 69

What if the corp. cant agree on a price for appraisal rights?

Back 69

If they cant agree on a price for the dissenting shareholders shares, which are valued as of the close of business, on the day prior to the camp vote, then the remedy is a CPLR aticle 4 special proceding (speed) in the supreme court, and the bcl empowers the court to award attornees fees to a successfull shareholder.

Front 70

How does the court determine value of shares in an apprasial special proceding.

Back 70

For closely held, or family owned corps, there is no single factor for the court to value a minority interest, but the court will consider the three methods for valuing corporate stock.

A-The net asset value of corporate holdings after subtracting liabilities.

I- The investment value, by looking at the earning power of a stock and looking at its price to earnings ratio.

M- Market value, in which the court values the stock based on arms length of what a willing buyer would pay. This is usually based on the sale of similar businesses.

Front 71

Can a court consider that the shre is a minorty, non-controlling, in setting value?

Back 71

The court cannot consider that the shareholders share are worth less because they represent only a minority and not a controlling interest, because BCL 623 expressly states that fair appraiaal requires the shareholder to be paid for proportionate interest. However, the court of appeals has upheld an illiquidity discount ( a lack of marketability discount) because there is no ready market for the shareholders shares. NYAA 289-290

Front 72

What if the corp is insolvent when SH seeks appraisal rights?

Back 72

No payment of appraisal rights can be made if a corporation is insolvent, or would become insolvent by paying the shareholder for the shares, because this would result in a reference to the shareholder over corporate creditors. The shareholder can agree to either becaome a suboridinate creditor or she can withdraw the appraisal election and continue as a shareholder

Front 73

Inspection of Corporate Records

Back 73

Provided a shareholders purpose is "reasonably related to a corporate interest", a shareholder has a limited right to inspect the following corporate records:

1. Minutes of shareholder's meetings.
2. balance sheet and profit/loss statement for the preceding year (2010)
3.Plus any current interim statements.

3. The name and address of other shareholders.

4. A current list of directors and officers.


The shareholder must cubmit an affidavit as to the relevant corp. purpose, and stating that he has not been involved in selling shareholder list sin the last five years.

Front 74

Can courts compel?

Back 74

Nothing in the BCL can impair the CL power of NY Courts to compel production OF ANY CORPORATE BOOK OR RECORD.

Front 75

Notice of a shareholders annual meeting

Back 75

Notice of a Shareholder meeting can be served personally or ordinary mail with a minimum of at least ten days notice, but not more than sixty days before the shareholders meeting.

Front 76

requirements of notice of meeting

Back 76

Notice need not state the business to be conducted unless it would entitle a dissenting shareholder to appraisal rights (CAMP activity)

Front 77

Waiver of right to notice

Back 77

Insufficient notice can be waived

1. By a writing signed by the shareholder or director before or after the meeting

or 2. Attendance at the meeting without timely objecting, which constitutes an implied waiver of that right to receive notice.

Front 78

Objecting based on lack of notice

Back 78

A director us to object at the outset of the directors meeting, but a shareholders objection is not waived if he objects at any time prior to the conclusion of the shareholder's meeting.

Front 79

Consequences of failure to notify

Back 79

Absent a waiver, the corps failure to timely notify a director or shareholder of a meeting renders the action taken at that meeting invalid, and the corp would have to start all over again

Front 80

Proxies

Back 80

July essay 10 2003

A shareholders written proxy appoints an agent to vote a shareholder's share at a meeting.

Front 81

Proxy pwoers

Back 81

Proxy shares are counted for quorum pruposes and can vote on all issues unless otherwise expressly otherwise limited in the written proxy

Front 82

Can a shareholder sell his proxy?

Back 82

Against policy for a shareholder to sell a proxy.

Front 83

revocable proxy duration

Back 83

A revocable proxy is good for only 11 months, unless otherwise stated in the proxy.

Front 84

Oral limitation on proxies

Back 84

A SH's oral limitation on a proxies power is not binding on the corporation, relying on the proxies apparent authority.

Front 85

One exception to oral limtiation

Back 85

Where notice of the shareholder's meeting did not state it would consider CAMP activity giving rise to appraisal rights, in which case the absent shareholder can invalidate that corporate activity based on lack of adequate notice, even though that shareholder's proxy voted in favor of the CAMP activity.

Front 86

Death or mental incompetency

Back 86

These will not revoke the proxy unless the corporate officer responsible for maintaining the shareholder list received actual written notice of that fact. This is an exception to the A BID rule on agency (lecture 40)

Front 87

Effect of notice to Officer of death or mental incompetency

Back 87

Notice of incompetency terminates the rights of the proxy

Front 88

Are proxies always revocable?

Back 88

A proxy is always revocable at the whim of the shareholder, unlease its PEACE irrevocable proxy, which is a proxy supported by consideration.

Front 89

P in PEACE proxy

Back 89

P pleadeg shres (for a loan)

Front 90

E in PEACE proxy.

Back 90

E- SOmeone entitled to the shares either because she has contracted to buy them, or she in fact now owns them but was not the owner of record on the corporate books when the meeting was scheduled.

Front 91

A - in Peace

Back 91

Agreement between shareholders to vote a particular way at a shareholders meeting (pvtmclAw), and they each executed irrevocable proxies for that purpose.

Front 92

C in PEACE

Back 92

A creditor of the corporation who has extended new credit or has agreed to continue extendign credit in exchange for the irrevocable proxy.

Front 93

E in PEACE

Back 93

Employees who are given proxies in consideration for joining are staying with the corporation (frequently done by pro teams to entice a coach to come).

Front 94

What if the

Back 94

If it is not a peace proxy, then even though it states it is irrevocable, it is nevertheless revocable at the shareholders whim.

Front 95

Preemptive Rights

Back 95

These are rights of shareholders to have first refusal to purchase stock issued by the corp in order to preserve their percentage of voting or divident rights. Shareholders in Old Crops automatically have PR but shareholders in New Corps do not unless expressly given in the C of I.

Front 96

Where a shareholder gives its employees preemptive rights, these do not apply to COTI

Back 96

C - Shares issued for Consideration other than cash, shares issued to purchase property or to extinguish a corporate debt.

O- Shares issued to affect an organic change, such as a consolidation or merger.

A - Shares issued to attract or keep corporate empoyees.

T- Shares issued within two years from when the C of I was filed with the secretary of state.

T- Shares previously owned by a shareholder, but were sold back to the corp and held in its treasury.

Front 97

Treasury share limtiations

Back 97

treasury shares cannot be used for quorum or voting purposes.

Front 98

Duty to minority shareholders regardless of preemeptive rights

Back 98

Even without preemotive rights, there is a common law fiduciary duty owned by directors, officers, and majority shareholders not to use their majority position of power for personal advantage to the detriment of the shareholders. Whenever a corporations existing balance of power is disturbed, or where there is unequal treatment of shareholders, then if this activity is challenged in court by minority shareholders, the board of directors must be able to show 1. an independent business objective for the conduct, and 2. the same objective could not have been accomplished just as effectively by other means (which would not have disturbed the existing balance of power.)