Corporations

Front 1

The Four-Element Test to a Partnership:

Back 1

1) Agreement to share profits
2) Agreement to share losses
3) A mutual right to control or management of the business, and
4) Community of interest in the venture

Front 2

§ 6 – (1) A partnership is:

Back 2

1) an association
2) of two or more persons (and notice how person is defined in § 2: “individuals, partnerships, corporations, and other associations”…a “person” could be another partnership! You could have partnerships of partnerships!)
3) to carry on as co-owners
4) a business (“every trade, occupation, or profession”)
5) for profit.

Front 3

§ 7 – So does a partnership exist? 

Back 3

1) If A and B aren’t partners to each other, then they can’t both be partners to C, except under § 16 below.
2) Common law co-ownership type stuff like joint tenancy, tenancy in common, tenancy by the entireties and so on doesn’t automatically a partnership make.
3) Sharing gross returns doesn’t make a partnership.
4) But, if you get a share of the profits, then that’s evidence you’re a partner, unless:
1) The profits were going to pay a debt.
2) The profits were paid as wages or rent.
3) The profits were paid out to a representative of a deceased partner as an annuity.
4) The profits were paid out as interest on a loan.
5) The profits were paid as consideration for the sale of a “good-will”…huh?

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§ 18 - Rules Determining Rights and Duties of Partners

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(a) Basically, the partners must share and share alike in good times and in bad, whether there be profits or losses. (b) If a partner spends personal money to do the partnership’s business, the partnership basically promises to pay that partner back. (c) & (d) If the partner makes a loan to the partnership, the partner must be paid back with interest. (e) All the partners get equal rights in managing the partnership. (f) No partner is entitled to get paid for what they do for the partnership. They just get a share of the profits. (g) No one can join the partnership unless all the partners agree. (h) In ordinary matters, it’s majority rules among the partners, but if there’s a previous agreement among them, it can’t be violated without the consent of all the partners.

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§ 21 – Partner Accountable as a Fiduciary

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The partner has a fiduciary duty to the partnership to make sure the partnership gets all the benefit from any use of any of its property. In other words, if an individual partner has cash in hand from the partnership, it still belongs to the partnership.

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§ 31 – Causes of Dissolution

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Lots of different things that cause dissolution, like (1)(a) the end of the agreed upon term, (b) the will of any one partner when it’s a partnership at will, (c) consent of all the partners, (d) if one of the partners gets kicked out, (2) if the agreement between the partners is broken, (3) if something makes it illegal to carry on with the partnership, (4) if any partner dies, (5) if any partner or the partnership itself goes bankrupt, or (6) if a court says so under § 32 below.

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103 Effect of partnership agreement — Nonwaivable provisions.

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(2) The partnership agreement may not:

(a) Vary the rights and duties under 105 except to eliminate the duty to provide copies of statements to all of the partners;

(b) Unreasonably restrict the right of access to books and records under 403(b);

(c) Eliminate the duty of loyalty under 404(b) or 603(b)(3), but, if not manifestly unreasonable:

.............(i) The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty; or

..............(ii) All of the partners or a number or percentage specified in the partnership agreement may authorize or ratify a specific act or transaction that otherwise would violate the duty of loyalty;

(d) Unreasonably reduce the duty of care under 404(c) or 603(b)(3);

(e) Eliminate the obligation of good faith and fair dealing under 404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;

(f) Vary the power to dissociate as a partner under 602(a), except to require the notice under 601(1) to be in writing;

(g) Vary the right of a court to expel a partner in the events specified in 601(5);

(h) Vary the requirement to wind up the partnership business in cases specified in 801(4), (5), or (6);

(i) Vary the law applicable to a limited liability partnership under 106(b); or

(j) Restrict rights of third parties under this chapter.

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202 - Formation of partnership.

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(1) Except as otherwise provided in subsection (2) of this section, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.

(2) An association formed under a statute other than this chapter, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this chapter.

(3) In determining whether a partnership is formed, the following rules apply:

(a) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property;

(b) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived; and

(c) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:

(i) Of a debt by installments or otherwise;

(ii) For services as an independent contractor or of wages or other compensation to an employee;

(iii) Of rent;

(iv) Of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;

(v) Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or

(vi) For the sale of the goodwill of a business or other property by installments or otherwise.

Front 9

Choice of Entity:

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1) Sole Proprietorship
2) General Partnership
3) Limited Partnership
4) Limited Liability Company or LLP
5) Corporation
........a)S Corp
........b)C Corp

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6 Factors in Picking Entity

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1) Liability (Who's on the hook)
2) Control and Management
3) Transferability (Transferring stakes to someone else)
4) Continuity of Existence (How long can entity last?)
5) Taxation (Firm/Entity level taxation or flow-through tax entity?)
6) Capatilization (How quickly can entity raise money?)

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SP Factors:

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1) Liability: belongs to owner; unlimited personal liability; no legal distinction b/t human & business
2) Control: owner controls
3) Transferability of Ownership Interest: sell assets, liabilities
4) Continuity of Existence: can last for life of owner; until retirement; until sale of business; or bankruptcy
5) Taxation: taxed as part of individual owner's tax return on Schedule C, attached to 1040EZ
6) Capitalization: borrow money from friends, bank

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GP Factors:

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1) Liability: partners are Jointly & Severablly liable; liable to extent of investment but can be sued for entire amount with right to seek contribution; personal creditors can only go after your partnership stake, not partnership itself
2) Control: can be determined by agreement, otherwise, allocated control; look to 18(e)
3) Transferability of Ownership Interest: Partner can transfer her interest. Interest consists of 2 parts: Financial & Managerial. You can only transfer your financial attributes (profits & losses, and right to receive distribution of cash/property). You need unanimous vote by all remaining partners to transfer managerial attributes. Transferor, otherwise, keeps managerial control attribute. Transferor retaining J&S as long as he has managerial control.
4) Continuity of existence: Partnership lasts until following events of dissolution occur: death of partner, incapacitation of partner, completion of project. Leads to fork in the road: continue or dissolve.
5) Taxation: Flow-through entity. Partners taxed based on allocated share of P/L. Receive US Return of Partnership Income, which is an information form. It directs IRS to look to your Indiv. Return.
6) Capitalization: Bring in partners or debt financing.

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RUPA 301 - Partner Agent of Partnership

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Every partner is an agent of the PS for the purpose of its business & their action in apparently carrying on in an ordinary way of the business of the PS binds the PS, unless:
• He has not real authority to act AND the 3rd party knew he had no such authority (broad apparent authority)
• An act not in apparently carrying on in the usual way the business of the PS is not binding, unless authorized by all of the other partners (real authority)
Factors to see if apparently carrying on in an ordinary way the business of the PS
• Express agreements between the partners
• Actual course of PS business
• Similar business custom or practice in that locality

Front 14

RUPA 401(f), (i), (j) - Partner's Rights and Duties

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Each partner has equal rts in mgmt and conduct of the PS business.
• Acts in contravention of any agreement between the parties or an amendment to the PS agreement need unanimous consent.
• This is b/c it is not an ordinary matter of the business.
• Ordinary matters just need majority vote

(9) A person may become a partner only with the consent of all of the partners.

(10) A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.

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RUPA 303 - Statement of Partnership Authority

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(1) A partnership may file a statement of partnership authority, which:

(a) Must include:

(i) The name of the partnership; and

(ii) The street address of its chief executive office and of one office in this state, if there is one; and

(b) May state the names of all of the partners, the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership, the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter.

(2) A grant of authority contained in a filed statement of partnership authority is conclusive in favor of a person not a partner who gives value without knowledge to the contrary, so long as and to the extent that a limitation on that authority is not then contained in a subsequently filed statement. A filed cancellation of a limitation on authority revives the previous grant of authority.

(3) A person not a partner is deemed to know of a limitation on the authority of a partner to transfer real property held in the name of the partnership if the limitation is contained in a filed statement of partnership authority.

(4) Except as otherwise provided in subsection (3) of this section and RCW 25.05.265 and 25.05.320, a person not a partner is not deemed to know of a limitation on the authority of a partner merely because the limitation is contained in a filed statement.

(5) Unless earlier canceled, a filed statement of partnership authority is canceled by operation of law five years after the date on which the statement, or the most recent amendment, was filed with the secretary of state.

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RUPA 404 - General Standards of Partner's Conduct

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1) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (2) and (3) of this section.

(2) A partner's duty of loyalty to the partnership and the other partners is limited to the following:

(a) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;

(b) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and

(c) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

(3) A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(4) A partner shall discharge the duties to the partnership and the other partners under this chapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

(5) A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.

(6) A partner may lend money to and transact other business with the partnership, and as to each loan or transaction the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law.

(7) This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

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RUPA 503(d) - Transfer of Partner's Transferable Interest

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(1) A transfer, in whole or in part, of a partner's transferable interest in the partnership:

(a) Is permissible;

(b) Does not by itself cause the partner's dissociation or a dissolution and winding up of the partnership business; and

(c) Does not, as against the other partners or the partnership, entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership business, to require access to information concerning partnership transactions, or to inspect or copy the partnership books or records.

(2) A transferee of a partner's transferable interest in the partnership has a right:

(a) To receive, in accordance with the transfer, allocations of profits and losses of the partnership and distributions to which the transferor would otherwise be entitled;

(b) To receive upon the dissolution and winding up of the partnership business, in accordance with the transfer, the net amount otherwise distributable to the transferor; and

(c) To seek under RCW 25.05.300(6) a judicial determination that it is equitable to wind up the partnership business.

(3) In a dissolution and winding up, a transferee is entitled to an account of partnership transactions only from the date of the latest account agreed to by all of the partners.

(4) Upon transfer, the transferor retains the rights and duties of a partner other than the interest in profits and losses of the partnership and distributions transferred.

(5) A partnership need not give effect to a transferee's rights under this section until it has notice of the transfer.

(6) A transfer of a partner's transferable interest in the partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer.

Front 18

Summers v. Doley

Facts: P entered into a partnership with Doodley (D) for the purposes of operation a trash collection business. When one of the partners was unable to work, he had to provide a replacement. In July 1966, P approached D regarding the hiring of another man and D refused. Nevertheless, P hired a person and paid him out of his pocket. Upon discovery of this action, D again voiced his objection. P continued to operate using the third man till 10/1967, then instituted this action. He claims that D owes him $6,000 , for the $11,000 in expense incurred by hiring of another man.

Back 18

Rule: If a partner incurs expenses for the partnership, the partnership need not reimburse them unless those expenses were authorized by a majority of partners, absent contrary agreement or later ratification.

Front 19

Sanchez v. Saylor

Sanchez and Saylor were partners, a third party was going to lend money but Sanchez refused to provide his personal financial statements. Saylor sued for breach of fiduciary duty, court found in favor of Sanchez. Partner refuses to provide personal financial statements so loan is not given and partnership goes bust. Taylor sues for breach of fiduciary duty.

Back 19

In Covalt one party has 75% of the stock as a differentiator. Covalt rule is that each partner has an equal say in decisions, and appropriate remedy for disagreements where there is no enforceable agreement covering such circumstane is dissolution, not breach of fiduciary duty.

Front 20

Meinhard v. Salmon


ISSUE: Is a joint adventurer required to inform another co-adventurer of a business opportunity that occurs as a result of participation in a joint venture?

Back 20

HOLDING: A joint venture existed in which two partners pooled their money in order to lease a building for shops and offices. Defendant partner was more business savvy and, in an effort to increase his wealth, he entered into an agreement with another businessperson to purchase surrounding property as a leasehold estate. The specifics of this transaction were not disclosed to plaintiff partner, and he subsequently sued for breach of the joint venture agreement when he discovered the transaction. Litigation ensued and plaintiff received a substantial judgment for breach of contract.

RULE: Coadventurers were subject to fiduciary duties akin to those of partners.

Front 21

Latta v. Kilbourn

Back 21

One partner cannot, directly or indirectly carry on the business of the partnership for his private advantage.

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Consequences Among Partners As a Result of Dissoultion

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1) Remaining Partners may make a cash payment of the value of a partner's share of the partnership or an in-kind distribution in order to keep the partnership's business operating. Termed Continuation Agreements.

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Effect of Dissolution on the Relationship B/T Partnership and Third Parties

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After a patnership is dissolved, the transfer of assets, agreements, etc...to a new partnership creates a "new" partnership for legal purposes. This can cause pre-existing insurane policies to become "null and void."

Front 24

Tax Consequences from Dissolution of Partnership

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Partnership's existence does not terminate for tax purposes until either:
A) no part of partnership's business continues to be carried on, or
B) within 12 month period there is a sale or exchange of 50% or more of total interest in capital and profits.

Front 25

Hilco Property Services, Inc. v. US

Back 25

to determine the existence of partnership, courts consult a variety of factors including intent or parties to act as partners, sharing profits and losses, right to participate in control of enterprise, or commonly held real property. The required element is “an intent to do those things which constitute a partnership” NOT the intent to be legally bound as partners. Thus, an explicit disclaimer of partnership is not in itself dispositive (Arnold v. Erkmann)

- about objective intent & outward manifestations

Front 26

Martin v. Petyon

Brief Fact Summary. Respondents, William Peyton et al., entered an agreement with a broker, John Hall, to loan Hall collateral to keep his business afloat. Appellant, Charles Martin, interpreted the agreement as forming a partnership.

Back 26

Held. The agreements did not establish a partnership. Although Respondents ensured that they had some control over the operations of Hall’s business, the controls they bargained for were to ensure that their investment was secure. Immediately prior to Respondent’s investment, Hall’s business was doing poorly due to bad decision-making and Respondents needed to prevent further bad decisions. Hall still was able to control the day-to-day affairs, and Respondents never had control to initiate their own ideas

Jury often determines whether there is a partnership b/c it is an issue of fact. They look to factors in UPA 7(4).

Front 27

Lupien & Malsbenden

Facts:On March 5, 1980, P entered into a written agreement with Gragin, doing business as York Motor Mart (business) for the construction of Bradley automobile. P made two payments ($500 and $3,950) towards the final price of $8,020.00. During P's visits to the shop, he only dealt with D and not Gragin. In April, P was told to sign over ownership of his pick-up truck, which would be used as a consideration for the new car and the proceeds from sale would be used for completion of the Bradley. P was provided with a leased car and later with a demo Bradley car (which later turned out to be someone else's car). P never received the car he purchased. D claimed that his interest was that of a banker; he loaned Gragin $85,000 to finance the business. D acknowledged that Bradley kits were purchased with his personal checks and that he had also purchased equipment for York Motor Mart. He also stated that after Cragin disappeared sometime late in May 1980, he had physical control of the premises of York Motor Mart and that he continued to dispose of assets there even to the time of trial in 1983.

Back 27

Rule: A creditor who actively manages its borrower’s business may be liable as the borrower’s partner.

Front 28

gateway potato sales v. G.B. Investment Co.

Facts: Creditor would not give seed potatoes to Ellsworth [president of limited partnership, Sunworth] because he had a checkered financial past. Ellsworth said that he had a financial backer, who was a limited partner in Sunworth, and on the strength of that, the Creditor extended loan. Ellsworth did not pay. Creditor of a limited partnership sued the limited partner/financial backer, alleging that the limited partner’s activities had rendered him personally liable despite the general rule. The financial backer/limited partner claims he did not exercise any control, but Ellsworth had two pages of depositions about all of the shots that the limited partner called.

Back 28

Holding: Evidence provided that was enough evidence that the limited partner had engaged in corporation as a full partner to get past summary judgment.
- General rule: limited partners have no personal liability unless they exercise control
- New law: If limited partner participation in business is not substantially the same as the general partner, then liable only to persons who transact business with limited partnership with ACTIVE KNOWLEDGE of participation in business.


- Old 303: Limited Partner has some rights he can engage w/o violating Control Rule:
....1) Being a contractor or employee of LP
....2) Consult & advise GP on limited partnership
....3) Attend meetings of partners
....4) Proposing, approving, or disapproving, by voting or otherwise, one or more of the following matters: dissolution, winding up, sale of assets, incurrence of debt other than in the ordinary course of business, change in nature of business, admission/removal of GP/LP.

Front 29

In re USACafes, L.P. Litigation

Brief Fact Summary. Plaintiffs Limited Partners of USACafes, L.P. (”Plaintiffs”) brought a class action suit against Defendants USACafes General Partner, Inc and six directors of the General Partner (”Defendants”) for breach of fiduciary duty. Plaintiffs claimed that the sale of Plaintiffs’ assets to an independent entity, under which Defendants received side payments, breached Defendants’ fiduciary duty to Plaintiffs because Defendants consequentially accepted a lower offer price for Plaintiffs’ assets.

Back 29

Synopsis of Rule of Law. Directors of a corporate general partner owe a fiduciary duty to a limited partnership.

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Flow-Through Taxation

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All of the firm's income and expenses, and gains and losses, are taxable directly to the firm's owners.

Any domesticated unincorporated business that constitutes an "eligible entity" can elect either flow-through taxation or firm taxation.

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Eligible Entity

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any business entity other than:

1) a corporation, or
2) a business entity that is specifically made taxable as corporation under the IRC (i.e. Master Limited Partnership)

- S corp taxed like an individual

Front 32

LLP

Back 32

General partnerships with one core difference and one ancillary difference:
1)general partners of a limited liability partnership are not individually liable for any debts or obligations of the partnership that arise from a wrongful act or omission of another partner or agent of the partnership
2) LLPs must be registered with the appropriate state office
3) the statutory change usually did not protect a partner from joint liability for the contractual obligations of the partnership, such as those to trade creditors or lenders
4) statutes leave open the possibility of liability for the wrongful act or omission of another partner or agent under the partner's supervision or control
5) protection from liability applies only to wrongful acts or omissions that took place after the general partnership became an LLP

Front 33

PLLC

Back 33

Availability to professionals will be determined by:

1) provisions of the applicable LLC statute, and
2) limitations of the applicable state professional licensing or regulatory organizations.

Characteristics:
1) shields members from PL to the entity's trade creditors or to non-practice-related tort claimants, but will not shield from PL for malpractice or for malpractice of a fellow member/employee supervised

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Characteristics of a Corporation

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Formed: by filing a certificate of incorporation or charter

1) Limited Liability: normally, shareholders are not personally liable for corporate obligations.
2) Free Transferability of Ownership Interests: ownership interests are freely transferable.
3) Continuity of Existence: usually perpetual, unless a shorter term is specified
4) Centralized Management: power to manage vested in board of directors
4) Entity Status: Corp can exercise powers and have rights in its own name (ex. it can be sued or sue, own real and personal property)

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S Corps Taxation

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permits the owners of qualifying corps to elect a special tax status under which the corporation and it shareholders receive flow-through taxation that is comparable to partnership taxation.

Exceptions:
1) Items of income, loss, deduction, and credit, are passed through to the shareholders on a pro rata basis, and added to or subtracted from each shareholder's gross income.
2) corp may not have more than 100 shareholders
3) corp may not have more than one class of stock
4) all shareholders must be individuals or qualified estates or trusts
5) no shareholder may be a nonresident alien

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Doing-business tax

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tax on corporation on a basis that reflects the amount of that business being done in a certain state

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Franchise tax

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tax by a state on a corp for the privilege of incorporation

Front 38

RUPA 1001: Statement of Qualification

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a) parntershp may become a LLP pursuant to this section
b) terms and conditions of LLP must be approved by the vote necessary to amend the partnership agreement except, in a partnership agreement that expressly considers contribution obligations, the vote necessary to amend those provisions.
c) after approval, a partnership may become an LLP by filing a statement of qualification which contains: 1) name of partnership, 2) address of CEO in State, 3) an agent in state if no CEO in state, 4) statement that partnership elects to be an LLP, and 5) a deferred effective date, if any.
d) status of LLP is effective on later of filing or date specified in stmt.
e) status of LLP and liability of partners is not affected by errors or later changes in stmt of qualification
f) filing establishes that partnership has satisfied all conditions to the qualification of partnership as a LLP.
g) amendment or cancellation of statement is effective when filed or on deferred effective date specified in amendment or cancellation

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RUPA 1002: Name of LLP

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the name of an LLP must end with "Registered Limited Liability Partnership," "Limited Liability Partnership", "R.L.L.P.", "L.L.P.", "RLLP", or "LLP"

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RULCA 104: Nature, purpose, and duration of limited liability company.

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(1) A limited liability company is an entity distinct from its members.
(2) A limited liability company may have any lawful purpose, regardless of whether for profit.
(3) A limited liability company has perpetual duration.

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RULCA 202: Amendment or restatement of certificate of organization.

Back 41

(1) A certificate of organization may be amended or restated at any time,
(2) To amend its certificate of organization, a limited liability company must deliver to the division for filing an amendment stating:
(a) the name of the limited liability company;
(b) the date of filing of its certificate of organization; and
(c) the changes the amendment makes to the certificate as most recently amended or restated.
(3) To restate its certificate of organization, a limited liability company must deliver to the division for filing a restatement, designated as such in its heading, stating:
(a) in the heading or an introductory paragraph, the limited liability company's present name and the date of the filing of the limited liability company's initial certificate of organization;
(b) if the limited liability company's name has been changed at any time since the limited liability company's formation, each of the limited liability company's former names; and
(c) the changes the restatement makes to the certificate as most recently amended or restated.
(4) Subject to Subsections 112(c) and 205(c), an amendment to or restatement of a certificate of organization is effective when filed by the division.
(5) If a member of a member-managed limited liability company, or a manager of a manager-managed limited liability company, knows that any information in a filed certificate of organization was inaccurate when the certificate was filed or has become inaccurate owing to changed circumstances, the member or manager shall promptly:
(a) cause the certificate to be amended; or
(b) if appropriate, deliver to the division for filing a statement of change under Section 114 or a statement of correction under Section 206.

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RULPA 304: Liability of members and managers.

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(1) The debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise:
(a) are solely the debts, obligations, or other liabilities of the limited liability company; and
(b) do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.
(2) The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the limited liability company.

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LLC Characteristics

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noncorporate entities created under statutes that combine elements of corporation and partnership law.

1) Liability: members have limited liability. However, members may become liable if the conditions for piercing the veil of an LLC are satisfied.
2) Great freedom to structure its internal governance by agreement.
3) Individual entity allowed to hold property and sue or be sued under its own name.
4) Come in two types: Member-managed LLC & Manager-managed LLCs (may or may not be members)
5) Formation: formed by Articles of Organization in a designtated state office.
6) Operating Agreements: agreements among members concerning the conduct of its affairs. Provides for governance, capitalization, admission and withdrawal of members, and distributions.
7) Management: Managed by its members.
8) Voting: Members vote per capita(one vote per member) or pro rata (by financial interest).
9) Distributions: made per capita or pro rata.
10) Dissociation: most provide that withdrawing members are entitled to some payment on withdrawal. Most also provide that dissociation does not dissolve or trigger liquidation.

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Member-managed LLCs

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each member has power to bind the LLC for any act that is for apparently carrying on the business of the LLC in the usual way or ordinary course

Front 45

Difference b/t allocation & distribution

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Distribution must follow allocation so that you have money to pay tax

Allocations do not equal distributions.

Front 46

Limited Partnership

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-1 or more general partners & 1 or more limited partners
- 201: must file certificate to give public constructive notice that limited partners don't have J&S liability
-Liability & Control are different for LP's but last 4 elements remain same as GP's
-Voting: 302: the partnership agreement may grant to all or a specified group of the limited partners the right to vote (on a per capita or other basis) upon any matter.
1) Liability: J&S for GP's (controlling) & limited liability for LP's (non-controlling) - Control Rule; to mitigate concern for GP you can form an LLC & have it be the GP of the LP & thus entity has J&S

Front 47

New ULPA 303: No liability as limited partner for limited partnership obligations

Back 47

An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.

This section eliminates the so-called "control rule" with respect to personal liability for entity obligations and brings limited partners into parity with LLC members, LLP partners and corporate shareholders.

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§ 101. Incorporators; how corporation formed; purposes.

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(a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.

(b) A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.

(c) Corporations for constructing, maintaining and operating public utilities, whether in or outside of this State, may be organized under this chapter, but corporations for constructing, maintaining and operating public utilities within this State shall be subject to, in addition to this chapter, the special provisions and requirements of Title 26 applicable to such corporations.

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§ 102. Contents of certificate of incorporation.

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(a) The certificate of incorporation shall set forth:

(1) The name of the corporation, which (i) shall contain 1 of the words "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate," or "limited," (or abbreviations thereof, with or without punctuation), or words (or abbreviations thereof, with or without punctuation) of like import of foreign countries or jurisdictions (provided they are written in roman characters or letters); provided, however, that the Division of Corporations in the Department of State may waive such requirement (unless it determines that such name is, or might otherwise appear to be, that of a natural person) if such corporation executes, acknowledges and files with the Secretary of State in accordance with § 103 of this title a certificate stating that its total assets, as defined in § 503(i) of this title, are not less than $10,000,000, or, in the sole discretion of the Division of Corporations in the Department of State, if the corporation is both a nonprofit nonstock corporation and an association of professionals, (ii) shall be such as to distinguish it upon the records in the office of the Division of Corporations in the Department of State from the names that are reserved on such records and from the names on such records of each other corporation, partnership, limited partnership, limited liability company or statutory trust organized or registered as a domestic or foreign corporation, partnership, limited partnership, limited liability company or statutory trust under the laws of this State, except with the written consent of the person who has reserved such name or such other foreign corporation or domestic or foreign partnership, limited partnership, limited liability company or statutory trust, executed, acknowledged and filed with the Secretary of State in accordance with § 103 of this title, (iii) except as permitted by § 395 of this title, shall not contain the word "trust," and (iv) shall not contain the word "bank," or any variation thereof, except for the name of a bank reporting to and under the supervision of the State Bank Commissioner of this State or a subsidiary of a bank or savings association (as those terms are defined in the Federal Deposit Insurance Act, as amended, at 12 U.S.C. § 1813), or a corporation regulated under the Bank Holding Company Act of 1956, as amended, 12 U.S.C. § 1841 et seq., or the Home Owners' Loan Act, as amended, 12 U.S.C. § 1461 et seq.; provided, however, that this section shall not be construed to prevent the use of the word "bank," or any variation thereof, in a context clearly not purporting to refer to a banking business or otherwise likely to mislead the public about the nature of the business of the corporation or to lead to a pattern and practice of abuse that might cause harm to the interests of the public or the State as determined by the Division of Corporations in the Department of State;

(2) The address (which shall be stated in accordance with § 131(c) of this title) of the corporation's registered office in this State, and the name of its registered agent at such address;

(3) The nature of the business or purposes to be conducted or promoted. It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any;

(4) If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class. The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, which are permitted by § 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired, and an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof that may be desired but which shall not be fixed by the certificate of incorporation. The foregoing provisions of this paragraph shall not apply to nonstock corporations. In the case of nonstock corporations, the fact that they are not authorized to issue capital stock shall be stated in the certificate of incorporation. The conditions of membership, or other criteria for identifying members, of nonstock corporations shall likewise be stated in the certificate of incorporation or the bylaws. Nonstock corporations shall have members, but failure to have members shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation. Nonstock corporations may provide for classes or groups of members having relative rights, powers and duties, and may make provision for the future creation of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. Except as otherwise provided in this chapter, nonstock corporations may also provide that any member or class or group of members shall have full, limited, or no voting rights or powers, including that any member or class or group of members shall have the right to vote on a specified transaction even if that member or class or group of members does not have the right to vote for the election of the members of the governing body of the corporation. Voting by members of a nonstock corporation may be on a per capita, number, financial interest, class, group, or any other basis set forth. The provisions referred to in the 3 preceding sentences may be set forth in the certificate of incorporation or the bylaws. If neither the certificate of incorporation nor the bylaws of a nonstock corporation state the conditions of membership, or other criteria for identifying members, the members of the corporation shall be deemed to be those entitled to vote for the election of the members of the governing body pursuant to the certificate of incorporation or bylaws of such corporation or otherwise until thereafter otherwise provided by the certificate of incorporation or the bylaws;

(5) The name and mailing address of the incorporator or incorporators;

(6) If the powers of the incorporator or incorporators are to terminate upon the filing of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.

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§ 103. Execution, acknowledgment, filing, recording and effective date of original certificate of incorporation and other instruments; exceptions.

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(a) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such instrument shall be executed as follows:

(1) The certificate of incorporation, and any other instrument to be filed before the election of the initial board of directors if the initial directors were not named in the certificate of incorporation, shall be signed by the incorporator or incorporators (or, in the case of any such other instrument, such incorporator's or incorporators' successors and assigns). If any incorporator is not available by reason of death, incapacity, unknown address, or refusal or neglect to act, then any such other instrument may be signed, with the same effect as if such incorporator had signed it, by any person for whom or on whose behalf such incorporator, in executing the certificate of incorporation, was acting directly or indirectly as employee or agent, provided that such other instrument shall state that such incorporator is not available and the reason therefor, that such incorporator in executing the certificate of incorporation was acting directly or indirectly as employee or agent for or on behalf of such person, and that such person's signature on such instrument is otherwise authorized and not wrongful.

(2) All other instruments shall be signed:

a. By any authorized officer of the corporation; or

b. If it shall appear from the instrument that there are no such officers, then by a majority of the directors or by such directors as may be designated by the board; or

c. If it shall appear from the instrument that there are no such officers or directors, then by the holders of record, or such of them as may be designated by the holders of record, of a majority of all outstanding shares of stock; or

d. By the holders of record of all outstanding shares of stock.

(b) Whenever this chapter requires any instrument to be acknowledged, such requirement is satisfied by either:

(1) The formal acknowledgment by the person or 1 of the persons signing the instrument that it is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true. Such acknowledgment shall be made before a person who is authorized by the law of the place of execution to take acknowledgments of deeds. If such person has a seal of office such person shall affix it to the instrument.

(2) The signature, without more, of the person or persons signing the instrument, in which case such signature or signatures shall constitute the affirmation or acknowledgment of the signatory, under penalties of perjury, that the instrument is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true.

(c) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such requirement means that:

(1) The signed instrument shall be delivered to the office of the Secretary of State;

(2) All taxes and fees authorized by law to be collected by the Secretary of State in connection with the filing of the instrument shall be tendered to the Secretary of State; and

(3) Upon delivery of the instrument, the Secretary of State shall record the date and time of its delivery. Upon such delivery and tender of the required taxes and fees, the Secretary of State shall certify that the instrument has been filed in the Secretary of State's office by endorsing upon the signed instrument the word "Filed", and the date and time of its filing. This endorsement is the "filing date" of the instrument, and is conclusive of the date and time of its filing in the absence of actual fraud. The Secretary of State shall file and index the endorsed instrument. Except as provided in paragraph (c)(4) of this section and in subsection (i) of this section, such filing date of an instrument shall be the date and time of delivery of the instrument.

(4) Upon request made upon or prior to delivery, the Secretary of State may, to the extent deemed practicable, establish as the filing date of an instrument a date and time after its delivery. If the Secretary of State refuses to file any instrument due to an error, omission or other imperfection, the Secretary of State may hold such instrument in suspension, and in such event, upon delivery of a replacement instrument in proper form for filing and tender of the required taxes and fees within 5 business days after notice of such suspension is given to the filer, the Secretary of State shall establish as the filing date of such instrument the date and time that would have been the filing date of the rejected instrument had it been accepted for filing. The Secretary of State shall not issue a certificate of good standing with respect to any corporation with an instrument held in suspension pursuant to this subsection. The Secretary of State may establish as the filing date of an instrument the date and time at which information from such instrument is entered pursuant to paragraph (c)(8) of this section if such instrument is delivered on the same date and within 4 hours after such information is entered.

(5) The Secretary of State, acting as agent for the recorders of each of the counties, shall collect and deposit in a separate account established exclusively for that purpose a county assessment fee with respect to each filed instrument and shall thereafter weekly remit from such account to the recorder of each of the said counties the amount or amounts of such fees as provided for in paragraph (c)(6) of this section or as elsewhere provided by law. Said fees shall be for the purposes of defraying certain costs incurred by the counties in merging the information and images of such filed documents with the document information systems of each of the recorder's offices in the counties and in retrieving, maintaining and displaying such information and images in the offices of the recorders and at remote locations in each of such counties. In consideration for its acting as the agent for the recorders with respect to the collection and payment of the county assessment fees, the Secretary of State shall retain and pay over to the General Fund of the State an administrative charge of 1 percent of the total fees collected.

(6) The assessment fee to the counties shall be $24 for each 1-page instrument filed with the Secretary of State in accordance with this section and $9.00 for each additional page for instruments with more than 1 page. The recorder's office to receive the assessment fee shall be the recorder's office in the county in which the corporation's registered office in this State is, or is to be, located, except that an assessment fee shall not be charged for either a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title or a document filed in accordance with subchapter XV of this chapter.

(7) The Secretary of State, acting as agent, shall collect and deposit in a separate account established exclusively for that purpose a courthouse municipality fee with respect to each filed instrument and shall thereafter monthly remit funds from such account to the treasuries of the municipalities designated in § 301 of Title 10. Said fees shall be for the purposes of defraying certain costs incurred by such municipalities in hosting the primary locations for the Delaware courts. The fee to such municipalities shall be $20 for each instrument filed with the Secretary of State in accordance with this section. The municipality to receive the fee shall be the municipality designated in § 301 of Title 10 in the county in which the corporation's registered office in this State is, or is to be, located, except that a fee shall not be charged for a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title, a resignation of agent without appointment of a successor under § 136 of this title, or a document filed in accordance with subchapter XV of this chapter.

(8) The Secretary of State shall cause to be entered such information from each instrument as the Secretary of State deems appropriate into the Delaware Corporation Information System or any system which is a successor thereto in the office of the Secretary of State, and such information and a copy of each such instrument shall be permanently maintained as a public record on a suitable medium. The Secretary of State is authorized to grant direct access to such system to registered agents subject to the execution of an operating agreement between the Secretary of State and such registered agent. Any registered agent granted such access shall demonstrate the existence of policies to ensure that information entered into the system accurately reflects the content of instruments in the possession of the registered agent at the time of entry.

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§ 109. Bylaws.

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(a) The original or other bylaws of a corporation may be adopted, amended or repealed by the incorporators, by the initial directors of a corporation other than a nonstock corporation or initial members of the governing body of a nonstock corporation if they were named in the certificate of incorporation, or, before a corporation other than a nonstock corporation has received any payment for any of its stock, by its board of directors. After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote. In the case of a nonstock corporation, the power to adopt, amend or repeal bylaws shall be in its members entitled to vote. Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws.

(b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

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§ 122. Specific powers.

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Every corporation created under this chapter shall have power to:

(1) Have perpetual succession by its corporate name, unless a limited period of duration is stated in its certificate of incorporation;

(2) Sue and be sued in all courts and participate, as a party or otherwise, in any judicial, administrative, arbitrative or other proceeding, in its corporate name;

(3) Have a corporate seal, which may be altered at pleasure, and use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced;

(4) Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated;

(5) Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation;

(6) Adopt, amend and repeal bylaws;

(7) Wind up and dissolve itself in the manner provided in this chapter;

(8) Conduct its business, carry on its operations and have offices and exercise its powers within or without this State;

(9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof;

(10) Be an incorporator, promoter or manager of other corporations of any type or kind;

(11) Participate with others in any corporation, partnership, limited partnership, joint venture or other association of any kind, or in any transaction, undertaking or arrangement which the participating corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others;

(12) Transact any lawful business which the corporation's board of directors shall find to be in aid of governmental authority;

(13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of (a) a corporation all of the outstanding stock of which is owned, directly or indirectly, by the contracting corporation, or (b) a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, or (c) a corporation all of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation;

(14) Lend money for its corporate purposes, invest and reinvest its funds, and take, hold and deal with real and personal property as security for the payment of funds so loaned or invested;

(15) Pay pensions and establish and carry out pension, profit sharing, stock option, stock purchase, stock bonus, retirement, benefit, incentive and compensation plans, trusts and provisions for any or all of its directors, officers and employees, and for any or all of the directors, officers and employees of its subsidiaries;

(16) Provide insurance for its benefit on the life of any of its directors, officers or employees, or on the life of any stockholder for the purpose of acquiring at such stockholder's death shares of its stock owned by such stockholder.

(17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or 1 or more of its officers, directors or stockholders.

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§ 241. Amendment of certificate of incorporation before receipt of payment for stock.

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(a) Before a corporation has received any payment for any of its stock, it may amend its certificate of incorporation at any time or times, in any and as many respects as may be desired, so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of filing the amendment.

(b) The amendment of a certificate of incorporation authorized by this section shall be adopted by a majority of the incorporators, if directors were not named in the original certificate of incorporation or have not yet been elected, or, if directors were named in the original certificate of incorporation or have been elected and have qualified, by a majority of the directors. A certificate setting forth the amendment and certifying that the corporation has not received any payment for any of its stock, or that the corporation has no members, as applicable, and that the amendment has been duly adopted in accordance with this section shall be executed, acknowledged and filed in accordance with § 103 of this title. Upon such filing, the corporation's certificate of incorporation shall be deemed to be amended accordingly as of the date on which the original certificate of incorporation became effective, except as to those persons who are substantially and adversely affected by the amendment and as to those persons the amendment shall be effective from the filing date.

(c) This section will apply to a nonstock corporation before such a corporation has any members; provided, however, that all references to directors shall be deemed to be references to members of the governing body of the corporation.

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§ 242. Amendment of certificate of incorporation after receipt of payment for stock; nonstock corporations.

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(a) After a corporation has received payment for any of its capital stock, or after a nonstock corporation has members, it may amend its certificate of incorporation, from time to time, in any and as many respects as may be desired, so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of the filing of the amendment; and, if a change in stock or the rights of stockholders, or an exchange, reclassification, subdivision, combination or cancellation of stock or rights of stockholders is to be made, such provisions as may be necessary to effect such change, exchange, reclassification, subdivision, combination or cancellation. In particular, and without limitation upon such general power of amendment, a corporation may amend its certificate of incorporation, from time to time, so as:
(1) To change its corporate name; or
(2) To change, substitute, enlarge or diminish the nature of its business or its corporate powers and purposes; or
(3) To increase or decrease its authorized capital stock or to reclassify the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares, or the qualifications, limitations or restrictions of such rights, or by changing shares with par value into shares without par value, or shares without par value into shares with par value either with or without increasing or decreasing the number of shares, or by subdividing or combining the outstanding shares of any class or series of a class of shares into a greater or lesser number of outstanding shares; or
(4) To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared; or
(5) To create new classes of stock having rights and preferences either prior and superior or subordinate and inferior to the stock of any class then authorized, whether issued or unissued; or
(6) To change the period of its duration.
Any or all such changes or alterations may be effected by 1 certificate of amendment.
(b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner:
(1) If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders. Such special or annual meeting shall be called and held upon notice in accordance with § 222 of this title. The notice shall set forth such amendment in full or a brief summary of the changes to be effected thereby. At the meeting a vote of the stockholders entitled to vote thereon shall be taken for and against the proposed amendment. If a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment, a certificate setting forth the amendment and certifying that such amendment has been duly adopted in accordance with this section shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.
(2) The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any class so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of this paragraph. The number of authorized shares of any such class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote irrespective of this subsection, if so provided in the original certificate of incorporation, in any amendment thereto which created such class or classes of stock or which was adopted prior to the issuance of any shares of such class or classes of stock, or in any amendment thereto which was authorized by a resolution or resolutions adopted by the affirmative vote of the holders of a majority of such class or classes of stock.
(3) If the corporation is a nonstock corporation, then the governing body thereof shall adopt a resolution setting forth the amendment proposed and declaring its advisability. If a majority of all the members of the governing body shall vote in favor of such amendment, a certificate thereof shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title. The certificate of incorporation of any nonstock corporation may contain a provision requiring any amendment thereto to be approved by a specified number or percentage of the members or of any specified class of members of such corporation in which event such proposed amendment shall be submitted to the members or to any specified class of members of such corporation in the same manner, so far as applicable, as is provided in this section for an amendment to the certificate of incorporation of a stock corporation; and in the event of the adoption thereof by such members, a certificate evidencing such amendment shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.
(4) Whenever the certificate of incorporation shall require for action by the board of directors of a corporation other than a nonstock corporation or by the governing body of a nonstock corporation, by the holders of any class or series of shares or by the members, or by the holders of any other securities having voting power the vote of a greater number or proportion than is required by any section of this title, the provision of the certificate of incorporation requiring such greater vote shall not be altered, amended or repealed except by such greater vote.
(c) The resolution authorizing a proposed amendment to the certificate of incorporation may provide that at any time prior to the effectiveness of the filing of the amendment with the Secretary of State, notwithstanding authorization of the proposed amendment by the stockholders of the corporation or by the members of a nonstock corporation, the board of directors or governing body may abandon such proposed amendment without further action by the stockholders or members.

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NYBCL § 201. Purposes.

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(a) A corporation may be formed under this chapter for any lawful business purpose or purposes except to do in this state any business for which formation is permitted under any other statute of this state unless such statute permits formation under this chapter. If, immediately prior to the effective date of this chapter,1 a statute of this state permitted the formation of a corporation under the stock corporation law2 for a purpose or purposes specified in such other statute, such statute shall be deemed and construed to permit formation of such corporation under this chapter, and any conditions, limitations or restrictions in such other statute upon the formation of such corporation under the stock corporation law shall apply to the formation thereof under this chapter.
(b) The approval of the industrial board of appeals is required for the filing with the department of state of any certificate of incorporation, certificate of merger or consolidation or application of a foreign corporation for authority to do business in this state which states as the purpose or one of the purposes of the corporation the formation of an organization of groups of working men or women or wage earners, or the performance, rendition or sale of services as labor consultant or as advisor on labor-management relations or as arbitrator or negotiator in labor-management disputes.
(c) In time of war or other national emergency, a corporation may do any lawful business in aid thereof, notwithstanding the purpose or purposes set forth in its certificate of incorporation, at the request or direction of any competent governmental authority.
(d) A corporation whose statement of purposes specifically includes the establishment or operation of a child day care center, as that term is defined in section three hundred ninety of the social services law, shall provide a certified copy of the certificate of incorporation, each amendment thereto, and any certificate of merger, consolidation or dissolution involving such corporation to the office of children and family services within thirty days after the filing of such certificate, amendment, merger, consolidation or dissolution with the department of state. This requirement shall also apply to any foreign corporation filing an application for authority under article thirteen of this chapter, any amendments thereto, and any surrender of authority or termination of authority in this state of such corporation.
(e) A corporation may not include as its purpose or among its purposes the establishment or maintenance of a hospital or facility providing health related services, as those terms are defined in article twenty-eight of the public health law unless its certificate of incorporation shall so state and such certificate shall have annexed thereto the approval of the public health and health planning council.

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NYBCL § 202. General powers.

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(a) Each corporation, subject to any limitations provided in this chapter or any other statute of this state or its certificate of incorporation, shall have power in furtherance of its corporate purposes:
(1) To have perpetual duration.
(2) To sue and be sued in all courts and to participate in actions and proceedings, whether judicial, administrative, arbitrative or otherwise, in like cases as natural persons.
(3) To have a corporate seal, and to alter such seal at pleasure, and to use it by causing it or a facsimile to be affixed or impressed or reproduced in any other manner.
(4) To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with, real or personal property, or any interest therein, wherever situated.
(5) To sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, or create a security interest in, all or any of its property, or any interest therein, wherever situated.
(6) To purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, employ, sell, lend, lease, exchange, transfer, or otherwise dispose of, mortgage, pledge, use and otherwise deal in and with, bonds and other obligations, shares, or other securities or interests issued by others, whether engaged in similar or different business, governmental, or other activities.
(7) To make contracts, give guarantees and incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property or any interest therein, wherever situated.
(8) To lend money, invest and reinvest its funds, and take and hold real and personal property as security for the payment of funds so loaned or invested.
(9) To do business, carry on its operations, and have offices and exercise the powers granted by this chapter in any jurisdiction within or without the United States.
(10) To elect or appoint officers, employees and other agents of the corporation, define their duties, fix their compensation and the compensation of directors, and to indemnify corporate personnel.
(11) To adopt, amend or repeal by-laws, including emergency by-laws made pursuant to subdivision seventeen of section twelve of the state defense emergency act,1 relating to the business of the corporation, the conduct of its affairs, its rights or powers or the rights or powers of its shareholders, directors or officers.
(12) To make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof.
(13) To pay pensions, establish and carry out pension, profit-sharing, share bonus, share purchase, share option, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions for any or all of its directors, officers and employees.
(14) To purchase, receive, take, or otherwise acquire, own, hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares.
(15) To be a promoter, partner, member, associate or manager of other business enterprises or ventures, or to the extent permitted in any other jurisdiction to be an incorporator of other corporations of any type or kind.
(16) To have and exercise all powers necessary or convenient to effect any or all of the purposes for which the corporation is formed.
(b) No corporation shall do business in New York state under any name, other than that appearing in its certificate of incorporation, without compliance with the filing provisions of section one hundred thirty of the general business law governing the conduct of business under an assumed name.

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NYBCL § 402. Certificate of incorporation; contents.

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(a) A certificate, entitled “Certificate of incorporation of ...... (name of corporation) under section 402 of the Business Corporation Law”, shall be signed by each incorporator, with his name and address included in such certificate and delivered to the department of state. It shall set forth:
(1) The name of the corporation.
(2) The purpose or purposes for which it is formed, it being sufficient to state, either alone or with other purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under this chapter, provided that it also state that it is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. By such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations therein or in this chapter, if any.
(3) The county within this state in which the office of the corporation is to be located.
(4) The aggregate number of shares which the corporation shall have the authority to issue; if such shares are to consist of one class only, the par value of the shares or a statement that the shares are without par value; or, if the shares are to be divided into classes, the number of shares of each class and the par value of the shares having par value and a statement as to which shares, if any, are without par value.
(5) If the shares are to be divided into classes, the designation of each class and a statement of the relative rights, preferences and limitations of the shares of each class.
(6) If the shares of any preferred class are to be issued in series, the designation of each series and a statement of the variations in the relative rights, preferences and limitations as between series insofar as the same are to be fixed in the certificate of incorporation, a statement of any authority to be vested in the board to establish and designate series and to fix the variations in the relative rights, preferences and limitations as between series and a statement of any limit on the authority of the board of directors to change the number of shares of any series of preferred shares as provided in paragraph (e) of section 502 (Issue of any class of preferred shares in series).
(7) A designation of the secretary of state as agent of the corporation upon whom process against it may be served and the post office address within or without this state to which the secretary of state shall mail a copy of any process against it served upon him.
(8) If the corporation is to have a registered agent, his name and address within this state and a statement that the registered agent is to be the agent of the corporation upon whom process against it may be served.
(9) The duration of the corporation if other than perpetual.
(b) The certificate of incorporation may set forth a provision eliminating or limiting the personal liability of directors to the corporation or its shareholders for damages for any breach of duty in such capacity, provided that no such provision shall eliminate or limit:
(1) the liability of any director if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated section 719, or
(2) the liability of any director for any act or omission prior to the adoption of a provision authorized by this paragraph.
(c) The certificate of incorporation may set forth any provision, not inconsistent with this chapter or any other statute of this state, relating to the business of the corporation, its affairs, its rights or powers, or the rights or powers of its shareholders, directors or officers including any provision relating to matters which under this chapter are required or permitted to be set forth in the by-laws. It is not necessary to set forth in the certificate of incorporation any of the powers enumerated in this chapter.

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NYBCL § 601. By-laws.

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(a) The initial by-laws of a corporation shall be adopted by its incorporator or incorporators at the organization meeting. Thereafter, subject to section 613 (Limitations on right to vote), by-laws may be adopted, amended or repealed by a majority of the votes cast by the shares at the time entitled to vote in the election of any directors. When so provided in the certificate of incorporation or a by-law adopted by the shareholders, by-laws may also be adopted, amended or repealed by the board by such vote as may be therein specified, which may be greater than the vote otherwise prescribed by this chapter, but any by-law adopted by the board may be amended or repealed by the shareholders entitled to vote thereon as herein provided. Any reference in this chapter to a “by-law adopted by the shareholders” shall include a by-law adopted by the incorporator or incorporators.
(b) The by-laws may contain any provision relating to the business of the corporation, the conduct of its affairs, its rights or powers or the rights or powers of its shareholders, directors or officers, not inconsistent with this chapter or any other statute of this state or the certificate of incorporation.

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§ 616. Greater requirement as to quorum and vote of shareholders.

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(a) The certificate of incorporation may contain provisions specifying either or both of the following:
(1) That the proportion of votes of shares, or the proportion of votes of shares of any class or series thereof, the holders of which shall be present in person or by proxy at any meeting of shareholders, including a special meeting for election of directors under section 603 (Special meeting for election of directors), in order to constitute a quorum for the transaction of any business or of any specified item of business, including amendments to the certificate of incorporation, shall be greater than the proportion prescribed by this chapter in the absence of such provision.
(2) That the proportion of votes of shares, or votes of shares of a particular class or series of shares, that shall be necessary at any meeting of shareholders for the transaction of any business or of any specified item of business, including amendments to the certificate of incorporation, shall be greater than the proportion prescribed by this chapter in the absence of such provision.
(b) An amendment of the certificate of incorporation which changes or strikes out a provision permitted by this section, shall be authorized at a meeting of shareholders by two-thirds of the votes of the shares entitled to vote thereon, or of such greater proportion of votes of shares, or votes of shares of a particular class or series of shares, as may be provided specifically in the certificate of incorporation for changing or striking out a provision permitted by this section.
(c) If the certificate of incorporation of any corporation contains a provision authorized by this section, the existence of such provision shall be noted conspicuously on the face or back of every certificate for shares issued by such corporation, except that this requirement shall not apply to any corporation having any class of any equity security registered pursuant to Section twelve of the Securities Exchange Act of 1934, as amended.

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NYBCL § 622. Preemptive rights.

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(a) As used in this section, the term:
(1) “Unlimited dividend rights” means the right without limitation as to amount either to all or to a share of the balance of current or liquidating dividends after the payment of dividends on any shares entitled to a preference.
(2) “Equity shares” means shares of any class, whether or not preferred as to dividends or assets, which have unlimited dividend rights.
(3) “Voting rights” means the right to vote for the election of one or more directors, excluding a right so to vote which is dependent on the happening of an event specified in the certificate of incorporation which would change the voting rights of any class of shares.
(4) “Voting shares” means shares of any class which have voting rights, but does not include bonds on which voting rights are conferred under section 518 (Corporate bonds).
(5) “Preemptive right” means the right to purchase shares or other securities to be issued or subjected to rights or options to purchase, as such right is defined in this section.
(b) (1) With respect to any corporation incorporated prior to the effective date of subparagraph (2) of this paragraph, except as otherwise provided in the certificate of incorporation, and except as provided in this section, the holders of equity shares of any class, in case of the proposed issuance by the corporation of, or the proposed granting by the corporation of rights or options to purchase, its equity shares of any class or any shares or other securities convertible into or carrying rights or options to purchase its equity shares of any class, shall, if the issuance of the equity shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the unlimited dividend rights of such holders, have the right during a reasonable time and on reasonable conditions, both to be fixed by the board, to purchase such shares or other securities in such proportions as shall be determined as provided in this section.
(2) With respect to any corporation incorporated on or after the effective date of this subparagraph, the holders of such shares shall not have any preemptive right, except as otherwise expressly provided in the certificate of incorporation.
(c) Except as otherwise provided in the certificate of incorporation, and except as provided in this section, the holders of voting shares of any class having any preemptive right under this paragraph on the date immediately prior to the effective date of subparagraph (2) of paragraph (b) of this section, in case of the proposed issuance by the corporation of, or the proposed granting by the corporation of rights or options to purchase, its voting shares of any class or any shares or other securities convertible into or carrying rights or options to purchase its voting shares of any class, shall, if the issuance of the voting shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the voting rights of such holders, have the right during a reasonable time and on reasonable conditions, both to be fixed by the board, to purchase such shares or other securities in such proportions as shall be determined as provided in this section.
(d) The preemptive right provided for in paragraphs (b) and (c) shall entitle shareholders having such rights to purchase the shares or other securities to be offered or optioned for sale as nearly as practicable in such proportions as would, if such preemptive right were exercised, preserve the relative unlimited dividend rights and voting rights of such holders and at a price or prices not less favorable than the price or prices at which such shares or other securities are proposed to be offered for sale to others, without deduction of such reasonable expenses of and compensation for the sale, underwriting or purchase of such shares or other securities by underwriters or dealers as may lawfully be paid by the corporation. In case each of the shares entitling the holders thereof to preemptive rights does not confer the same unlimited dividend right or voting right, the board shall apportion the shares or other securities to be offered or optioned for sale among the shareholders having preemptive rights to purchase them in such proportions as in the opinion of the board shall preserve as far as practicable the relative unlimited dividend rights and voting rights of the holders at the time of such offering. The apportionment made by the board shall, in the absence of fraud or bad faith, be binding upon all shareholders.
(e) Unless otherwise provided in the certificate of incorporation, shares or other securities offered for sale or subjected to rights or options to purchase shall not be subject to preemptive rights under paragraph (b) or (c) of this section if they:
(1) Are to be issued by the board to effect a merger or consolidation or offered or subjected to rights or options for consideration other than cash;
(2) Are to be issued or subjected to rights or options under paragraph (d) of section 505 (Rights and options to purchase shares; issue of rights and options to directors, officers and employees);
(3) Are to be issued to satisfy conversion or option rights theretofore granted by the corporation;
(4) Are treasury shares;
(5) Are part of the shares or other securities of the corporation authorized in its original certificate of incorporation and are issued, sold or optioned within two years from the date of filing such certificate; or
(6) Are to be issued under a plan of reorganization approved in a proceeding under any applicable act of congress relating to reorganization of corporations.
(f) Shareholders of record entitled to preemptive rights on the record date fixed by the board under section 604 (Fixing record date), or, if no record date is fixed, then on the record date determined under section 604, and no others shall be entitled to the right defined in this section.
(g) The board shall cause to be given to each shareholder entitled to purchase shares or other securities in accordance with this section, a notice directed to him in the manner provided in section 605 (Notice of meetings of shareholders) setting forth the time within which and the terms and conditions upon which the shareholder may purchase such shares or other securities and also the apportionment made of the right to purchase among the shareholders entitled to preemptive rights. Such notice shall be given personally or by mail at least fifteen days prior to the expiration of the period during which the shareholder shall have the right to purchase. All shareholders entitled to preemptive rights to whom notice shall have been given as aforesaid shall be deemed conclusively to have had a reasonable time in which to exercise their preemptive rights.
(h) Shares or other securities which have been offered to shareholders having preemptive rights to purchase and which have not been purchased by them within the time fixed by the board may thereafter, for a period of not exceeding one year following the expiration of the time during which shareholders might have exercised such preemptive rights, be issued, sold or subjected to rights or options to any other person or persons at a price, without deduction of such reasonable expenses of and compensation for the sale, underwriting or purchase of such shares by underwriters or dealers as may lawfully be paid by the corporation, not less than that at which they were offered to such shareholders. Any such shares or other securities not so issued, sold or subjected to rights or options to others during such one year period shall thereafter again be subject to the preemptive rights of shareholders.
(i) Except as otherwise provided in the certificate of incorporation and except as provided in this section, no holder of any shares of any class shall as such holder have any preemptive right to purchase any other shares or securities of any class which at any time may be sold or offered for sale by the corporation. Unless otherwise provided in the certificate of incorporation, holders of bonds on which voting rights are conferred under section 518 shall have no preemptive rights.

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NYBCL § 630. Liability of shareholders for wages due to laborers, servants or
employees.

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(a) The ten largest shareholders, as determined by the fair value of their beneficial interest as of the beginning of the period during which the unpaid services referred to in this section are performed, of every corporation (other than an investment company registered as such under an act of congress entitled “Investment Company Act of 1940”1), no shares of which are listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association, shall jointly and severally be personally liable for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation. Before such laborer, servant or employee shall charge such shareholder for such services, he shall give notice in writing to such shareholder that he intends to hold him liable under this section. Such notice shall be given within one hundred and eighty days after termination of such services, except that if, within such period, the laborer, servant or employee demands an examination of the record of shareholders under paragraph (b) of section 624 (Books and records; right of inspection, prima facie evidence), such notice may be given within sixty days after he has been given the opportunity to examine the record of shareholders. An action to enforce such liability shall be commenced within ninety days after the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services.
(b) For the purposes of this section, wages or salaries shall mean all compensation and benefits payable by an employer to or for the account of the employee for personal services rendered by such employee. These shall specifically include but not be limited to salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds; and any other moneys properly due or payable for services rendered by such employee.
(c) A shareholder who has paid more than his pro rata share under this section shall be entitled to contribution pro rata from the other shareholders liable under this section with respect to the excess so paid, over and above his pro rata share, and may sue them jointly or severally or any number of them to recover the amount due from them. Such recovery may be had in a separate action. As used in this paragraph, “pro rata” means in proportion to beneficial share interest. Before a shareholder may claim contribution from other shareholders under this paragraph, he shall, unless they have been given notice by a laborer, servant or employee under paragraph (a), give them notice in writing that he intends to hold them so liable to him. Such notice shall be given by him within twenty days after the date that notice was given to him by a laborer, servant or employee under paragraph (a).

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NYBCL § 709. Greater requirement as to quorum and vote of directors.

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(a) The certificate of incorporation may contain provisions specifying either or both of the following:
(1) That the proportion of directors that shall constitute a quorum for the transaction of business or of any specified item of business shall be greater than the proportion prescribed by this chapter in the absence of such provision.
(2) That the proportion of votes of directors that shall be necessary for the transaction of business or of any specified item of business shall be greater than the proportion prescribed by this chapter in the absence of such provision.
(b)(1) An amendment of the certificate of incorporation which changes or strikes out a provision permitted by this section shall be authorized at a meeting of shareholders by (A) (i) for any corporation in existence on the effective date of subparagraph (2) of this paragraph, two-thirds of the votes of all outstanding shares entitled to vote thereon, and (ii) for any corporation in existence on the effective date of this clause the certificate of incorporation of which expressly provides such and for any corporation incorporated after the effective date of subparagraph (2) of this paragraph, a majority of the votes of all outstanding shares entitled to vote thereon or (B) in either case, such greater proportion of votes of shares, or votes of a class or series of shares, as may be provided specifically in the certificate of incorporation for changing or striking out a provision permitted by this section.
(2) Any corporation may adopt an amendment of the certificate of incorporation in accordance with any applicable clause or subclause of subparagraph (1) of this paragraph to provide that any further amendment of the certificate of incorporation that changes or strikes out a provision permitted by this section shall be authorized at a meeting of the shareholders by a specified proportion of the votes of the shares, or particular class or series of shares, entitled to vote thereon, provided that such proportion may not be less than a majority.

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NYBCL § 804. Class voting on amendment.

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(a) Notwithstanding any provision in the certificate of incorporation, the holders of shares of a class shall be entitled to vote and to vote as a class upon the authorization of an amendment and, in addition to the authorization of the amendment by a majority of the votes of all outstanding shares entitled to vote thereon, the amendment shall be authorized by a majority of the votes of all outstanding shares of the class when a proposed amendment would:
(1) Exclude or limit their right to vote on any matter, except as such right may be limited by voting rights given to new shares then being authorized of any existing or new class or series.
(2) Change their shares under subparagraphs (b) (10), (11) or (12) of section 801 (Right to amend certificate of incorporation) or provide that their shares may be converted into shares of any other class or into shares of any other series of the same class, or alter the terms or conditions upon which their shares are convertible or change the shares issuable upon conversion of their shares, if such action would adversely affect such holders, or
(3) Subordinate their rights, by authorizing shares having preferences which would be in any respect superior to their rights.
(b) If any proposed amendment referred to in paragraph (a) would adversely affect the rights of the holders of shares of only one or more series of any class, but not the entire class, then only the holders of those series whose rights would be affected shall be considered a separate class for the purposes of this section.

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NYBCL § 301. Corporate name; general.

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(a) Except as otherwise provided in this chapter, the name of a domestic or foreign corporation:
(1) Shall contain the word “corporation”, “incorporated” or “limited”, or an abbreviation of one of such words; or, in the case of a foreign corporation, it shall, for use in this state, add at the end of its name one of such words or an abbreviation thereof.
(2) (i) Shall be such as to distinguish it from the names of corporations of any type or kind, or a fictitious name of an authorized foreign corporation filed pursuant to article thirteen of this chapter,1 as such names appear on the index of names of existing domestic and authorized foreign corporations of any type or kind, including fictitious names of authorized foreign corporations filed pursuant to article thirteen of this chapter, in the department of state, division of corporations, or a name the right to which is reserved.
(ii) Shall be such as to distinguish it from (A) the names of domestic limited liability companies, (B) the names of authorized foreign limited liability companies, (C) the fictitious names of authorized foreign limited liability companies, (D) the names of domestic limited partnerships, (E) the names of authorized foreign limited partnerships, or (F) the fictitious names of authorized foreign limited partnerships, in each case, as such names appear on the index of names of existing domestic and authorized foreign limited liability companies, including fictitious names of authorized foreign limited liability companies, in the department of state, or on the index of names of existing domestic or authorized foreign limited partnerships, including fictitious names of authorized foreign limited partnerships, in the department of state, or names the rights to which are reserved; provided, however, that no corporation that was formed prior to the effective date of this clause and no foreign corporation that was qualified to do business in this state prior to such effective date shall be required to change the name or fictitious name it had on such effective date solely by reason of such name or fictitious name being indistinguishable from the name or fictitious name of any domestic or authorized foreign limited liability company or limited partnership or from any name the right to which is reserved by or on behalf of any domestic or foreign limited liability company or limited partnership.
(3) Shall not contain any word or phrase, or any abbreviation or derivative thereof, the use of which is prohibited or restricted by any other statute of this state, unless in the latter case the restrictions have been complied with.
(4) Shall not contain any word or phrase, or any abbreviation or derivative thereof, in a context which indicates or implies that the corporation, if domestic, is formed or, if foreign, is authorized for any purpose or is possessed in this state of any power other than a purpose for which, or a power with which, the domestic corporation may be and is formed or the foreign corporation is authorized.
(5)(A) Shall not contain any of the following phrases, or any abbreviation or derivative thereof:
board of trade
state police
urban development
chamber of commerce
state trooper
urban relocation
community renewal
tenant relocation
(B) Shall not contain any of the following words, or any abbreviation or derivative thereof:
acceptance
endowment
loan
annuity
fidelity
mortgage
assurance
finance
savings
bank
guaranty
surety
benefit
indemnity
title
bond
insurance
trust
casualty
investment
underwriter
doctor
lawyer
unless the approval of the superintendent of financial services is attached to the certificate of incorporation, or application for authority or amendment thereof; or that the word “doctor” or “lawyer” or an abbreviation or derivation thereof is used in the name of a university faculty practice corporation formed pursuant to section fourteen hundred twelve of the not-for-profit corporation law or a professional service corporation formed pursuant to article fifteen of this chapter, or a foreign professional service corporation authorized to do business in this state pursuant to article fifteen-A of this chapter, the members or shareholders of which are composed exclusively of doctors or lawyers, respectively, or are used in a context which clearly denotes a purpose other than the practice of law or medicine.
(6) Shall not, unless the approval of the state board of standards and appeals2 is attached to the certificate of incorporation, or application for authority or amendment thereof, contain any of the following words or phrases, or any abbreviation or derivative thereof: union, labor, council, industrial organization, in a context which indicates or implies that the domestic corporation is formed or the foreign corporation authorized as an organization of working men or women or wage earners or for the performance, rendition or sale of services as labor or management consultant, adviser or specialist, or as negotiator or arbitrator in labor-management disputes.
(7) Shall not, unless the approval of the state department of social services is attached to the certificate of incorporation, or application for authority or amendment thereof, contain the word “blind” or “handicapped”. Such approval shall be granted by the state department of social services, if in its opinion the word “blind” or “handicapped” as used in the corporate name proposed will not tend to mislead or confuse the public into believing that the corporation is organized for charitable or non-profit purposes related to the blind or the handicapped.
(8) Shall not contain any words or phrases, or any abbreviation or derivation thereof in a context which will tend to mislead the public into believing that the corporation is an agency or instrumentality of the United States or the state of New York or a subdivision thereof or is a public corporation.
(9) Shall not contain any word or phrase, or any abbreviation or derivation thereof, which, separately, or in context, shall be indecent or obscene, or shall ridicule or degrade any person, group, belief, business or agency of government, or indicate or imply any unlawful activity.
(10) Shall not, unless the approval of the attorney general is attached to the certificate of incorporation, or application for authority or amendment thereof, contain the word “exchange” or any abbreviation or derivative thereof. Such approval shall not be granted by the attorney general, if in his opinion the use of the word “exchange” in the proposed corporate name would falsely imply that the corporation conducts its business at a place where trade is carried on in securities or commodities by brokers, dealers, or merchants.
(11) Shall not, unless the consent of the commissioner of education is endorsed on or annexed to the certificate of incorporation, contain the words “school;” “education;” “elementary;” “secondary;” “kindergarten;” “prekindergarten;” “preschool;” “nursery school;” “museum;” “history;” “historical;” “historical society;” “arboretum;” “library;” “college;” “university” or other term restricted by section two hundred twenty-four of the education law; “conservatory,” “academy,” or “institute,” or any abbreviation or derivative of such terms. Such consent shall not be granted by the commissioner of education, if in the commissioner's opinion, the use of such terms in the corporate name is likely to mislead or confuse the public into believing that the corporation is organized for non-profit educational purposes or for educational business purposes that are not specified in the corporate purposes and powers contained in its certificate of incorporation.

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NYBCL § 404. Organization meeting.

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(a) After the corporate existence has begun, an organization meeting of the incorporator or incorporators shall be held within or without this state, for the purpose of adopting by-laws, electing directors to hold office until the first annual meeting of shareholders, except as authorized under section 704 (Classification of directors), and the transaction of such other business as may come before the meeting. If there are two or more incorporators, the meeting may be held at the call of any incorporator, who shall give at least five days' notice thereof by mail to each other incorporator, which notice shall set forth the time and place of the meeting. Notice need not be given to any incorporator who attends the meeting or submits a signed waiver of notice before or after the meeting. If there are more than two incorporators, a majority shall constitute a quorum and the act of the majority of the incorporators present at a meeting at which a quorum is present shall be the act of the incorporators. An incorporator may act in person or by proxy signed by the incorporator or his attorney-in-fact.
(b) Any action permitted to be taken at the organization meeting may be taken without a meeting if each incorporator or his attorney-in-fact signs an instrument setting forth the action so taken.
(c) If an incorporator dies or is for any reason unable to act, action may be taken as provided in such event in paragraph (c) of section 615 (Written consent of shareholders, subscribers or incorporators without a meeting).

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NYBCL § 803. Authorization of amendment or change.

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(a) Amendment or change of the certificate of incorporation may be authorized by vote of the board, followed by vote of a majority of all outstanding shares entitled to vote thereon at a meeting of shareholders; provided, however, that, whenever the certificate of incorporation requires action by the board of directors, by the holders of any class or series of shares, or by the holders of any other securities having voting power by the vote of a greater number or proportion than is required by any section of this article, the provision of the certificate of incorporation requiring such greater vote shall not be altered, amended, or repealed except by such greater vote; and provided further that an amendment to the certificate of incorporation for the purpose of reducing the requisite vote by the holders of any class or series of shares or by the holders of any other securities having voting power that is otherwise provided for in any section of this chapter that would otherwise require more than a majority of the votes of all outstanding shares entitled to vote thereon shall not be adopted except by the vote of such holders of class or series of shares or by such holders of such other securities having voting power that is at least equal to that which would be required to take the action provided in such other section of this chapter.
(b) Alternatively, any one or more of the following changes may be authorized by or pursuant to authorization of the board:
(1) To specify or change the location of the corporation's office.
(2) To specify or change the post office address to which the secretary of state shall mail a copy of any process against the corporation served upon him.
(3) To make, revoke or change the designation of a registered agent, or to specify or change the address of its registered agent.
(c) This section shall not alter the vote required under any other section for the authorization of an amendment referred to therein, nor alter the authority of the board to authorize amendments under any other section.
(d) Amendment or change of the certificate of incorporation of a corporation which has no shareholders of record, no subscribers for shares whose subscriptions have been accepted and no directors may be authorized by the sole incorporator or a majority of the incorporators.

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Preferred Stock

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1) Contains Dividend Preference (Contains Annual Dividend Rate as Percentage or Dollar Amount; Payable at the Discretion of BOD and only out of funds legally available due to legal capital rule; PS are riskier than debt securities)
2) Contains Liquidation Preferences (PS must receive LP plus accrued and unpaid dividends before CS get anything; they get par value for each stock, which is what the investor paid for stock originally)
3) They are contract claimants w/i Articles of Incorporation within the Charter
4) Found within Charter by way of: a) original charter, or b) shareholders can approve amendment to charter that approves a particular securities offering - normally by blank check preferred stock provision (Certificate of Designation or Amendment)
5) You want to issue PS when IR is low as possible
6) Voting Rights: extremely limited; no right to vote for directors; vote as a single class with the common stock on amendments to charter so the PS vote will get overshadowed by the CS; if amendment will get adversely affected then that class vote as a separate class much like a veto power; limited contractual voting rights - if a certain number of dividend payments are missed then PS class get to vote as a separate class to elect 1 or 2 board members
7) Conversion Rights: can issue PS that can be converted to CS; upside to PS is capped at dividend yield but CS is uncapped; right to convert can be monetized
8) Participation Rights: not seen that often; allow you to participate in CS dividend on top of PS dividend
9) Redemption Rights: rights that company negotiates for; allows Corp to buy back stock; Corps do this to refinance at a lower rate; holders can protect against with call redemption rights and after that corp can buy back after paying a redemption premium

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Common Stock

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- company wants to give away the least amount of equity for the biggest per share price
1) Voting Rights: allows CS holder to one vote but can issue non-voting stock over general affairs but statutorily must vote for amendments to charter; Super-Voting Stock - Class B CS allows 10 votes per share and Class A CS has only 1 vote per share; can vote for board members, amendments to charter, mergers, sale of company's assets, board's salary compensation advisory vote, dissolution
2) Dividends: CS legally not entitled to dividends in form of cash, excess inventory, securities in parent company or spin-off(subsidiary); can only receive dividends if board approves and only out of funds legally available; what is a carve-out
3) Voting dilution - can be protected with pre-emptive rights; these rights guarantee you the ability to purchase enough of new shares offered so that you can maintain your percentage in the company; there are carve-outs for pre-emptive rights where company is issuing new shares as merger or acquisition consideration or option purchases - these carve-outs prohibit you from using your pre-emptive rights; pre-emptive rights must be stipulated in the corporate charter

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Ultra Vires Doctrine

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The doctrine in the law of corporations that holds that if a corporation enters into a contract that is beyond the scope of its corporate powers, the contract is illegal.

-Beyond a corp's powers

-Ashbury Railway - any contract found to be beyond it's powers will be found to be void; it's void even if shareholders unanimously approve it after the fact

-Implied Powers & State Corporate Code provide powers to corp to conduct activities not explicitly stated in charter

- Unauthorized and illegal acts can also be ultra vires.
- All illegal acts are Ultra Vires, however, not all ultra vires acts are illegal.

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Goodman v. Ladd Estate Co.

Facts: Corporation made a guarantee agreement. P brought suit, claiming that the agreement was ultra vires for the corporation and P sought an injunction to prevent enforcement of the agreement.

Corp charter did not permit guarantees for personal loans. Everyone conceded that guarantee was ultra vires.

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Held: P was denied equitable relief (the agreement was enforced) because the statute says that an ultra vires agreement is enforceable, and besides, there was only one shareholder in the corporation, and he approved the agreement (“when the shareholder participates in an ultra vires act, he cannot thereafter attack it as ultra vires”).

The shareholder approved the amendment of an ultra vires act by effectuating the loan. Since he was sole shareholder he had full authority to amend the charter.

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Dodge v. Ford Motor Co.

Shareholder Primacy view (common law):

Ford wanted to stop paying special dividends and instead use that money to employ more men and distribute the wealth. He also decided to lower the price of cars and improve the quality. He did this to improve mankind.

P's claimed he was turning comp into charity organization and they sued to make him pay out the special dividends.

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The court held that the corporation couldn’t use the shareholders’ money to benefit society the corporation didn’t have the authority to be benevolent with the shareholders’ money, rather, they had an obligation to pay shareholder dividends when there was so much extra money in the company (Ford wanted to use the money to increase production and thereby reduce the price of cars for consumers). Stands for shareholder supremacy.
Under this case, the plaintiff in the hypo has a case, or at least an argument.

Court: maximizing profits needs to be the primary goal of corporations not humanitarian motives. Purpose of corp cannot be changed from maximizing profits for stockholders to helping public at large as primary purpose of corp.

Front 72

A.P. Smith Mfg. Co. v. Barlow


Nexus Between Activity and Business Interest view (common law):


Facts: AP Smith donated $1500 to Princeton, and the shareholders questioned the authority of the Bd to make such a donation.

Back 72

Held: The corporation can make such a donation if it is approved by the Bd without shareholder approval because corporations have replaced individuals as society’s wealth holders and therefore, must be looked to as the source of “charitable” giving. There is a benefit to the corporation: the company uses the “products” of Princeton. It generally benefits from an educated population, and it provides good public relations for the corporation. Similar arguments could be made for the homeless donation, e.g., homelessness around the plant creates problems for the corporation, makes it look bad, etc. The law generally try to tie the rationale to shareholder welfare (courts are becoming receptive to even the most tenuous connections, as in Smith. On the other side, try to make Dodge arguments and attack the purported “nexus.” The donation was modest and well within the limitations imposed by the statutory enactments.

- D's instituted a declartory judgment action to tell them it's ok to make the charitable contribution.
- P's argue that charitable giving is Ultra Vires b/c corp charter doesn't expressely prescribe the act.

-Common Law Rule regarding corp charitable giving is that its allowed so that the expenditure would benefit the corporation in terms of profit and so long as money donated were reasonable in amount.

-State statutes passed laws prescribing corp charitable statutes. NJ cannot contribute substantial sums subject to: (1) if donee institution owns more than 10% of the stock of the corp in question, (2) contribution can't exceed 1% of corp's capital and surplus unless shareholders agree on excess

Retroactivity: court has no trouble finding support for corp charitable giving.

Danger in allowng corp chartiable gifts: giving to pet charities.

Front 73

Corporate Gov Docs

Back 73

Listed in Order of Supremacy:

1) Corp Charter (Cert of Inc., or Art. of Inc.)
2) By-laws (Roberts Rules of Order; day-to-day copr gov. on i.e. when to have director/shareholder meetings, notice of meetings, etc.)
3) Directorial Resolutions (a binder of corp. transactions that notes resolutions)

Front 74

Corporate Charter (Cert of Inc.)

Back 74

1) Del. 102, NY 402 - lists where to find the corp charter
a) NY 301 - prescribes corp names (i.e. NY State Police Inc.)
b) NY 301 - To have a bank name you must clear with Superintendent of Banks and must include that approval when filing cert of inc.
3) NY 301 - proscribes words that must be included at end of corp name
4) Must state amount of shares you intended to issue with par value. Cannot issue more shares once sold unless you amend the charter.

Front 75

Business Purpose (402(a)(2))

Back 75

NY & Del require that you provide a bus purpose in your charter.

It can be specific or generic or mixed statement of purpose.

Or you can put "engage any lawful activity."

If you go with specific business purpose and operate outside of purpose then you may violate ultra vires.

Front 76

402(a)(5)

Back 76

If shares are divided into classes then rights preferences must be delineated into corp charter.

Front 77

What do we do if something we declared in our charter becomes problematic down the road?

Back 77

We can amend the corp charter.

NY 803(a) allows us to amend the charter. Have shares of stock been issued or not is the question that affects how you can amend.

If shares have been issued must have approval by BOD and a majority of holders of shares voting as a single class.

Once approval has been obtained, you file certificate of amendment. (Del. 242)

Exceptions to Getting Majority Approval.

-What if shares have not been issued? The sole incorporator can amend the charter carte blanche b/c there are no shareholders and possible no BOD. (NY 803(d), Del 241)

-No Shareholder Approval (NY 105): can correct certain typos w/o going to shareholders for approval

Front 78

DGCL 124

Back 78

Effect of lack of corporate capacity or power; ultra vires.

No act of a corporation and no conveyance or transfer of real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to do such act or to make or receive such conveyance or transfer, but such lack of capacity or power may be asserted:

(1) In a proceeding by a stockholder against the corporation to enjoin the doing of any act or acts or the transfer of real or personal property by or to the corporation. If the unauthorized acts or transfer sought to be enjoined are being, or are to be, performed or made pursuant to any contract to which the corporation is a party, the court may, if all of the parties to the contract are parties to the proceeding and if it deems the same to be equitable, set aside and enjoin the performance of such contract, and in so doing may allow to the corporation or to the other parties to the contract, as the case may be, such compensation as may be equitable for the loss or damage sustained by any of them which may result from the action of the court in setting aside and enjoining the performance of such contract, but anticipated profits to be derived from the performance of the contract shall not be awarded by the court as a loss or damage sustained;

(2) In a proceeding by the corporation, whether acting directly or through a receiver, trustee or other legal representative, or through stockholders in a representative suit, against an incumbent or former officer or director of the corporation, for loss or damage due to such incumbent or former officer's or director's unauthorized act;

(3) In a proceeding by the Attorney General to dissolve the corporation, or to enjoin the corporation from the transaction of unauthorized business.

Front 79

NYBCL 203

Back 79

(a) No act of a corporation and no transfer of real or personal property to or by a corporation, otherwise lawful, shall be invalid by reason of the fact that the corporation was without capacity or power to do such act or to make or receive such transfer, but such lack of capacity or power may be asserted:
(1) In an action by a shareholder against the corporation to enjoin the doing of any act or the transfer of real or personal property by or to the corporation. If the unauthorized act or transfer sought to be enjoined is being, or is to be, performed or made under any contract to which the corporation is a party, the court may, if all of the parties to the contract are parties to the action and if it deems the same to be equitable, set aside and enjoin the performance of such contract, and in so doing may allow to the corporation or to the other parties to the contract, as the case may be, such compensation as may be equitable for the loss or damage sustained by any of them from the action of the court in setting aside and enjoining the performance of such contract; provided that anticipated profits to be derived from the performance of the contract shall not be awarded by the court as a loss or damage sustained.
(2) In an action by or in the right of the corporation to procure a judgment in its favor against an incumbent or former officer or director of the corporation for loss or damage due to his unauthorized act.
(3) In an action or special proceeding by the attorney-general to annul or dissolve the corporation or to enjoin it from the doing of unauthorized business.

Front 80

ALI Approach

Back 80

§ 2.01(a) adopts the framework of the shareholder primacy argument
(1) But see ALI § 2.01(b): lose the touchstone of increasing long-term shareholder wealth “even if corporate profits and shareholder gains are not thereby enhanced, the corporation, in the context of its business:
(a) is obliged to act within the ethical boundaries of law;
(b) may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and
(c) may devote a reasonable amount of resources to public welfare, humanitarian, educational and philanthropic purposes.”

Front 81

NYBCL 717(b)

Back 81

§ 717. Duty of directors.


(b) In taking action, including, without limitation, action which may involve or relate to a change or potential change in the control of the corporation, a director shall be entitled to consider, without limitation, (1) both the long-term and the short-term interests of the corporation and its shareholders and (2) the effects that the corporation's actions may have in the short-term or in the long-term upon any of the following:

(i) the prospects for potential growth, development, productivity and profitability of the corporation;

(ii) the corporation's current employees;

(iii) the corporation's retired employees and other beneficiaries receiving or entitled to receive retirement, welfare or similar benefits from or pursuant to any plan sponsored, or agreement entered into, by the corporation;

(iv) the corporation's customers and creditors; and

(v) the ability of the corporation to provide, as a going concern, goods, services, employment opportunities and employment benefits and otherwise to contribute to the communities in which it does business.

Nothing in this paragraph shall create any duties owed by any director to any person or entity to consider or afford any particular weight to any of the foregoing or abrogate any duty of the directors, either statutory or recognized by common law or court decisions.

For purposes of this paragraph, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the corporation, whether through the ownership of voting stock, by contract, or otherwise.

Front 82

Hypo: chair of NY corp, liquor distributor, wants to know if corp can make a donation to anti-drinking campaign

Back 82

If we make the public feel the corp is a responsible corp then it is in furtherance of corp purpose and benefit.

Front 83

NY & Del Constituency Statutes

Back 83

1) NY 717(b) - adopted when comp came under attack due to a hostile takeover. Legislature was worried that remaining company would move the company after taking it over. NY Statute goes further and says that whenever the board makes a decision, the company could consider the interests of other groups besides shareholders (i.e. employees, customers, creditors, etc...)

2) Del: does not have a const. statute. It is pro-management and pro-shareholders. Case law (Revlon): addresses the need of other constituencies; concern for other const. is limited to the extent that there is some eventual benefit to stockholders.

Front 84

Promoters

Back 84

Entrepreneurs who want to get a business started.

They have the business idea and investigate the feasibility.

You can reward a promoter stock for past consideration (i.e pre-incorporation transaction).

Front 85

Goodman v.


Goodman(subconractor) negotiated to contract with Contracting Company; Goodman defaulted on contract; Goodman argues that he wasn't a party to the contract but rather the corpration that he formed was the party; Goodman signed the contract with his name as President and the corporation's name (in formation); he doesn't form company until after he defaults on contract; Goodman was receiving checks signed to him but he strikes his name and endorses it to his company

Issue: whether Goodman himself, as a promoter, is a party to pre-incorporation contract.

Back 85

Rule: if a corp does not yet exist when a contract is entered into, the promoter is personally liable for that contract even if contract will provide future benefit to that corp, except, if other party knew that corp did not yet exist, but nevertheless agreed to look to only that corp once formed for performance, the promoter is off the hook. Promoter has the burden on that exception.

Analysis: Goodman doesn't meet his burden of proof and finds that he was a party to the contract. Since D wrote a check to both Goodman and his company it shows they didn't know who they were dealing with so they weren't looking exclusively to

Front 86

Does a corp.., once formed, have to be bound by the pre-incorporation contracts agreed upon by its promoter?

Back 86

Look to:

1) Ratification: comes in after-the fact. Corp embraces as its own a previously unauthorized contract. A corp once formed cannot ratify a pre-incorp contract b/c ratification presupposes an agent and principal.

2) Adoption: a corp once formed can adopt pre-incorp contracts. The board doesn't have to take formal action to adopt a pre-incorp contract. That adoption could be inferred from actions. After adoption both promoter and new corp are liable for that contract.

3) Novation: this gets a promoter off the hook. This is a new contract substituting the old K with new parties.

Front 87

Clifton v. Tune

Back 87

That adoption could be inferred from actions. After adoption both promoter and new corp are liable for that contract.

Front 88

Are there situtation where a party should receive benefits for incorproation even though the incorporation process is defective?

Back 88

1) De Jure corp: a corp formed where there is substantial compliance in forming that corp. Usually you would receive paperwork saying you have a de jeure corp.

2) De facto corp: situtation where you have not fully complied with the statute. Inadvertenet promoter receives the benefits of limited liability. (1) Need a legal right to incorp, (2) Need to make a bona fide effort, in good faith, to file cert of incorp., including signing it and (3) must exercise actual corp power on basis that you think you have a corp(i.e. signing as if corp, entering into contracts). You don't get the benefit of de facto corp defense when state brings the action.

3) Estoppel theory: a 3rd party who has dealt with a busiens thinking it is a corp, will be estopped from imposing personal liablity on inadvertent promoter based on fact that you always thought it was a corp. There must be unjust harm that would result if denial of corp is allowed. NY does not embrace the estoppel theory. It is available in other states. (Involuntary creditors, de facto defense works for these but the estoppel defense doesn't work these creditors.)

Front 89

If you enter into a K with a 3rd party thinking that you have a corp, then what are you?

Back 89

You would be the promoter.

Front 90

Is there something you could do or fail to do to lose your LL even though you have a properly formed Dejeure copro?

Back 90

Yes, via piercing corporate veil doctrine.

Front 91

Corp. Veil Doctrine

Back 91

Piercing this would cause individual shareholders to be liable. Usually only applies to active shareholders. Not those who just give money and remain hands-off.

Front 92

Fletcher v. Atex

Brief Fact Summary. Fletcher, (Appellants), brought this personal injury suit against Eastman Kodak Company, (Appellee), and its subsidiary, Atex, Inc. Appellants appeal summary judgment in favor of Appellee.

P's argue that Atex(sub) was alter-ego(mere instrumentality) of Kodak.

Back 92

Synopsis of Rule of Law. To pierce the corporate veil on an alter ego theory, a plaintiff must show that the two corporations operated as a single economic entity and that an overall element of injustice or unfairness is present. Among the factors to be considered in determining whether the two corporations operate as a single economic entity are: whether the corporation was adequately capitalized; whether the corporation was solvent; whether corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether in general the corporation simply functioned as a fa

Rule: Del. Law: appropriate to pierce corp veil when there is a perpetuation of fraud where sub is a mere instrumentality of its alter ego.

Must show parent & sbu operated as a (1) single economic entity such that it would be inequitable to uphold a legal distinction between them and (2) overall element of injustice or unfairness.

1) Single Economic Entity: (a) Inadequate capitalization; if sub went belly up, would parent feel financial pain; (b) whether the sub corporation was insolvent; (c) were corporate formalities at sub property observed (i.e. filing taxes, management of day-to-day, record of minutes, shareholder/BOD meetings) AKA corporate housekeeping; (d) whether parent siphoned corporate funds from sub (parent siphoned money from sub into corp mngmt to gain a higher rate of interest); (e) was sub a mere facade of parent (i.e. parent's approval of sub's transactions was standard practice so no facade); (f) commingling; (g) interlocking boards of directors

2) overall element of injustice or unfairness: a) "unfair" business practices; (b) intentional misrep, deception, or other fraud-like conduct; (c) actions which might incur criminal or civil penalties; (d) unjust enrichment - removing corp funds/assets in bad faith, leaving the business undercapitalized; (e) fraud

Front 93

Walkovszky v. Carlton

Facts. Defendant was a shareholder in ten separate corporations wherein each corporation has two cabs registered in its name. A single shareholder for multiple corporations is a common practice for the cab industry. A cab from one of Defendant’s corporations hit Plaintiff, and Plaintiff brought this cause of action to recover. Each cab has only $10,000 worth of insurance coverage, which is the statutory minimum. Plaintiff contends that Defendant was fraudulently holding out the corporations as separate entities when they actually work as one large corporation.

P was injured from being run down by cab driver. Cab owned by Seon Cab Corp. Carlton was sole stockholder of Seon. He owned 9 other cab companies. Assets owned were the actual cabs, not the medallions.

P wants to break through LL shield of Seon and get at assets of Carlton(i.e. stock of other companies).

P's argument: Seon is alter-ego, mere instrumentait; maintenance of cabs was performed in one location. This distribution of corps (10 different companies) was set up only for the purpose of limiting liability. Corp was set up to defraud the comp. If one comp is exposed, a P could not get after another.

Back 93

Standard: When can we pierce the veil of a NY corp? We pierce the corp veil whenever necessary to prevent fraud or to achieve equity.

Whenever anyone uses control of the corp to further his own rather than the corp's business, he will be liable for the corp's acts.

The company would need to be a dummy corp for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends.


Is shareholder treating corp as agent, rather than corp with it's own purpose? and

Is shareholder commingling assets, directives with its entity? The Court looks to corp formalities of entity to disprove this factor.

Also make sure corp funds are not commingled with personal funds to protect from veil piercing.

If comp needs money, don't just give it money w/o documentation. Give the money by issuing additional stock, or with a promissory note.

Adequate capitalization: provide minimal amount of capital customary for the type of business involved. You have to feel some type of pain if the corp goes under, not just the stockholders.

Front 94

Berle, The Theory of Enterprise Entity

Back 94

Reason why people create conglomerates is for tax reasons but also for liability reasons.

If there is veil piercing the assets of whole enterprise ought to be available to satisfy the claims of one sub's liability.

Front 95

Minton v. Cavaney


P sued Seminal HOt Springs Corp. Won 10K judgment. P never collects form Seminal so they sue Cavaney personally.

Seminal did not have any assets. They did not issue any shares. They did not have any capital.

Cavaney was director, secretary and treasurer of Seminole Hot Spring Corp. He held these offices as a favor for his clients. He was an attorney. He also kept records and received the mail for the corp.

P's argue that Seminole was the alter-ego of Cavaney and he should be liable.

Back 95

Factors in considering Veil Piercing:
1) treat assets of corp as their own,
2) they hold themsevles out as personally liable for debts of corp(happens when corp doesn't have it's own bank account),
3) inadequate capitalization (not a dispositive factor),
4) if you add/withdraw capital from corp at will, and
5) active participation in mngmt and conduct of corp. (shows who you would responsible)


Analysis: no capitalization here. Court rejects the notion of temporary participation in management and says that doesn't matter if it was temporary or permanent participation. Any participation in management will be considered active for purposes of piercing corp. veil.

Front 96

DGCL § 329. Defective organization of corporation as defense.

Back 96

(a) No corporation of this State and no person sued by any such corporation shall be permitted to assert the want of legal organization as a defense to any claim.

(b) This section shall not be construed to prevent judicial inquiry into the regularity or validity of the organization of a corporation, or its lawful possession of any corporate power it may assert in any other suit or proceeding where its corporate existence or the power to exercise the corporate rights it asserts is challenged, and evidence tending to sustain the challenge shall be admissible in any such suit or proceeding.

Front 97

MBCA § 2.04. LIABILITY FOR PREINCORPORATION TRANSACTIONS

Back 97

All persons purporting to act as or on behalf of a nonprofit corporation, knowing there was no incorporation under this [act], are jointly and severally liable for all liabilities created while so acting.

Front 98

NYBCL § 109(a)(2) Actions or special proceedings by attorney-general

Back 98

(a) The attorney-general may maintain an action or special proceeding: (2) To annul the corporate existence or dissolve any corporation that has not been duly formed;

Front 99

Kinney Shoe Corporation v. Polan


FACTS
Defendant created two corporations: first was an industrial company and second held
a lease to a building, which it then subleased to the first. Second had no other assets
except the sublease. Plaintiff was the landlord who had leased the building to the
second company. When second corporation did not pay its lease, the plaintiff wanted
to go after the first corporation and its owner.

Back 99

ANALYSIS
Court added an option third prong to the two-prong test in Pepper Source: if the
plaintiff should have known that the corporation was grossly undercapitalized, it
should not be able to pierce the corporate veil.
On basis of third prong, plaintiff could not reach defendant in this case. Third prong, so far, only applies to big institutions that could perform credit checks which would disclose if a company is grossly undercapitalized.

Front 100

DGCL § 102(b)(6). Contents of certificate of incorporation.

Back 100

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: (6) A provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts;

Front 101

Kaycee Land and Livestock v. Flahive



FACTS Roger Flahive (D) was the managing member of Flahive Oil & Gas (D), a limited liability company (LLC), which negotiated a lease with Kaycee Land and Livestock (P) for certain real estate. Kaycee (P) contended that Flahive Oil (D) contaminated the property. Kaycee (P) did not allege that Flahive Oil (D)
acted fraudulently, but wanted to pierce Flahive Oil's (D) corporate veil to reach Roger Flahive's (D) personal assets to satisfy the LLC's debt for cleaning up the property.

Back 101

RULE The common law doctrine of piercing the corporate veil is not abrogated by the limited liability company act and may be used against limited liability company members in appropriate cases.

HOLDING: In the absence of fraud, is the veil of a Limited Liability Company pierced in the same manner as a corporation? Yes. In the piercing of a corporate veil courts use a fact driven inquiiy to determine if the circumstances justify a piercing. This case is certified in the abstract with little facts. Under this situation, we cannot reach a conclusion and believe it is improvident to prohibit this remedy from applying to unforeseen circumstances in the future. Piercing the corporate veil is an equitable doctrine developed under the common law when such provisions are absent in statutory law. Under the LLC statute it is difficult to read it as intended to preclude courts from deciding to disregard the veil of an improperly used LLC. Our statute is very short and establishes the minimal requirements for creating and operating LLCs. From this statute it seems highly unlikely that the legislature gave any attention to whether piercing the veil should apply to an LLC. Because it lies in equity, the paucity of statutory authority should not be read as a barrier to application of the doctrine to LLCs. It is instructive to note that every state enacting LLC law has chosen to follow corporate law standards and not develop separate LLC standards.

Factors in deciding whether to pierce corp veil:
1) Commingling of funds and other assets: indicates lack of separation
2) Inadequate Capitalization
3) Using LLC funds and assets as personal funds/assets
4) Holding yourself out as personally liable for comp's debts
5) Failure to show corp formalities

Don't need to show fraud for piercing veil of LLC's.

Front 102

Equitable Subordination

Back 102

"Deep Rock" Doctrine.

When a corp is in bankruptcy, debt claims that a controlling shareholder has against the corp may be subordinated to the claims of other persons, including the claims of preferred shareholders, on various equitable grounds.

Applies to debt/creditor claims held by controlling stockholders of corporations.

Claims will be subordinated to secured creditors and preferred stockholders. Will be re-characterized as equity claims.

Front 103

Benjamin v. Diamond

Back 103

Three conditions must be satisfied befor exercise of the power of equitable subordination is appropriate:

1) THe claimant(controlling stockholder) who may be an owner, dirctor, or officer of the bankrupt corp must have engaged in some type of inequitable conduct(i.e. fraud, breach of fiduciary duty, under capitalization); Claimant has burden of proving that conduct was fair & equitable;
2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant;
3) equitable subordination of the claim must not be inconsistent withe the provisions of the Bankruptcy Act

Front 104

Costello v. Fazio

(i) Facts: Fazio and two others had a partnership which they had contributed capital to. When business was waning, they decided to incorporate, and exchanged most of their capital for loans. The corporation entered bankruptcy, and the trustee challenged the capital/loan transaction. The bankruptcy referee found that the transaction was in good faith.

All creditors, except for partners, have been paid in full by the time of bankruptcy filing. This conduct adversely impacted the new creditors of the corp.

Back 104

(ii) Holding: Although the directors had become secured creditors, their status was subordinated to the same as unsecured creditors b/c the directors had taken advantage of their fiduciary position and unfairly withdrew capital in exchange for loans at a time when the economy's outlook was weak (i.e. capital was inadequate).
(iii) Notes:
1. “Undercapatilization” is a murky concept. It depends upon the business cycle. If the law does not require minimum capitalization and creditors can insist on disclosure, how is it unfair for a company to have minimal capital? Perhaps it is in consideration of creditors who are either unsophisticated or should not be expected to investigate capital on a small deal.
2. P was not a creditor at the time of the reorganization. Apparently, P was misinformed.

Front 105

Fraudulent Conveyance

Back 105

involves the transfer of money or assets without receipt of equivalent value, with the knowledge or intent of defrauding one's creditors.

Front 106

Uni. Fraud. Trans. Act. 4(a):
SECTION 4. TRANSFERS FRAUDULENT AS TO PRESENT AND FUTURE CREDITORS.

Back 106

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the
debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.

Front 107

11 USC § 548 - Fraudulent transfers and obligations

Back 107

(a)
(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)
(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)
(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which—
(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or
(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.
(b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.
(c) Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.
(d)
(1) For the purposes of this section, a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition.

Front 108

Kenny Shoe Corp

Back 108

Holding: while corp formalities are a hassle, they are a small inconvenience to getting limited liability

Front 109

When is adequate capitalization important?

Back 109

In the beginning. At the time of inception.

Front 110

Taylor v. Standard Gas

Back 110

Standard for review of equitable subordination: Whether in the bound of fairness, a bankruptcy plan can be justified in light of duty to be fair and reasonable to the parties involved.

Front 111

Pepper v. Litton

Back 111

Applies when a fiduciary is involved.

Whether or not under all circumstances the transaction b/t corp and fiduciary carries an arms length bargain. Or were they given special treatment due to their position in the company.

Front 112

Arnold v. Phillips

Facts:

Arnold puts in 125K into his new business. 50K was paid for CS. Other 75K was deemed to be a secured loan, secured by plant. Once business was going down, he lent more money but that did not help. Business goes into Chapter 7, liquidation. Court looks at initial 75K and determines whether it deserves true creditor status.

Back 112

Holding: The initial investment, 75K, is re-characterized as an equity contribution, therefore he won't have a priority claim in bankruptcy. The additional loans after inception were, however, considered credit loans(i.e. given priority) because adequate capitalization was already provided at inception. Similar to company borrowing money from a bank later on down the road.

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MM COMPANIES, INC. V. LIQUID AUDIO, INC.

MM Companies, Inc. (MM) (plaintiff) began its efforts to acquire control of Liquid Audio, Inc. (defendant) in October 2001. The directors of Liquid Audio (defendants) rebuffed MM’s initial offer to purchase the company at $3 per share. Liquid Audio had a staggered board with five total members. In June 2002, MM launched a proxy campaign for the 2002 shareholders meeting. It nominated two candidates to fill the two board positions up for election that year, and also proposed to add four positions to the board and nominated candidates for those seats. If approved, MM’s proposals would have granted it control of Liquid Audio’s board. The shareholders’ meeting was scheduled for September 26, 2002. By mid-August, it became clear that at a minimum, MM would be successful in electing its two candidates for the open board seats. On August 23, Liquid Audio’s board announced that it had amended the bylaws to increase the size of the board to seven members, and that it had filled the new vacancies with two of its candidates. At the shareholders meeting, MM’s two candidates were elected, but the shareholders rejected its proposal to expand the board by four members. MM sued Liquid Audio and its five directors, challenging the August 23expansion of the board. MM argued that the expansion frustrated MM’s efforts to obtain a substantial presence on the board, and that it improperly interfered with the shareholder franchise. After a trial, the Court of Chancery found that the board had acted with the primary purpose of diminishing the effectiveness of MM’s two elected board members. The court also found, however, that the board expansion was a valid defensive measure under the Unocal test because it was reasonable in relation to the threat posed. MM appealed.

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Standard of judicial review is often dispositive of which party has the burden of proof in corp litigation.

Business Judgment Rule: presumption that board acting with good faith, due care, loyalty and with no conflict in running the company. (easiest way to rebut presumption is by showing conflict b/t board member and transaction in question). No discovery allowed here in pleadings. Filters out all frivolous lawsuits except most egregious. Directors only need to show that what they did can be attributed to any rational business purpose.

Blazious Standard: Compelling Justification standard. If BOD members are acting unilaterally for the primary purpose of impeding and interfering with the efforts of the stockholders' voting powers then they must show compelling justification for their actions.

Unocal Standard: applies to unilateral defensive actions in response to an actual or perceive threat to the corporate enterprise. Proportionality test: defenses must be proportional to threat posed. This standard has been weakened and is almost meaningless. Favors the board.

Standard: 1) the incumbent board had the burden of demonstrating a compelling justification for its defensive measure (Blazius).


Rule: Both Blazius and Unocal. If the defensive measure is designed for the primary purpose of impeding and interfering with the efforts of the stockholders' power to effectively exercise their voting rights, then compelling justification must be shown. If you can show compelling justification then also Unocal requires the focus of enhanced judicial scrutiny to shift to the range of reasonableness and proportionality in relation to the threat posed.

When the primary purpose of a board's unilateral defensive measures is to interfere with or impede the effective exercise of teh shareholder voting franchise in a contested election of directors, the Board must show compelling justification as a condition precedent to any judicial consideration of the reasonableness and proportionality of the defensive measure.

Holding: since Director D's did not demonstrate a compelling justification for that defensive action, the bylaw amendment that expanded the size of the Liquid Audio board, and permitted the appointment of two new members of the even of a contested election, should have been invalidated by the Court of Chancery.

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Williams v. Geier.

FACTS:
Cincinnati Milacron adopted a recapitalization plan. In the plan holders of common stock on therecord date would have ten votes per share. Plaintiffs argued that the recapitalization unfairly benefited the majority block and its intention was to entrench management. P's argue that reason behind this plan is to allow Geier family to sell shares while the shares they retain would give them super voting power. Geier family could sell as much as 30% of their shares while still retaining more than 50% of the voting power.

Simple majority is all that is required to approve resolution for amendment in Del.
Super majority is needed by NYSE to approve resolution.

P argues that statements made in favor of resolution approval were coercive.

ISSUE:
Whether to apply the Blasius
compelling justification standard when shareholders are not given a fulland fair opportunity to vote.

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Standard Applied: Business Judgment Rule. Unocal and Blazius only applies to defensive actions unilaterally applied by the Board (i.e. "Poison Pill" w/o shareholder approval). Here shareholders approved amendment.

RULE:
Only demonstrating that the board breached its fiduciary duties may the presumption of the business judgment rule be rebutted, shifting the burden to the board. The boards action is thus protected by the business judgment rule. Court also finds that the presence of a controlling majority stockholder did not undermine the validity of the vote.

Business Judgment Analysis:

1)Due Care? no evidence of board being not careful with recapatilization.
2)Disloyalty? Did Geiger family keep directors on board doing the bidding of Geiger family? Court rejects that argument saying that majority of directors were outside directors.
3) Good faith? Courts give a lot of credence to decisions made by independent directors.
4) Breach of fiduciary duty to minority shareholder? Standard is: did controlling stockholder force company to extract some benefit not made avaialbe to other stockholders? No, because all incumbent shareholders got 10 votes per share.
5) Bad business decision? Not job of shareholders to question management. Board need only show some rational business decision for its actions: Tenure voting plan acts as a deterrent to hostile takeovers.

Can't argue that majority of minority did not vote on tenure voting plan according to 240(c)(1).

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Tender Offer

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An offer to purchase another company to all shareholders in exchange for consideration of value (i.e. cash, stock, debt)

Must comply with disclosure requirements (i.e. prospectus) and within temporal framework.

Hostile: not welcomed or approved in advance by the target company. Target board typically reacts negatively to hostile offer and reacts detrimentally to hostile takeover.

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DGCL § 141. Board of directors; powers; number, qualifications, terms and quorum; committees; classes of directors; nonstock corporations; reliance upon books; action without meeting; removal.

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(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

(b) The board of directors of a corporation shall consist of 1 or more members, each of whom shall be a natural person. The number of directors shall be fixed by, or in the manner provided in, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate. Directors need not be stockholders unless so required by the certificate of incorporation or the bylaws. The certificate of incorporation or bylaws may prescribe other qualifications for directors. Each director shall hold office until such director's successor is elected and qualified or until such director's earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. A resignation which is conditioned upon the director failing to receive a specified vote for reelection as a director may provide that it is irrevocable. A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors except that when a board of 1 director is authorized under this section, then 1 director shall constitute a quorum. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number.

(c)(1) All corporations incorporated prior to July 1, 1996, shall be governed by this paragraph (c)(1) of this section, provided that any such corporation may by a resolution adopted by a majority of the whole board elect to be governed by paragraph (c)(2) of this section, in which case this paragraph (c)(1) of this section shall not apply to such corporation. All corporations incorporated on or after July 1, 1996, shall be governed by paragraph (c)(2) of this section. The board of directors may, by resolution passed by a majority of the whole board, designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not the member or members present constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in § 151(a) of this title, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation under § 251, § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution, bylaws or certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to § 253 of this title.

(2) The board of directors may designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the corporation.

(3) Unless otherwise provided in the certificate of incorporation, the bylaws or the resolution of the board of directors designating the committee, a committee may create 1 or more subcommittees, each subcommittee to consist of 1 or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.

(d) The directors of any corporation organized under this chapter may, by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted by a vote of the stockholders, be divided into 1, 2 or 3 classes; the term of office of those of the first class to expire at the first annual meeting held after such classification becomes effective; of the second class 1 year thereafter; of the third class 2 years thereafter; and at each annual election held after such classification becomes effective, directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire. The certificate of incorporation or bylaw provision dividing the directors into classes may authorize the board of directors to assign members of the board already in office to such classes at the time such classification becomes effective. The certificate of incorporation may confer upon holders of any class or series of stock the right to elect 1 or more directors who shall serve for such term, and have such voting powers as shall be stated in the certificate of incorporation. The terms of office and voting powers of the directors elected separately by the holders of any class or series of stock may be greater than or less than those of any other director or class of directors. In addition, the certificate of incorporation may confer upon 1 or more directors, whether or not elected separately by the holders of any class or series of stock, voting powers greater than or less than those of other directors. Any such provision conferring greater or lesser voting power shall apply to voting in any committee or subcommittee, unless otherwise provided in the certificate of incorporation or bylaws. If the certificate of incorporation provides that 1 or more directors shall have more or less than 1 vote per director on any matter, every reference in this chapter to a majority or other proportion of the directors shall refer to a majority or other proportion of the votes of the directors.

(e) A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.

(f) Unless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board, or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

(g) Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors of any corporation organized under this chapter may hold its meetings, and have an office or offices, outside of this State.

(h) Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors shall have the authority to fix the compensation of directors.

(i) Unless otherwise restricted by the certificate of incorporation or bylaws, members of the board of directors of any corporation, or any committee designated by the board, may participate in a meeting of such board, or committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at the meeting.

(j) The certificate of incorporation of any nonstock corporation may provide that less than 1/3 of the members of the governing body may constitute a quorum thereof and may otherwise provide that the business and affairs of the corporation shall be managed in a manner different from that provided in this section. Except as may be otherwise provided by the certificate of incorporation, this section shall apply to such a corporation, and when so applied, all references to the board of directors, to members thereof, and to stockholders shall be deemed to refer to the governing body of the corporation, the members thereof and the members of the corporation, respectively; and all references to stock, capital stock, or shares thereof shall be deemed to refer to memberships of a nonprofit nonstock corporation and to membership interests of any other nonstock corporation.

(k) Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows:

(1) Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d) of this section, stockholders may effect such removal only for cause; or

(2) In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director's removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part.

Whenever the holders of any class or series are entitled to elect 1 or more directors by the certificate of incorporation, this subsection shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole.

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DGCL § 211. Meetings of stockholders.

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(a)(1) Meetings of stockholders may be held at such place, either within or without this State as may be designated by or in the manner provided in the certificate of incorporation or bylaws, or if not so designated, as determined by the board of directors. If, pursuant to this paragraph or the certificate of incorporation or the bylaws of the corporation, the board of directors is authorized to determine the place of a meeting of stockholders, the board of directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by paragraph (a)(2) of this section.

(2) If authorized by the board of directors in its sole discretion, and subject to such guidelines and procedures as the board of directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication:

a. Participate in a meeting of stockholders; and

b. Be deemed present in person and vote at a meeting of stockholders, whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.

(b) Unless directors are elected by written consent in lieu of an annual meeting as permitted by this subsection, an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws. Stockholders may, unless the certificate of incorporation otherwise provides, act by written consent to elect directors; provided, however, that, if such consent is less than unanimous, such action by written consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action. Any other proper business may be transacted at the annual meeting.

(c) A failure to hold the annual meeting at the designated time or to elect a sufficient number of directors to conduct the business of the corporation shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation except as may be otherwise specifically provided in this chapter. If the annual meeting for election of directors is not held on the date designated therefor or action by written consent to elect directors in lieu of an annual meeting has not been taken, the directors shall cause the meeting to be held as soon as is convenient. If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director. The shares of stock represented at such meeting, either in person or by proxy, and entitled to vote thereat, shall constitute a quorum for the purpose of such meeting, notwithstanding any provision of the certificate of incorporation or bylaws to the contrary. The Court of Chancery may issue such orders as may be appropriate, including, without limitation, orders designating the time and place of such meeting, the record date or dates for determination of stockholders entitled to notice of the meeting and to vote thereat, and the form of notice of such meeting.

(d) Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.

(e) All elections of directors shall be by written ballot unless otherwise provided in the certificate of incorporation; if authorized by the board of directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxy holder.

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DGCL § 222. Notice of meetings and adjourned meetings.

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(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

(b) Unless otherwise provided in this chapter, the written notice of any meeting shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

(c) When a meeting is adjourned to another time or place, unless the bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the board of directors shall fix a new record date for notice of such adjourned meeting in accordance with § 213(a) of this title, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting.

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DGCL § 223. Vacancies and newly created directorships.

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(a) Unless otherwise provided in the certificate of incorporation or bylaws:

(1) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director;

(2) Whenever the holders of any class or classes of stock or series thereof are entitled to elect 1 or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.

If at any time, by reason of death or resignation or other cause, a corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the certificate of incorporation or the bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in § 211 or § 215 of this title.

(b) In the case of a corporation the directors of which are divided into classes, any directors chosen under subsection (a) of this section shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified.

(c) If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10 percent of the voting stock at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by § 211 or § 215 of this title as far as applicable.

(d) Unless otherwise provided in the certificate of incorporation or bylaws, when 1 or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

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DGCL § 228. Consent of stockholders or members in lieu of meeting.

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(a) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

(b) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at a meeting of the members of a nonstock corporation, or any action which may be taken at any meeting of the members of a nonstock corporation, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members having a right to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of members are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

(c) Every written consent shall bear the date of signature of each stockholder or member who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of holders or members to take action are delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

(d)(1) A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder, member or proxyholder, or by a person or persons authorized to act for a stockholder, member or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (A) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder, member or proxyholder or by a person or persons authorized to act for the stockholder, member or proxyholder and (B) the date on which such stockholder, member or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded. Delivery made to a corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission, may be otherwise delivered to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded if, to the extent and in the manner provided by resolution of the board of directors or governing body of the corporation.

(2) Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

(e) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders or members who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders or members to take the action were delivered to the corporation as provided in subsection (c) of this section. In the event that the action which is consented to is such as would have required the filing of a certificate under any other section of this title, if such action had been voted on by stockholders or by members at a meeting thereof, the certificate filed under such other section shall state, in lieu of any statement required by such section concerning any vote of stockholders or members, that written consent has been given in accordance with this section.

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DGCL § 271. Sale, lease or exchange of assets; consideration; procedure.

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(a) Every corporation may at any meeting of its board of directors or governing body sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or other property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors or governing body deems expedient and for the best interests of the corporation, when and as authorized by a resolution adopted by the holders of a majority of the outstanding stock of the corporation entitled to vote thereon or, if the corporation is a nonstock corporation, by a majority of the members having the right to vote for the election of the members of the governing body and any other members entitled to vote thereon under the certificate of incorporation or the bylaws of such corporation, at a meeting duly called upon at least 20 days' notice. The notice of the meeting shall state that such a resolution will be considered.

(b) Notwithstanding authorization or consent to a proposed sale, lease or exchange of a corporation's property and assets by the stockholders or members, the board of directors or governing body may abandon such proposed sale, lease or exchange without further action by the stockholders or members, subject to the rights, if any, of third parties under any contract relating thereto.

(c) For purposes of this section only, the property and assets of the corporation include the property and assets of any subsidiary of the corporation. As used in this subsection, "subsidiary" means any entity wholly-owned and controlled, directly or indirectly, by the corporation and includes, without limitation, corporations, partnerships, limited partnerships, limited liability partnerships, limited liability companies, and/or statutory trusts. Notwithstanding subsection (a) of this section, except to the extent the certificate of incorporation otherwise provides, no resolution by stockholders or members shall be required for a sale, lease or exchange of property and assets of the corporation to a subsidiary.

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DGCL § 275. Dissolution generally; procedure.

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(a) If it should be deemed advisable in the judgment of the board of directors of any corporation that it should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution to be mailed to each stockholder entitled to vote thereon as of the record date for determining the stockholders entitled to notice of the meeting.

(b) At the meeting a vote shall be taken upon the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon shall vote for the proposed dissolution, a certification of dissolution shall be filed with the Secretary of State pursuant to subsection (d) of this section.

(c) Dissolution of a corporation may also be authorized without action of the directors if all the stockholders entitled to vote thereon shall consent in writing and a certificate of dissolution shall be filed with the Secretary of State pursuant to subsection (d) of this section.

(d) If dissolution is authorized in accordance with this section, a certificate of dissolution shall be executed, acknowledged and filed, and shall become effective, in accordance with § 103 of this title. Such certificate of dissolution shall set forth:

(1) The name of the corporation;

(2) The date dissolution was authorized;

(3) That the dissolution has been authorized by the board of directors and stockholders of the corporation, in accordance with subsections (a) and (b) of this section, or that the dissolution has been authorized by all of the stockholders of the corporation entitled to vote on a dissolution, in accordance with subsection (c) of this section;

(4) The names and addresses of the directors and officers of the corporation; and

(5) The date of filing of the corporation's original certificate of incorporation with the Secretary of State.

(e) The resolution authorizing a proposed dissolution may provide that notwithstanding authorization or consent to the proposed dissolution by the stockholders, or the members of a nonstock corporation pursuant to § 276 of this title, the board of directors or governing body may abandon such proposed dissolution without further action by the stockholders or members.

(f) Upon a certificate of dissolution becoming effective in accordance with § 103 of this title, the corporation shall be dissolved.

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NYBCL § 602. Meetings of shareholders.

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(a) Meetings of shareholders may be held at such place, within or without this state, as may be fixed by or under the by-laws, or if not so fixed, at the office of the corporation in this state.
(b) A meeting of shareholders shall be held annually for the election of directors and the transaction of other business on a date fixed by or under the by-laws. A failure to hold the annual meeting on the date so fixed or to elect a sufficient number of directors to conduct the business of the corporation shall not work a forfeiture or give cause for dissolution of the corporation, except as provided in paragraph (c) of section 1104 (Petition in case of deadlock among directors or shareholders).
(c) Special meetings of the shareholders may be called by the board and by such person or persons as may be so authorized by the certificate of incorporation or the by-laws. At any such special meeting only such business may be transacted which is related to the purpose or purposes set forth in the notice required by section 605 (Notice of meetings of shareholders).
(d) Except as otherwise required by this chapter, the by-laws may designate reasonable procedures for the calling and conduct of a meeting of shareholders, including but not limited to specifying: (i) who may call and who may conduct the meeting, (ii) the means by which the order of business to be conducted shall be established, (iii) the procedures and requirements for the nomination of directors, (iv) the procedures with respect to the making of shareholder proposals, and (v) the procedures to be established for the adjournment of any meeting of shareholders. No amendment of the by-laws pertaining to the election of directors or the procedures for the calling and conduct of a meeting of shareholders shall affect the election of directors or the procedures for the calling or conduct in respect of any meeting of shareholders unless adequate notice thereof is given to the shareholders in a manner reasonably calculated to provide shareholders with sufficient time to respond thereto prior to such meeting.

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NYBCL § 605. Notice of meetings of shareholders.

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(a) Whenever under the provisions of this chapter shareholders are required or permitted to take any action at a meeting, notice shall be given stating the place, date and hour of the meeting and, unless it is the annual meeting, indicating that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. Notice of any meeting of shareholders may be written or electronic. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the requirements of section 623 (Procedure to enforce shareholder's right to receive payment for shares) to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect and shall be accompanied by a copy of section 623 or an outline of its material terms. Notice of any meeting shall be given not fewer than ten nor more than sixty days before the date of the meeting, provided, however, that such notice may be given by third class mail not fewer than twenty-four nor more than sixty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at the shareholder's address as it appears on the record of shareholders, or, if the shareholder shall have filed with the secretary of the corporation a request that notices to the shareholder be mailed to some other address, then directed to him at such other address. If transmitted electronically, such notice is given when directed to the shareholder's electronic mail address as supplied by the shareholder to the secretary of the corporation or as otherwise directed pursuant to the shareholder's authorization or instructions. An affidavit of the secretary or other person giving the notice or of a transfer agent of the corporation that the notice required by this section has been given shall, in the absence of fraud, be prima facie evidence of the facts therein stated.
(b) When a meeting is adjourned to another time or place, it shall not be necessary, unless the by-laws require otherwise, to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment the board fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice under paragraph (a).

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NYBCL § 615. Written consent of shareholders, subscribers or incorporators
without a meeting.

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(a) Whenever under this chapter shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon or, if the certificate of incorporation so permits, signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In addition, this paragraph shall not be construed to alter or modify the provisions of any section or any provision in a certificate of incorporation not inconsistent with this chapter under which the written consent of the holders of less than all outstanding shares is sufficient for corporate action.
(b) No written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this paragraph to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation by delivery to its registered office in this state, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who have not consented in writing.
(d) Written consent thus given by the holders of such number of shares as is required under paragraph (a) of this section shall have the same effect as a valid vote of holders of such number of shares, and any certificate with respect to the authorization or taking of any such action which is to be delivered to the department of state shall recite that written consent has been given in accordance with this section and that written notice has been given as and to the extent required by this section.
(e) When there are no shareholders of record, such action may be taken on the written consent signed by a majority in interest of the subscribers for shares whose subscriptions have been accepted or their successors in interest or, if no subscription has been accepted, on the written consent signed by the incorporator or a majority of the incorporators. When there are two or more incorporators, if any dies or is for any reason unable to act, the other or others may act. If there is no incorporator able to act, any person for whom an incorporator was acting as agent may act in his stead, or if such other person also dies or is for any reason unable to act, his legal representative may act.

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NYBCL § 704. Classification of directors.

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(a) The certificate of incorporation or the specific provisions of a by-law adopted by the shareholders may provide that the directors be divided into either two, three or four classes. All classes shall be as nearly equal in number as possible. The terms of office of the directors initially classified shall be as follows: that of the first class shall expire at the next annual meeting of shareholders, the second class at the second succeeding annual meeting, the third class, if any, at the third succeeding annual meeting, and the fourth class, if any, at the fourth succeeding annual meeting.
(b) At each annual meeting after such initial classification, directors to replace those whose terms expire at such annual meeting shall be elected to hold office until the second succeeding annual meeting if there are two classes, the third succeeding annual meeting if there are three classes, or the fourth succeeding annual meeting if there are four classes.
(c) If directors are classified and the number of directors is thereafter changed:
(1) Any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible.
(2) When the number of directors is increased by the board and any newly created directorships are filled by the board, there shall be no classification of the additional directors until the next annual meeting of shareholders.

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NYBCL § 705. Newly created directorships and vacancies.

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(a) Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the board for any reason except the removal of directors without cause may be filled by vote of the board. If the number of the directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office. Nothing in this paragraph shall affect any provision of the certificate of incorporation or the by-laws which provides that such newly created directorships or vacancies shall be filled by vote of the shareholders, or any provision of the certificate of incorporation specifying greater requirements as permitted under section 709 (Greater requirements as to quorum and vote of directors).
(b) Unless the certificate of incorporation or the specific provisions of a by-law adopted by the shareholders provide that the board may fill vacancies occurring in the board by reason of the removal of directors without cause, such vacancies may be filled only by vote of the shareholders.
(c) A director elected to fill a vacancy, unless elected by the shareholders, shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until his successor has been elected and qualified.
(d) Unless otherwise provided in the certificate of incorporation or by-laws, notwithstanding the provisions of paragraphs (a) and (b) of this section, whenever the holders of any class or classes of shares or series thereof are entitled to elect one or more directors by the certificate of incorporation, any vacancy that may be filled by the board or a majority of the directors then in office, as the case may be, shall be filled by a majority of the directors elected by such class or classes or series thereof then in office, or, if no such director is in office, then as provided in paragraph (a) or (b) of this section, as the case may be.

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NYBCL § 706. Removal of directors.

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(a) Any or all of the directors may be removed for cause by vote of the shareholders. The certificate of incorporation or the specific provisions of a by-law adopted by the shareholders may provide for such removal by action of the board, except in the case of any director elected by cumulative voting, or by the holders of the shares of any class or series, or holders of bonds, voting as a class, when so entitled by the provisions of the certificate of incorporation.
(b) If the certificate of incorporation or the by-laws so provide, any or all of the directors may be removed without cause by vote of the shareholders.
(c) The removal of directors, with or without cause, as provided in paragraphs (a) and (b) is subject to the following:
(1) In the case of a corporation having cumulative voting, no director may be removed when the votes cast against his removal would be sufficient to elect him if voted cumulatively at an election at which the same total number of votes were cast and the entire board, or the entire class of directors of which he is a member, were then being elected; and
(2) When by the provisions of the certificate of incorporation the holders of the shares of any class or series, or holders of bonds, voting as a class, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series, or the holders of such bonds, voting as a class.
(d) An action to procure a judgment removing a director for cause may be brought by the attorney-general or by the holders of ten percent of the outstanding shares, whether or not entitled to vote. The court may bar from re-election any director so removed for a period fixed by the court.

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NYBCL § 803. Authorization of amendment or change.

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(a) Amendment or change of the certificate of incorporation may be authorized by vote of the board, followed by vote of a majority of all outstanding shares entitled to vote thereon at a meeting of shareholders; provided, however, that, whenever the certificate of incorporation requires action by the board of directors, by the holders of any class or series of shares, or by the holders of any other securities having voting power by the vote of a greater number or proportion than is required by any section of this article, the provision of the certificate of incorporation requiring such greater vote shall not be altered, amended, or repealed except by such greater vote; and provided further that an amendment to the certificate of incorporation for the purpose of reducing the requisite vote by the holders of any class or series of shares or by the holders of any other securities having voting power that is otherwise provided for in any section of this chapter that would otherwise require more than a majority of the votes of all outstanding shares entitled to vote thereon shall not be adopted except by the vote of such holders of class or series of shares or by such holders of such other securities having voting power that is at least equal to that which would be required to take the action provided in such other section of this chapter.
(b) Alternatively, any one or more of the following changes may be authorized by or pursuant to authorization of the board:
(1) To specify or change the location of the corporation's office.
(2) To specify or change the post office address to which the secretary of state shall mail a copy of any process against the corporation served upon him.
(3) To make, revoke or change the designation of a registered agent, or to specify or change the address of its registered agent.
(c) This section shall not alter the vote required under any other section for the authorization of an amendment referred to therein, nor alter the authority of the board to authorize amendments under any other section.
(d) Amendment or change of the certificate of incorporation of a corporation which has no shareholders of record, no subscribers for shares whose subscriptions have been accepted and no directors may be authorized by the sole incorporator or a majority of the incorporators.

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NYBCL § 909. Sale, lease, exchange or other disposition of assets.

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(a) A sale, lease, exchange or other disposition of all or substantially all the assets of a corporation, if not made in the usual or regular course of the business actually conducted by such corporation, shall be authorized only in accordance with the following procedure:
(1) The board shall authorize the proposed sale, lease, exchange or other disposition and direct its submission to a vote of shareholders.
(2) Notice of meeting shall be given to each shareholder of record, whether or not entitled to vote.
(3) The shareholders shall approve such sale, lease, exchange or other disposition and may fix, or may authorize the board to fix, any of the terms and conditions thereof and the consideration to be received by the corporation therefor, which may consist in whole or in part of cash or other property, real or personal, including shares, bonds or other securities of any other domestic or foreign corporation or corporations, by vote at a meeting of shareholders of (A) for corporations in existence on the effective date of this clause the certificate of incorporation of which expressly provides such or corporations incorporated after the effective date of this clause, a majority of the votes of all outstanding shares entitled to vote thereon or (B) for other corporations in existence on the effective date of this clause, two-thirds of the votes of all outstanding shares entitled to vote thereon.
(b) A recital in a deed, lease or other instrument of conveyance executed by a corporation to the effect that the property described therein does not constitute all or substantially all of the assets of the corporation, or that the disposition of the property affected by said instrument was made in the usual or regular course of business of the corporation, or that the shareholders have duly authorized such disposition, shall be presumptive evidence of the fact so recited.
(c) An action to set aside a deed, lease or other instrument of conveyance executed by a corporation affecting real property or real and personal property may not be maintained for failure to comply with the requirements of paragraph (a) unless the action is commenced and a notice of pendency of action is filed within one year after such conveyance, lease or other instrumment1 is recorded or within six months after this subdivision takes effect,2 whichever date occurs later.
(d) Whenever a transaction of the character described in paragraph (a) involves a sale, lease, exchange or other disposition of all or substantially all the assets of the corporation, including its name, to a new corporation formed under the same name as the existing corporation, upon the expiration of thirty days from the filing of the certificate of incorporation of the new corporation, with the consent of the state tax commission attached, the existing corporation shall be automatically dissolved, unless, before the end of such thirty-day period, such corporation has changed its name. The adjustment and winding up of the affairs of such dissolved corporation shall proceed in accordance with the provisions of article 10 (Non-judicial dissolution).
(e) The certificate of incorporation of a corporation formed under the authority of paragraph (d) shall set forth the name of the existing corporation, the date when its certificate of incorporation was filed by the department of state, and that the shareholders of such corporation have authorized the sale, lease, exchange or other disposition of all or substantially all the assets of such corporation, including its name, to the new corporation to be formed under the same name as the existing corporation.
(f) Notwithstanding shareholder approval, the board may abandon the proposed sale, lease, exchange or other disposition without further action by the shareholders, subject to the rights, if any, of third parties under any contract relating thereto.

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Blasius v. Atlas.

Blasius started buying up shares of Atlas, and ended up with about 9% of the stock. They suggested that Atlas liquidate most of their assets and give the shareholders a nice big dividend. Atlas' management was not keen on this idea.
Blasius sent Atlas' management a precatory resolution saying that they should restructure, double the size of the board of directors, and elect Blasius' candidates to those positions.
A precatory resolution, is a letter sent to a board of directors from a powerful shareholder threatening them to acquiesce to a particular policy or else they would try to get their way through a shareholder vote.
In response, Atlas management held an emergency meeting of the board, amended the by-laws to add a few more directors, and appointed Atlas-friendly people to those new directorships. Blasius sued.
Blasius argued that the directors do not have the authority to act for the primary purpose of thwarting the exercise of a shareholder vote.
Blasius argued that Atlas' action were selfishly motivated in order to protect the incumbent board from a perceived threat to its control.
Atlas argued that the Business Judgment Rule prevented the courts from looking into the reasons for why the management voted to increase the size of the board of directors.

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Standard: The Court held that the board must have a "compelling justification" for taking unilateral action, the primary purpose of which is to interfere with or impede the exercise of the stockholders' voting franchise.

If the board takes such action without a compelling justification, then it breaches its duty of loyalty to stockholders.

The Court noted that there might be some possible "compelling justification" for the directors' action (so the directors actions aren't necessarily per se forbidden). Compelling justification might be:
-When stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests;
-When information useful to the stockholders' decision-making process has not been considered adequately or not yet been publicly disclosed; and
-When if the stockholders vote no the opportunity to receive the bid will be irretrievably lost.

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Mercier v. Inter-Tel (Delaware), Inc.

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HOlding: Cour found that a special committee had a "compelling justification" to postpone a stockholders' meeting so as to avoid the defeat of an advantageous merger proposal.

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Unocal v. Mesa Petroleum (Takeover Defensive Measures)

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In the context of a takeover battle, a board has a conflict of interest because of the "ominipresent specter" that it may be acting primarily in its own best interests rather than in the best interests of the corp and its stockholders. Thus, before the board's action is protected by the business judgment rule, the board must satisfy its own two-part burden:
1) the board must demonstrate that it had reasonable grounds for believing that a danger to corp policy and effectiveness existed (the "Reasonable Grounds Test"); and
2) the board must demonstrate that is defensive response was reasonable in relation to the threat posed (the "Proportionality Test").

If the board satisfies both tests of Unocal, its action will receive the protections of the business judgment rule.

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Schnell v. Chris-Craft Industries, Inc.

The directors of Chris-Craft were worried because some shareholders had announced that at the next shareholders' meeting, they were going to hold a vote to replace the directors.
So, the directors moved the annual meeting up from January to December, making it harder for stockholders to make travel arrangements (and therefore show up to vote to kick out the directors).
Some of the shareholders (including Schnell) sued to stop the directors from moving up the date of the shareholders' meeting.
Under the by-laws of the company, and under Delaware State law, it was legal for the directors to change the date of a shareholders meeting, as long as they gave 60 days notice (which they did).
The Trial Court found for the directors. The shareholders appealed.
The Trial Court found that the directors' actions were designed to obstruct the shareholders' efforts to gain control of the corporation. However, the Court declined to force the directors to reschedule the meeting.

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Changing the date is allowed under DGCL 109. Shareholders may through a corproate charter provisions may share the power to amend the bylaws with the directors.

The Delaware Supreme Court reversed.
The Delaware Supreme Court found that even though the directors strictly complied with Delaware law, it was inequitable for them to profit from their shady decision.

Directors violated the duty of loyalty.

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CA, Inc. v. AFSCME Employees Pension Plan.

AFSCME was a CA shareholder. They submitted a shareholder proposal to amend CA's bylaws.
The proposal would require that CA reimburse the reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least one nominee from the dissident slate was victorious.
The directors of CA objected to this proposal and asked the SEC to exclude it from the proxy statement.
CA argued that the shareholder proposal was improper because under Delaware law (8 Del. §141(a)), the decision as to whether or not to reimburse election expenses was at the discretion of the directors. Securities Exchange Act of 1934 Rule 14a-8 allows the exclusion of shareholder proposals that would be illegal.
AFSCME argued that a different section of Delaware law (8 Del. §109) grants shareholders the right to adopt bylaws. So their shareholder proposal was not illegal under Delaware law and Rule 14a-8 did not apply.

CA says that it was not obligated to accept the bylaw proposal because it would violate Del. law.

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The Delaware Supreme Court found for CA.
The Delaware Supreme Court found that in general, the proposed bylaw related to director elections and, thus, was a proper subject for a shareholder proposal under Rule 14a-8.
However, the Court found that a shareholder proposal to amend the bylaws in the way AFSCME proposed would violate Delaware law because it "mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude" and, thus, if adopted, could cause CA to violate Delaware law.

Is it appropriate for a by-law proposal to spend money, when normally this decision is up to the board? Yes, bc/ there are already other bylaws that reimburse shareholders.

If adopted would the proposal violate Del. law? Yes, it would violate common law fiduciary duties. There could be a situation where BOD would have to reimburse the shareholder in a way that would violate it's fiduciary duty to the company(i.e. if someone wanted to nominate two BOD's out of petty concerns and then they were elected, then the board would violate its fiduciary duty to be loyal to the company b/c they would have to reimburse the activist shareholder).

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Apparent Authority of President: Lee v. Jenkins Bros.

Back 136

The president has apparent authority to bind the corporation to contracts that are made in the usual and regular course of business, but does not have apparent authority to bind the corporation to contracts of an extraordinary nature.

i.e. declaration of dividends are required by statute to be decided by the board so not under apparent authority of president

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Examples of extraordinary action which do not bind the corporation

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1) Creation of long-term or other significant debt
2) The reacquisition of equity securities
3) Significant capital investments
4) Significant business combinations
5) Disposition of a significant business
6) Entry into important new lines of business
7) Significant acquisitions of stock in other corporation, and
8) Actions that would foreseably expose the corporation to significant litigation or significant new regulatory problems

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Apparent Authority of a Secretary

Back 138

THe secretary of a corp has apparent authority to certify the records of the corporation, including resolutions of the board.

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Apparent AUthority of President in Closely Held Corps

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Some cases hold that if the president has been exercising absolute authority over the corp's affairs, and the board has never questioned, altered, or rejected his decisions, the president will have extremely wide actual and apparent authority.

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Ratification

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Even if an officer lacks both actual and apparent authority, the corporation may be bound by her act of entering into a transaction on the corp's behalf if the board later ratifies the officer's act.

Ratification may occur where a corp, knowing all of the facts, accepts and uses the proceeds of such a transaction.

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The Duty of Care: Francis v. United Jersey Bank.

Brief Fact Summary. Plaintiffs, the trustees in bankruptcy of Pritchard & Baird Intermediaries Corporation (”P&B”), filed suit against Defendant, the executrix of the estate of Lillian Pritchard, for a breach of fiduciary duty as a director of P&B. Lillian Pritchard did not exercise ordinary care in monitoring the finances of P&B when her sons, other members of P&B management, misappropriated funds.

FACTS
-P&B was an insurance broker that handled large sums of money for its clients.
-Prichard had a habit of borrowing large sums of money out of his clients accounts.
-Prichard died. His wife began drinking heavy and didn’t do much in regards to her duty as a director. Her sons borrowed money causing the company to go bankrupt.
-P argues that the wife failed to keep track of what was happening with the company and did not step in to stop her sons from looting it.)

ISSUE
Was Mrs. Prichard negligent in not noticing and trying to prevent the misappropriation of funds held by the corporation in an implied trust?

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HOLDING
Yes, she was liable in negligence for the wrongdoings of her sons.
Dicussion of Holding
-Industry custom was segregation of funds.
-Funds here were commingled. All funds were deposited in a single account.
“Loans”
-Funding of the loans left the corporation with insufficient money to operate.
D was not active in the business of P&B and knew virtually nothing of its corporate affairs.
D was unfamiliar with the rudiments of reinsurance.
She did not pay attention to her duties as a director or to the affairs of the corporation.
RULES
Problem arises here when a third party asserts a director, because of nonfeasance, is liable for the losses caused by acts of insiders (in this case, officers directors, or shareholders.)
a. Determination of liability requires: findings that D had a duty to the clients of the corporation, that D breached that duty and that her breach was a proximate cause of their losses.
b. Directors must discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.
i. A director should acquire at least a rudimentary understanding of the business of the corporation.
ii. A director should become familiar with the fundamentals of the business in which the corporation is engaged.
iii. Lack of knowledge is not a defense.
a. If one feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act.
b. Directors are under a continuing obligation to keep informed about the business activities of the corporation. Otherwise they may not be able to participate in the overall management of corporate affairs.
c. Needs not be a detailed inspection of day to day activities, rather a general monitoring of corporate affairs and policies.
d. Must attend board meetings regularly. (must attend meetings as a matter of practice, not every single board meeting.)
A director who is absent from a board meeting is presumed to concur in action taken on a corporate matter unless he files a dissent with the secretary of the corp. within a reasonable time of learning of such action.
e. Directors should maintain familiarity with the financial status of the corporation by a regular review of financial statements.
iv. Generally directors are immune from liability if in good faith they rely upon opinion of counsel or upon written reports setting forth financial data concerning the corporation and prepared by an independent accountant, or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of the books in account, or the person presiding at a meeting of the board.
a. Review of financial statements may give rise to duty to inquire further into matters revealed by those statements.
b. Upon discovery of an illegal course of action, a director has a duty to object and if the corp. does not correct conduct, to resign("noisy exit").
c. There may be more than a duty to object, and instead, duty to seek advice of counsel.
i. In some circumstances, a director is well advised to consult with regular corporate counsel at any time in which he is doubtful regarding proposed action.
d. Director may have to make threat of a suit (as in this case).
v. The relationship of a corporate director to the corporation and its stockholders is that of a fiduciary.
a. Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation.
b. The institutional integrity of a corporation depends upon the proper discharge of duties by their directors.
vi. Directors may owe a fiduciary duty to creditors (generally in insolvency).
APPLICATION
-The court discusses that there is trust and confidence in the reinsurance industry.
-Resembled a bank rather than a small family business.
a. D’s relationship to her clients was akin to that of a director of a bank to its depositors.
b. If D had read the financial statements, she would have known that her sons were converting trust funds.
i. Negligence of director does not result in liability unless it is a proximate cause of the loss.
(The act or failure to act must be a substantial factor in producing the harm).
The court states that reinsurance brokers are encumbered with fiduciary duties owed to third parties, in other corporations, however, a director’s duty normally does not extend beyond the shareholders to third parties.
-D’s dereliction of duties was not the immediate cause, however, it was a substantial factor contributing to the loss.
Here there was more than a mere duty to reject and resign, she should have consulted with an attorney and threatened to sue.

1) Must have rudimentary understanding
2) Must have system of internal controls - keeping informed (regularly reviewing the financial statements)
3) If director notices misfeasance, she has duty to correct (i.e. noisy exit, sue)
4) Director malfeasance has to be a substantial factor in P's loss

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Aronson v. Lewis

Back 142

Under the BJR director liability is predicated upon conepts of gross negligence.

Gross negligence under Del. Law.

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Causation: Barnes v. Andrews.

Andrews(Director) was sued for violating the duty of care by not paying sufficient attention to the corp's affairs.

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Passive director Andrews not liable when president had not done job and director has met just occasionally with president. Though Director had failed to keep apprised and informed of the corporation’s affairs. What could bd member have done anyway, says Hand. And people wouldn’t become bd members if they’d be liable.]

Directors breach must be proximate cuase. This serves as an affirmative defense.

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The Duty to Monitor: In re Caremark Internation Inc. Derivative Litigation.

FACTS
Caremark International, Inc., a health services company, was the subject of a major federal criminal investigation. The company allegedly violated laws that prohibit health care companies from paying doctors to refer Medicare or Medicaid patients to their services. Prior to 1991, Caremark had a regular practice of entering into financial arrangements with referring doctors which were not clearly prohibited but which raised legal questions. However, Caremark’s board issued guidelines that attempted to clarify what sort of arrangements were acceptable. After they were notified of the federal investigation, the board announced that it would no longer pay certain types of fees to Medicare and Medicaid doctors. The board also employed an outside auditor to review its practices for business and ethical concerns. The federal investigation resulted in indictments of junior officers in 1994. The officials took plea deals to lesser charges and Caremark paid roughly $250 million in civil and criminal penalties. A group of Caremark shareholders (plaintiffs) promptly brought derivative suits, alleging that Caremark’s directors (defendants) breached their duty to monitor(care) by failing to adequately oversee the conduct of Caremark’s employees and thereby exposing the company to enormous civil and criminal penalties. The parties negotiated a settlement.. In the settlement, the board did not agree to any monetary penalties; it simply agreed to implement a number of more cautious


Issue. The issue is whether the Board exercised an appropriate level of attention to the possibility of ARPL violations.

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Synopsis of Rule of Law. Directors are potentially liable for a breach of duty to exercise appropriate attention if they knew or should have known that employees were violating the law(i.e. reported to them by internal controls made in good faith), declined to make a good faith effort to prevent the violation, and the lack of action was the proximate cause of damages.

Held. There was no evidence that the directors knew that there were ARPL violations, and there was no systemic or sustained failure to exercise oversight. However, the terms of the settlement merely required Caremark to institute policies to further assist in monitoring for violations. Therefore the settlement was approved.

Discussion. A breach of duty to exercise appropriate attention, as the court notes, is more difficult for Plaintiffs to prove than a breach of the duty of loyalty. Most decisions that would come under this duty will resemble many decisions shielded by the business judgment rule.

Violations arise when there is:
1) Bad decision making
2) Unconsidered inaction(failure to take action b/c of being unaware of problem in first place)

Boards of Del. Corps are obligated to set up, in good faith, internal controls(Corp Infor. and Reporting System) designed to inform directors of misfeasance.

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Delaware 216(2)

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Need holders of a majority of shares at a meeting at which a quorum is present to vote on a matter.

Plurality: HOlders of just 25% of shares where bare quorum is met can take action which would be binding on the corporation. (Not sure if this is in 216(2))

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How does DE treat abstentions?

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You have to actively choose not to support something. That means you will be represented at the meeting to vote for nothing. It counts for quorum purposes.

An abstention in DE, means that your present and helps to achieve a quorum, and your vote will count as a No.

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NY's treatment of abstentions 614(b)

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For purposes other than to elect directors:

An abstention in NY will count towards a quorum but will not constitute a vote either way.

In NY you need a majority, but you don't count the abstentions.

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Irrevocable Proxy 609(a)-(h)

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If irrevocable , it transfers voter authority to proxy.

To be irrevocable the proxy card must state it is irrevocable on face of card and must be held by proxy voter who fits into the laundry list of potentional proxy holders under 609(i.e. the pledgee(the bank), a person who has agreed to purchase your shares as of record date, Closely-held Corps allow shareholder agreements - 620(a))

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DOC in NY/NJ/DE

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DE: common law based
NY & NJ: are a mix of objective & subjective standards and are equally comparable

Objective: ordinary reasonable prudent person
subjective: in a like position: compare the director in question to the ordinary reasonable similar director under similar circumstances

Courts do not look to the outcome but rather the process that the directors used in making their decisions

Standard: against which directorial decisionmaking is measured is gross negligence, rather than simple or "mere" negligence.

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Ordinary Reasonable Prudent Person: In Re Emerging Communications, Inc. Shareholders Litigation

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The court found that a director violated his duty of care by agreeingto a merger in which his corporation would be purchased for an excessivelylow price. According to the court, the director’s financial expertise shouldhave alerted him to the fact that the proposed price was unfairly low. Thecourt held that this knowledge obligated him to object to the merger.

He could not solely rely on outside advisors b/c he was more knowledgeable about telecommunications valuations.

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Reading v. Attorney General.

Mr Reading was stationed in Egypt as an army sergeant. Smugglers paid him to ride in their lorries, while they were doing their smuggling of illegal spirits, while visibly wearing his army uniform, hence making a search less likely. Mr Reading was caught, and the Crown seized the money he was paid, and put him in prison. Mr Reading claimed that the money should be returned.

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The House of Lords held that the Crown could retain the money for many reasons, including that Mr Reading was in a fiduciary position. He was required to give up all unauthorised profits to his principal, the Crown.

Money shall be taken from agent and given to his master, because he got it solely by reason of the position which he occupied as a servant of his master.

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Rash v. J.V. Intermediate, LTD.

Facts:
Rash was a manager at one of JV Intermediate’s industrial plants. JV claims that Rash actively participated in and owned at least four other businesses, none of which were ever disclosed to JV. One of those businesses was Total Industrial Plant Services, Inc. (TIPS), a scaffolding business.

TIPS bid on projects for JV, and with Rash as its manager, often selected TIPS as a subcontractor.
Between 2001 to 2004, JV paid over $1 million to TIPS.
At some point during Rash’s tenure, JV started its own scaffolding business. Rash resigned and then sued JV for breach of contract and fraud.

He claimed the company purposely understated the net profits and equity of the Tulsa branch and therefore did not properly pay him the net profit and equity bonuses.
JV countered that Rash

(1) materially breached his employment agreement,
(2) breached his duty of loyalty, and
(3) breached his fiduciary duty.

Issues:
(1) The existence and scope of a fiduciary duty between an agent and a principal.
(2) The propriety of the equitable remedy of forfeiture for breach of a fiduciary duty.

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Holding:
(1) Rash’s agency relationship with JV created a fiduciary obligation, and he breached that duty.
(2) Fee forfeiture is a proper equitable remedy in response to a breach of contract claim.

Case reversed and remanded.

Reasoning:
(1) Rash’s agency relationship with JV created a fiduciary obligation, and he breached that duty.

Agency:
Rash was an agent contractually, and also because he “ran the shop” and was responsible for generating business for the Tulsa upstart.

Breach:
Restatement (Second) of Agency § 387:

Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.

Restatement (Second) of Agency § 13:

The employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business.

(2) Fee forfeiture is a proper equitable remedy in response to a breach of contract claim.

Forfeiture is based on two propositions:
(i) the principal is considered not to have received what he bargained for if the agent breaches his fiduciary duties while representing the principal and

(ii) fee forfeiture is designed to discourage agents from being disloyal to their principal or to protect relationships of trust by discouraging agents’ disloyalty.

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NYBCL § 707. Quorum of directors

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Unless a greater proportion is required by the certificate of incorporation, a majority of the entire board shall constitute a quorum for the transaction of business or of any specified item of business, except that the certificate of incorporation or the by-laws may fix the quorum at less than a majority of the entire board but not less than one-third thereof.

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NYBCL § 708. Action by the Board

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(a) Except as otherwise provided in this chapter, any reference in this chapter to corporate action to be taken by the board shall mean such action at a meeting of the board.
(b) Unless otherwise restricted by the certificate of incorporation or the by-laws, any action required or permitted to be taken by the board or any committee thereof may be taken without a meeting if all members of the board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the board or committee shall be filed with the minutes of the proceedings of the board or committee.
(c) Unless otherwise restricted by the certificate of incorporation or the by-laws, any one or more members of the board or any committee thereof may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
(d) Except as otherwise provided in this chapter, the vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the board.

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NYBCL § 712. Executive committee and other committees

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(a) If the certificate of incorporation or the by-laws so provide, the board, by resolution adopted by a majority of the entire board, may designate from among its members an executive committee and other committees, each consisting of one or more directors, and each of which, to the extent provided in the resolution or in the certificate of incorporation or by-laws, shall have all the authority of the board, except that no such committee shall have authority as to the following matters:
(1) The submission to shareholders of any action that needs shareholders' approval under this chapter.
(2) The filling of vacancies in the board of directors or in any committee.
(3) The fixing of compensation of the directors for serving on the board or on any committee.
(4) The amendment or repeal of the by-laws, or the adoption of new by-laws.
(5) The amendment or repeal of any resolution of the board which by its terms shall not be so amendable or repealable.
(b) The board may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee.
(c) Each such committee shall serve at the pleasure of the board. The designation of any such committee, the delegation thereto of authority, or action by any such committee pursuant to such authority shall not alone constitute performance by any member of the board who is not a member of the committee in question, of his duty to the corporation under section 717 (Duty of directors).

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NYBCL § 717(a). Duty of directors

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(a) A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements including financial statements and other financial data, in each case prepared or presented by:
(1) one or more officers or employees of the corporation or of any other corporation of which at least fifty percentum of the outstanding shares of stock entitling the holders thereof to vote for the election of directors is owned directly or indirectly by the corporation, whom the director believes to be reliable and competent in the matters presented,
(2) counsel, public accountants or other persons as to matters which the director believes to be within such person's professional or expert competence, or
(3) a committee of the board upon which he does not serve, duly designated in accordance with a provision of the certificate of incorporation or the by-laws, as to matters within its designated authority, which committee the director believes to merit confidence, so long as in so relying he shall be acting in good faith and with such degree of care, but he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A person who so performs his duties shall have no liability by reason of being or having been a director of the corporation.

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NYBCL § 711. Notice of meetings of the board

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(a) Unless otherwise provided by the by-laws, regular meetings of the board may be held without notice if the time and place of such meetings are fixed by the by-laws or the board. Special meetings of the board shall be held upon notice to the directors.
(b) The by-laws may prescribe what shall constitute notice of meeting of the board. A notice, or waiver of notice, need not specify the purpose of any regular or special meeting of the board, unless required by the by-laws.
(c) Notice of a meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him.
(d) A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the by-laws so provide, notice of any adjournment of a meeting of the board to another time or place shall be given to the directors who were not present at the time of the adjournment and, unless such time and place are announced at the meeting, to the other directors.

(b) In taking action, including, without limitation, action which may involve or relate to a change or potential change in the control of the corporation, a director shall be entitled to consider, without limitation, (1) both the long-term and the short-term interests of the corporation and its shareholders and (2) the effects that the corporation's actions may have in the short-term or in the long-term upon any of the following:
(i) the prospects for potential growth, development, productivity and profitability of the corporation;
(ii) the corporation's current employees;
(iii) the corporation's retired employees and other beneficiaries receiving or entitled to receive retirement, welfare or similar benefits from or pursuant to any plan sponsored, or agreement entered into, by the corporation;
(iv) the corporation's customers and creditors; and
(v) the ability of the corporation to provide, as a going concern, goods, services, employment opportunities and employment benefits and otherwise to contribute to the communities in which it does business.
Nothing in this paragraph shall create any duties owed by any director to any person or entity to consider or afford any particular weight to any of the foregoing or abrogate any duty of the directors, either statutory or recognized by common law or court decisions.
For purposes of this paragraph, “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the corporation, whether through the ownership of voting stock, by contract, or otherwise.

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NYBCL § 716. Removal of officers

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(a) Any officer elected or appointed by the board may be removed by the board with or without cause. An officer elected by the shareholders may be removed, with or without cause, only by vote of the shareholders, but his authority to act as an officer may be suspended by the board for cause.
(b) The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights.
(c) An action to procure a judgment removing an officer for cause may be brought by the attorney-general or by ten percent of the votes of the outstanding shares, whether or not entitled to vote. The court may bar from re-election or reappointment any officer so removed for a period fixed by the court.

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NYBCL § 604. Fixing record date

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(a) For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the by-laws may provide for fixing or, in the absence of such provision, the board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action.
(b) If no record date is fixed:
(1) The record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held.
(2) The record date for determining shareholders for any purpose other than that specified in subparagraph (1) shall be at the close of business on the day on which the resolution of the board relating thereto is adopted.
(c) When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the board fixes a new record date under this section for the adjourned meeting.

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NYBCL § 608. Quorum of shareholders

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(a) The holders of a majority of the votes of shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a particular class or series of shares, voting as a class, the holders of a majority of the votes of shares of such class or series shall constitute a quorum for the transaction of such specified item of business.
(b) The certificate of incorporation or by-laws may provide for any lesser quorum not less than one-third of the votes of shares entitled to vote, and the certificate of incorporation may, under section 616 (Greater requirement as to quorum and vote of shareholders), provide for a greater quorum.
(c) When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders.
(d) The shareholders present may adjourn the meeting despite the absence of a quorum.

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NYBCL § 609. Proxies

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(a) Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy.
(b) No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided in this section.
(c) The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the corporate officer responsible for maintaining the list of shareholders.
(d) Except when other provision shall have been made by written agreement between the parties, the record holder of shares which he holds as pledgee or otherwise as security or which belong to another, shall issue to the pledgor or to such owner of such shares, upon demand therefor and payment of necessary expenses thereof, a proxy to vote or take other action thereon.
(e) A shareholder shall not sell his vote or issue a proxy to vote to any person for any sum of money or anything of value, except as authorized in this section and section 620 (Agreements as to voting; provision in certificate of incorporation as to control of directors); provided, however, that this paragraph shall not apply to votes, proxies or consents given by holders of preferred shares in connection with a proxy or consent solicitation made available on identical terms to all holders of shares of the same class or series and remaining open for acceptance for at least twenty business days.
(f) A proxy which is entitled “irrevocable proxy” and which states that it is irrevocable, is irrevocable when it is held by any of the following or a nominee of any of the following:
(1) A pledgee;
(2) A person who has purchased or agreed to purchase the shares;
(3) A creditor or creditors of the corporation who extend or continue credit to the corporation in consideration of the proxy if the proxy states that it was given in consideration of such extension or continuation of credit, the amount thereof, and the name of the person extending or continuing credit;
(4) A person who has contracted to perform services as an officer of the corporation, if a proxy is required by the contract of employment, if the proxy states that it was given in consideration of such contract of employment, the name of the employee and the period of employment contracted for;
(5) A person designated by or under an agreement under paragraph (a) of section 620.
(g) Notwithstanding a provision in a proxy, stating that it is irrevocable, the proxy becomes revocable after the pledge is redeemed, or the debt of the corporation is paid, or the period of employment provided for in the contract of employment has terminated, or the agreement under paragraph (a) of section 620 has terminated; and, in a case provided for in subparagraphs (f)(3) or (4), becomes revocable three years after the date of the proxy or at the end of the period, if any, specified therein, whichever period is less, unless the period of irrevocability is renewed from time to time by the execution of a new irrevocable proxy as provided in this section. This paragraph does not affect the duration of a proxy under paragraph (b).
(h) A proxy may be revoked, notwithstanding a provision making it irrevocable, by a purchaser of shares without knowledge of the existence of the provision unless the existence of the proxy and its irrevocability is noted conspicuously on the face or back of the certificate representing such shares.
(i) Without limiting the manner in which a shareholder may authorize another person or persons to act for him as proxy pursuant to paragraph (a) of this section, the following shall constitute a valid means by which a shareholder may grant such authority.
(1) A shareholder may execute a writing authorizing another person or persons to act from him as proxy. Execution may be accomplished by the shareholder or the shareholder's authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature.
(2) A shareholder may authorize another person or persons to act for the shareholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be reasonably determined that the telegram, cablegram or other electronic transmission was authorized by the shareholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the nature of the information upon which they relied.
(j) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to paragraph (i) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

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NYBCL § 614. Vote of shareholders

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(a) Directors shall, except as otherwise required by this chapter or by the by-laws or certificate of incorporation as permitted by this chapter, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election.
(b) Whenever any corporate action, other than the election of directors, is to be taken under this chapter by vote of the shareholders, it shall, except as otherwise required by this chapter or by the certificate of incorporation as permitted by this chapter or by the specific provisions of a by-law adopted by the shareholders, be authorized by a majority of the votes cast in favor of or against such action at a meeting of shareholders by the holders of shares entitled to vote thereon. Except as otherwise provided in the certificate of incorporation or the specific provision of a by-law adopted by the shareholders, an abstention shall not constitute a vote cast.

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NYBCL § 617. Voting by class or classes of shares

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(a) The certificate of incorporation may contain provisions specifying that any class or classes of shares or of any series thereof shall vote as a class in connection with the transaction of any business or of any specified item of business at a meeting of shareholders, including amendments to the certificate of incorporation.
(b) Where voting as a class is provided in the certificate of incorporation, it shall be by the proportionate vote so provided or, if no proportionate vote is provided, in the election of directors, by a plurality of the votes cast at such meeting by the holders of shares of such class entitled to vote in the election, or for any other corporate action, by a majority of the votes cast at such meeting by the holders of shares of such class entitled to vote thereon.
(c) Such voting by class shall be in addition to any other vote, including vote by class, required by this chapter and by the certificate of incorporation as permitted by this chapter.

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NYBCL § 612. Qualification of voters

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(a) Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation.
(b) Treasury shares and shares held by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the corporation, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares.
(c) Shares held by an administrator, executor, guardian, conservator, committee, or other fiduciary, except a trustee, may be voted by him, either in person or by proxy, without transfer of such shares into his name. Shares held by a trustee may be voted by him, either in person or by proxy, only after the shares have been transferred into his name as trustee or into the name of his nominee.
(d) Shares held by or under the control of a receiver may be voted by him without the transfer thereof into his name if authority so to do is contained in an order of the court by which such receiver was appointed.
(e) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee.
(f) Redeemable shares which have been called for redemption shall not be deemed to be outstanding shares for the purpose of voting or determining the total number of shares entitled to vote on any matter on and after the date on which written notice of redemption has been sent to holders thereof and a sum sufficient to redeem such shares has been deposited with a bank or trust company with irrevocable instruction and authority to pay the redemption price to the holders of the shares upon surrender of certificates therefor.
(g) Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the by-laws of such corporation may provide, or, in the absence of such provision, as the board of such corporation may determine.
(h) If shares are registered on the record of shareholders of a corporation in the name of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect:
(1) If only one votes, the vote shall be accepted by the corporation as the vote of all;
(2) If more than one vote, the act of the majority so voting shall be accepted by the corporation as the vote of all;
(3) If more than one vote, but the vote is equally divided on any particular matter, the vote shall be accepted by the corporation as a proportionate vote of the shares; unless the corporation has evidence, on the record of shareholders or otherwise, that the shares are held in a fiduciary capacity. Nothing in this paragraph shall alter any requirement that the exercise of fiduciary powers be by act of a majority, contained in any law applicable to such exercise of powers (including section 10-10.7 of the estates, powers and trusts law);
(4) When shares as to which the vote is equally divided are registered on the record of shareholders of a corporation in the name of, or have passed by operation of law or by virtue of any deed of trust or other instrument to two or more fiduciaries, any court having jurisdiction of their accounts, upon petition by any of such fiduciaries or by any party in interest, may direct the voting of such shares for the best interest of the beneficiaries. This subparagraph shall not apply in any case where the instrument or order of the court appointing fiduciaries shall otherwise direct how such shares shall be voted; and
(5) If the instrument or order furnished to the secretary of a corporation shows that a tenancy is held in unequal interests, a majority or equal division for the purposes of this paragraph shall be a majority or equal division in interest.
(i) Notwithstanding the foregoing paragraphs, a corporation shall be protected in treating the persons in whose names shares stand on the record of shareholders as the owners thereof for all purposes.

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NYBCL § 618. Cumulative voting

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The certificate of incorporation of any corporation may provide that in all elections of directors of such corporation each shareholder shall be entitled to as many votes as shall equal the number of votes which, except for such provisions as to cumulative voting, he would be entitled to cast for the election of directors with respect to his shares multiplied by the number of directors to be elected, and that he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit, which right, when exercised, shall be termed cumulative voting.

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NYBCL § 1104. Petition in case of deadlock among directors or shareholders

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(a) Except as otherwise provided in the certificate of incorporation under section 613 (Limitations on right to vote), the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors may present a petition for dissolution on one or more of the following grounds:
(1) That the directors are so divided respecting the management of the corporation's affairs that the votes required for action by the board cannot be obtained.
(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.
(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.
(b) If the certificate of incorporation provides that the proportion of votes required for action by the board, or the proportion of votes of shareholders required for election of directors, shall be greater than that otherwise required by this chapter, such a petition may be presented by the holders of shares representing more than one-third of the votes of all outstanding shares entitled to vote on non-judicial dissolution under section 1001 (Authorization of dissolution).
(c) Notwithstanding any provision in the certificate of incorporation, any holder of shares entitled to vote at an election of directors of a corporation, may present a petition for its dissolution on the ground that the shareholders are so divided that they have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors.

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DGCL § 213. Fixing date for determination of stockholders of record.

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(a) In order that the corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the board of directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the board of directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this subsection (a) at the adjourned meeting.

(b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by this chapter, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by this chapter, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action.

(c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.

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DGCL § 216. Quorum and required vote for stock corporations.

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Subject to this chapter in respect of the vote that shall be required for a specified action, the certificate of incorporation or bylaws of any corporation authorized to issue stock may specify the number of shares and/or the amount of other securities having voting power the holders of which shall be present or represented by proxy at any meeting in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business, but in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting, except that, where a separate vote by a class or series or classes or series is required, a quorum shall consist of no less than 1/3 of the shares of such class or series or classes or series. In the absence of such specification in the certificate of incorporation or bylaws of the corporation:

(1) A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of stockholders;

(2) In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders;

(3) Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors; and

(4) Where a separate vote by a class or series or classes or series is required, a majority of the outstanding shares of such class or series or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, in all matters other than the election of directors, the affirmative vote of the majority of shares of such class or series or classes or series present in person or represented by proxy at the meeting shall be the act of such class or series or classes or series.

A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors.

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Haft v. Haft

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Rule: For a proxy to be irrevocable, it must state on its face that it is irrevocable and essentially be "coupled with an interest." Under 212(e) that "interest" could also be an interest in the corporation generally.

Holding: Herbert Haft's "senior executive officer" position with the Dart Group Corp. constituted a sufficient "interest" in the company. THus the irrevocable proxy that his son Ronald gave him was, indeed, "irrevocable" under 212(e) of DGCL.

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Shareholders typically vote on the following matters:

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1) Election of directors
2) Fundamental changes to the corporation (i.e. merger, sale of all the assets, corporate dissolution and amending the Articles of Incorp. or the Bylaws); and
3) Shareholder resolutions (Two different forms: (i) resolutions which are proposed by a corporation's management such as a resolution to ratify an option plan, or an action taken by the Board of Directors; and (ii) resolutions which are proposed by the shareholders, requesting or advising that the Board take certain action.)

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Types of Agency Authority

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1) Actual authority
2) Apparent authority
3) Agency by estoppel
4) Inherent authority
5) Ratification

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How directors take official action

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1) Unanimous written consent: series of written resolutions are prepared to be signed unanimously by BOD. If signed, board doesnt' have to meet to vote on an issue.

Must satisfy quorum environment to vote on an issue.

2) Vote by a majority, provided there is a quorum. Default rule for passing a vote - majority of directors where quorum is satisfied. You can reduce a quorum but not a majority.

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How shareholders vote for directors

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1) Directors are normally elected by plurality voting: top vote getters win down to the number of open seats.

Manner of Voting: Pro-Rata = you receive the number of votes equal to the number of shares you own multiplied by the number of votes per share(normally = 1). Shareholders vote in proportion to their holdings.

Cumulative Voting: used to give minority shareholders a greater opportunity to select a director to a corporation's Board. Shareholders are entitled to spread out their votes or to "accumulate" all their votes to select one or two directors, to maximize a minority shareholder's impact and to increase the chance for them to elect a director to the Board.

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Actual Authority

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Exists when the principal communicates to the agent about the activities in which the agent may engage and the obligations the agent may undertake. There are two forms of actual authority:

1) Express authority
2) Implied authority: involves examining the principal's explicit instructions and asking what else might be reasonably included in those instructions to accomplish the job.(i.e. incidental authority)

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Apparent Authority

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Is about what a third party reasonably believes the principal has authorized the agent to do.

An agent has apparent authority to act in a given way on a principal's behalf in relation to a third person if manifestations of the principal to the third person (or manifestations by the agent to the third person that the principal authorized the agent to make) would lead a reasonable person in the third person's position to believe that the principal had authorized the agent to so act.

If the agent has apparent authority and acts within the scope of that authority, the principal is bound.

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Ratification

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Is authority that is granted after the contract has been made.

Even if an agent has neither actual, apparent nor inherent authority, the principal will be bound to the third person if the agent purported to act on the principal's behalf and the principal, with knowledge of the material facts, either (1) affirmed the agent's conduct by manifesting an intention to treat the agent's past conduct as authorized, or (2) engaged in conduct that is justifiable only if he has such an intention.

Limits on Ratification:
1) To be valid, the Principal must know or have reason to know, at the time of the alleged ratification, the material facts relating to the transaction;
2) a principal may not partially ratify a transaction. It is all or nothing;
3) If the third party manifests an intention to withdraw from the transaction, prior to ratification, the principal may not then ratify the agreement;
4) Ratification will be denied when necessary to protect the rights of innocent third parties

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Inherent Authority(i.e. Liability of an Undisclosed Principal)

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The law will sometimes hold an undisclosed principal liable for certain "unauthorized transactiosn" of his agent when a third party has made a "detrimental change in position," if the principal had notice of the agent's conduct and that it might induce third parties to change their positions, and the principal did not take reasonable steps to notify the third parties of the facts.

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Agency by estoppel

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Estoppel generally arises in agency situations in which the principal has done something improper. It involves:

1) Acts or omissions (generally wrongful) by the principal, either intentional or negligent, which create an appearance of authority in the purported agent.
2) The third party reasonably and in good faith, acts in reliance on that appearance of authority.
3) The third party changes her position in reliance upon that appearance of authority.

This applies even when the principal has not made a manifestation that an agent has authority as an agent and even when the principal is not otherwise liable as a party to a transaction purportodly done by the agent on the principal's behalf.

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DOC in a Board's Decision to Sell the Company

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Rule: Under DE, A director must inform herself prior to making a business decision of all material facts reasonable to her. A director may not abdicate that duty by leaving the decision to the stockholders alone.

1) A valuation is needed in order to determine whether the price being offered makes sense. Directors are entitled to rely on the valuation reports of mngmt and others if they do so in good faith. 141(e).
2) When directors possess a body of reliable evidence with which to evaluate the fairness of a transaction, they may approve that transaction without conducting an active survey of the market. (Barkan v. Amsted)

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Exculpatory Charter Provision - DGCL 102(b)(7)

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This section allows a DE corp to relieve directors from personal liability for any breach of the duty of care except in the case of illegal dividend payments.

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DOC in a Board's Decision to Purchase a Company

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Standard of Review: the "process" that the Board follows in approving the exchange/purchase rather than the substance of the board's decision. Was the board reasonably well-informed of all material information reasonably available at the time if made its decision.

Reliance on Experts: directors are protected by the BJR when they rely in good faith on teh reports of qualified experts.

Duty of Oversight & Cure(as essentially a DOC violation) Standard: Utter failure to attempt to assure that a reasonable reporting system exists or exhibit a sustained and systematic failure to exercise reasonable oversight.

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Standard of Conduct to functions of directors in exercising due care

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1) Duty to monitor
2) Duty of inquiry
3) Duty to make prudent or reasonable decisions on matters that the board is obliged or chooses to act upon,
4) Duty to employ a reasonable process to make decision.

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BJR - Standard of Review

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1) The director must have made a decision. Won't get benefit for failing to make due inquiry.
2) The director must have employed a reasonable decisionmaking process. Implicates DOC.
3) Duty of Good Faith. The decision must have been made in good faith.
4) Duty of Loyalty. The decision must have been in the best interest of the corporation. The director may not have a financial interest in the subject matter of the decision.

If conditions of the BJR are not satisfied, then the quality of the decision is reviewed under the standard of review based on entire fairness or reasonability, with the burden of the directors.

If conditions of the BJR are satisfied, then the review of the quality of the decision is whether the decision was made in good faith(or rational)

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Smith v. Van Gorkom.


FACTS-A corporation (Marmon) was attempting a leveraged buy-out of TransUnion. TransUnion's CEO, Van Gorkom proposed a price of $55/share.
-Van Gorkom and his CFO didn't bother to do any research to see how much the company was worth. Van Gorkom did not even inform TransUnion's legal department about the transaction.
- $55 a share was only around 60% of what the company was later appraised at.
-At the time of the merger, the stock was selling for $37.25 a share, so $55 seemed like a lot.
-Van Gorkom called an emergency meeting of the board of directors, proposed the merger, and the directors gave him preliminary approval.
-Van Gorkom did not disclose a number of things at the board meeting where the vote was to be taken, including the fact that there was no basis for the $55 price, and that there had been objections by TransUnion management regarding the merger.
-Van Gorkom did not provide the directors with copies of the merger agreement.
-Some shareholders instituted a derivative lawsuit against the directors for breach of fiduciary duty.

PROCEDURAL HISTORY
-The Trial Court found that Van Gorkom's actions fell within the business judgment rule.
-The business judgment rule says that the courts should not second guess business decisions made by directors.
-Shareholders appealed.

ISSUE
-Were the directors grossly negligent due to approving the merger without substantial inquiry or procural of expert advice?

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HOLDING
-Yes, they should have made inquiry and breached their duty of care.

RULES
-The Business Judgment Rule is a "presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.' ...Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one."

-"Under the business judgment rule there is no protection for directors who have made an unintelligent or unadvised judgment."

ANALYSIS
-The Court found that the directors breached their fiduciary duty by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the merger.(i.e. Standard)

-The Court also found that there was a failure to disclose all material information such as that which a reasonable stockholder would consider important in deciding whether to approve the merger.
-Van Gorkom breached his duty to care by offering $55 a share because, "the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company."
-Court found that the business judgment rule was not a defense because the directors and Van Gorkom did not use any "business judgment" when they came to their decision.
-The courts will ask: whether there was an adequate decision-making process.
-in order to hide behind the business judgment rule, you have to show that you made an informed decision based on some principle of business. If you randomly pull numbers out of thin air or cast votes without due diligence, then the courts can (and will often) overturn your decisions.

In order to cure there mistakes at the initial consideration of the merger, they would have to look at all the contracts(normally they don't have to do this) to satisfy their due diligence standard.

What is the remedy? Director's would have to pay the difference b/t true valuation and contract price.

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ALI-PCG 3.05 Audit Committee in Large Publicly Held Corporations

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Every large publicly held corporation [1.24] should have an audit committee to implement and support the oversight function of the board [3.02] by reviewing on a periodic basis the corp's processes for producing financial data, its internal controls, and the independence of the corporation's external auditor. The audit committee should consist of at least three members, and should be composed exclusively of directors who are neither employed by the corp nor were so employed w/i the two preceding years, including at least a majority of members who have no significant relationship [1.34] with the corporation's senior executives.

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3A.05 Compensation Committee in Large Publicly Held Corporations: Composition, Powers, and Functions

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(a) Every large publicly held corporation should estab- lish a compensation committee to implement and support the oversight function of the board in the area of compensation.The committee should be composed exclusively of directors who are not officers or employees of the corp, including at least a majority of members who have no significant relationship with the corp's senior executives.

(b) The compensation committee should:

(1) Review and recommend to the board, or determine, the annual salary, b bonus, stock options, and other benefits, direct and indirect, of the senior executives.
(2) Review new executive compensation programs; review on a periodic basis the operation of the corporation’s executive compensation programs to determine whether they are properly coordi- nated; establish and periodically review policies for the administration of executive compensa- tion programs; and take steps to modify any ex- ecutive compensation programs that yield pay- ments and benefits that are not reasonably related to executive performance;
(3) Establish and periodically review policies in the area of management perquisites.

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RSA § 390. Acting As Adverse Party With Principal's Consent

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An agent who, to the knowledge of the principal, acts on his own account in a transaction in which he is employed has a duty to deal fairly with the principal and to disclose to him all facts which the agent knows or should know would reasonably affect the principal's judgment, unless the principal has manifested that he knows such facts or that he does not care to know them.

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MBCA § 8.31 STANDARDS OF LIABILITY FOR DIRECTORS

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(a) A director shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any action, as a director, unless the party asserting liability in a proceeding establishes that:
(1) no defense interposed by the director based on (i) any provision in the articles of incorporation authorized by section 2.02(b)(4) or, (ii) the protection afforded by section 8.61 (for action taken in compliance with section 8.62 or section 8.63), or (iii) the protection afforded by section 8.70, precludes liability; and
(2) the challenged conduct consisted or was the result of:
(i) action not in good faith; or
(ii) a decision
(A) which the director did not reasonably believe to be in the best interests of the corporation, or
(B) as to which the director was not informed to an extent the director reasonably believed appropriate in the circumstances; or
(iii) a lack of objectivity due to the director's familial, financial or business relationship with, or a lack of independence due to the director's domination or control by, another person having a material interest in the challenged conduct
(A) which relationship or which domination or control could reasonably be expected to have affected the director's judgment respecting the challenged conduct in a manner adverse to the corporation, and
(B) after a reasonable expectation to such effect has been established, the director shall not have established that the challenged conduct was reasonably believed by the director to be in the best interests of the corporation; or
(iv) a sustained failure of the director to devote attention to ongoing oversight of the business and affairs of the corporation, or a failure to devote timely attention, by making (or causing to be made) appropriate inquiry, when particular facts and circumstances of significant concern materialize that would alert a reasonably attentive director to the need therefore; or
(v) receipt of a financial benefit to which the director was not entitled or any other breach of the director's duties to deal fairly with the corporation and its shareholders that is actionable under applicable law.
(b) The party seeking to hold the director liable:
(1) for money damages, shall also have the burden of establishing that:
(i) harm to the corporation or its shareholders has been suffered, and
(ii) the harm suffered was proximately caused by the director's challenged conduct; or
(2) for other money payment under a legal remedy, such as compensation for the unauthorized use of corporate assets, shall also have whatever persuasion burden may be called for to establish that the payment sought is appropriate in the circumstances; or
(3) for other money payment under an equitable remedy, such as profit recovery by or disgorgement to the corporation, shall also have whatever persuasion burden may be called for to establish that the equitable remedy sought is appropriate in the circumstances.
(c) Nothing contained in this section shall (1) in any instance where fairness is at issue, such as consideration of the fairness of a transaction to the corporation under section 8.61(b)(3), alter the burden of proving the fact or lack of fairness otherwise applicable, (2) alter the fact or lack of liability of a director under another section of this Act, such as the provisions governing the consequences of an unlawful distribution under section 8.33 or a transactional interest under section 8.61, or (3) affect any rights to which the corporation or a shareholder may be entitled under another statute of this state or the United States.


Business judgment rule. If an articles of incorporation provision adopted pursuant to section 2.02 or a safe harbor procedure under section 8.61 does not shield the director's conduct from liability, this standard of judicial review for director conduct-deeply rooted in the case law presumes that, absent self-dealing or other breach of the duty of loyalty, directors' decision-making satisfies the applicable legal requirements. A plaintiff challenging the director's conduct in connection with a corporate decision, and asserting liability by reason thereof, encounters certain procedural barriers. In the first instance, many jurisdictions have special pleading requirements that condition the ability to pursue the challenge on the plaintiff's bringing forward specific factual allegations that put in question the availability of the business judgment presumption. Assuming the suit survives a motion to dismiss for failure to state (in satisfaction of such a condition) an actionable claim, the plaintiff has the burden of overcoming that presumption of regularity.

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DGCL § 102(b)(7) Contents of certificate of incorporation.

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(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

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Malpiede v. Townson.

Facts:
Frederick’s of Hollywood was negotiating a merger with Knightsbridge Capi-tal Corporation. The terms of the merger restricted Frederick’s from negoti-ating with competing bidders. Despite that Frederick’s subsequently received higher bids from two other prospective buyers, the directors of Frederick’scompleted the merger with Knightsbridge. Shareholders of Frederick’s thensued on the ground that the directors had breached the duty of care by failingto consider the higher bids.

Fredericks BOD makes a decision to sell the company. However, this decision comes after the Revlon decision which stipulates that you have duties upon selling a company.


Issue:
Can the directors be personally liable for breaching the duty of care?

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Holding
The directors cannot be personally liable for breaching the duty of care.

ReasoningVeasey, Chief Justice:
Section 102(b)(7) of the Delaware General Corpo-ration Law insulates directors from personal liability for breaching the dutyof care. Since the shareholders have not alleged that the directors engagedin conduct falling within any of the exceptions to
§
102(b)(7), the directorscannot be held personally liable.

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The Duty to Act in Good Faith: In Re The Walt Disney Co. Derivative Lit.

FACTS: Disney's (D) president and COO, Frank Wells, died in a helicopter crash in 1994. Board chairman and CEO Eisner stepped in to temporarily fill Wells's shoes, but, when Eisner underwent heart surgery just three months later, Eisner and the board realized they needed to name a new company president. Ovitz was selected. Eisner and Ovitz entered into a letter agreement that outlined the terms of Ovitz's employment, including a five-year term and a generous severance package, all of which was subject to approval by the board. The board granted its approval shortly thereafter, and Ovitz began his employment on the date the agreement was officially executed. It soon became clear, however, that Ovitz was a poor fit with other Disney executives. Disney attempted to work out a deal whereby Sony took Ovitz in "trade," but negotiations with Sony proved fruitless, and it became clear that Disney would need to terminate Ovitz. Disr 's legal counsel advised Eisner that there were no grounds to terminate Ovitz for cause. Nonetheless, just fourteen months after Ovitz began his employment with Disney, Eisner advised Ovitz that his employment was terminated. Eisner further advised Ovitz that upon termination he would receive all that was offered under the severance terms of the employment agreement, which amounted to a staggering $130 million.



ISSUE: Whether the Disney directors breach their fiduciary duties of due care and good faith to the shareholders and commit waste by entering into an employment agreement with a new company president that included a termination provision allowing for $130 million in severance payments after just fourteen months of employment?

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ssue: 1. Whether Disney’s compensation committee knew, at the time they approved Ovitz’s agreement, that the value of the option component of the severance package could reach the 92 million order of magnitude if they terminated orvitz without cause after one year?

2. Whether Disney’s directors were grossly negligent in electing to hire Orvitz because they were not properly informed?
Holding:1. Yes, the evidentiary record was sufficient to support the conclusion that the compensation committee had adequately informed itself of the magnitude of Orvitz’s agreement, therefore, they were adequately informed.

2. No, the directors were informed of all reasonably available information and material facts, and the appellants failed to establish any lack of due care on the directors’ part. In Delaware, the law does not require corp's to exercise "best practices," but rather simply avoid gross negligence to satisfy duty of care.

Analysis: The good faith required of a corporate fiduciary includes not only the duty of care and loyalty, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, where (1) the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, (2) where the fiduciary acts with the intent ot violate applicable positive law, or (3) where the fiduciary intentionally fails to act in the fact of a known duty to act, demonstrating a conscious disregard for his duties.

2. The directors knew of Orvitz’s skills, reputation and experience. The board members were informed of the key terms of Orvitz’s agreement. Relying upon the compensation committee’s approval of the agreement, the Disney directors unanimously elected Ovitz as president.
Subjective bad faith: fiduciary conduct motivated by an actual intent to do harm.

third category: (1) conduct motivated by subjective bad intent and (2) conduct resulting from gross negligence.
(gross negligence bad faith: fiduciary action taken solely by reason of gross negligence and without any malevolent intent. Grossly negligent conduct, without more, does not constitute a breach of the fiduciary duty to act in good faith.

Disloyalty without self-interest equals bad faith.

Waste Claim: To recover on a claim of waste, the P must show the that the transaction must be so once-sided that no ordinary business person or sound judgment could receive adequate consideration in return. They must be shown to irrationally have squandered the corporate assets. If P's fail to rebut BJR, then as long as long D's show they acted rationally then there is no claim.

Claim that Ovitz breached his duty of good faith by trying to get himself fired and taking advantage of cash-out incentive?: Court rejects b/c Ovitz resisted getting fired originally. Plus if he was so deliberate in trying to get himself fired , the board could fire him with cause and therefore would not be liable for compensation.

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Good Faith: Stone v. Ritter.

Facts: Derivative shareholder suit against teh directors of a bank holding company. P's alleged that the defendant directors had improperly discharged their "oversight" duties by failing to detect that bank employees had failed to file Suspcious Activities Reports with respect to money laundering monitoring duties under the Federal Bank Secrecy Act.

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Holding: Where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corp... only a sustained or systematic failure of the board to exercise oversight - such as an utter failure to attempt to assure a reasonable information and reporting system exists - will establish the lack of good faith that is a necessary condition to liability.

THe failure to act in good faith may result in liability b/c a lack of good faith is a "subsidiary element," i.e., a condition, of the fundamental duty of loyalty.

Therefore, a demonstration of bad faith conduct is essential to establish director oversight liability, and the fiduciary duty violated by that conduct is the duty of loyalty.

2 Consequences of this decision:
1) Good faith results in indirect liability through duty of loyalty.
2) Disloyalty without self-interest is bad faith. THerefore duty of loyalty expands beyond actions of self-dealing.

Must have good faith in reporting system.

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Good Faith: Lyondell Chem. Co. v. Ryan.

Facts: Shareholders alleged that the Defendant director breached their fidcuiary duties, including the duty of good faith, in connection with the sale of their company.

The company's charter contained an exculpatory charter provision which exonerated directors for breaches of the duty of care.

However, such a provision is impotent against breaches of the duty of loyalty through failure to act in good faith.

Procedure: THe lower court had denied the directors' motion for SJ on the issue of bad faith due to their "two months of slothful indifference despite knowing that the Company was in play," as well as teh fact that they "languidly awaited overtures from potential suitors..."

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Holding: In finding that the lower court had erred in not granting summary judgment in favor of the directors, the Court stated that, in a transactional context like the one involved in this case, an extreme set of facts is required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.

Standard: Only if they knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty.

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D & O Insurance Policy

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1) Corporate Reimbursement: most corps in charter will indemnify directors and officers for any action against them in connection with performance as directors and officers. DGCL 145. Corp reimburses the director and officer and in turn, the D & O insurance will indemnify teh corp.

2) Personal Coverage: if not indeminified by corp or corp can't honor indemnification responsibilies then D & O can directly indemnify directors & officers for any action taken against them in connection with their roles

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Legal Malpractice Insurance

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Only cover claims arising after the policy's effective start date and only for claims brought during the life of the policy.

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Duty of Loyalty: Lewis v. S.L. & E., Inc.

Facts. Leon Lewis, Sr. formed Lewis General Tires, Inc. ("LGT") in Rochester, New York in 1933, and 10 years later formed S.L. & E., Inc. ("SLE") which functioned as a shell corporation for the benefit of LGT, owning and leasing it a section of property, SLE's only asset. In 1962 Leon, Sr. transferred his SLE stock to his six children, Richard, Alan, Leon, Jr., Donald, Margaret, and Carol, with an agreement that those not a shareholder of LGT would in 1972 sell all SLE shares to LGT. When LGT's lease on the property expired in 1966 the SLE board did not renew the lease but allowed LGT to continue paying $14,400 per year. All SLE directors, including Richard, Alan and Leon, Jr., were also directors of LGT. In 1972 Donald sued his brothers, refusing to sell his shares to LGE until the value of the shares were revalued, claiming that his brothers had wasted the corporate asset of SLE by not charging LGT a sufficiently high rental price. The defendants, Richard, Alan and Leon, Jr., showed evidence that the neighborhood prices had declined over the period from 1966 to 1972, and that in 1973 and 1974 other property in the area had brought lower per-square-foot rental prices.

Brief Fact Summary. Plaintiff, Donald Lewis, brought a derivative suit against Defendants, the directors of S.L. & E, Inc. (SLE), for waste after Defendants did not raise the rent paid to SLE by a company, Lewis General Tires, Inc. (LGT), that Defendants also owned.

Issue: Does the plaintiff have a burden of proof in proving that a contract was fair and reasonable when the directors of the corporation have an interest on both side of a contract?


Issue 2: Did the defendants meet their burden of proof in showing that rental prices to LGT were adequate between 1966 and 1972?

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Held: No. BCL § 713 says that if a corporation contracts with an entity in which the directors have an interest, the contract may be set aside unless the director(s) promoting the contract "shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board…." Here the defendants were directors of both corporations involved in the rental agreement, so they have the burden to show that the conflict of interest agreement did not adversely affect the plaintiff, who was only a stockholder in one of the corporations. The burden is on the D's, according to NYBCL 713(b), b/c the rental system was not approved as per 713(a).


Held No. Although the defendants showed evidence that the property value had went down and that rental prices were low in 1973 and 1974, they did not provide adequate proof of the rental worth during 1966 and 1972. (Although defendants showed some proof that LGT could not afford a higher rental price, this evidence was not persuasive and moreover SLE might have been able to find other tenants who could have paid more.) The defendants are therefore liable to the plaintiff for the amount by which any higher rental price would have increased the value of the plaintiff's shares in SLE.

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Terms of a self-interested transaction

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Fairness requires not only that the terms of a self-interested transaction be fair, but that entering into the transaction, even on fair terms, is in the corporation's interest.

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DGCL § 144. Interested directors; quorum

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(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose, if:
(1) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
(2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders.
(b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.

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ALI-PCG § 5.02 Transactions With The Corporation

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(a) General Rule. A director [§ 1.13] or senior executive [§ 1.33] who enters into a transaction with the corporation (other than a transaction involving the payment of compensation) fulfills the duty of fair dealing with respect to the transaction if:
(1) Disclosure concerning the conflict of interest [§ 1.14(a)] and the transaction [§ 1.14(b)] is made to the corporate decisionmaker [§ 1.11] who authorizes in advance or ratifies the transaction; and
(2) Either:
(A) The transaction is fair to the corporation when entered into;
(B) The transaction is authorized in advance, following disclosure concerning the conflict of interest and the transaction, by disinterested directors [§ 1.15], or in the case of a senior executive who is not a director by a disinterested superior, who could reasonably have concluded that the transaction was fair to the corporation at the time of such authorization;
(C) The transaction is ratified, following such disclosure, by disinterested directors who could reasonably have concluded that the transaction was fair to the corporation at the time it was entered into, provided (i) a corporate decisionmaker who is not interested [§ 1.23] in the transaction acted for the corporation in the transaction and could reasonably have concluded that the transaction was fair to the corporation; (ii) the interested director or senior executive made disclosure to such decisionmaker pursuant to Subsection (a)(1) to the extent he or she then knew of the material facts; (iii) the interested director or senior executive did not act unreasonably in failing to seek advance authorization of the transaction by disinterested directors or a disinterested superior; and (iv) the failure to obtain advance authorization of the transaction by disinterested directors or a disinterested superior did not adversely affect the interests of the corporation in a significant way; or
(D) The transaction is authorized in advance or ratified, following such disclosure, by disinterested shareholders [§ 1.16], and does not constitute a waste of corporate assets [§ 1.42] at the time of the shareholder action.
(b) Burden of Proof. A party who challenges a transaction between a director or senior executive and the corporation has the burden of proof, except that if such party establishes that none of Subsections (a)(2)(B), (a)(2)(C), or (a)(2)(D) is satisfied, the director or senior executive has the burden of proving that the transaction was fair to the corporation.
(c) Ratification of Disclosure or Nondisclosure. The disclosure requirements of § 5.02(a)(1) will be deemed to be satisfied if at any time (but no later than a reasonable time after suit is filed challenging the transaction) the transaction is ratified, following such disclosure, by the directors, the shareholders, or the corporate decisionmaker who initially approved the transaction or the decisionmaker's successor.

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NYBCL § 713. Interested directors

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(a) No contract or other transaction between a corporation and one or more of its directors, or between a corporation and any other corporation, firm, association or other entity in which one or more of its directors are directors or officers, or have a substantial financial interest, shall be either void or voidable for this reason alone or by reason alone that such director or directors are present at the meeting of the board, or of a committee thereof, which approves such contract or transaction, or that his or their votes are counted for such purpose:
(1) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the board or committee, and the board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the board as defined in section 708 (Action by the board), by unanimous vote of the disinterested directors; or
(2) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders.
(b) If a contract or other transaction between a corporation and one or more of its directors, or between a corporation and any other corporation, firm, association or other entity in which one or more of its directors are directors or officers, or have a substantial financial interest, is not approved in accordance with paragraph (a), the corporation may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board, a committee or the shareholders.
(c) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board or of a committee which approves such contract or transaction.
(d) The certificate of incorporation may contain additional restrictions on contracts or transactions between a corporation and its directors and may provide that contracts or transactions in violation of such restrictions shall be void or voidable by the corporation.
(e) Unless otherwise provided in the certificate of incorporation or the by-laws, the board shall have authority to fix the compensation of directors for services in any capacity.

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Implication of Duty of Loyalty Scenarios

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1) Self-Interest/Dealing Transactions (by director or by director affiliations)
2) Interlocking Directorate (i.e. one or more directors sitting both on parent and sub; or directors sitting on multiple boards engaged in transactions w/each other)
3) Usurpation of Corp Opportunities( director keeps transaction to herself and pursues it personally)
4) Entrenchment Activities (i.e. BOD conditions takeover on maintaining office position)
5) Class Favoriticism (i.e. BOD gives Merging Corp the option of paying down the CS or PS)

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Circumstances for allowance of self-dealing & interlocking directorate: DE 144(a)

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1) There is full disclosure to the board and approved by majority of disinterested directors(board must have a quorum, and can count interested director as part of the quorum); or
2) Full disclosure to shareholders and shareholders vote to approve transaction, or
3) Objective fairness of transaction

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Circumstances for allowance of self-dealing & interlocking directorate: NYGCL

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New York is less trusting of Self-Dealing/Interlocking Directorate.

3 Distinctions from Del. Law:
1) Transactions btwn Interlocking Directorate require that Director of Company A have material interest in Company B.
2) 713(a)(1): disintered director approval must satisfy normal director approval under 708 or disintered directors must be unanimous in favor of transaction (i.e. 15 member BOD, charter has default quorum provision, 708(d) requires a majority of directors present at which quorum exists to approve transaction, 13 directors attend, 4 directors are interested, 7 of disinterested directors vote yes, if 13 present you need a majority to vote yes, so here majority is satisfied)
3) Procedure 713(b): if properly cleansed, with full disclosure and either through disinterested director or shareholder, the transaction is not subject to judicial scrutiny. In DE, however, a shareholder can still challenge as unfair, but burden is on him to prove that it is unfair.

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Usurpation: Northeast Harbor Golf Club, Inc. v. Harris.


Procedural Background/Facts: Defendant Nancy Harris was the president of the plaintiff corporation Northeast Harbor Golf Club Inc from 1971 until 1990 when she was asked to resign. Over time Nancy purchased parcels surrounding the golf course in her own name and informed the directors and other officers at the annual meetings. In 1988, Harris began the process of obtaining approcal for a five-lot subdivision and Northeast brought suit against Harris for the breach of her fiduciary duty to act in the best interest of the corporation, seeking an injunction to prevent development and also to impose a constructive trust on the property for the benefit of the Club. The trial court found that Harris had not usurped a corporate opportunity because her good faith acquisition of real estate was not in the Club’s line of business. Additionally, the court found that the club lacked the financial ability to purchase the real estate at issue.

Issue: Whether the trial court erred in finding that Nancy Harris did not breach her fiduciary duty of loyalty as president of the Club by purchasing and developing property abutting the golf course?

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Holding: Yes, the trial court’s use of the “line of business test,” was erroneous, and should have followed the ALI standard §5.05. vacated + remanded.

Analysis: Under the American law Institute “Principles of Corporate Governance § 5.05 (1992) senior executives, like Harris, are required to give full disclosure prior to taking advantage of any corporate opportunity. If the opportunity is not offered to the corporation, the director or senior executive will not have satisfied § 5.05(a). Corporate opportunity includes “opportunities closely related to a business in which the corporation is engaged. § 5.05(b)

A party who challenges the taking of a corporate opportunity has the burden of proof.

Under the AlI standard of “disclosure-oriented” approach, once the club shows that the opportunity is a corporate opportunity, it must show either that Harris did not offer the opportunity to the Clun or that the club did not reject it properly. If the club shows that the board did not reject the opportunuity by a vote of the disinterested directors after full disclosure, then Harris may defend her actions on the basis that the taking of the opportunity was fair to the corporation. § 5.05(c). If harris failed to offer the opportunity at all, however, then she may not defend on the basis that the failure to offer the opportunity was fair.

General Rule. A director [§ 1.13] or senior executive [§ 1.33] may not take advantage of a corporate opportunity unless:
(1) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest [§ 1.14(a)] and the corporate opportunity [§ 1.14(b)];
(2) The corporate opportunity is rejected by the corporation; and
(3) Either:
(A) The rejection of the opportunity is fair to the corporation;
(B) The opportunity is rejected in advance, following such disclosure, by disinterested directors [§ 1.15], or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule [§ 4.01(c)]; or
(C) The rejection is authorized in advance or ratified, following such disclosure, by disinterested shareholders [§ 1.16], and the rejection is not equivalent to a waste of corporate assets [§ 1.42].

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Takeover Defense: Unocal Corp. v. Mesa Petroleum Co.

Facts. Plaintiff was a corporation led by a well-known corporate raider. Plaintiff offered a two-tier tender offer wherein the first tier would allow for shareholders to sell at $54 per share and the second tier would be subsidized by securities that the court equated with “junk bonds”. The threat therefore was that shareholders would rush to sell their shares for the first tier because they did not want to be subject to the reduced value of the back-end value of the junk securities. Defendant directors met to discuss their options and came up with an alternative that would have Defendant corporation repurchase their own shares at $72 each(essentially conducting a "poison pill" b/c it creates more debt for the company and then deters Mesa from buying a Unical with so much debt). The Directors decided to exclude Plaintiffs from the tender offer because it was counterintuitive to include the shareholder who initiated the conflict. The lower court held that Defendant could not exclude a shareholder from a tender offer.

P claims: Unical was violating its duty of loyalty b/c it offered to buy its own shares back but would not extend the purchase to Mesa's shares.

Issue. The issue is whether Defendant can exclude Plaintiff from participating in Defendant’s self-tender. Can D selectively repurchase its shares?

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Holding: Yes, under 160(a), D could exclude P from the repurchase of its own shares. The directors for D corporation have a duty to protect the shareholders and the corporations, and one of the harms that can befall a company is a takeover by a shareholder who is offering an inadequate offer. The directors’ decision to prevent an offer such as the one at issue should be subject to heightened scrutiny since there is a natural conflict when directors are excluding a party from acquiring a majority control. Here the directors met their burden.


Rule: -There is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rules may be conferred upon a decision of the board of directors to purchase a stockholder's shares with corporate funds, and this entails an examination of whether the directors have shown that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of shareholder's stock ownership.


Coercive coduct = if you don't tender into first tier offer, then you may be left holding junk bunds in second tier.

Ominipresent Spector - directors cannot take this defensive action primarily to protect their jobs.

2 Part Test for Determining if BOD is taking disinterested Defensive Measure:
1) must have reasonable grounds for believing an actual threat to corporate policy and effectiveness(i.e. show good faith & reasonable investigation)
2) Proportionality. Actions must be reasonable in relation to the threat posed (cannot defeat a threat by any draconian measure).

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Del. Line of Business Test

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(1) Did the director or officer come upon this opportunity in their corporate or individual capacity?
(2) Is the corporation financially able to undertake the opportunity
3) Is the opportunity in the line of the corp's business and is of practical advantage to it, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation.

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DGCL § 160(a). Corporation's powers respecting ownership, voting, etc., of its own stock; rights of stock called for redemption

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(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; provided, however, that no corporation shall:
(1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation other than a nonstock corporation may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock, or, if no shares entitled to such a preference are outstanding, any of its own shares, if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title. Nothing in this subsection shall invalidate or otherwise affect a note, debenture or other obligation of a corporation given by it as consideration for its acquisition by purchase, redemption or exchange of its shares of stock if at the time such note, debenture or obligation was delivered by the corporation its capital was not then impaired or did not thereby become impaired;
(2) Purchase, for more than the price at which they may then be redeemed, any of its shares which are redeemable at the option of the corporation; or
(3) a. In the case of a corporation other than a nonstock corporation, redeem any of its shares, unless their redemption is authorized by § 151(b) of this title and then only in accordance with such section and the certificate of incorporation, or

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Greenmail in NY

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You can't receive greenmail within 2 year purchase of block of shares.

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ALI-PCG § 5.05 Taking Of Corporate Opportunities By Directors Or Senior Executives

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(a) General Rule. A director [§ 1.13] or senior executive [§ 1.33] may not take advantage of a corporate opportunity unless:
(1) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest [§ 1.14(a)] and the corporate opportunity [§ 1.14(b)];
(2) The corporate opportunity is rejected by the corporation; and
(3) Either:
(A) The rejection of the opportunity is fair to the corporation;
(B) The opportunity is rejected in advance, following such disclosure, by disinterested directors [§ 1.15], or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule [§ 4.01(c)]; or
(C) The rejection is authorized in advance or ratified, following such disclosure, by disinterested shareholders [§ 1.16], and the rejection is not equivalent to a waste of corporate assets [§ 1.42].
(b) Definition of a Corporate Opportunity. For purposes of this Section, a corporate opportunity means:
(1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either:
(A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or
(B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or
(2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.
(c) Burden of Proof. A party who challenges the taking of a corporate opportunity has the burden of proof, except that if such party establishes that the requirements of Subsection (a)(3)(B) or (C) are not met, the director or the senior executive has the burden of proving that the rejection and the taking of the opportunity were fair to the corporation.
(d) Ratification of Defective Disclosure. A good faith but defective disclosure of the facts concerning the corporate opportunity may be cured if at any time (but no later than a reasonable time after suit is filed challenging the taking of the corporate opportunity) the original rejection of the corporate opportunity is ratified, following the required disclosure, by the board, the shareholders, or the corporate decisionmaker who initially approved the rejection of the corporate opportunity, or such decisionmaker's successor.
(e) Special Rule Concerning Delayed Offering of Corporate Opportunities. Relief based solely on failure to first offer an opportunity to the corporation under Subsection (a)(1) is not available if: (1) such failure resulted from a good faith belief that the business activity did not constitute a corporate opportunity, and (2) not later than a reasonable time after suit is filed challenging the taking of the corporate opportunity, the corporate opportunity is to the extent possible offered to the corporation and rejected in a manner that satisfies the standards of Subsection (a).

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ALI-PCG § 5.04 Use By A Director Or Senior Executive Of Corporate Property, Material Non–Public Corporate Information, Or Corporate Position

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(a) General Rule. A director [§ 1.13] or senior executive [§ 1.33] may not use corporate property, material non-public corporate information, or corporate position to secure a pecuniary benefit, unless either:
(1) Value is given for the use and the transaction meets the standards of § 5.02 (Transactions with the Corporation);
(2) The use constitutes compensation and meets the standards of § 5.03 (Compensation of Directors and Senior Executives);
(3) The use is solely of corporate information, and is not in connection with trading of the corporation's securities, is not a use of proprietary information of the corporation, and does not harm the corporation;
(4) The use is subject neither to § 5.02 nor § 5.03 but is authorized in advance or ratified by disinterested directors [§ 1.15] or disinterested shareholders [§ 1.16], and meets the requirements and standards of disclosure and review set forth in § 5.02 as if that Section were applicable to the use; or
(5) The benefit is received as a shareholder and is made proportionately available to all other similarly situated shareholders,
and the use is not otherwise unlawful.
(b) Burden of Proof. A party who challenges the conduct of a director or senior executive under Subsection (a) has the burden of proof, except that if value was given for the benefit, the burden of proving whether the value was fair should be allocated as provided in § 5.02 in the case of a transaction with the corporation.
(c) Special Rule on Remedies. A director or senior executive is subject to liability under this Section only to the extent of any improper benefit received and retained, except to the extent that any foreseeable harm caused by the conduct of the director or senior executive exceeds the value of the benefit received, and multiple liability based on receipt of the same benefit is not to be imposed.

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ALI-PCG § 5.06 Competition With The Corporation

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(a) General Rule. Directors [§ 1.13] and senior executives [§ 1.33] may not advance their pecuniary interests by engaging in competition with the corporation unless either:
(1) Any reasonably foreseeable harm to the corporation from such competition is outweighed by the benefit that the corporation may reasonably be expected to derive from allowing the competition to take place, or there is no reasonably foreseeable harm to the corporation from such competition;
(2) The competition is authorized in advance or ratified, following disclosure concerning the conflict of interest [§ 1.14(a)] and the competition [§ 1.14(b)], by disinterested directors [§ 1.15], or in the case of a senior executive who is not a director, is authorized in advance by a disinterested superior, in a manner that satisfies the standards of the business judgment rule [§ 4.01(c)]; or
(3) The competition is authorized in advance or ratified, following such disclosure, by disinterested shareholders [§ 1.16], and the shareholders' action is not equivalent to a waste of corporate assets [§ 1.42].
(b) Burden of Proof. A party who challenges a director or senior executive for advancing the director's or senior executive's pecuniary interest by competing with the corporation has the burden of proof, except that if such party establishes that neither Subsection (a)(2) nor (3) is satisfied, the director or the senior executive has the burden of proving that any reasonably foreseeable harm to the corporation from such competition is outweighed by the benefit that the corporation may reasonably be expected to derive from allowing the competition to take place, or that there is no reasonably foreseeable harm to the corporation.

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NYBCL § 513(c). Purchase, redemption and certain other transactions by a corporation with respect to its own shares

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(c) No domestic corporation which is subject to the provisions of section nine hundred twelve of this chapter shall purchase or agree to purchase more than ten percent of the stock of the corporation from a shareholder for more than the market value thereof unless such purchase or agreement to purchase is approved by the affirmative vote of the board of directors and a majority of the votes of all outstanding shares entitled to vote thereon at a meeting of shareholders unless the certificate of incorporation requires a greater percentage of the votes of the outstanding shares to approve.
The provisions of this paragraph shall not apply when the corporation offers to purchase shares from all holders of stock or for stock which the holder has been the beneficial owner of for more than two years.
The terms “stock”, “beneficial owner”, and “market value” shall be as defined in section nine hundred twelve of this chapter.

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Defensive Measures Ex.'s:

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1) Defensive Charter Amendments (i.e. staggared or classified BOD, there can be no merger w/another company without super-majority shareholder approval)
2) Crown Jewel (entering into a K with a 3rd party to sell your key asset at a bargain basement pricy should there be hostile takeover)
3) White Knight (friendly third party that buys you instead of hostile party but usually buys you at a lower price than hostile)
4) Pac-man Strategy (if someone launches a hostile takeover of you, you turn around and launch a hostile takeover of them)
5) Golden-Parachute Strategy (i.e. very attractive severance package for senior executive officers if your fired, which happens after a takeover)

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SEC 14(d)(10) - selective tender offers.

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Prescribes discriminatory tender offers.

Illegal under Federal Law to conduct selective tender offer purchases.

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Unitrin, Inc. v. American General Corp.

Facts: Hostile Takeover of Unitrin.

Defenses: super-majority voting privilege. If merger was going to be approved b/t Unitrin and 3rd Party who owns 15% or more of Unitrin stock then you needed shareholder approval at 75% level.

Directors of Unitrin owned 23% of oustanding shares. This provides a very slim margin of error for approval the takeover.

Unitrin also instituted the share repurchase program. BOD decided to repurchase enough shares to increase their percentage of the company, enough over 25% so they can veto the tender offer.

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Holding: this collection of defenses is not disproportionate.

Rule: To be disproportionate defensive measures cannot be draconian.

Draconian = strategy must be either preclusive, under no scenario can the hostile party be successful to acquire, or coercive, such as when the measure operates to force management's preferred alternative upon the stockholders).

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Revlon, Inc. v. MacAndres & Forbes Holdings, Inc.

Hostile Takover.

Takeover Defenses: (1) sell off its individual divisions which would yield more than the tender offer, (2) buy-back some shares (this is done for ESOP(employee stock ownership plan) putting shares in trust for benefit of employees - trustee gets to vote those shares and Revlon can appoint trustee; putting stock in friendly hands; or White Squire - friendly third party buys and votes as management sees fit and will not tender those shares w/o mngmt approval), (3) Poison Pill: dilution - all shareholders but takeover party can buy additional shares at 50% off - this depresses the price of stock accordingly)

Revlon issued new bonds to shareholders in exchange for shares under these conditions:
-Limited Revlon's ability to incur additional debt, unless approved by Independent directors of Revlon. This is called poison put.

14 directors; 6 were inside directors; 2 were significant shareholders(these are most inclined to side with shareholders); 4 others having significant bus relationships with Revlon; 2 have no relationship

Revlon rejected offer and decided to negotiate with other parties who may be interested in acquiring the company (White Knights).

Forssman emerges as the White Knight. Forssman intends to perform an LBO. Then counteroffers at a lower price with the option to buy the "crown jewels" at a bargain basement price in case another offerer buys the company; there is also a "no-shopping clause" and cancellation fee. Forssman also agrees to support the value of the notes to prop up the price. Revlon accepts.

Pantry brings an action challenging Revlon's defensive measures.

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Holding: Directors violated their fiduciary duty of loyalty b/c they were favoring the note holders (due to the agreement that Forsmann would bail them out) instead of the common stockholders.

Standard: Would Pantry pride have success on the merits? Verify.

Court applies the Unocal standard against each defensive measure.
-Poison pill was reasonable.
-Exchange offer for notes: court was fine with this.
-Finding a White Knight: recognition of putting yourself up for sale. Court found that Revlon could not use defensive measures when it started shopping itself.

Standard: Once this has occurred, you're focus changes to sell and you must become the auctioneer charged with getting the highest price. You don't have to take highest dollar amount if you take into consideration other factors such as: cash, buyer reputation, effect on constituents. Defensive measures become moot. You cannot play favorites. You have to have a level-playing field auction.

Cancellation fee is fine so long as it is compensatory (for cost of efforts in bidding), not punitive.

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Duties of Controlling Stockholders: Sinclair Oil Corp. v. Levien

Facts: Sinven was a subsidiary of Sinclair (who owned 97% of the stock). Sinclair nominated all of Sinven's directors and pretty much controlled Sinven.
The directors of Sinven took a number of actions that were not in the best interest of Sinven, but were in the best interest of Sinclair (like paying out extra-large dividends instead of investing in business infrastructure). Levien, one of the minority shareholders of Sinven, sued Sinclair for breach of fiduciary duty.
Sinven was paying out more in dividends than they were making in earnings! Levien argued that Sinclair authorized the huge dividend because they were short of cash and needed the money.
In addition, Levien argued that Sinclair had Sinven sign a contract to supply oil to another Sinclair subsidiary, and then didn't allow Sinven to take action when the other subsidiary breached.

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Holding: The Appellate Court found that the intrinsic fairness standard should only be applied in cases where there both a parent-subsidiary relationship and evidence of self-dealing.
Self-dealing is defined as situations where the parent causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of and detriment to the minority shareholders of the subsidiary.
The Court found that with regards to the dividend issue, Sinven's minority shareholders got just as much dividend as Sinclair did, so there was no self-dealing, the intrinsic fairness didn't apply and the business judgment rule should be used. Damages to the minority shareholder cause by excessive dividends are reversed.
The Court also found that there were no business opportunities that could have gone to Sinven if they retained the money they paid out in dividends.
However, the Court found that with regards to the contract issue, Sinclair was self-dealing by having their subsidiaries enter into contract with one another and then breach them without penalty. Therefore intrinsic fairness applied, and damages to the minority shareholders caused by the breach of contract are affirmed.

Intrinsic Fairness: the burden of proof is on the controlling shareholder (Sinclair) to prove that there was a high degree of fairness.

Rule: Basically, this case said that if there is a parent corporation dominating a subsidiary, they can't take actions that would help the parent but hurt the subsidiary's minority shareholders. But, if the parent and the minority shareholders get the same benefit from a transaction, then the business judgment rule applies.

Intrinsic Fairness test still applied to breaches of contract.

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Sale of Control: Zetlin v. Hanson Holdings, Inc.

Facts

Plaintiff owned 2% of the shares of Gable Industries, Inc.

Defendants Hanson Holdings, Inc. and the Sylvestri family owned 44.4%

Flintkote purchased the 44.4% of shares from defendants in order to acquire voting control

In doing so, Flintkote paid $15/share when the market price was $7.38

Plaintiff claimed that the minority stockholders are entitled to an opportunity to share equally in any premium paid for a controlling interest of the corporation

Issue

Are minority shareholders entitled to a share of the premium paid by an investor in order to acquire a controlling interest in the corporation?

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Holding: No.

Rationale

Those who invest in the dominant position have the right to a controlling interest

Rule: Absent proof of fraud or bad faith, a controlling stockholder is free to sell, and the buyer is free to purchase, that controlling interest at a premium price

Minority shareholders are not entitled to inhibit the interest of other shareholders

This is why voting control shares usually sell at a premium price

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Proxy Voters: Haft v. Haft

Facts: Herbert Haft, the founder and CEO of Dart Group Corp, transferred 172, 730 shares of Dart Class B common stock to his son, Ronald Haft. Class B was Dart's sole class of voting stock. The transferred shares constituted 57% of the oustanding Class B, and therefore carried the power to elect the Dart board. In exchange the for the stock, Ronald gave Herbert a promissory note and granted Herbert a lifetime irrevocable proxy to vote the transferred shares. Subsequently, Ronald sought to revoke the proxy.

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Holding: The court held that Herbert Haft's interest in Dart by virtue of his CEO position was sufficient to render specifically enforceable Ronald's undertaking not to revoke the proxy..

Rule: under Del. Corp. Law 212(e) an interest sufficient to support an irrevocable proxy must be either "an interest in the stock itself or an interest in the corp generally."

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Market-Based and Contractual-Based Restricitons on Shareholder Voting and Transfer of Shares: F.B.I. Farms, Inc. v. Moore

FBI was formed by the Burgers, their children, and the children’s spouses. Moore was divorced from Linda, child of Burger, in 1982. Linda was awarded all of the shares in the farm and Moore was awarded monetary judgment. Linda never satisfied the judgment and a sheriff’s sale commenced to sell the shares in the farm. Moore purchased the shares. There was a provision in the Board minutes that if any stock be offered for sale, the farm had the first opportunity to purchase the stock.

Issue(s)

Did the trial court err in finding the disputed transfer restrictions were unreasonable and thus unenforceable?

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Holding(s)

Yes.

Reasoning/Analysis

The Court found that the Court of Appeals missed the issue in the case; before Linda could transfer her shares, she was obliged to offer them to FBI and the other shareholders. FBI, however, was aware of the sale and did not nothing to stop the sale. FBI did have the right of first refusal, but failed to exercise it. Moore acquired the shares at the sheriff’s sale but not because the restrictions were inapplicable. The sheriff’s sale was an involuntary transfer. While Moore could purchase the shares, he was aware of the restrictions on the shares and thus could not acquire more property rights than were possessed by Linda.

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Contractual-Based Restricitons Transfer of Shares: Evangelista v. Holland

At the trial of an action arising out of a dispute between the executors under the will of a deceased stockholder in two closely held family corporations and another stockholder with regard to whether a certain stockholders' meeting had accomplished an amendment to a previous stockholders' agreement, which would have raised from $75,000 to $191,000 the amount required to purchase a deceased or withdrawing stockholder's shares, the judge's findings, including his determination that, whatever the deceased may have believed, the objective facts did not support a conclusion that the other stockholders believed their agreement establishing the $75,000 buy-out price had been amended or cancelled, were warranted by the evidence and were not clearly erroneous.

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Stockholders in two closely held family corporations, who had previously entered into an agreement establishing a buy-out price of $75,000 for the purchase of stock of a withdrawing or deceased stockholder, did not violate the duty of good faith and loyalty owed one another by requiring the executors under the will of a deceased stockholder to relinquish their interest in the corporations for $75,000, although the appraised or market value of the stock was much greater at the stockholder's death. [248-249]

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Drag-Along Rights

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If majority shareholder sells his interest he can opt to force the minority shareholders to sell their shares too.

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Voting Restrictions: 3 Ways of Insuring that Voting Goes the way you want

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1) Putting a voting provision in a shareholder's agreement (i.e. allowed to nominate a director to the board despite not having a controlling interest) Del. 218(c), NY 620(a)

2) Obtain voting authority via irrevocable proxy. Del. 212(e), NY 609(f)

3) Voting Trust (separates voting rights from financial rights)

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Control of Identity Restrictions

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1) Restrictions on Transferability(i.e. right of first refusal; right of first offer which contains a pricing formula; consent restraints - board/shareholders must give permission to sell your shares; Group Transfer restraints - allowed to transfer but only amongst those within the group/family as long as not manifestly unreasonably)

-Involuntary Transfers: are not subject to restrictions except for intestate succession
-Disclosure of Restrictions is paramount: if restrictions are not disclosed then you buy free & clear of those restrictions unless you know about them already

2) Forced Resale Provisions - shareholder must sell shares back to company upon certain occurrences (i.e. death of the shareholder; termination of employment