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278 Cards in this Set

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Formation: What do incorporators do? (2)

What are requirements of incorporators? (2)
a. Execute cert and deliver it to Dep’t of State and

b. Hold the organization meeting.

c. Need one or more.

d. Only natural persons – humans – can be incorporators in NY.
Formation: What is the purpose of a cert of incorp?
(1) It’s a K between corp and S

(2) Also a K between corp and State
Formation: What goes into cert?
(1) Names and Addresses - must have corp name+inc/corp/ltd, name(s) of incorps, address of corp

(2) May have statement of duration: No statement of duration in cert = perpetual duration

(3) Corp purpose statement required –
Organization of NY Corps:

(a) May corp purp statement state purpose b/f getting state agency approval?

(b) What does ultra vires mean?
(a) Yes.

(b) Ultra vires – engaging in biz beyond scope of cert. CL – void. NY – UV limited, but UV Ks are valid, may be asserted in 3 situations:

(i) To seek an injunction,

(ii) Hold responsible O + D liable to corp for UV losses

(iii) Injunction action by S to enjoin any unauth act or transfer of prop by/to corp

If Bar gives you specific stated purpose of corp., be on lookout for this.
Organization of NY Corps: What are the definitions for the different types of stock?
(i) Authorized stock is max # of shares corp can sell.

(ii) Issued stock is # of shares corp actually sells

(iii) Outstanding stock is stock that corp has sold and not reacquired.
A, I, O
Organization of NY Corps: What must be included in cert about corp’s stock? (4)

What 2 things must at least one class of stocks/bonds have?
(i) Authorized stock

(ii) # of shares per class

(iii) Info on par value, rights, preferences, and limitations of each class

(iv) Info on any series (sub-class of stock, rarely seen) of preferred shares

Note – at least one class of stock/bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights
Organization of NY Corps: Acts - what are the steps taken to form a corp?
a. Each incorporator signs cert + ack it before notary. Deliver it to NY Dep’t of State. Filing = conclusive evidence of valid formation of a de jure (legal) corp.

b. Incorps hold organizational meeting (or can do by written consent) What happens at it:

(1) Adopt any bylaws
(2) Elect the initial BoD.

BoD then takes over management.
Organization of NY Corps: Why does it matter that somebody formed a Corp
1. Internal affairs (duties, relationship among D, O, S, etc.) of NY corp governed by NY Law.

2. Sep legal person: broad power by statute, including K, transfer prop, buy sell S, sue/ be sued

a. Can make political contributions. But: NY election law not > $5k/yr per cand/org

b. Can make charitable contributions – no statutory ceiling

c. M/C – Corp can guaranty loan not in furtherance of corp biz if 2/3 shares ETV approve.

3. Liability for what corp does

a. D + O not liable for what corp does (incur debt, breach K, commit tort) à Entity status
b. S limited liabilty for what corp does – limited to price of their stock
c. Corp itself is liable for what it does
Organization of NY Corps: De Facto corp doctrine: ∆’s.
Failure to form a de jure corp. Business gets treated like corp so S not personally liable

De Facto Corp –

(1) Must show to get ∆:
(a) There is a relevant incorportation statute (there is),
(b) The parties made a good faith, colorable attempt to comply, and
(c) Business being run as a corp.
(d) If (i)-(iii) applicable, treated as corp for all purposes except state action.
Note: Not common FP on bar
Organization of NY Corps: Bylaws

1. Are they required? Why have them:

2. If bylaws inconsistent w/ Cert, what controls? What are 2 reasons why?

3. Who adopts the initial bylaws?

4. Can S amend/adopt/repeal bylaws?

5. How about BoD?
1. Bylaws not requirement, can have corp w/o bylaws. But almost every corp has them. Why:

a. Set up procedures + responsibilities of people like O

b. Set for the type of notice required for meetings.

c. Note: Almost imposs to ask meaningful Q on this

2. If bylaws inconsistent w/ Cert, Cert controls. Cert is a K w/ state, much more important doc.

a. Bylaws not filed w/ state

b. Outsiders not bound by bylaws – they are an internal doc, outsideders have no access

3. Incorporators at org meeting adopt the initial bylaws. By law – they have the status of S.

4. Yes

5. BoD can amend/repeal/adopt new bylaws only if cert or S bylaw allows. BoD usually nothing to do w/ bylaws (and even then, S can amend/repeal BoD bylaw)
Organization of NY Corps: What is a promoter?
person acting on behalf of unformed corp, Might K w/ 3rdP for unformed corp
Organization of NY Corps: When will a corp be liable on a pre-incorporation K?
Only if it adopts the K.
Organization of NY Corps: How can adoption happen?
1. Express adoption where Bd takes an act adopting the K

2. ***Implied adoption:*** Arises from corp's knowing acceptance of a benefit of a K. If they moved into leased space, would satisfy requirement.
Organization of NY Corps:

1. What's promoter's liability on pre-
incorporation Ks?

2. What's a novation?
1. Unless K clearly indicates otherwise, promoter is liable on pre-incorp Ks until there is a novation

2. An agreement among the promoter, corp, and the other King party that the corp will replace the promoter under the K. The corp adopting the K won't get promoter off hook until the novation.
Organization of NY Corps: What is the secret profit rule as it applies to promoters?
Rarely tested. P can't make a secret profit on her dealings with corp. If she does, she is liable and has to account for the profit - return it to the corporation.

* If P sells to corp prop acquired b/f b/c P: Profit equals price paid the corp minus FMV.

* If P sells to corp prop acquired after b/c P: Profit = price paid by corp minus price paid by promoter.

Remember: Profit must only be secret, if corp knows OK.
Organization of NY Corps: What must a foreign corp do in order to do business in NY?
Qualify.
Organization of NY Corps: What's a foreign corp?
One incorporated outside of NY.
Organization of NY Corps: What's a NY corp called?
A domestic corp.
Organization of NY Corps: What does doing business mean?
Regular course of intra-state, not inter-state, business activity.
Organization of NY Corps: What's the qualification process for a foreign corp? (3)
Foreign corp may qualify by

applying to NY Dept of State and

designating the Sec'y of State as agent for service of process.

It also has to pay fees to NY for the privilege of doing business there.
Organization of NY Corps: What kind of info does the foreign corp give to NY Dep't of State?
1. Info from its cert, and

2. Proof of good standing in its home state.
Organization of NY Corps: What happens if a foreign corp does business in NY w/o qualifying?
1. Penalty when corp doesn't qualify

2. Until it qualifies, can't sue in NY, but it can be sued. If sued can defend.
Organization of NY Corps: Most important stuff?
Pre-incorp K most important, and ultra-vires.
Issuance of Stock: What is issuance?
Issuance of stock occurs when a corp sells its own stock.
Issuance of Stock: Why issue stock?
Issuance of stock is one way a corp can raise capital. Investors buy stock and thereby become holders of an equity security. Owners of the corp.
Issuance of Stock: How is this distinguished from the issuance of bonds?
W/ a bond, the investor makes a loan to the corp, to be repaid (usually w/ interest) as agreed in the K. Holder of a bond is a creditor (not an owner) of the corp. She holds a 'debt security.'
Issuance of Stock: What is a debenture?
It's a loan, the repayment of which is not secured by corp assets. Sub-class of debt securities.
Issuance of Stock: Do these rules apply to family guy?
No. The rules apply only to issuance.
Issuance of Stock: What is a subscription?
It's a written signed offer to buy stock from the corp. Important consideration: Whether a subscription can be revoked.
Issuance of Stock: Is a pre-incorporation subscription revocable?
No. A pre-incorp subscription is irrevocable for 3 months unless it says otherwise or all subscribers agree. It's so ppl forming corp can rely on $ being there.
Issuance of Stock: Are post-incorp subscriptions revocable?
Yes, until acceptance by corp
Issuance of Stock: What does acceptance by corp mean?
The corp and subscriber become obligated under a subscription when the Bd accepts the offer.
Issuance of Stock: Can corp sell only to some subscribers and not to others?
No. Must be uniform w/in each class or series of stock.
Issuance of Stock: What happens if corp accepts the offer and the subscriber defaults on payment?
1. If he has paid less than 1/2 the purchase price, and fails to pay the rest w/in 30 days of written demand, corp can keep the money paid and cancel the shares. The shares then become authorized and unissued.

2. If subscriber has paid 1/2 or more, and fails to pay the rest w/in 30 days of written demand, corp must try to sell the stock to someone else for cash (or a binding obligation to pay cash).
Issuance of Stock: What happens if no one will pay the remaining balance?
The defaulting subscriber forfeits what he has paid and the shares are canceled.
Issuance of Stock: What happens if someone will pay more than the remaining balance due?
The defaulting subscriber recovers any excess over what he agreed to pay (but deduct from that the corporation's expenses in selling to the new buyer)
Issuance of Stock: Example of above?
X enters subscrip to buy 5k of stock. X pays 3k and defaults. Corp spends $50 to get a new buyer, Y. Y agrees to pay 2.5k. Corp collects 5.5k, 500 more than X agreed to pay. X gets 500 minus the 50 = 450.
Issuance of Stock: What consideration must corporation receive when it issues stock?
Five forms:

1. Money (cash or check)

2. Tangible or intangible property.

3. Labor or services already performed for the corp.

4. A binding obligation to pay in the future in money or property

5. A binding obligation to perform future services having an agreed value.
Issuance of Stock: Can corp issue stock to somebody for performing services in forming the corp?
Yes, labor or services includes this (3.)
Issuance of Stock: What forms of consideration are prohibited?
Anything other than the 5 permitted forms of consideration.
Issuance of Stock: What happens if somebody "pays" for an issuance with an improper form?
This is called unpaid stock. All treated as water.
Issuance of Stock: With regard to the amount of consideration, what does par mean?
Par means minimum issue price.

If C corp issues 10k shares of $3 par stock, it must receive at least 30k.
Issuance of Stock: Can a corp issue stock for more than par?
Yes, Par is just a minimum floor.
Issuance of Stock: What does no par mean?
No par means no minimum issuance price. Can sell for any price.
Issuance of Stock: Who sets the price at which to sell no par stock?
The Bd, unless cert allows S to do it.
Issuance of Stock: What is treasury stock?
Stock that was previously issued and had been reacquired by the corp. The corp may then sell the treasury stock.
Issuance of Stock: For purposes of value, how to treat T stock?
Always treat T stock as no par.
Issuance of Stock: Can a corp issue par value stock to acquire property?
Yes. This is tangible or intangible property (#2)
Issuance of Stock: Is the amount of consideration OK?
Yes, so long as the property is worth the par value.
Issuance of Stock: When Bd determines the value of the consideration for an issuance, is its determination of value conclusive?
Yes, if it's made in the absence of fraud. Can't pay 1M to director's nephwe to sweep floor for 1 wk. That's how obvious fraud will be on exam.
Issuance of Stock: What are the consequences of issuing par stock for less than par value (watered stock)?
1. The corporation (or creditors if the company is insolvent) can sue for the amount of "water."

2. If the directors knowingly authorized the issuance, they are liable.

3. The purchaser of the watered stock is also liable, and has no defense.

4. If the purchaser of the watered stock sells it to a 3P, that 3P is not liable if she acts in good faith, i.e., she did not know about the water. This doesn't change the liability of seller and/or directors, though.
Issuance of Stock: ***What are pre-emptive rights?***
***Most heavily tested issue of Issuance of Stock fact pattern***

It's the right of an existing shareholder to maintain her % of ownership by buying stock whenever there is a new issuance of common stock for money (which includes cash or checks).

Ex: S owns 1k shares of C Corp. 5k shares outstanding. C Corp planning on issuing 3k shares. If S has preemptive rights, S has right to buy 600 of those new shares, since she owns 20% of the outstanding shares.
Issuance of Stock: If the certificate is silent, does new issuance include sale of shares authorized by the original certificate and sold w/in 2 years of formation?
***On the bar, dates always matter***

No. No pre-emptive rights attach to this.
Issuance of Stock: If the cert is silent regarding preemptive rights, do they exist?
No. They exist only if cert says so.
Issuance of Stock: Do pre-emptive rights attach if the new issuance is to acquire real property?
No. Preemptive rights attach only if the new issuance is for money. This is an issuance for property.
Issuance of Stock: What's important?
Preemptive rights. Form of consideration, 5 things. T-Stock.
***Directors and Officers:

How many directors are required by statute?

Where is the number of Ds set?
One or more adult natural persons.

The number is set:

1. In the bylaws

2. By S act OR

3. By Bd if S bylaw allows.

If no number of directors is set in any such way, then there is one director.
***Directors and Officers: The incorporators elect initial directors. After that, who elects directors?
S at annual meeting.
***Directors and Officers: Do we have to elect all new directors every year?
No. There can be a "classified board," with 2, 3, or 4 classes of directors, with one class elected each year.
***Directors and Officers:

How many directors must be in a class?

Where is this # set?
At least 3.

This is set in cert or by S bylaw.

So, if there were 9 directors, could elect all 9 each year and they would have one year terms. Or, could have 3 classes of 3 directors each, and each year could elect 3 directors, who would serve 3 year terms.
***Directors and Officers: Can S remove a D for cause?
Yes. Always.
***Directors and Officers: Can Bd remove a director for cause?
Only if allowed by cert or bylaws [Usually will be silent on cert or bylaw on bar]
***Directors and Officers: Can anyone remove a D w/o cause?
S only, and only if cert or bylaws allow.
***Directors and Officers: Who selects the person who will serve the remainder of the term?
The remaining directors.
***Directors and Officers: Who selects the person who will serve the remainder of the term in the rare case when a D is removed by S w/o cause?
S very unlikely, b/c S can remove D w/o cause only if cert/bylaws allow.
***Directors and Officers: What are the only 2 ways in which Bd can take a valid act?
1. Unanimous written consent to act w/o meeting, OR

2. A meeting
***Directors and Officers: If Ds purport to take an act in some other way (e.g., individual convos), what is the effect of such an act?
It is void unless ratified by a valid Bd act.
***Directors and Officers: If Bd has meeting, must it be held in NY?
No, can be held anywhere. Meeting can be conference call (assuming everyone can hear all other participants)
***Directors and Officers: Is notice required for regular meetings of the Bd?
No. Usually the time and place are set in the bylaws. Don't have to give notice for regular meetings.
***Directors and Officers: Is notice required for special meetings of the Bd?
Yes. The timing and method of this notice can be set in the bylaws?
***Directors and Officers: What happens if required notice for a special meeting is not given to a D?
Any action taken at the meeting is void unless the D not given notice waives the notice defect. How done:

1. In writing and signed at any time, OR

2. By attending the meeting w/o objection [which is what you usually see on bar]
***Directors and Officers: Can a director give a proxy for director voting?
No. This would violate public policy.
***Directors and Officers: Can directors enter voting agreements on how they will vote as directors?
No. This also would violate public policy.
***Directors and Officers: What is a quorum?

Once quorum req is met, how many votes are needed to pass a resolution?
A quorum is the majority of "entire Bd" (duly constituted board -- the # of positions if no vacancies.)

Once a quorum exists, though, passing a resolution (which is how the Bd takes an act at a meeting) requires majority vote of those present.

If 9 Dship positions on Bd, at least 5 directors must attend the meeting to constitute a quorum. If 5 Ds attend, at least 3 directors must vote for a resolution for it to pass.

IF 9 D positions on Bd, and 5 show up at a properly called meeting, but then one of them leaves the meeting, the quorum is broken and the Bd can't act.

The # of D positions controls, not the # that are currently serving.
***Directors and Officers: Can a corp decrease a quorum to less than a majority of directors?
Yes, by cert or bylaws but quorum can never be fewer than 1/3 of entire Bd.
***Directors and Officers: Can corp decrease the requirement that passing a resolution requires a majority of the directors present?
No.
***Directors and Officers: Can the corp increase a quorum to greater than a majority of directors (e.g., 90% of the entire Bd must be present to do business?
Yes, but in the cert only, not in the bylaws.
***Directors and Officers: Can the corp require a supermajority vote to pass a resolution (e.g., 60% of the directors present must approve the resolution)?
Yes, but in the cert only, not in the bylaws. To make quorum easier in both bylaws and cert.
***Directors and Officers:

1. What does the BoD do?

2. When can BoD delegate?
1. BoD manages business of corp. It sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corp will issue stock, recommends fundamental corporate changes, etc.

2. If cert or bylaws allow, a majority of the entire board can delegate substantial management function to a committee of ONE or more directors. But, Bd can't delegate all powers and responsibilities to a committee.
***Directors and Officers: What can a committee not do?
1. Fill a Bd vacancy

2. Set director compensation

3. Submit a fundamental change to S
***Directors and Officers: Can a committee recommend any of these things for full Bd action?
Yes. This is common, just can't make decision.
***Directors and Officers: What is a particularly important area in which committees are used?
S derivative suits.
***Directors and Officers:

1. What is the duty of care for D and O?

2. What is nonfeasance?

3. What is misfeasance?
1. D must discharge her duties in good faith and w/ that degree of diligence, care and skill that an OPP would exercise under similar circs in like position.

2. Nonfeasance: breach of the duty of care (D doesn't show up to any meetings), but nonfeasor D only liable if his breach caused a loss to the corp. P must show causation. Breaching a duty not enough.

3. Misfeasance: Bd does something that hurts the corp, and the causation is clear.
OPP (yeah you know me)
***Directors and Officers: When will a Bd that commits misfeasance avoid liability?
If it meets BJR. Prudent people do appropriate homework. If D did, D is not liable. Under the circumstances, did you do the homework that a prudent person would do.
***Directors and Officers: What is BJR? (3)
BJR means that a court will not second guess a business decision if:

(1) it was made in good faith,

(2) was reasonably informed, and

(3) had a rational basis.

Bd will only be held liable if intentionally or grossly negligent.

Ex: Bd invested in real property w/o inspecting it. OPP would inspect property.
***Directors and Officers: What is the duty of loyalty?
***A D must act in good faith w/ the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries***
GF, C,F,M,H
***Directors and Officers: Why does BJR not apply in duty of loyalty cases?
b/c these involve conflicts of interest. BJR doesn't apply.
***Directors and Officers: What is an interested D transaction?
***Any deal b/t the corp and one of its Ds (or business of which its D is also a D or O or in which he has a substantial financial interest).
***Directors and Officers: Applying the duty of loyalty?
M D of XYZ, Inc. If she sells wreaths to corp, interested D X-action. M in trouble?

1. State the duty of loyalty standard. Interested D X-actions will be set aside UNLESS D shows either

(1) the deal was fair and reasonable to the corp when approved OR

(2) the material facts and her interest (i) were disclosed or known and (ii) the deal was approved by any of these:

i) By S

ii) Bd approval by sufficient vote not counting the votes of the interested Ds

iii) Unanimous vote of disinterested Ds if there are not enough disinterested Ds to take an act of the Bd. If not enough disinterested Ds to act, the ones who can vote must be unanimous. If 9 Ds, and only 3 are DIDs, those three must be unanimous.
***Directors and Officers: Do interested Ds count toward a quorum of the Bd?
Yes. They can participate at the meeting, but their vote does not count.
***Directors and Officers: Can the Bd set compensation of Ds?
Yes, BUT compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets. Ex: If a corp wants to give a D or O or Ee stock options as an incentive to service, and the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. If the stock is not listed on an exchange, then their use of options must be approved by S.
***Directors and Officers: How to handle competing ventures Qs?
When answering, 1st state the D of L standard.

If D forms a corp that goes into competition w/ the corp for whom she owes a D of L not to compete, D's 1st corp can get a constructive trust on those profits from D's corp.

Account for D's profits to corp.

Corp *might* recover damages to harm caused by competition.
***Directors and Officers: D can't usurp a corp opportunity. What does that mean?
***D can't take an opportunity away from the corp for her own profit. She must first tell the BD of the opportunity and wait for the BD to reject it***
***Directors and Officers: What qualifies as a corp opportunity?
Something that the corp needs, has an interest or tangible expectation in, or that is logically related to that corp's business.
***Directors and Officers: What is the usual remedy for usurpation?
Constructive trust.

The D has to account for the usurped opportunity. D must either sell it to the corporation at her cost, or, if she has sold it at a profit, corp gets the profit.
***Directors and Officers: What are other bases of D liability?
1. Improper loans of corp funds - BoD can vote to lend a director corporate funds if the Bd finds that it benefits the corp.

[Sarbanes - fed law restricts loans to executives in registered (publicly-traded) corps. NY has never tested fed law in corps.]

2. Improper distributions Later on.
***Directors and Officers: For anything that D can be liable for, which Ds are liable?
General rule: D is presumed to have concurred w/ board action unless her dissent is noted in writing in corporate records. How D does this:

i) In the minutes

ii) In writing to the corp sec'y at the meeting or

iii) Deliver or send by registered mail to sec'y promptly after the adjournment.

Note: Oral dissent is useless: must be in writing.

D can't dissent if voted for the resolution at the meeting.
***Directors and Officers: What are the exceptions to the above general rule?
1. If D misses a meeting due to sickness, D not liable if Bd approved something wrongful that day if she registers written dissent w/in a reasonable time after learning of the action. D does this by delivering the dissent or sending it by registered mail to the corp sec'y, ensuring that the dissent is filed w/ the minutes for the meeting.

2. Good faith reliance on info, opinions, reports, or statements by

(a) Os or Ees of the corp whom the D or O believes competent and reliable

(b) lawyers or public accountants whom the D or O believes are acting w/in their competence, or

(c) a committee of which the person relying is not a member, as to mattter w/in its designated authority.
***Directors and Officers: What duties do Os owe to the corp?
Owe duties of care and loyalty (same as Ds): applies to Os and Ds.
***Directors and Officers: Os are As of the corp. Can they bind the corp to acts that they take in the corp's behalf?
Yes, if they have authority to do so. Watch for crossovers w/ agency, e.g., President has apparent authority to sue on behalf of the corp.
***Directors and Officers: What Os may the Bd select?
Bd may select a pres, one or more VPs, a sec'y, a treas, and any others the Bd may determine or for which the bylaws provide.
***Directors and Officers: Can more than 1 person hold office simultaneously?
Yes. 1 person can be all of the above,.
***Directors and Officers: Who selects and removes the Os?
The Ds, unless cert allows S to elect them (unlikely on bar, cert usually silent) If S can elect Os, only S can fire them. Even then, for cause, Ds can suspend an O's authority to act.
***Directors and Officers: What happens if Ds appoint a person as pres, and then later fire that person as pres?
Pres loses job, but the corp may be liable for breach of K damages. Watch for crossover for Ks.
***Directors and Officers: Heirarchy: Who hires and fires Ds? Who hires and fires Os?
S hires and fires Ds.

Ds hire and fire Os.
***Directors and Officers: So as a general rule, do S hire and fire Os?
No. Bar exam may have trick on this. Don't fall for the head fake.
***Directors and Officers: Who can sue for a judgment removing O for cause?
AG or holders of 10% of all shares may sue for a judgment removing an O for cause. Court can bar reappointment of a person so removed from office.
***Directors and Officers: Who sets compensation of Os?
Bd of D.
***Directors and Officers: 3 possible indemnification scenarios?
A person is sued in her capacity as O or D by or on behalf of the corp. She incurs costs, atty's fees, maybe even fines, a jdugment or settlement. She seeks reimbursement from the corp. 3 possibilities:

1. PROHIBITED: Reimbursement is prohibited if O or D was held liable to the corp. Actual holding.

2. OF RIGHT: Corp must reimburse the D or O if she was successful in defending the case on merits or otherwise.

3. PERMISSIVE: If O or D can show that she acted in good faith and for a purpose reasonably believed to be in corp's best interest, corp MAY in its discretion reimburse the O or D.
P O P
***Directors and Officers: What does reimbursement in category 3 (permissive) include?
Settlement amt, expenses and atty's fees (not any judgment, though)
***Directors and Officers: For permissive reimbursement, who determines eligibility?
Must be independent people making the determination:

1. Bd (w/ a quorum of Ds being non-parties), or if there is no such quorum,

2. S or a quorum of those Ds who are disinterested, or

3. The Bd pursuant to report from independent legal counsel.
***Directors and Officers: Notwithstanding the above categories, can the court in which the O or D gets sued force the Bd to reimburse?
Yes, if it finds that she is reasonably entitled to reimbursement, the court can order the corp to reimburse D/O for litigation expenses and atty's fees (not including a judgment against her).
***Directors and Officers: Can the corp advance litigation expenses to the D/O?
Yes, but they must be repaid if it turns out she is not entitled to reimbursement.
***Directors and Officers: How can corp deal with this?
Corp can buy insurance to cover D and O liability.
***Directors and Officers: Can the cert or bylaws provide for indemnification?
Yes, by resolution of Bd or S or by agreement, unless:

-D/O acted in bad faith,

-was deliberate and dishonest in a way material to the case OR

-wrongfully profited.
***Directors and Officers: Can cert provide for elimination of D liability to the corp or S for damages for breach of duty?
Yes, EXCEPT when the D:

1. acted in bad faith

2. committed intentional misconduct

3. received an improper financial benefit or

4. approved an unlawful distribution or loan.

Put this in essay ALWAYS when D sued for breach of duty
***Directors and Officers: What's important?
Duty of loyalty

Duty of care

Removal of officers

Indemnification

How Bd acts
***FP 4: Shareholders: Can S manage the corp?
General answer must be no, b/c BoD supposed to manage.
***Shareholders: Exception to the above rule?
S can manage the business directly in a close (or "closely held") corp. What is a close corp:

1. It has few shareholders AND

2. There is no public market for the stock.
***Shareholders: What don't you have to have in a close corp?
S management. Can have a BoD. NY close corps almost always have BoD.
***Shareholders: If you want to have S management in a close corp, what do you need to have in the cert? (5)
1. provision in the cert restricting or transferring Bd power to S (or others).

2. Unanimous approval by all incorporators and all S (voting and nonvoting)

3. Must be conspicuously noted on front and back of all shares that close corp is S managed

4. All subsequent S must have notice AND

5. Shares are not listed on an exchange or regularly quoted OTC
***Shareholders: In an S run close corp, who owes the duties of care and loyalty?
The managing S will owe the duties of care and loyalty.
***Shareholders: Controlling S can't use their power for personal gain at the expense of minority S or the corp or to oppress minority S or the corp. They owe a duty of utmost good faith. Why are courts increasingly willing to protect minority S in a close corp?
b/c they have no way out. There is no public market for the stock.
***Shareholders: Can members of a licensed profession, like docs and attys, practice thru a general business corp?
No. But they can form a professional service corp, usually abbreviated PC.
***Shareholders: Must S in a PC be licensed professionals?
Yes, and so must O and D.
***Shareholders: Are the PC pros laible for their own malpractice?
Yes, but not for mal of others. Better than partnership in this respect.
***Shareholders: Are the PC pros liable for Ks entered by the entity or for rent due on leases in the PC's name?
No. The entity is liable.
***Shareholders: How is the PC governed?
In general, by the rules of the business corp:

- cert must meet the general reqs except for the use of "PC" and

- must indicate the profession to be practiced and

- include the names and addresses of the original S, Ds and Os

- there must also be a cert that each S D and O is licensed to practice the profession.
***Shareholders: What happens if a S in a PC dies or is DQ'd from practice?
The entity MUST purchase his stock
***Shareholders: Are the S liable for what corp does?
General answer must be no, b/c the corp is liable for what it does General rule - S not liable
***Shareholders: Exception to the above rule?
An S might be personally liable for what the corp did if the court PCV.

***This can only happen in close corps, no PCV in public corps***
***Shareholders: What is the PCV requirement?
To PCV and hold S personally liable,

1. They must have abused the privilege of incorporating and

2. Fairness must require holding them liable
***Shareholders: Why might courts PCV?
To prevent fraud, or to achieve equity
***Shareholders: Alter ego hypo and approach
1. State the general rule (about S generally not liable for debts or acts of corp), and state the PCV standard and explain PCV.

2. RULE: There is no PCV if corp has ANY mind, existence, or will of its own [very tough to PCV in NY, it's the toughest standard]

3. If a court did PCV here, probably only X liable, b/c only X was abusive.
***Shareholders: What are other possible examples of candidates for PCV?
1. A dummy corp, where S carry on business in personal capacity or for purely personal, not corporate, ends.

2. Remember that S can be another corp. So if a parent corp forms a subsid to avoid its obligations, the court might PCV through the subsid and hold the parent liable.
***Shareholders: Glowco corp hypo
1. F: S = shareholder in G corp, which handles nuclear waste. G has no insurance and has an initial capitalization of 1k. V is injured radiation.

2. I: Can V sue S

3. State general rule that S not liable for corp debts and PCV standard and explain PCV.

3. A: Here corp undercapitalized when formed. Why? b/c S failed to invest enough insurance to cover prospective liability.
***Shareholders: Is undercapitalization enough in NY?
Apparently not by itself. Also need excessive domination or fraud or illegality.
***Shareholders: As a general rule, do we expect PCV more readily in tort or K cases?
Tort. Throw it in.
***Shareholders: What are the 10 largest S personally liable for?
For wages and benefits to corp's Ees.
***Shareholders: What is a S derivative suit?
In SD suit, S is suing to enforce corp's claim, not her own personal claim. Case in which corp not pursuing its own claim, so S steps in to prosecute the claim.
***Shareholders: What to ask in SD suit?
Threshold test, always ask:

1. Is P a S (record or beneficial) at time of action?

2. Was P S at and from time of complained of X-action?

If yes to both, S can bring D suit.
***Shareholders: Is S suing Bd of D of C Corp for usurping corp opportunities a derivative suit?
Yes.
***Shareholders: What about if S sues Bd of D of C Corp for issuing new stock w/o honoring her preemptive rights. D suit?
No. This is a direct suit, for S's personal claim.
***Shareholders: What if S sues to compel declaration of a dividend?
Probably not. S looking to put $ in own pocket. Maybe, though, if it could be arguable based upon a breach of duty to the corp. The breach might be demonstrated if the failure to pay div part of mismanagement by Ds. Mismanagement = breach of duty to corp.
***Shareholders: S sues regarding waste of corporate assets. Derivative?
Always. Ds are hurting corp by committing waste.
***Shareholders: What happens if S wins the deriv suit?
The corp generally gets recovery in a successful deriv suit. It's the corp's claim
***Shareholders: What does S get?
***Costs, and atty's fees, usually from the judgment won for the corp. After all, S conferred a benefit on the corp by suing and winning.***
***Shareholders: Can S ever recover the damages directly in a deriv suit?
Maybe, if recovery by corp would return money to the bad guys.
***Shareholders: What happens if S loses the derivative suit?
S will not recover costs and expenses.
***Shareholders: Is S liable to defs for their costs?
Probably, b/c winner usually recovers costs from the loser.
***Shareholders: Can other S later sue same defs on same X-action?
No. Res judicata
***Shareholders: ***What are the requirements for bringing an S deriv suit?***
***

1. Stock ownership when claim arose - person bringing suit must have owned stock (or held a voting trust cert) at the time the claim arose OR have gotten it by operation of law from someone who owned the stock when the claim arose. Examples of operation of law: Inheritance, divorce decree. In addition person bringing suit must own stock when action brought and through entry of judgment

2. S must adequately represent interest of corp and other S.

3. S can be required to post a bond for def's costs. Doesn't have to though, if she owns 5% or more of the stock or her stock is worth more than 50k.

4. S must make a demand on D that the corp sue.

- needn't do so if demand would be futile

5. P must plead w/ particularity her effort to get Bd to sue or why demand is excused.

6. Corp must be joined in the litigation as a D. Makes no sense, but that's the rule.
***Shareholders: When might demand be futile? (3)
If

1. majority of Bd interested or under the control of interested Ds

2. the Bd didn’t inform itself of the X-action to the extent reasonable under the circs or

3. the X-action is so egregious on its face that it could not have been the result of sound business judgment
***Shareholders: Of the 3 demand futility scenarios, which is most likely?
#1. If maj Bd interested OR under control of D -- classic example of futility. They're going to be the defs!
***Shareholders: What if S makes the demand, and corp refuses to have the corp sue? Can S bring deriv suit anyway?
Only if S can show a majority of Bd is interested or its procedure was incomplete or inadequate
***Shareholders: S brings a deriv suit, and corp wants to dismiss. Can it?
Corp may move to dismiss. Motion based on finding by independent Ds (or a committee of independent Ds, sometimes called a special litigation committee) that the suit is not in corp's best interests. Examples of such instances: case has a low chance of recovery, cost of suit will exceed recovery.
***Shareholders: In deciding whether to dismiss case on corp's motion, what does the corp look at?
1. Independence of those making investigation and

2. The sufficiency of their investigation

NY court will only look at these 2 factors.
***Shareholders: Can parties dismiss or settle a deriv suit?
Only w/ court approval. The court may notify S an seek S's feedback.
***Shareholders: Can a D or O bring a deriv suit?
Yes. Exclusive to NY. D/O can sue another D/O to compel her to account for her violation of duties. Such a potential P doesn't have to meet the reqs of a S deriv suit.
***Shareholders: Who votes?
This topic is occassionally hit. Very mechanical. General rule is that record owner as of record date has right to vote.
***Shareholders: Who is the record owner?

What is the eligibility cut-off?
The person shown as the owner in the corp records. The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days b/f the meeting.
***Shareholders: C Corp sets annual meeting for 7/7 and record date for 6/6. S sells B her C Corp stock on 6/25. Who is entitled to vote at meeting, S or B?
S b/c she owned it on 6/6. If own on record date, can vote.
***Shareholders: What are the exceptions to the general rule that record owner on record date votes?
a. Corp reacquires stock on 1/10. Record date is 1/15. Does corp itself get to vote this treasury stock? No.

b. Death of S. S owns stock in C Corp. S is record owner. After record date, S dies. Can S's executor vote the shares? Yes.

c. Proxies. OK for S voting. [but not OK for D voting]
***Shareholders: What is a proxy? (4)
A proxy is

1. a writing

2. signed by record S or auth A,

3. directed to sec'y of corp,

4. authorizing another to vote the shares.
***Shareholders: For proxy purposes, is fax/e-mail considered a writing?
Yes.
***Shareholders: How long is a proxy good for?
11mths, unless it states otherwise.
***Shareholders: Can S revoke proxy?
Yes.
***Shareholders: Can S revoke her proxy even though it states that it's irrevocable?
Yes!
***Shareholders: How to make a proxy truly irrevocable?
1. If the proxy says it is irrevocable, and

2. and proxy-holder has some interest in the shares,

it is irrevocable b/c it is a proxy coupled w/ an interest.

Ex: S sells B her shares after record date. S gives B an irrevocable proxy. Now S can't revoke the proxy, b/c B has an ownership interest. W/ option to buy stock, same result.
***Shareholders: What are the reqs for a voting trust?
X, Y, Z own relatively few shares of C Corp. Decide to increase their influence on corp policy by bloc voting. Requirements for a voting trust:

1. written trust agreement controlling how shares will be voted

2. copy of agreement to corp

3. X-fer legal title of shares to voting T, and

4. original S receive voting trust certificates and retain all S rights except for voting.

It's a real trust. Separation of legal and equitable title.
***Shareholders: Time limit on voting trusts?
Yes, in NY, 10 yr max (but w/in 6 mths of exp, can extend for another term of up to 10yrs)
***Shareholders: Reqs for and characteristics of voting agreement (or "pooling" agreement)
Note: Not a trust

1. S can enter into voting agreements, but Ds can't

2. Agreement must be in writing and signed

3. Voting agreements are not specifically enforceable

4. To be, irrevocable, a proxy given subject to a voting agreement need only say it's irrevocable (proxy-holder interest not required)
***Shareholders: Can 2 S agree to vote to elect each other as Ds?
Yes. Electing Ds is something S do.
***Shareholders: Can they then agree about what actions they'll take once they are Ds?
No, b/c Ds can't enter voting agreements on how they'll vote as Ds.

It would be OK tho if these were the only S in corp
***Shareholders: What are the only 2 ways S can take a valid act?
1. Written consent signed by holders of all voting shares to act w/o meeting

2. Have S meeting
***Shareholders: What kinds of meetings do S have?
1. Annual meeting (can be held anywhere): court can order one if not held. What's so important about annual meeting: it's where S elect Ds

-- highest vote-getter for each seat on Bd wins that seat, even if she didn't get a majority of the votes. All she needs is a plurality, not a majority, of the votes.

2. Special meeting (can also be held anywhere): Who can call a special meeting:

-- Bd or

-- anyone provided for in the cert or bylaws.
***Shareholders: NERD ALERT: When must a special meeting to elect Ds be called by Bd?
If there is a failure to elect a sufficient # of Ds to conduct the business of the corp. If Bd fails to call such a meeting, holders of 10% of the voting shares may demand in writing that corp hold the meeting. In this case, corp sec'y must give notice of the meeting. If sec'y fails to do so, S may give notice.
***Shareholders: What's the notice req for S meeting? (4)
1. Written notice (e-mail OK) to every S entitled to vote, for every meeting (annual or special) between 10 and 60 days b/f meeting.

1. notice must state when/where meeting is to be held.

2. must inform if proposed action would entitle S to appraisal rights and tell why (and even include the statute about appraisal rights)

3. If special meeting must state who called it and the purpose of the meeting. Important b/c that will be the only business that can be done at the special meeting.
***Shareholders: Suppose a proper person calls a special meeting of S, and the state purpose of the meeting is to remove a particular O?
Meeting must be for a proper S purpose. S do not remove O. If the purpose of meeting was to remove a D, would be OK.
***Shareholders: what happens if corp doesn't give notice to everyone entitled to vote?
General R: action taken at that meeting is void BUT

action could be held if those not given notice waive the notice defect.
***Shareholders: How does a waiver of notice defect occur?
Express: in writing and signed anytime, or

Implied: (same rule for d) if s attends mtg w/o objection

notice defect waived.
***Shareholders: How do S vote?
Must be a quorum represented at meeting. Determination of a quorum focuses on # of shares represented, not number of S. Generally, quorum requires a majority of outstanding shares.
***Shareholders: X corp has 120k shares outstanding. X corp has 700 S. What's a quorum?
At least 60k shares + 1. Head fake.
***Shareholders: Can cert or bylaws reduce quorum to less than a majority?
Yes, but can never be few than 1/3 shares entitled to vote.

***But can never reduce the requirement of majority approval.
***Shareholders: Is it possible to require a supermajority vote of shares at meeting to pass a resolution?
Yes. This can be done in cert but not in bylaws. D has exactly same rule
***Shareholders: What's the effect of a majority vote if quorum is met?
If quorum met, majority may act to bind corp. Majority means majority of the shares actually voting in favor of or against the proposal (abstentions don't count)
***Shareholders: X corp has 120k shares outstanding. 62k shares are represented at the meeting, but only 50k shares vote on a particular proposal. How many shares must vote for the proposal for it to be accepted by S?
25k + 1. Just need a majority of those voting. The 62k is important b/c it gave quorum, but that's all
***Shareholders: once a quorum is established at S's meeting, can it be lost if ppl leave meeting?
No. In S voting, we don't lose quorum if leave meeting. Different from D voting.
***Shareholders: How and when do S use cumulative voting?
1. Cum voting only avail in voting for Ds. It's a device to help small S get representation on the Bd.

2. Multiply # of shares times number of Ds to be elected.

You own 1k shares of stock in C Corp. C Corp has nine D-ships open for election. You want N to be a D of C corp. Under cumulative voting, you can cast 9k votes for N: 1k shares*9 D slots open

point: cum voting avoids possibility of stacking deck
***Shareholders: If corp cert silent as to whether S can vote cum, can C's S still vote cum?
no. exists only if cert explicitly allows
***Shareholders: what's the %age of shares required to elect one D if cum voting in place?
You need 1 share more than this percentage: 100/X+1 (X # of Ds being elected) If 9 Ds being elected, to elect 1 D, would need 1 share more than 10%. If electing fewer ppl, would need more shares under cum
***Shareholders: what's nice about corp form if S?
X-ferability of ownership interest
***Shareholders: If S has 100 shares of $4 par of C Corp stock, can S sell her shares for less than $4 a share?
Yes. Trick Q. Par is an issuance rule. Rule apply only when corp selling own stock.
***Shareholders: Where are stock X-fer restrictions set, and why?
Why: sometimes, if want to impose restrictions on X-fer (especially in close corp, to keep outsiders out)

Where set: in cert, bylaws, or by agreement
***Shareholders: what is right of 1st refusal for stocks?
it's a stock transfer restriction that requires S to offer it 1st to corp.
***Shareholders: When will stock X-fer restrictions be upheld?
If they are reasonable under circs (i.e., not an undue restraint on alienation)
***Shareholders: so is a rt of 1st refusal acceptable?
yes so long as the price offered is reasonable, for ex, if corp offered to match B's offer to S.
***Shareholders: can corp require S to get corp's approval to sell stock?
probably an unreasonable restriction. Could let corp refuse for no reason at all
***Shareholders: what to look for in an action against X-feree of stock?
look for X-feree's knowledge or notice
***Shareholders: even if restriction is reasonable and thus valid, when can it not be invoked against X-feree?
It can't be invoked against X-feree unless either

1. it is conspicuously noted on the stock cert OR

2. the X-feree had actual knowledge of the restriction
***Shareholders: who can demand access to inspect (and copy) (1) minutes of S proceedings and (2) record of S?
Any S (in person or by agent) on 5 days written demand.
***Shareholders: There has been little activity on this subject, and NY statute is intricate, but if they hit it, what can corp demand of S if S demands access?
As to demand for (1) minutes of S proceedings or (2) record of S, Corp can demand that S give affidavit that his purpose is not other than in the interest of the corp and he has not w/in 5 years tried to sell any list of corps.
***Shareholders: can corp demand more detail than above in affidavit?
Never
***Shareholders: What happens if S refuses to furnish such an affidavit after corp demands it?
Corp can deny access
***Shareholders: How much notice required for demand of list of current Ds and Os?
Any S can demand that on 2 day's written demand. Corp can't require affidavit
***Shareholders: what about (1) corp's latest annual balance sheet, (2) profit and loss sheet and (3) latest interim statements distributed to S or public?
Any S can make a written request, and the corp must provide the docs. Can do so by mail
***Shareholders: What is S's CL right to inspect?
***If this subject comes up, always throw this in***

All S have CL right to inspect records at a reasonable time and proper place for a proper purpose (related to S's role as S)
***Shareholders: What documents does CL right to inspect cover?
***If this subject comes up, always throw this in***

It's unclear how broad this is, but it's probably broader than statute
***Shareholders: How does S's rights to inspect compare to D's right to inspect corp books and records?
D has absolute right. D need not make any showing.
***Shareholders: ***What are distributions?
***payments by corp to S
***Shareholders: ***What forms can distributions take?
can be

1. dividend or

2. payment to repurchase shares or

3. to redeem shares [forced sale to corp at price set in cert]
***Shareholders: Is there any S right to a distribution?
Distributions are declared in Bd's discretion. No S right to a distribution until it is declared. (but once distribution is declared, S affected have a right to it)
***Shareholders: When will court interfere w/ Bd's discretion and order a distribution?
Only on a showing of bad faith or dishonest purpose
***Shareholders: is a distribution the same as a stock split?
no. don't confuse distribution w/ a stock split, which gives S more shares than she now has but reduces the value of each share proportionately. S owns 100 shares of XYZ Inc. Shares are selling at $40/share. If stock splits 2-for-1, S will end up w/ 200 shares, now worth $20/share. Economic effect is nothing, has 4k worth of stock either way.
***Shareholders: Which S get divs?
Rarely tested. Bd of D of C Corp declares div of $400k. If the outstanding stock is:

1. 100k shares of common stock: $4/share. Divide it out.

2. 100k shares of common and 20k shares of preferred w/ $2 div pref: Pref = pay 1st. So those 20k pref shares must be paid their $2 pref 1st, b/f anybody else gets anything. 20k shares * $2 = total pref of $40k. Skim of $40k and pay that to the preferred holders 1st. That leaves $360k, which goes to common shares. Since 100k common shares, div = $3.60/share

3. 100k shares of common and 20k shares of $2 preferred that is participating: Participating = pay again. So thes 20k shares get paid 2X - once as preferred, and again b/c they are participating. Preferred gets done same way as hypo 2. 20k shares multiplied by $2 pref = $40k. Pay that 1st, b/c it's preferred. $360k remains, but here the $360k gets divided by 120k shares = $3/share. So common stock winds up with $3/share div, and part pref winds up w/ $5/share div

4. cumulative preferred means the years in which no div paid, the cumulative holders div is adding. So if a corp hasn't paid divs in 4 years, and it pays a $2/share div, it owes the cumulative preferred S $8/share.
***Shareholders: ***Can surplus funds be used for any distribution (div, repurchase, redemption)?
Yes. Surplus: Surplus is computed as Assets minus Liabilities minus Stated Capital plus number of shares. Bar must tell assets and liabilities. Surplus can be used for distribution. Proper fund
***Shareholders: ***Can stated capital be used for distribution?
No. Can never touch, would be unlawful (think about it, capital is used for investing in the corp to make it more profitable, wouldn't want to use it for distributions)
***Shareholders: ***How is stated capital computed?
C Corp has issued 10k shares of $2 par stock for $50k and 4k shares of no par stock for $70k.

On the par stock: $20k goes to stated capital and $30k goes to surplus. Why? b/c stated capital is the par value of the issuance (10k shares of $2 par = $20k) The excess over par goes up into surplus ($30k => 10k share of $2 par stock $50k sold: $50k-$20k = $30k surplus
***Shareholders: How is stated capital computed on the no-par stock?
w/in 60 days of issuance, Bd can allocate any part, but not all, to surplus.
***Shareholders: What if the Bd does nothing w/in 60 days after the issuance of the no-par stock?
It all goes into stated capital.
***Shareholders: ***When can and when can't corp make distribution when it has money problems?
***Corp can make distributions even though it lost money last year. Corp can't make distributions if it is insolvent or if the distribution would render it insolvent. Insolvent means that the corp is unable to pay debts as they come due in OCB.

Whenever you have a distribution, look out for this.
***Shareholders: ***Who are personally liable for unlawful distributions?
Ds are personally liable for unlawful distros, as are S who knew the distrib was unlawful when they received it.
***Shareholders: ***Who would sue to recover the unlawful distribution?
This would be a corp claim, so it could be a derivative suit.

Remember tho, D's possible defense of good faith reliance. X-reference to cards above (BJR, and can rely in good faith on what financial ppl told you, great defense to raise here)
***Shareholders: How are redemptions set?
Redemptions are set in cert, and must be done proportionately w/in each class of stock. Repurchases are individually negotiated, and can discriminate except in close corp, where they must give equal opportunity to all shareholders.
***Shareholders: What does Freer think is important?
1. PCV

2. Deriv suits

3. Close corps and PCs

4. Hypo on S who can make agreement to elect each other as D, but can't make agreement about how they'll vote once/when they are Ds.

5. Liability for unlawful distribution

6. S inspection of records
Fundamental Corporate Changes: Characteristics of a fundamental corp change?
So fundamental that most of them require both that D approve and that S approve. In addition, in most, corp must notify the Dep't of State by delivering a docu which Dep't files.
Fundamental Corporate Changes: ***What is the dissenting Ss' right of appraisal?
The right of S to force the corp to buy her shares at fair value
Fundamental Corporate Changes: ***What actions by corp will trigger dissenting Ss' right of appraisal?
1. Some amendments to the cert

2. consolidation

3. ***when your corp merges into another corp (most likely)

4. your corp X-fers substantially all of its assets, or

5. your corp's shares are acquired in a share exchange (never seen on bar b/f)
Fundamental Corporate Changes: ***What are the exceptions to the rule of when S can exercise right of appraisal?
Even if the corp is doing one of the 5 things mentioned in the last card, there is no right of appraisal if the corp is listed on a national securities exchange or NASDAQ. Such corps have a public market for the stock, S can simply sell on market if not happy
Fundamental Corporate Changes: ***What does S have to do to perfect her right of appraisal?
Must do all three:

1. b/f S vote, file w/ corp written objection and notice of S's intent to demand payment,

2. Abstain from voting on change/vote against change, AND

3. After vote, make written demand to be bought out.
Fundamental Corporate Changes: ***What happens if S and corp can't agree on fair value?
Corp sues and the court determines the value.

Court of appeals case - I: In setting the value of stock, can court discount the value to reflect that minority shares may be worth less than controlling shares, b/c they carry no control over corp affairs? H: No. There is no minority discount. Can't reduce value. Must give fair value.
Fundamental Corporate Changes: How are amendments to the cert of incorp made?
1. Minor changes, such as those relating to office location, registered agent, etc., are made by Bd.

2. Other amendments must be approved by (1) D action and (2) a majority of shares entitled to vot.
Fundamental Corporate Changes: Hypos involving rules last card
1. Q: Ds approve an amendment and recommend it to S. If there are 4k outstanding shares entitled to vote, how many must vote for amendment? A: at least 2001, need majority

2. Q: Same facts, but suppose only 2.4k shares attend the meeting to vote on amendment, and only 2.2k shares actually vote. How many must vote in favor of amendment for it to pass? A: Head fake. Still need at least 2001. Now - need maj of shares entitled to vote.
Fundamental Corporate Changes: What if the amendment would change or strike a supermajority quorum or voting requirement for S (not D) voting?
In addition to D approval, the amendment must be approved by 2/3 of the shares entitled to vote. Doesn't matter here when corp formed, this is true for all corps
Fundamental Corporate Changes: What happens if amendment is approved?
deliver cert of amend to Dept of State for its filing.
Fundamental Corporate Changes: Are there dissenting S right of appraisal
Yes, if the amendment alters or abolishes a pref, change redemption rights, alter or abolishes a preemptive right or limts voting rights.
Fundamental Corporate Changes: What is the difference between a merger and a consolidation?
Merger: A corp merges into B corp, A corp disappears.

Consolidation: A corp and B corp form C corp, A corp and B corp disappear
Fundamental Corporate Changes: What are the mechanics of either of these changes?
1. Each company's BoD adopts a plan or merger/consolidation AND

2. S approval required from each corp disappearing

Ex: A corp has 6k outstanding shares entitled to vote. How many shares must vote for the proposed merger of A Corp into B, Inc? At least 3001, a majority of shares entitled to vote.
Fundamental Corporate Changes: Exception to merger/consolidation voting rule?
If parent corp owns 90%+ of each class of stock of a subsid that is merged into a parent, no S approval required. This is called a short form merger.
Fundamental Corporate Changes: How is cert of merger/consolid filed?
Deliver cert of merger/consolid to Dep't of State for filing.
Fundamental Corporate Changes: **Are there dissenting S rights of appraisal?
Yes for S of corp that disappeared, but NOT for S of surviving corp
Fundamental Corporate Changes: Do dissenting S of the subsid in a short-form merger have the right of appraisal?
Yes even tho they didn't get to vote
Fundamental Corporate Changes: ***What's the effect of merger/consol?
Surviving corp succeeds to all rights AND liabilities of the constituents. This is called successor liability (in merger/consol)
Fundamental Corporate Changes: What's happens in EITHER: X-fer (not just mortgage) of all or substantially all of the assets not in the OCB, OR share exchange?
One company acquires all the outstanding shares of one or more classes of another corp. These are considered fundamental corp changes for the selling corp ONLY, not for the buying corp.
Fundamental Corporate Changes: What's the procedure to sell all of corp's assets to another corp?
S Corp wants to sell all of its assets to B, inc, or B, inc wants to acquire all the shares of S corp:

1. Each corp's BoD authorizes the deal AND

2. Approval by selling corp's S.
Fundamental Corporate Changes: What are the number of shares required to approve the sale?
Selling corp: majority of the shares entitled to vote, not just those that show up for meeting.

Buying corp: Zero. Head fake. Buying corp's S don't vote b/c not considered a fundamental change for buyer corp, just for seller corp.
Fundamental Corporate Changes: Dissenting S rights of appraisal?
Yes, for S of the selling corp only. Not for S of buying corp (again, b/c not a fund change for buying corp)
Fundamental Corporate Changes: What filing reqs for share exchange/X-fer of assets?
For share X-change, deliver plan of X-change to Dept of State for filing.

For X-fer of assets, no such filing is required
Fundamental Corporate Changes: What's the rule on liability for torts of corp whose assets are acquired?
General rule: the corp acquiring assets will not be liable for the torts of the company whose assets it acquired unless Exception Rules apply:

1. the deal provides otherwise, or

2. the purchasing company is a mere continuation of the seller, or

3. the deal was entered fraudulently.
Fundamental Corporate Changes: Why is the rule in card #249 different from successor liability in a merger/consol?
Yes. General rule is NO successor liability w/ acquisition of assets b/c seller still exists. Different from merger/consol
Fundamental Corp Changes: ***Dissolution: Is Bd vote required for voluntary dissolution?
***Dissolution: Tested more heavily than the other FCCs combined***

No.
Fundamental Corp Changes: ***Dissolution: What S vote required for voluntary dissolution?
A majority of the shares entitled to vote. If vote yes, cert of dissolution delivered to Dep't of State for filing
Fundamental Corp Changes: ***Dissolution: What is involuntary dissolution?
Judicial: someone asking for a court order of dissolution
Fundamental Corp Changes: ***Dissolution: How might involuntary dissolution be initiated
1. By Bd resolution/resolution of majority of shares entitled to vote, stating that corp has insuf assets to discharge liabilities or that dissolution would be beneficial to S.

2. 1/2 or more of shares entitled to vote may petition if Ds too divided to manage or S too divided to elect Ds or magnitude of internal dissention makes dissolution beneficial to S.

3. Any S entitled to vote may petition if S unable to elect Ds for 2 annual meetings

1-3 are intricate, haven't done much w/

4. ***Bar loves this: 20% or more of voting shares in corp whose shares not traded on sec market (close corp) may petition on either of these grounds:

a. Management's illegal, oppressive, or fraudulent acts toward complaining S. Oppressive = conduct that defeats the reasonable expectations of minority S, OR

b. Management's wasting, divesting, or looting of assets
Fundamental Corp Changes: ***Dissolution: In invol dissol # 4, who is management?
D or managing S
Fundamental Corp Changes: ***Dissolution: When may court deny invol dissol #4?
if there is some other way the complaining S can obtain a fair return on his investment, e.g., by ordering a buy-out of complaining S's shares. Court will consider whether liquidation is necessary to protect the petitioners and is the only way for them to get a fair return on their investment.
Fundamental Corp Changes: ***Dissolution: In invol dissol # 4, how may corp or non-complaining S try to avoid dissolution?
***always throw this in***

w/in 90 days of petition, buy petitioner's shares at fair value on terms approved by court.
Fundamental Corp Changes: ***Dissolution: Does dissolution end the corp's existence?
No. Corp stays in existence to wind up. Steps in windup (liquidating):

1. gather all assets

2. convert to cash

3. pay creditors (who had been given notice earlier) and

4. distribute remainder to S, pro-rata by share unless there's a dissolution preference.
Fundamental Corp Changes: ***Dissolution: How does a dissolution preference work?
Pay first. It works exactly like a dividend preference, but for dissolution
Fundamental Corp Changes: ***Dissolution: Can S agree that they will be paid b/f creditors?
No chance. Creditors MUST be paid 1st. First in line. An S might be a creditor, if so he wears 2 hats. Will get priority as credior, but as S, will have to wait like the other S
Fundamental Corp Changes: ***Dissolution: What's important in FP 5?
Dissolution

Right of appraisal

Merger
FP 6: Controlling S and related topics: What is the trad rule on the fidu duties that S owe each other?
Outside the close corp, S generally do not owe fidu duties to each other or to the corp. They can act in their own self-interest.
FP 6: Controlling S and related topics: Does a controlling S owe a duty?
S who also occupies a control position (D position) or whose ownership is such that she has working control over the corp owes a fidu duty to minority S and sometimes, to others (including the corp) She cannot use a dominant position for individual advantage at the expense of the minority S or the corp.
FP 6: Controlling S and related topics: Where is such a problem w/ a controlling S most likely?
In a close corp. But can happen in public corp. Usually, on NY exam, will be close.
FP 6: Controlling S and related topics: May controlling S sell her shares at a premium?
Yes
FP 6: Controlling S and related topics: If controlling S does sel shares at premium, can she keep money?
Generally, yes. But courts may impose liability if something else happened too.
FP 6: Controlling S and related topics: Like what?
1. Controlling S sold to looter w/o making a reasonable investigation. Likely facts are facts that would put a reasonable person on notice of a problem, e.g., A approaches controlling S on behalf of an undisclosed P. If controlling S sells w/o reasonable investigation to somebody who then loots corp, disgorge S's profit AND say find S probably liable for all damage to corp.

2. Controlling S de facto sells a corp asset (like a widget machine). If she does, all S should share in the premium paid by the buyer. Often comes up w/ a looting scenario

3. Controlling S sells a position on the Bd. Fidus can't sell their position, e.g., controlling S sells controlling interest and agrees that she and "her" Ds will resign from Bd. One thing to have the new controlling S elect new Ds. Another, though to sell seats on Bd. Remedy: Disgorge her profit.
FP 6: Controlling S and related topics: What are freeze-out mergers.
All mergers must have a legitimate corp purpose, even though approved by requisite # of shares. Watch for "freeze-out" merger aimed solely at cashing out minority S unfairly. Usually majority S cause their corp to merge w/ another corp which they own. Minority S' shares are purchased for cash, so they have no interest in either corp.
FP 6: Controlling S and related topics: In a freeze-out merger scenario, what will court probably look at?
Courts increasingly protective of minority.

Court will "review X-action as a whole"

1. Overall course of dealing AND

2. Fairness of the price.

Case-by-case analysis, dependent on facts. Factors:

(1) whether deal tainted by self-dealing or fraud

(2) whether minority S are dealt w/ fairly

(3) whether there is a legit business reason for merger.
FP 6: Controlling S and related topics: What is market trading on inside info?
When D/O engages in market trading of her corp's stock based on inside info from corp. She makes a profit by doing so
FP 6: Controlling S and related topics: What duty as an inside trading D/O breached?
In NY, D/O has breached a duty to corp. Corp can sue to recover her profits (and b/c it's a corp claim could be a deriv suit)
FP 6: Controlling S and related topics: What is nondisclosure of "special facts" or "special circumstances?"
All D/O (and probably controlling S) owe an aff duty not to trade on "special facts" in a securities X-action w/ a non-insider. So they can't trade on secrets. They must abstain or ensure disclosure so others are on the same footing. THIS IS CL INSIDER TRADING
FP 6: Controlling S and related topics: What are special facts?
Those a reasonable investor would consider important in making an investment decision (usually obvious)
FP 6: Controlling S and related topics: Who can sue on this theory?
S w/ whom the D/O deals and violates the special facts doctrine.
FP 6: Controlling S and related topics: How will damages be measured under special facts doctrine?
Measure of damage: difference b/t price paid and value of stock a reasonable time after public disclosure
FP 6: Controlling S and related topics: What's a fact pattern that would involve this?
D of X Corp learns that company is developing a new machine that will revolutionize the market. Corp stock is selling at $10/share. Reports indicate that stock will go to $50/share w/in weeks of the new machine's announcement. S calls to complain to D about the company, wishes he'd never bought. D kindly offers to take stock of S' hands for $20/share. S sells. After announcement, stock goes to $50/share.
FP 6: Controlling S and related topics: Can S sue on these facts?
Not CL fraud, b/c D made no affirmative misrep (if he had S could sue D for fraud).

But S can sue D under special facts doctrine:

(1) Information is a special fact, b/c a reasonable investor would consider it important. D trading on insider info.

(2) S shareholder, who doesn't know inside info. D is D, has inside info. D traded on that inside info w/o disclosing it. He thereby breached a duty to S.

(3) S' damages are difference b/t price paid and price after market digests info. $ 50 minus $ 20 = $30/share damages.
FP 6: Controlling S and related topics: What's most important stuff in FP 6?
Sale of controlling S interest

Freeze-mergers

Market trading on inside info