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369 Cards in this Set
- Front
- Back
ORGANIZATION OF NEW YORK CORPORATIONS
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What are the three formation requirements?
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1. People
2. Paper 3. Acts |
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What kind of people do you need?
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Incorporators
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What do incorporators do?
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1. Execute the certificate
2. Deliver it to the Department of State 3. Hold the organizational meeting |
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How many incorporators do you need?
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One or more
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Who can be an incorporator?
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Adult humans only. Can't be an entity.
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What kind of Paper do you need?
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Certificate of Incorporation (Articles)
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What is the purpose of the certificate?
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1. It's a contract between corporation and shareholders
2. It's also a contract between corporation and state |
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What information goes into the certificate?
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1. Name and Addresses
2. Statement of Duration (not mandatory) 3. Corporate Purpose 4. Capital Structure |
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Restrictions on the corporate name
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Must have the name corporation, incorporated, or limited
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What do you give as the corporation's address?
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- County in NY of the office of corporation
- Doesn't have to be the place where the corporation actually does business |
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What must you designate as the corporation's agent for service of process?
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NY Secretary of State
- You also MAY name a registered agent for service of process in addition to the Secretary of State |
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What other information must be given for service of process?
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- Address for forwarding process to the corporation
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What if any additional addresses must be given?
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The names and addresses of each incorporator
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What happens if the certificate makes no statement of duration?
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The corporation has perpetual existence
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Is the purpose to " engage in all lawful activity, after first obtaining necessary state approval" an acceptable statement of corporate purpose?
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YES
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What if after writing the corporate purpose, the company acts contrary to that purpose?
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This is an ultra vires act, in other words, beyond the scope of the certificate
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How do courts deal with an ultra vires act?
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1. Ultra Vires contracts are valid
2. Shareholders can seek an injunction 3. Responsible managers are liable to the corproration for ultra vires losses |
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What must be included in the certificate about the corporation's stock?
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1. Authorized Stock
2. NUmber of shares per class 3. Information on par value, rights, preferences, and limitations of each class 4. Information on any series of preferred stock |
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What is authorized stock?
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The maximum number of shares the corporation can sell
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What is issued stock?
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The number of shares the corporation actually sells
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What is outstanding stock?
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Stock that the corporation has sold and has not reacquired
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What is the requirement regarding classes of stocks or bonds and voting rights/ dividend rights?
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At least one class of stock or bonds must have unlimited voting rights, and at least one class of stock must have unlimited dividend rights
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What kinds of Acts are required to form a corporation?
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1. Each incorporator signs the certificate and acknowledges it before a notary
2. They deliver it to the NY Department of State 3. If it conforms with the law, and filing fees are paid, the Department files the certificate |
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What is the effect of the Department filing the certificate?
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It is conclusive evidence of valid formation. At this point, there is a de jure corporation
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What happens after the filing of the certificate?
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The incorporators hold an organizational meeting (or by written consent)
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What occurs in the organizational meeting?
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Adopt bylaws, elect initial directors, then the board of directors takes over management
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WHY DOES IT MATTER THAT SOMEBODY FORMED A CORPORATION?
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If the company is a NY corporation, what laws govern the internal affairs of the business if the company does not actually do ANY business IN NY?
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NY law governs the internal affairs
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What powers does a corporation have?
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- Is a separate legal person
- Broad powers by statute, including the power to enter contracts, transfer property, buy and sell securities, and to sue or be sued. |
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Can a corporation make political contributions?
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Yes, but no more than $5,000 per year per candidate or organization
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Can a corporation make charitable contributions?
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Yes, with no statutory ceiling
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Can a corporation guaranty a loan that is NOT in the furtherance of corporate business?
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Yes, if approved by 2/3 of the shares entitled to vote
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If the corporation does something like incur a debt, breach a contract, or commit a tort, are the people who run the corporation (directors and officers) liable for what the corporation does?
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NO
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Are the people who own the corporation (shareholders) liable for what the corporation does?
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No, shareholders have limited liability
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What does limited liability mean?
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That the shareholders are liable only to pay for their stock.
They are generally not liable for what the business does |
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So who IS liable for what the corporation does?
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The corporation itself
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What defense do incorporators have if they failed to properly form a corporation and are just a partnership BUT they want to be treated as if they ARE a corporation so that the shareholders are not personally liable for what the business did?
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Must show that they are a De Facto Corporation
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How do you show that you are a De Facto Corporation?
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1. There is a relevant incorporation statute (BCL)
2. The parties made a good faith, colorable attempt to comply with it; AND 3. The business is being run as a corporation |
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What happens if it is shown that there is a De Facto Corporation?
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The business is treated as a corporation for all purposes except in an action by the state
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What is NY's view on the de facto corporation?
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Thought to be completely abolished but case law suggests that it MAY exist in very limited circumstances such as when there is a valid certificate that was simply not filed
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What is corporation by Estoppel?
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Theory that dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business's corporate status.
- Plaintiff can't sue the individual proprietors |
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What is NY's view on corporation by Estoppel?
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ABOLISHED. Proprietors ARE liable if they fail to form a de jure corporation.
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What do bylaws do?
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They set up procedures and responsibilities of people (such as officers), set forth the type of notice required for a meeting, etc.
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Can you have a corporation without bylaws?
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Yes, but most have them
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If bylaws are inconsistent with the certificate, which document controls?
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The certificate
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Do bylaws have to be filed with the state?
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NO
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Are people outside the corporation bound by the bylaws?
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NO
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Who adopts the initial bylaws?
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The incorporators at the organizational meeting
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Who can amend or repeal the bylaws or adopt new ones?
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The shareholders
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Does the board of directors ever get to amend, repeal, or adopt new bylaws?
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ONLY if the certificate or the shareholders allow it, and even then the shareholders have the final say
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What is a pre-incorporation contract?
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A promoter (a person acting on behalf of a corporation that hasn't been officially formed yet) enters into a contract with a third party on behalf of the corporation that hasn't been formed.
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Is the corporation liable for the pre-incorporation contract?
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ONLY if the corporation chooses to adopt the contract once it is officially formed
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How can the corporation adopt the contract?
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1. Express adoption (board action)
OR 2. Implied adoption: Arises if the corporation knowingly accepts a benefit of the contract |
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Is the promoter liable on pre-incorporation contract?
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YES
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Exceptions
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1. The contract clearly indicates otherwise
2. There is a novation: an agreement among the promoter, the corporation, and the third party that the corporation will replace the promoter under the contract |
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Can both the corporation AND the promoter be found liable if the corporation adopts?
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YES
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What is the secret profit rule?
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Promoter cannot make a secret profit from her dealings with the corporation. If she does she is LIABLE and has to return the profit to the corporation
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How do you calculate the profit owed when the sale to the corporation was of property acquired BEFORE becoming the promoter?
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Profit = Price paid by the corporation - Fair Market Value
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How do you calculate the profit owed when the sale to the corporation was of property acquired AFTER becoming promoter?
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Profit = Price paid by the corporation - Price paid by the promoter
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What is a foreign corporation?
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Corporation that is incorporated OUTSIDE of NY
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What is a corporation that is incorporated INSIDE of NY called?
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Domestic Corporation
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Does the foreign corporation have to qualify if it is "doing business" in NY?
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YES
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What does "doing business" mean
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The regular course of intra-state business activity
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How does a foreign corporation qualify?
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1. Applies to the NY Department of State
2. Designates the NY Department of State as an agent for service of process 3. Has to pay fees to NY for the privilege of doing business here |
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What kind of information must the foreign corporation have to give the NY Department of State to qualify?
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1. Information from its certificate
2. Proof of good standing in its home state |
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What happens if a foreign corporation does business in NY without qualifying?
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It cannot sue in NY until it qualifies, pays fees, taxes, and accrued penalties and interest.
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ISSUANCE OF STOCK
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When does issuance of stock occur?
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When a corporation sells its own stock
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What is the purpose of issuance of stock?
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It is one way that a corporation can raise capital.
Investors buy stock and become holders of "equity security" and are owners of the corporation |
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How is issuance of stock different than issuing a bond?
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With a bond, the investor makes a loan to the corporation, to be repaid, as agreed in the contract.
Bond owner is a creditor of the corporation, not an owner |
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What is a debenture?
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A loan, the repayment of which is not secure by corporate assets
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What is a subscription?
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A written, signed, offer to buy stock from the corporation
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Can a pre-incorporation subscription be revoked by the person making the offer?
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NO, a pre-incorporation subscription is irrevocable for 3 months
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Exception
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The subscription provides otherwise, or all of the subscribers agree to let you revoke
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Are post- incorporation subscriptions revocable?
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Yes, until they are accepted by the corporation
(when the board accepts the offer) |
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Can the corporation decide to sell only to some subscribers and not others?
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NO, must be uniform within each class or series of stock
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If the corporation accepts the offer and the subscriber defaults on payment what happens?
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Depends on how much they have paid
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If he has paid less than half or more
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If he fails to pay the rest within 30 days of a written demand:
The corporation can keep the money paid and cancel the share |
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What happens to the stock?
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It becomes authorized and unissued stock (the corporation can sell it)
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If he has paid half or more
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If he fails to pay the rest within 30 days of a written demand:
The corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash) |
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What if no one will pay the remaining balance?
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It because authorized and unissued stock
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What happens if someone will pay more than the remaining balance due?
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The defaulting subscriber recovers any excess over what she agreed to pay
However, you must deduct any expenses the corporation incurred from selling to the new guy |
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What must you consider to determine if the corporation can issue stock?
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CONSIDERATION
1. Form of consideration 2. Amount of consideration |
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What are the five permitted forms of consideration for an issuance?
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1. Money (cash or check)
2. Tangible or Intangible Property 3. Services already performed for the corporation 4. Binding obligation to pay $ or property in the future (ex: promissory note) 5. Binding obligation to perform future services having an agreed value |
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Can the corporation issue stock to somebody for performing services in forming the corporation?
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Yes, this counts as services performed for the corporation
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What are prohibited forms of consideration?
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ANYTHING other than the 5 permitted forms
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What happens if the corporation issues stock to someone without consideration?
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It becomes unpaid stock, and it is all treated as water
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What does par value mean?
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The minimum issuance price of the stock
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What is stock that is no par?
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There is no minimum issuance price and can be sold for any price
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Who sets the price at which to sell no par stock?
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The board, unless the certificate lets the shareholders do it
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What is treasury stock?
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Stock that was previously issued and has been reacquired by the corporation.
Corporation can now sell it |
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What is the minimum issuance price for treasury stock?
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There is none! You treat it like no-par stock
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When the board determines the value of the consideration for an issuance, is its determination of value conclusive?
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Yes, if it is made without fraud (waste of corporate assets)
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What happens when a corporation issues par stock for less than its par value?
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This is called "watered stock"
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Are the directors liable for the water?
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Yes, if they knowingly authorized the issuance
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Is the guy who bought the watered stock liable?
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Yes
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What if X buys watered stock and transfers it to a third party, is the third party liable?
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Not liable if they acted in good faith (didn't know about the water)
- This has no affect on the liability of X and the directors |
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What is a pre-emptive right?
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The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever:
1. There is a new issuance of common stock AND 2. For money (which includes cash or checks) (NOT property) |
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If the certificate is silent:
Does a new issuance include the sale of treasury stock? |
NO
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If the certificate is silent:
Does a new issuance include sale of shares authorized by the original certificate and sold within 2 years of formation? |
NO, dates always matter
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FOR EXAMPLE:
S owns 1,000 shares, and there are 5,000 shares outstanding = 20% ownership Company plans to issue an additional 3,000 shares. If S has pre-emptive rights, what can she do? |
She can buy 600 shares that way her percentage of ownership is still 20%.
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When do pre-emptive rights exist?
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ONLY if the certificate expressly says that they do
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DIRECTORS AND OFFICERS
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How many directors do you need?
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One or more adult natural persons
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How is the number of directors set?
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Can be in the bylaws, or by shareholder act, or by the board if a shareholder bylaw allows it
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What if there is no set number for directors?
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Then there is only one director
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Who elects initial directors?
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The incorporators
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Who elects directors after the initial directors?
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Shareholders at the annual meeting
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Do you have to elect new directors every year?
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No, the certificate or a shareholder bylaw can establish 2, 3, or 4 classes or directors with one class elected each year
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What is this called?
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Classified board
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Can shareholders remove a director for cause?
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Yes
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Can a board remove a director for cause?
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Only if the certificate or a shareholder bylaw allows
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Can anyone remove a director without cause?
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Shareholders ONLY and ONLY if the certificate or bylaws allow
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How do you fill a vacancy on the board?
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The board picks someone to serve the remainder of the term
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Who selects the person who will serve the remainder of the term in the rare case where a director is removed by shareholders WITHOUT cause?
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The shareholders
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What are the two ways that the board of directors can act?
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1. Unanimous written consent
2. At a meeting (Individual directors are NOT agents of the corporation. They have no power to bind the corporation to anything, they must act in a group) |
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If the directors purport to take an act in some other way, what happens?
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The action is void, unless ratified by a valid act
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If there is a meeting, does it have to be in NY?
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NO
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Can a meeting be held by conference call?
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Yes, so long as everyone can hear all of the participants
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Is notice required for a regular meeting of the board?
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No, if the time and place are set in the bylaws or by the board
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Is notice required for a special meeting of the board?
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Yes, myst state the time and place but you don't have to state the purpose
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What happens if the required notice for a special meeting is not given to a director?
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Any action at the meeting is void, unless the director not given notice waives the notice defect
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How can a director waive a notice defect?
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1. In writing and signed at any time
2. By attending the meeting without objection |
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Can a director give a proxy for director voting?
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No, they are void.
Directors have a non-delegable fiduciary duty |
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Can directors enter into voting agreements on how they will vote as directors?
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NO. They are void
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What does it mean to have a quorum for a meeting?
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To do business you need a majority of the entire board, and then the vote requires a majority vote of those present
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What if at the beginning of the meeting there is a majority of board members present, but then one leaves, can the board continue to do business?
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NO, the quorum has been broken and the board cannoy act
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Can the corporation decrease a quorum to less than a majority of directors?
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YES, in the certificate or the bylaws, but it can never be fewer than 1/3 of the entire board.
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Can the corporation decrease the requirement that passing a resolution requires a majority vote of the directors present?
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NO
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Can the corporation increase a quorum to greater than a majority of directors need to be present to do business?
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Yes but ONLY in the certificate, not the bylaws
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Can the corporation require a supermajority vote to pass a resolution?
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Yes but ONLY in the certificate, not the bylaws
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What does the board of directors do?
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Manages business of the corporation, sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corporation will issue stock, recommends fundamental corporate changes
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Can substantial management functions be delegated to a committee of one or more directors?
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Yes, but the board cannot delegate ALL powers and responsibilities to a committee
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What can a committee NOT do?
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1. Set director compensation
2. Fill a board vacancy 3. Submit a fundamental change to shareholders 4. Amend bylaws |
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What is a particularly important area in which committees are used?
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Shareholder derivative suits
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Director's Fiduciary Duty of Care Standard
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A director must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in like position
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Types of breach of Duty of Care
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1. Nonfeasance
2. Misfeasance |
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Nonfeasance
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- Director does nothing
- Liable only if breach causes a loss to the company |
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Misfeasance
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- Board does something that hurts the corporation
- Follow the Business Judgment Rule |
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What is the Business Judgment Rule?
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The court will not second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.
Director is not a guarantor of success |
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Duty of Loyalty Standard
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A director must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries
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Does the Business Judgment Rule apply in the loyalty standard?
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NO, because it cannot apply when there is a conflict of interest
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What is an interested director transaction?
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Any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest)
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Are interested director transactions allowed?
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Director must show either:
The deal was fair and reasonable to the corporation when approved OR The material facts and her interest were disclosed or known AND the deal was approved by any of these: 1. Shareholder action 2. Board approval by a sufficient vote, not counting votes of interested directors 3. Unanimous vote of disinterested directors if disinterested are insufficient to take a board act |
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Do interested directors count towards a quorum of the board?
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Yes! And they can participate in the meeting, they just cannot vote
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What if majority is impossible due to the number of interested directors?
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Then you need ALL of the disinterested directors
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Can the board set the compensation of directors?
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Yes BUT the compensation must be reasonable and in good faith, if it is in excess it is a waste of corporate assets
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Can a corporation give a director or officer or employee stock options as an incentive to service?
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- If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies
- If it is NOT listed, use of option must be approved by the shareholders |
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Can a director compete with her corporation?
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NO, pursuant to the duty of loyalty a director cannot compete with her corporation
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What happens if a director DOES compete with her corporation?
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The corporation gets a constructive trust in the director's profits and she must account to the corporation.
The corporation may get damages if the competition hurt it |
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Can a director USURP a corporate opportunity?
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Under the duty of loyalty standard, a director cannot usurp a corporate opportunity until he
1. Tells the board about the opportunity 2. Waits for the board to reject it |
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What qualifies as a corporate opportunity?
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Something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its own business
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Can the director use as a defense that the corporation couldn't have afforded the opportunity?
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Probably not
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What is the remedy for an usurpation?
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A constructive trust
He must sell it to the corporation at his cost, of if they have already sold it for a profit the corporation gets the profit |
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What is a proper loan of corporate funds?
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A loan to a director of corporate funds if approved by shareholders or if the board finds it will benefit the corporation
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What is the Sarbanes- Oxley Act
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Restricts loans to executives in registered (publicly-traded) corporations. It requires the board of such a large corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports
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How do you know which particular director is liable for any of these actions?
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A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate
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How does a director get her dissent into writing?
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1. In the minutes
2. In writing to the corporate secretary at the meeting 3. Registered letter to the secretary at the meeting |
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Is an oral dissent effective?
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NEVER by itself
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Can a director dissent after voting for a resolution at the meeting?
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NO
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If a director missed a meeting, is he liable if the board approved something wrongful that day?
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Not if he registers with written dissent within a reasonable time after learning of the action
He does this by delivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes for the meeting |
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What about good faith reliance?
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Can be a defense to liability if there was good faith reliance on information, opinions, reports, or statements by
(1) Officers or employees of the corporation whom the director or officer believes competent and reliable (2) lawyers or public accountants whom the director or officer believes are acting within their competence, or (3) a committee of which the person relying is not a member, as to matters within its designated authority |
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OFFICERS
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-
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What duties do officers owe the corporation?
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Same as directors, the duty of care and the duty of loyalty
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Can officers bind the corporation to acts that they take in the corporation's behalf?
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Yes, if they have the authority to do so. Officers are agents of the corporation.
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What are different officers that can be appointed?
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A president, one or more vice-presidentsm a secretary, a treasurer, and any others that the Board may determine or for which the bylaws provide
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Can one person hold multiple offices simultaneously?
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Yes
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Who selects and removes the officers?
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The board, unless the certificate allows the shareholders to elect them
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If the certificate provides that shareholders elect officers, who can fire officers?
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ONLY the shareholders, but directors can still suspend an officer's authority to act
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Who may sue for a judgment removing an officer for cause
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The attorney general or holders of 10 percent of all shares may sue for a judgment removing an officer for cause. Court can bar reappointment of a person so removed from office.
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REIMBURSEMENT OF DIRECTORS AND OFFICERS
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_
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What happens when a person is sued in her capacity as officer or director by or on behalf of the corporation and seeks reimbursement (indemnification) from the corporation?
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Depends on the outcome of the case!
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If she was held liable to the corporation
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Prohibited Reimbursement:
Reimbursement is prohibited |
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If she won a judgment on the merits or otherwise
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Of Right Reimbursement:
The corporation MUST reimburse the director or officer |
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If the corporation refuses to reimburse her and she sues and wins can she recover attorney fees for the most recent suit?
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No, she pays her own attorney fees in this case
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For any other outcome (ex: settlement)
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Permissive Reimbursement:
The corporation MAY reimburse if she shows 1.That she acted in good faith AND 2. For a purpose reasonably believed in the company's best interest |
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Who determines eligibility for a permissive reimbursement?
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1. The board (with a quorum of directors being non-parties); or, if there is no such quorum,
2. Shareholders or a quorum of those directors who are disinterested; or 3. The Board pursuant to report from independent legal counsel |
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Can the COURT order the corporation to reimburse her for litigation expenses and attorney's fees?
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Yes, if it finds she is reasonably entitled to it
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Can the corporation advance litigation expenses to the director or officer?
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Yes, but they must be repaid if it turns out she is not entitled to the reimbursement
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Can the corporation buy insurance to cover director and officer liability
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Yes
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Whenever you see a director arguably breaching a duty, what should you say regarding the certificate?
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The certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty EXCEPT:
if she acted in bad faith or with intentional misconduct or received an improper financial benefit OR approved an unlawful distribution or loan |
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SHAREHOLDERS
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_
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Can shareholders manage the corporation?
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Generally no, the board manages not the shareholders
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When CAN shareholders manage the corporation?
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In a close or "closely held" corporation
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What is a close corporation?
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1. Few shareholders AND
2. The stock is not publicly traded |
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Does there HAVE to be shareholder management in a close corporation?
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No, you can still have a board of directors
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If as a close corporation you choose to have shareholder management what do you need to do?
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1. Provision in the certificate restricting or transferring board power to shareholders
2. All incorporators or shareholders (voting and nonvoting) approve it; 3. It is conspicuously noted on front and back of all shares; 4. All subsequent shareholders have notice AND 5. Shares are not listed on an exchange or regularly quoted over-the-counter. |
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In a close corporation run by shareholders, who owes the duties of care and loyalty?
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The managing shareholders owe the duties to the corporation
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In a close corporation, what is the trend regarding fiduciary duties and shareholders?
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To impose fiduciary duties on shareholders in their dealings with each other, especially controlling shareholders so that they can't use their power for personal gain at the expense of minority shareholders.
They owe a duty of utmost good faith |
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Why do courts want to protect the minority shareholders in a close corporation?
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To give them a remedy for behavior that defeats reasonable expectations for investing
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What is a professional service corporation?
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Members of a licensed profession, like doctors and lawyers CANNOT practice the profession through a general business corporation.
They must form a professional service corporation "P.C." |
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Must shareholders, officers, and directors in a P.C. be licensed professionals?
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Yes, but they can have non-licensed employees
|
|
Are the professionals liable for their own malpractice?
|
Yes, but not for that of others
|
|
Are the professionals liable for contracts entered by the entity or for rent due on leases in the P.C.'s name?
|
No, the entity is liable
|
|
What law governs the P.C.
|
The rules of business corporations, but there must also be certification that each shareholder, director, and officer is licensed to practice the profession
|
|
What happens if a shareholder in a P.C. dies or is disqualified from the practice?
|
The P.C. must buy the stock
|
|
SHAREHOLDER LIABILITY
|
_
|
|
Are shareholders liable for what the corporation does?
|
Generally no
|
|
Why?
|
The corporation is liable for what it does
(Even if there is only one shareholder) |
|
When might a shareholder be liable for what the corporation did?
|
If the court pierces the corporate veil
|
|
What kind of corporation is required in order to pierce the corporate veil?
|
ONLY in close corporations
|
|
What do you need in order to pierce the corporate veil and hold shareholders personally liable?
|
1. They must have abused the privilege of incorporating AND
2. Fairness must require holding them liable |
|
Why might fairness require PCV?
|
To prevent fraud, or the use of a corporation as a cloak for illegality
|
|
What circumstances bring rise to PCV?
|
1. Alter ego
2. Undercapitalization 3. Wages |
|
What is a situation of Alter Ego
|
Identity interest, agency, excessive domination
|
|
How do you go about answering a question with this fact pattern?
|
1. State the general rule
2. State the PCV standard THEN ASK 3. DId the shareholders abuse the corporation? (In NY, shareholder must exercise complete domination over the company to perpetrate fraud or injustice against the plaintiff) AND 4. Does fairness require PCV |
|
How do you answer a question with an undercapitalization fact pattern
|
1. State the general rule
2. State the PCV standard THEN ASK 3. How was the corporation clearly undercapitalized? 4. is it enough for NY? You need complete domination over the company and fraud or injustice |
|
Is PCV more likely in tort or contract cases?
|
Tort cases
|
|
In a close corporation, the ten largest shareholders are personally liable for what?
|
The wages and benefits of the company's employees
|
|
SHAREHOLDER DERIVATIVE SUITWS
|
_
|
|
What is happening in a derivative suit?
|
A shareholder is suing to enforce the corporation's claim, not her own personal claim
It is a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute the claim |
|
When determining if there is a derivative suit always ask yourself
|
Could the corporation have brought this suit?
If yes: Derivative |
|
What happens when the shareholder wins the derivative suit?
|
The corporation will get the recovery
|
|
What does the shareholder get?
|
Costs and attorney's fees, usually from the judgment won for the corporation
|
|
Can the shareholder EVER recover the damages directly in a derivative suit?
|
Maybe, if recovery by the corporation would return the money to the bad guys
|
|
If the shareholder loses the derivative suit can she still recover costs and expenses?
|
NO
|
|
Is the shareholder liable to the defendant's for their costs?
|
Probably
|
|
Can other shareholders in the corporation later sue the same defendants on the same transaction?
|
No, the claim is barred
|
|
What are the requirements for bringing a shareholder derivative suit?
|
1. Stock ownership when claim arose
2. Must adequately represent the interests of the corporation and the shareholders 3. Can be required to post a bond for the defendant's costs 4. Must make a demand for the corporation to sue 5. Special pleading requirement 6. Corporation must be joined in the litigation as a defendant |
|
What does it mean to have stock ownership when the claim arose?
|
Person bringing suit must have owned stock (or held a voting trust certificate) at the time the claim arose
OR Have gotten it by operation of law from someone who owned the stock when the claim arose (ex: inheritance or divorce decree) - She also must own stock when the action is brought and through entry of judgment |
|
When does the shareholder NOT have to post a bond for the defendant's costs?
|
If she owns 5% or more of the stock OR her stock is worth more than $50,000
|
|
Is there ever a circumstance where the shareholder does NOT have to make a demand that the corporation sue?
|
Yes, if it would be futile to do so
|
|
When might it be futile?
|
1. If the majority of the board is interested or under the control of interested directors
2. The board did not inform itself of the transaction to the extent reasonable under the circumstances 3. The transaction is so egregious on its face that it could not be the result of sound business judgment |
|
What is the special pleading requirement?
|
The plaintiff must plead with particularity her efforts to get the board to sue OR why her demand was futile
|
|
If the shareholder makes the demand and the board refuses to have the corporation sue, can the shareholder bring the derivative suit anyway?
|
Only if she can show that a majority of the board is interested OR
Its procedure was incomplete or inadequate |
|
If the shareholder brings a derivative suit, what can the corporation do to stop it?
|
They can move to dismiss based on a finding by independent directors (or a committee of independent directors, sometimes called a special litigation committee) that the suit is not in the corporation's best interest
|
|
What does the court look at in determining whether or not to dismiss?
|
1. Independence of those making the investigation
2. Sufficiency of the investigation |
|
Can the parties dismiss or settle a derivative suit?
|
Only with court approval, and MAY require notice to shareholders
|
|
Can a director or officer bring a derivative suit against another director or officer?
|
Yes, can compel her to account to violations of duties or misappropriations of corporate assets
|
|
When a director or officer brings a derivative suit, does she have to meet the requirements for a derivative suit?
|
NO. She sues in her own name, but the recovery is by the corporation
|
|
SHAREHOLDER VOTING
|
_
|
|
Who votes?
|
General rule is that record owner as of record date has the right to vote.
|
|
Who is a record owner?
|
The person shown as the owner in the corporate records
|
|
What is the record date?
|
A voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting
|
|
Exceptions to the general rule that record owner on record date votes
(When it is NOT ok to vote even though you are the record holder or when you CAN vote even though you are not the record holder) |
1. Treasure stock
2. Death of shareholder 3. Proxies |
|
When a corporation reacquires stock prior to the record date, does the corporation itself get to vote the treasury stock?
|
NO
|
|
If the shareholder dies after the record date can the shareholder's executor vote the shares AFTER the record date?
|
YES
|
|
What is a proxy?
|
1. Writing
2. Signed by the record shareholder or authorized agent 3. Directed to secretary of corporation 4. Authorizing another to vote the shares |
|
Is a fax or e-mail considered a writing?
|
Yes
|
|
How long does a proxy last unless it says otherwise?
|
11 months
|
|
Can you revoke a proxy?
|
Yes
|
|
How?
|
In writing or by attending the meeting and voting
|
|
What if the shareholder gives P a proxy but then the shareholder dies. Does that revoke the proxy?
|
Only when written notice of death is received by the corporate secretary
|
|
Can the shareholder revoke a proxy even though it states that it is irrevocable?
|
YES
|
|
When IS there a truly irrevocable proxy?
|
1. It says that it is irrevocable AND
2. the proxy holder has some interest in the stock other than voting Called: Proxy coupled with interest |
|
Requirements for a voting trust (block voting)
|
1. Written trust agreement controlling how the shares will be voted
2. Copy to corporation 3. Transfer legal title of shares to voting trustee; AND 4. Original shareholders receive voting trust certificates and retain all shareholder rights except for voting |
|
Is there a time limit on voting trusts?
|
Yes, 10 year max
But within 6 months of expiration, can extend for another term of up to 10 years |
|
Requirements for voting agreement (or pooling agreement)
|
1. Writing
2. Signed Must be shareholders NOT directors |
|
Are voting agreements specifically enforceable?
|
Apparently not
|
|
What is special about a proxy given subject to a voting agreement
|
Irrevocable if it says so
|
|
What are the only two ways the shareholders can take a valid act?
|
1. Written consent of the holders of all voting shares
2. A meeting |
|
Two kinds of shareholder meetings
|
1. Annual
2. Special |
|
Do the meetings have to be in NY?
|
NO
|
|
What happens at the annual meeting?
|
Elect directors
|
|
What do you need to elect a director?
|
The highest vote-getter for each seat on the board wins, even if she did not get the majority of the votes
All she needs is PLURALITY, not majority of the votes |
|
What happens if the annual meeting is not held?
|
The Court can order one
|
|
Who can call a special meeting?
|
1. The board
2. Anyone provided in the certificate or bylaws |
|
What is the notice requirement for meetings?
|
Must give written notice to every shareholder entitled to vote for every meeting (annual or special) between 10 and 60 days before the meeting
|
|
What must be in the notice?
|
- Must always state the time and place
|
|
What if the action proposed at the meeting is something on which shareholders would have appraisal rights?
|
Notice must say so and tell why (and even include the statute about appraisal rights)
|
|
If there is a special meeting what additional notice requirements must be met?
|
Must state who is calling the meeting and the purpose of the meeting
|
|
Why is the statement of purpose important?
|
Because you cannot do ANYTHING else at the meeting
|
|
What if the stated purpose is to remove a particular officer?
|
NO GOOD, the meeting must be for something that the shareholders can actually vote on
|
|
What happens if the corporation does not give notice to everyone that is entitled to vote?
|
The action at the meeting is void
|
|
Exception
|
If those not given notice waive the notice defect
|
|
How does a waiver of notice occur?
|
Express: In writing and signed anytime OR
Implied: Attend the meeting without objection |
|
How do shareholders vote?
|
There must be a quorum represented at the meeting
|
|
How is a quorum determined?
|
Focuses on the number of shares represented, not the number of shareholders
Generally a quorum requires a majority of the outstanding shares |
|
Can the certificate or bylaws reduce a quorum to less than a majority?
|
yes, but never to fewer than 1/3 of the shares entitled to vote
|
|
Can you reduce the requirement of majority approval
|
NO
|
|
Is it possible to impose a requirement that a supermajority of the shares entitled to vote to be present at the meeting to constitute a quorum?
|
Yes, but in the certificate ONLY, not the bylaws
|
|
Is it possible to impose a requirement that resolutions at a meeting must be APPROVED by a supermajority?
|
Yes, but in the certificate ONLY, not the bylaws
|
|
What does majority of votes mean?
|
The majority of the shares ACTUALLY VOTING in favor of the proposal (Abstentions don't count)
|
|
Once a quorum is established at a shareholders' meeting, can it be lost if people leave the meeting?
|
NO
(this is different than the board) |
|
When is cumulative voting available?
|
Only available when shareholders are voting to elect directors
Devise to help small shareholders get representation on the board |
|
How do you calculate cumulative voting?
|
(Number of shares)
x (The number of directors to be elected) = Number of shares that the shareholder can distribute as they wish |
|
If the certificate says nothing about cumulative voting, does the shareholder still get to use cumulative voting?
|
NO, it exists only if the certificate says so
|
|
What is the formula to determine how many shares you need to elect a director?
|
(100)
_______ X plus 1 = #% You need one share more than this #% X= the number of directors being elected |
|
TRANSFER OF STOCK BY A SHAREHOLDER
|
_
|
|
Amount of consideration needed to transfer stock
|
Par value is irrelevant
|
|
Can there be restrictions on stock transfers?
|
Yes if they are set in the certificate, bylaws or by agreement
|
|
When are stock restrictions valid?
|
When they are not an undue restraint on alienation
|
|
Is a right of first refusal acceptable?
|
Yes, so long as the price offered is reasonable
|
|
Could a corporation require that a shareholder get its approval before selling stock?
|
Probably not because the corporation could refuse for no reason
|
|
Can there be a restriction requiring a sale of one's stock to the corporation when the shareholder dies or retires from working for the company?
|
Yes, this is merely a buy-back provision
|
|
Even if the restriction is valid, it cannot be invoked against the transferee unless either
|
1) it is conspicuously noted on the stock certificate OR
2) The transferee had actual knowledge of the restriction |
|
Who can access and demand to see the minutes of a shareholder proceeding or the record of shareholders?
|
Any shareholder on 5 days written demand
|
|
Can the corporation request anything in addition to a written demand?
|
Can demand that the shareholder give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders.
|
|
Can the corporation ever demand more detail in the affidavit?
|
NEVER
|
|
What happens if the shareholder refuses to furnish an affidavit after the corporation demands it?
|
The corporation can deny access to the records
|
|
What does a shareholder have to do to see the list of current directors and offers
|
Just need a two day written demand
Cannot require an affidavit |
|
How can a shareholder access the corporation's latest:
1. Annual balance sheet 2. Profit and loss statement 3. Interim statements distributed to shareholders or public? |
Must make a written request and the corporation must provide the documents
|
|
Common Law right to inspect records
|
All shareholders have a common law right to inspect records at a reasonable time and proper place. Inspection must be for a proper purpose, which means something related to your role as a shareholder
|
|
What documents do the common law right cover?
|
It is unclear
|
|
Can a director inspect the corporate books and records?
|
Yes, directors have unfettered access
|
|
DISTRIBUTIONS
|
_
|
|
What are distributions?
|
Payments by the corporation to the shareholders
|
|
What are the three different kinds of distributions?
|
1. Dividend
2. Payment to repurchase shares 3. To redeem shares (forced sale to corporation at price set in certificate) |
|
When do shareholders have a right to distribution?
|
When the board declares it
|
|
Will a court interfere with the Board's discretion and order a distribution?
|
Only if there is a showing of bad faith or dishonest purpose
|
|
What happens when you have a preferred share?
|
Preferred means paid first.
They get paid first, it gets skimmed off the top and then the rest is divided amongst the common shares |
|
What happens when you have a preferred participating share?
|
The preferred shares get paid first off the top
When the rest is divided amongst the common shares, it ALSO includes the preferred shares and they get paid at that rate They are getting paid twice! |
|
What happens when there is a cumulative share?
|
This occurs when a dividend has not been paid for a number of years.
The corporation owes these shareholders dividends for each of the years, not just the current year |
|
What funds can be used for any form of distribution?
|
Surplus
|
|
How is surplus computed?
|
Assets - Liabilities - Stated Capital = Surplus
|
|
Can Stated Capital itself ever be used for distributions?
|
NEVER
|
|
How is stated capital computed?
|
It is the par value of the issuance, any excess OVER par goes into surplus
|
|
If there is a no-par issuance, how does the consideration get allotted?
|
Within 60 days of the issuance the board CAN allocate any part, but not all, to surplus
|
|
When can a corporation NOT make distributions
|
1. When it is insolvent
2. If the distribution would render it insolvent |
|
What does insolvent mean?
|
The company is unable to pay its debts as they come due in the ordinary course of business
|
|
Who is liable for unlawful distributions?
|
Directors are personally liable.
Shareholders are also personally liable if they knew the distribution was unlawful when they received it. |
|
Who sues to recover when there is an unlawful distribution?
|
It is the corporation's claim, so the corporation can sue or it can be a derivative suit
|
|
What are redemptions?
|
They are set in the certificate, and must be done proportionately within each class of stock
|
|
What are repurchases?
|
THey are individually negotiated
|
|
Can the corporation discriminate in repurchases?
|
Yes, except it might have to give equal opportunity to all shareholders in a close corporation
|
|
FUNDAMENTAL CORPORATE CHANGES
|
-
|
|
What is the dissenting shareholders' right of appraisal
|
The right to force the corporation to buy your stock for fair value
|
|
What actions by the corporation trigger the shareholder's right of appraisal?
|
1. Some amendments to the certificate
2. Consolidation 3. Your corporation merges into another corporation 4. Your corporation transfers substantially all of its assets 5. Your corporation's shares are acquired in a share exchange |
|
What corporations are exempt from the right of appraisal?
|
If the corporation is listed on a nationals securities exchange or NASDAQ
If it is publicly traded, you don't need the right of appraisal because you can just sell the stock on the public market |
|
What actions must be taken by the shareholder to get the right to appraisal?
|
1. Before the shareholder vote, file a written objection AND your intent to demand payment
+ 2. Abstain or vote against the change + 3. After the vote, make a written demand to be bought out |
|
What happens if the shareholder and the corporation cannot agree on the fair value?
|
The corporation must sue, and the court will determine the value
|
|
In determining the value of the stock, can the court discount the value to reflect that minority shares may be worth less than controlling shares?
|
NO, there is no minority discount
|
|
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
|
_
|
|
Are minor changes to the certificate of incorporation allowed?
|
Yes these can be made by the board alone
ex: office location, registered agent |
|
What is required for all other amendments?
|
1. Director action
+ 2. Majority of the shares ENTITLED to vote |
|
When the amendment proposed will change or strike a supermajority quorum or voting requirement for shareholder voting, what do you need?
|
1. Director approval
+ 2. 2/3 majority of the shares entitled to vote |
|
What happens when the amendment is approved?
|
Must be delivered to the Department of State for its filing
|
|
What happens if you dissent to the amendment?
|
If you are a shareholder you have the right of appraisal if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right, or limits voting rights
|
|
MERGERS AND CONSOLIDATIONS
|
_
|
|
What is a merger?
|
A corporation merges INTO pre existing B corporation
|
|
What is a consolidation
|
A corporation and B corporation form C corporation
|
|
When can there be a merger or consolidation?
|
1. Each company's board of directors adopts a plan of merger or consolidation
+ 2. Shareholder approval in each corporation |
|
What percentage of shares votes do you need for a merger or consolidation?
|
Majority of shares ENTITLED TO VOTE
|
|
When is shareholder approval not required
|
In a short form merger
|
|
What is a short form merger?
|
When the parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into a parent corporation
|
|
What happens once the merger or consolidation has approval?
|
Certificate of merger or consolidation must be delivered to the Department of State for filing
|
|
Are there dissenting shareholders' rights of appraisal?
|
Yes, for the shareholders of the company that disappeared
Generally not available for the shareholders of the survivors |
|
Do dissenting shareholders of the subsidiary in a short-form merger have the right of appraisal?
|
Yes, even tho they did not vote
|
|
What is the effect of a merger or consolidation?
|
the surviving company succeeds all rights and liabilities of the disappearing company
"Successor liability" |
|
How can a company sell all of its assets to another company, or give all of its shares to another company?
|
1. Each corporation's board of directors authorizes the deal
+ 2. Approval by the selling corporation's shareholders |
|
What is the number of shares the selling corporation needs to approve the sale?
|
Majority of the shares ENTITLED to vote
|
|
How many shares does the company purchasing the assets need?
|
0. They do not vote!
|
|
Are there dissenting shareholder' rights of appraisal?
|
Yes, for the selling company only
|
|
In a share exchange what is required to make it final?
|
Deliver of plan exchange to the Department of State for filing
|
|
Do you have to file with the state for transfer of assets?
|
No
|
|
Is the company acquiring the assets liable for torts of the company?
|
Generally no, UNLESS
1. The deal provides otherwise, OR 2. The purchasing company is a mere continuation of the seller OR 3. The deal was entered fraudulently to escape such obligations |
|
What about in a merger?
|
There is no successor liability because the company selling the assets still exists
|
|
DISSOLUTION
|
-
|
|
What is required when dissolution is voluntary?
|
No board vote is necessary.
Shareholder vote: Majority of the shares entitled to vote |
|
How does a voluntary dissolution become final?
|
Certificate of dissolution delivered to the Department of the State for its filing
|
|
When can there be an involuntary (judicial) dissolution?
|
1. By Board resolution or resolution of majority shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders
2. 1/2 or more of shares entitled to vote may petition if directors are too divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders 3. Any shareholder entitled to vote may petition if shareholders unable to elect directors for two annual meetings 4. 20% or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds: Management illegal, oppressive, or fraudulent acts towards the complaining shareholders OR Management wasting, diverting, or diluting assets |
|
Can the court deny dissolution?
|
Yes, if there is some other way the complaining shareholder can obtain a fair return on his investment
The 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 |
|
Does dissolution end the corporation's existence?
|
NO, it stays in existence to wind up (liquidate)
|
|
What are the steps in winding up (liquidating)
|
1. Gather assets
2. Convert to cash 3. Pay creditors AND 4. Distribute remainder to shareholders, pro-rata by share unless there is a dissolution preference |
|
Can shareholders agree that they will be paid before creditors?
|
NO, creditors always get paid first
|
|
What is a controlling shareholder?
|
A shareholder who occupies a control position (such as a director) or whose ownership is such that she working control over the corporation
|
|
What duty does a controlling shareholder owe?
|
She owes a fiduciary duty to minority shareholders and, sometimes, to others (including the corporation),
She cannot use a dominant position for individual advantage at the expense of minority shareholders or the corporation |
|
Can a controlling shareholder sell their share at a premium?
|
Yes, but if she sells the stock for more than its economic worth, the excess she receives is called the "control premium"
|
|
Does she get to keep the control premium?
|
Generally yes, BUT there are three situations where the court may impose liability
1. Sold to looters without making a reasonable investigation 2. De facto sells a corporate asset 3. Sells a seat on the board. |
|
What is the remedy in the situation of selling to looters?
|
Disgorge the sellers profits and the seller is probably liable for all damage to the corporation
|
|
What is the remedy in the situation of selling a corporate asset de facto?
|
All the shareholders share the premium
|
|
What is a freeze out?
|
If a merger doesn't have a legitimate corporate purpose and instead the purpose is aimed solely at cashing out minority shareholders unfairly
|
|
What does a court look for in a freeze out to determine if they should protect the minority shareholders?
|
The transaction as a whole:
1. Fair price 2. Fair dealing 3. Legitimate corporate purpose |
|
What happens when there is market trading on inside information by a director or officer?
|
The corporation can sue and recover her profits
(Can be a derivative suit) |
|
What is the rule for nondisclosure of special facts?
|
All directors and officers (and probably controlling shareholders) owe a duty not to trade on special facts in a securities transaction with a non-insider
Cant trade on secrets! Have to abstain or ensure disclosure |
|
What are special facts?
|
Those a reasonable investor would consider important in making an investment decision
|
|
Who can sue in this situation?
|
A shareholder with whom the director or officer deals and violates the special facts doctrine
(The shareholder to whom the insider breaches a duty) Corporation does NOT sue |
|
What is the measure of damage?
|
The difference between price paid, and value of stock a reasonable time after public disclosure
|