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40 Cards in this Set

  • Front
  • Back
1) What does an incorporator do?
a) Execute the certificate and deliver it to the department of state and
b) Hold the organizational meeting
2) How many incorporators do you need?
1 or more
3) Who can be an incorporator? Can Bar/Bri serve as an incorporator for Curl Up and Dye Beauty Supply Corp? Can Michael Jackson?
Adult human beings ONLY
Bar/Bri cannot be an incorporator, Michael Jackson can
Certificate of Incorporation: Name and Address
1) Corporate name
Can I form a corporation with the name Bubba’s Bountiful Biscuits?
NO, it must have “corporation,” “incorporated,” or “limited” in the name – that shows the world it is a corporation
You may abbreviate whichever name you use
2) What do we give as an address?
We give the county in NY where we have our office of corporation
Does the “office of corporation” have to be a place where the corporation actually does business?
3) When MUST you designate as the corporation’s agent for service of process?
NY Secretary of State
What other information must be given for service of process?
An address for forwarding process to the corporation
In addition to the Secretary of State, you MAY (but don’t have to) name a registered agent for service of process
4) Name and address of each incorporator
Certificate of Incorporation: Duration and Purpose
a) Make a statement of duration. What if the certificate contains no statement of duration?
Corporation has perpetual existence – can live forever
b) Corporate purpose – statement is required
1) Could be a general statement of purpose
Can the certificate of Bubba’s Bountiful Biscuits, Inc. indicate that the corporations purpose is to “engage in all lawful activity, after first obtaining necessary state agency approval”? Yes
2) Could be a specific statement of purpose
What if purpose is to sell biscuits but later sell t-shirts too?
Selling t-shirts is an ultra vires act, outside of the contract
1) Ultra vires contracts are valid – they’re ok and enforceable, so we do not void them as we did at common law
2) Shareholders can seek an injunction – try to stop action
3) Responsible officers and directors are liable to the corporation for ultra vires losses
Certificate of Incorporation: Stock
1) Authorized stock: Maximum number of shares the corporation can sell. Issued stock: Number of shares the corporation actually sells. Outstanding stock: Shares that have been issued and not reacquired by the corporation
2) What must be included in the certificate about the corporation’s stock?
a) Authorized stock
b) The number of shares per class
c) Information on par value, rights, preferences, and limitations of each class
d) Information on any series (subclass) of preferred shares
But note: 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
Corporate Acts
Each incorporator signs certificate and acknowledges it before a notary. They deliver it to the NY Department of State. If it conforms with law, and filing fees are paid, the Department files the certificate. What is the effect of the Department’s filing?
It is conclusive evidence of valid formation – at that moment we are a de jure corporation (legal corporation in the eyes of the law)
Then the incorporators hold an organizational meeting (or they can do it by written consent). What do they do at the organizational meeting?
1) Adopt any bylaws
2) Elect the initial board of directors
3) The board takes over management
Legal Significance of Formation of Corporation
A. ***Internal affairs (duties, relationship among directors, officers, shareholders, etc) of a NY corporation are governed by NY law (wherever you are doing business)
B. A corporation is a separate legal person. It has broad powers by statute, including the power to enter contracts, transfer property, buy and sell securities (its own and other’s), and to sue or be sued
Can a corporation make political contributions?
Yes, but no more than $5000/year per candidate or organization
Can a corporation make charitable contributions?
Yes, and there is no statutory ceiling on this
Can a corporation guaranty a loan that is not in furtherance of corporate business?
Yes, if it is approved by 2/3 of the shares entitled to vote
C. Because the corporation is a separate entity, the people who run it (directors and officers) are not liable for its obligations. And the owners (shareholders) generally enjoy “limited liability,” which means that a shareholder only has to pay for her stock, and not any corporate liability.
So who is liable for the corporate debts and obligations?
The corporation
De Facto Corporation Doctrine/Corporation by Estoppel
Doctrines by which a business failing to achieve de jure corporate status nonetheless is treated as a corporation (so shareholders will not be personally liable for business debts)
A. De Facto Corporation: 1) there is a relevant incorporation statute, 2) the parties made a good faith, colorable attempt to comply with it, and 3) some exercise of corporate privileges. If applicable, treated as corporation for all purposes except in an action by the state, so it’s as good as being de jure (except in an action by the state).
What is the status of de facto corporation in NY?
It was thought to be abolished BUT case law suggests it may be alive, at least in limited circumstances.
For example, say the incorporators put together a proper certificate and deliver it to the Department of State, but the Department failed to file it (without rejecting it). Not de jure, because not filed. Can argue de facto corporation if meet the test.
B. Corporation by Estoppel: theory is the one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business’s corporate status. So such a person, under this theory, cannot sue the individual proprietors. BUT
This is ABOLISHED in NY – can go after them individually
A. De jure corporation can exist without bylaws: adoption of bylaws is NOT a condition precedent to formation of a corporation. But almost every corporation has them. They can establish internal procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.
B. If bylaws are inconsistent with the certificate, which document controls?
The certificate – it is a contract with the state
Are bylaws filed with the state? No
Are outsiders bound by bylaws?
No, the bylaws are an internal document
C. Who adopts the initial bylaws?
The incorporators, at the organizational meeting
Initial bylaws have the status of shareholder bylaws (some things can only be done by shareholder bylaws, these initial bylaws count as shareholder bylaws)
D. Who can amend or repeal the bylaws or adopt new ones?
The shareholders
When does the board of directors ever get to amend or repeal bylaws or adopt new ones?
Only if the certificate or a shareholder bylaw allows
If they are silent on that, then the board doesn’t have a role in amending/repealing (And shareholders can amend or repeal any director-adopted bylaws)
A. A promoter is a person acting on behalf of a corporation not yet formed. For example, she might enter a contract with a third party on behalf of the corporation not yet formed.
B. Liability on pre-incorporation contracts.
1) A corporation is not liable on pre-incorporation contracts until it adopts the contract
How can adoption happen?
1) Express adoption?
By directors’ action
2) Implied adoption?
Corporation’s knowing acceptance of a benefit of the contract
Generally, unless the contract clearly indicates that the parties do not intend the promoter to be liable, the promoter remains liable on pre-incorporation contracts until there has been a novation, ie: an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.
Will the promoter be liable on the lease if the corporation is never formed?
In case where promoter contracts for a lease, will the promoter be liable on the lease if the corporation is formed and adopts the lease?
Yes, promoter is liable until novation, when no novation yet promoter remains liable
The adoption makes the corporation liable too, but does not relieve the promoter. So both would be liable – corporation because adopted and promoter because no novation
Secret Profit Rule
Promoter dealing with corporation itself***
Promoter cannot make a SECRET profit on her dealings with the corporation. If made a secretprofit, has to give it up
A. Sale to corporation of property acquired before becoming promoter (Profit equals price paid by corporation minus fair market value (FMV))
On Jan 10th, P begins working as a promoter, On April 4th, P sells corporation to Green Acres for $40,000. P bought Green Acres in 1931 for $1.98. Is there any profit?
Maybe not, apply test: Price paid by corporation (40,000) minus FMV. If FMV is $40,000 or more then there is no profit on this facto pattern
What P paid for the property is irrelevant
B. Sale to corporation of property acquired after becoming promoter (Profit equals price paid by corporation minus price paid by promoter)
On Jan 10th, P begins working as promoter; On Feb 20 P buys property for $18,000; on March 3, P sells property to corporation for $24,000. Is there profit here?
Yes – price paid by corporation (24,000) minus price paid by promoter (18,000) so profit = 7,000
So, in the last hypo, P made a profit of $7000. Is P liable to the corporation for that amount?
ONLY if the profit was SECRET so it depends on the corporation’s knowledge
Foreign Corporation
Foreign corporations doing business in NY must qualify
A. A foreign corporation is one incorporated outside NY
Is a NJ corporation
“foreign”? Yes
A NY corporation is domestic – anything outside NY is foreign
B. What does “doing business” mean?
The regular course of intra state business activity
So, not just occasional or sporadic business. Not just having meetings in NY, etc
C. The foreign corporation can qualify by applying to the NY Department of State and designating the Secretary of State as agent for service of process AND pay fees to NY
In applying to qualify, what kind of information does the foreign corporation give the NY Department of State?
1) Information from its certificate and
2) Proof of good standing in its home state
D. What happens if a foreign corporation does business in NY without qualifying?
1) There is a penalty when the corporation does qualify
2) Until it qualifies, it cannot sue in NY although it can be sued (you can sue after you qualify and pay penalty)
Issuance of stock occurs when a corporation sells its own stock
Issuance of stock is one way a corporation can raise capital. Investors buy stock and thereby become holders of an “equity security.” They are owners of the corporation. Their equity interest brings with it various rights we will see.
This is to be distinguished from issuance of bonds. With a bond, the investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the contact. The holder of a bond is a creditor (not an owner) of the corporation. She holds a “debt security.”
What is a “debenture”?
It is a loan, the repayment of which is not secured by corporate assets
Mayberry Realty Corp, sells 10,000 shares of Mayberry stock. Is that an issuance?
Yes – corporation sold its own stock and that’s what an issuance is
Barney Fife sells 3,000 shares of Mayberry stock. Is that an issuance?
NO, only issuance if corporation sells own stock
REMEMBER: ALL of these following rules ONLY apply to the corporation selling own stock
A. A subscription is a written, signed offer to buy stock from the corporation. One important consideration is whether a subscription can be revoked.
B. Revocation of pre-incorporation subscriptions***
On Jan 10, S signs a subscription, offering to buy 100 shares of C Corp, a corporation not yet formed. A week later, S changes his mind. Can S revoke?
NO, a pre-incorporation subscription is irrevocable for 3 months unless it says otherwise or all subscribers agree
Why is this the rule?
So people forming the corporation can rely on the money being there
C. Are post-incorporation subscriptions revocable?
Yes, until acceptance
D. When do the corporation and the subscribers become obligated under a subscription?
When the board accepts the offer (At that point, there is an agreement to sell to this subscriber
Can the corporation decide to sell only to some subscribers and not others?
No, it must be uniform within each class or series (subclass) of stock
Subscriptions Continued
E. If the corporation accepts the offer and the subscriber defaults on payment, what happens?
1) If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. The shares then become authorized and unissued.
2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to may cash)
What happens if no one will pay the remaining balance?
Defaulting subscriber forfeits what he has paid and the shares are cancelled.
What happens if someone will pay more than the remaining balance due?
The defaulting subscriber recovers the excess over what he agreed to pay.
But, deduct from that the corporation’s expenses in selling
Form of Consideration
What are the five permitted forms of consideration for an issuance?
1) Money (cash or its equivalent, like a check)
2) Tangible or intangible property
3) Labor or services already performed for the corporation
4) A binding obligation to pay in the future in cash or property
5) A binding obligation to perform future services having an agreed value
Can the corporation issue stock to somebody for performing services in forming the corporation?
Yes – this meets the third requirement for consideration, considered labor/services performed for the corporation
What are prohibited forms of consideration?
Anything other than the five permitted forms of consideration.
Most things will meet one of the kinds of consideration
What happens if somebody “pays” for an issuance with an improper form?
It’s called “unpaid” stock and it’s all treated as water
Amount of Consideration
1) Par means “minimum issuance price”
If C Corp issues 10,000 shares of $3 par stock, it must receive at least: $30,000
Can it issue the stock for more than $30,000?
Yes, par means minimum – can always get more than par
2) No par means there is no minimum issuance price. Can sell for any price.
Who sets the price at which to sell no par stock?
The board unless the certificate allows shareholders to do so
If certificate is silent, then the board has to do it
3) ***Treasury stock is stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock.
C Corp is selling $3 par treasuring stock. It must receive at least what?
No minimum. Always treat treasury as no par
Even though stock was originally par it is reacquired as treasury so treat it as no par.
4) Acquiring property with par value stock
Can C Corp issue 5,000 shares of $3 par to acquire Vince’s farm?
Is the formation of consideration ok?
Yes, this is tangible property (on the list)
Is the amount of consideration ok?
Yes, if that farm is worth at least $15,000 (5,000 times $3)
The board always values the consideration in a par issuance. In no-par, board values consideration unless certificate allows shareholders to do so.
When the board 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
Corp issues $1,000,000 worth of its stock to pay a director’s nephew for providing one week’s worth of cleaning services for Corp. Got a problem with that?
Yes, that is fraud. There is no way this is worth $1,000,000 – wasting corporate assets so directors are liable
Amount of Consideration Continued
5) Consequences of issuing par stock for less than par value; ie “watered stock”
C Corp issues 10,000 shares of $3 par to X for $22,000. The corporation (or creditors if the company is insolvent) can sue for the $8,000 of “water.”
Are the directors liable for the water?
Yes, if they knowingly authorize the issuance
Is X (the guy who bought the watered stock) liable?
YES – you are charged with notice of the par value so no defense
What if X buys the watered stock and transfers it to a third party?
Third party is not liable if she acts in good faith which means she did not know about the water
But third party’s status has no effect on liability of X and the directors
Preemptive Rights
A. Preemptive right is the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuances of common stock for money (which includes cash or checks)
If the certificate is silent, does “new issuance” includes sale of treasury stock? NO
If the certificate is silent, does “new issuance” include sale of shares authorized by the original certificate and sold within two years of formation? NO
S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp is planning to issue an additional 3,000 shares. If S has preemptive rights, then S has the right to do what?
S owns 20% originally so can (doesn’t have to) buy 20% of the additional 3,000 shares = 600 shares
Preemptive Rights Continued
B. If the certificate of incorporation is silent regarding preemptive rights, do they exist? THE ANSWER DEPENDS UPON WHEN THE CORPORATION WAS FORMED
For corporations formed before Feb 22, 1998:
YES, have preemptive rights
For corporations formed on or after Feb 22, 1998:
NO, only exist if certificate says so
Note: for every other instance, the date of Feb 22, 1998 will go with the old law.
Suppose the certificate provides for preemptive rights and C Corp is issuing stock to G to acquire Green Acres from G? Are there preemptive rights?
No. This is not an issuance for money! ONLY exist if there’s a new issuance for money
Statutory Requirements
A. Number of directors: one or more adult natural persons.
How is the number set?
1) In bylaws or
2) By shareholder action or
3) By the board if a shareholder adopted bylaw allows
Note: Not in certificate
What if no number of directors is set in any such way?
Then there is one director.
B. Incorporators elect initial directors.
After that, who elects directors?
Shareholders at the annual meeting. Shareholders are the owners of the corporation and elect the directors.
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.
How many directors must be in a class?
At least 3 directors in each class
So, if we had 9 directors, we could elect all 9 each year and they would have one year terms. OR we could have 3 classes of 3 directors each, and each year we would elect 3 directors; they would serve 3 year terms (classified board)
Statutory Requirements (2)
C. Removal of directors before the expiration of their term***
Can shareholders remove a director for cause?
YES, can remove director anytime for cause
Can the board remove a director for cause?
ONLY if the certificate or bylaws allows
So, if silent the shareholder can remove the director for cause but the board cannot
Can anyone remove a director without cause?
Yes, ONLY shareholders and ONLY if the certificate or bylaws allow
D. Filling a vacancy on the board (eg, a director dies or resigns or is removed)
General rule: who selects the person who will serve the remainder of the term?
Remaining directors
Special rule: who selects the person who will serve the remainder of the term in the rare case when a director is removed by shareholders without cause?
Statutory Requirements (3)
D. Filling a vacancy on the board (eg, a director dies or resigns or is removed)
General rule: who selects the person who will serve the remainder of the term?
Remaining directors
Special rule: who selects the person who will serve the remainder of the term in the rare case when a director is removed by shareholders without cause?
E. How the board of directors acts
1) There are only 2 ways in which the board can take a valid act***
1) Unanimous written consent to act without a meeting or
2) A meeting
(If neither is met, the “act” taken is void unless later ratified by a valid act)
If we have a meeting, must it be held in NY?
No, can be anywhere in the world
Is a meeting by conference call ok?
Yes, if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meetings are allowed)
2) Notice requirements for board meetings
Is notice required for regular meetings?
NO, the time and place are usually set in the bylaws
Is notice required for special meetings?
YES, and the method of giving notice can be set in the bylaws
What happens if required notice for a special meeting is not given to a director?
Any action taken at the meeting is void unless the director not given notice waives the notice defect.
How can she waive the notice defect?
1) In writing and signed any time or
2) By attending the meeting without objection
Statutory Requirements (4)
3) Can a director give a proxy for director voting?
NO, it’s void, against public policy. There is no such thing as a proxy for director voting (but there can be proxies for shareholder voting, identify whether acting as shareholder or director)
4) Can directors enter voting agreements on how they will vote as directors?
NO, void, against public policy. NO voting agreements among directors (again, shareholders can have agreements but directors cannot).
5) Quorum for a meeting***: To do business, we must have a majority of “entire board” (duly constituted board – that means the number of positions if there were no vacancies). Once we have a quorum, though, passing a resolution (which is how the board takes an act at a meeting) requires majority vote of those present.
If there are 9 directorship positions on the board, at least 5 directors must attend the meeting to constitute a quorum. If 5 directors attend, at least 3 directors must vote for a resolution for it to pass.
Suppose there are 9 directorships positions on the board. Five of the directors show up at a properly called meeting, but then one of them leaves the meeting. Can the board continue to do business?
NO, the quorum has been broken and the board can no longer do business. There must be a quorum PRESENT
Suppose there are 9 directorship positions on the board, but 2 of the directors have resigned and no successors have been selected. So there are only 7 directors actually serving now. How many must show up at a meeting to constitute a quorum?
Need at least 5 – majority of ENTIRE BOARD
Statutory Requirements (5)
Can the corporation decrease a quorum to less than a majority of directors?***
Yes, by certificate or bylaw BUT it can never be fewer then 1/3 of the directors
Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?***
NO, that can NEVER be decreased
Can the corporation increase a quorum to greater than a majority of directors (eg 90% of entire board must be present to do business)?***
Yes, but ONLY in the certificate and NOT the bylaws
Can the corporation require a supermajority vote to pass a resolution (eg: 60% of the directors present must approve the resolution)?
Yes, but ONLY in the certificate and NOT the bylaws
Role of Directors
A. Generally, board of directors manages business of the corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc
B. If the certificate or bylaws allow, a majority of the “entire board” can delegate substantial management functions to a committee of ONE or more directors. But, the board cannot delegate ALL powers and responsibilities to a committee.
What can a committee NOT do?
1) Amend, repeal, or adopt bylaws
2) Submit a fundamental change to shareholders
3) Fill a board vacancy
4) Set the record compensation
Can a committee recommend any of these things for full board action?
YES, very common, especially with compensation
What is a particularly important area in which committees are used?
Shareholder derivative suits
Duty of Care
Duty of Care Standard: A director must discharge her duties in good faith and with the degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position****KNOW THIS AND HAVE IT IN THE ANSWER****
A. Nonfeasance (director does nothing)
Justin, director of C Corp, fails to attend any of the board of directors’’ meetings or to keep abreast of the business in any way. Will he be held liable for breach of duty of care?
State the duty of care standard. An ordinarily prudent person would attend some meetings. Justin never attended any meetings and did not stay abreast of the business, so he breached the duty of care. BUT he is liable ONLY if:
His breach caused a LOSS to the corporation
Have to show causation – if company got sued for antitrust violation and you were an expert in antitrust you could have stopped that by showing up
Duty of Care Continued
B. Misfeasance (board does something that hurts the corporation – causation is clear) – this involves the business judgment rule, which will be abbreviated “BJR”
The directors of Hedonists’ Hot Tubs, Inc voted to start a new product line of hot tubs with built-in wine coolers and video cameras. The idea is a disaster and the company loses money. Are the directors liable for breach of duty of care?
State the duty of care standard. Here, the directors’ decision caused the corporation to lose money
A director is not liable if she meets the BJR = prudent person standard
Prudent people do appropriate homework – look at facts and see if they deliberated, analyzed, etc because that’s what prudent people do under the circumstances – if so then not liable
***BJR: A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis***
You are only in trouble if it is irrational or grossly negligent
Don’t have to be perfect or right
Duty of Loyalty (1)
Remember: Directors are fiduciaries
Duty of Loyalty Standard: a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries
Why does the BJR not apply to duty of loyalty cases?
Because these involve conflicts of interest
A. Interested Director Transaction: 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)
Martha is a director of XYZ, Inc. If she sells wreaths to the corporation, it is an interested director transaction. Is Martha in trouble?
State the duty of loyalty standard. Interested director transactions will be set aside UNLESS the director shows either
1) the deal was fair and reasonable to the corporation when approved OR
2) 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 sufficient vote NOT counting the votes of interested directors or
3) Unanimous vote of disinterested directors if disinterested directors are insufficient to constitute an act of the board
Do interested directors count toward a quorum of the board?
Yes, they can participate but their vote does not matter
Duty of Loyalty (2)
There are nine directors. Five of them are interested in an interested director transaction. All nine attend the meeting to consider approving the deal. After appropriate disclosure, what vote could approve the deal?
Need all four disinterested directors to vote yes because this is the situation where the disinterested directors are insufficient for majority, only 4 out of 9 and need 5 out of 9 for quorum, so here need a majority of the disinterested directors.
Board can set compensation of directors in any capacity, unless certificate or bylaw says they can’t.
Compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets (and breach of duty of loyalty).
Sometimes a corporation may want to give a director or officer or employee stock options as an incentive to service. If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. What if the stock is not listed on a stock exchange?
This use of options must be approved by shareholder vote
B. Competing Ventures
Sharon is a director of Ozzie’s Music Corp. She can also serve as a director for Home Depot because Home Depot does not compete with Ozzie’s. But can Sharon start her own music corporation?
State the duty of loyalty standard. Director cannot go into competition with her corporation. What happens if she does?
Ozzie’s gets a constructive trust on her profits – she is a fiduciary, breaching fiduciary duty, duty of loyalty, so get constructive trust on profits
Duty of Loyalty (3)
C. Corporate Opportunity
Cheatem is a director of C Corp, which develops condo projects. Cheatem learns of some land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?
State the duty of loyalty standard. Director cannot USURP a corporate opportunity. What does that mean?
He cannot take it until he tells the board about it and waits for the board to reject it
What qualifies as a corporate opportunity?
“Something the corporation needs, or has an interested or tangible expectancy in or that is logically related to its business”
Remedy: If there is usurpation, the usual remedy is a constructive trust.
So if Cheatem still has it, he must sell it to the corporation at his cost. If Cheatem has sold it at a profit, the corporation gets the profit.
Other Basis Director Liability
A. Improper loans of corporate funds
The board of directors votes to lend a director $100,000 of corporate funds or to guarantee director’s personal obligation. Is this ok? APPROVAL REQUIRED DEPENDS ON WHEN CORPORATION WAS FORMED
For corporations formed on or before Feb 22, 1998:
Shareholder vote (in which a quorum is a majority of disinterested shares), unless the certificate allows board to decide that a loan benefits the corporation.
For corporations formed after Feb 22, 1998:
Need board’s conclusion that the loan benefits the corporation. You do not need shareholder approval.
Ex: lending money to officer take courses in business to then help the corporation
Sarbanes-Oxley Act restrict loans to executives in registered (publicly-traded) Corporations
Other Basis Director Liability
B. Improper Distributions (talk about later)
C. For these or any other thing a director can be liable for, exactly which directors are liable?
1) General Rule: A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records. How does the director do that?
1) In the minutes or
2) In writing to the corporate secretary at the meeting or
3) Registered letter to the corporation promptly after adjournment
Note: Director cannot dissent if voted for the resolution at the meeting
2) Exceptions to the general rule
a) Suppose a director missed a meeting, say because he was sick that day. Is he liable if the board approved something wrongful that day (like an illegal dividend)?
He is not liable if he registers written dissent within a reasonable time of 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.
b) ***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.
This exception might be especially likely in a case involving improper distributions (talk about later)
B. Status: Officers are agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so. (Watch for a cross-over with agency)
C. The Board may select a president, one or more vice-presidents, a secretary, a treasurer, and any others the Board may determine or for which the bylaws provide
Can one person hold multiple offices simultaneously?
YES, there is no limit
Officers continued
D. Selection and removal of officers
Who selects and removes officers?
The directors unless the certificate allows shareholders to do so
If the shareholder elect them, only the shareholders can fire them. Even then, for cause, directors can suspend an officer’s authority to act.
The directors of Viagra Corp appoint Bob Dole as president . What if the directors later fire Bob form the presidency?
Bob is gone/fired but the corporation may be liable for breach of contract damages
If breach contract can sue for monetary damages but does not get the job back
Look for cross-over with contracts
So remember the hierarchy. As general rules:
Who hires and fires directors?
Who hires and fires officers?
So, as a general rule, do shareholders hire and fire officers?
NO, generally do not, only if certificate allows them to do so
E. Judicial action.
The attorney general or holders of 10% of all shares may sue for a judgment removing an officer for cause. Court can bar reappointment of a person so removed from office.
F. Compensation of officers. Who sets it?
The Directors – directors monitor the officers
Indemnification against Directors/Officers
A. Situation: a person is sued in her capacity as officer or director by or on behalf of the corporation. She incurs costs, attorney’s fees, maybe even fines, a judgment or settlement; she seeks reimbursement from the corporation. There are 3 possibilities:
1) Prohibited: reimbursement is prohibited if the officer or director was held liable to the corporation
2) Of right: the corporation must reimburse the director or officer if she was successful in defending the case, on the merits or otherwise
Suppose a director or officer is successful in defending a suit against her, so she qualified for reimbursement of right form corporation. But the corporation refuses to reimburse her. Now she sues the corporation to force it to reimburse her, and wins. Can she recover the attorney’s fees of this suit against the corporation?
NO, even though she had a right to be reimbursed from the first case she cannot get attorney fees of suing the corporation
Indemnification of Directors/Officers continued
3) Permissive: Situation not satisfying (1) or (2) above, the corporation may reimburse the officer or director. What must she show for this?
1) That she acted in good faith and
2) For a purpose reasonably believed to be in the corporation’s best interest
Reimbursement in the “permissive” category can include settlement amount, expenses and attorney’s fees (not any judgment, though)
For permissive, who determines eligibility?
a) The Board (with a quorum of directors being non-parties) or if there is no such quorum
b) Shareholders or a quorum of those directors who are disinterested or
c) The Board pursuant to report from independent legal counsel
B. Can the court in which the officer or director gets sued order the corporation to reimburse the officer or director for litigation expenses and attorney’s fees?
Yes, if it finds she is reasonably entitled to it BUT this cannot include a judgment against her
C. Can the corporation advance litigation expenses to the director or officer?
YES, but they must be repaid if it turns out she is not entitled to reimbursement
D. Corporation can buy insurance to cover director and officer liability
E. Certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited.
F. Certificate may provide for elimination of director liability to the corporation or shareholders for damages for breach of duty EXCEPT:
When the director
1) Acted in bad faith or
2) With intentional misconduct or
3) Received an improper financial benefit or
4) Approved an unlawful distribution or loan
Raise this whenever you see a director being sued for breach of duty
Holding Shareholders Liable for Debts of Corporation
A. Generally, a shareholder is not liable for the debts or acts of a corporation.
But a court may “pierce the corporate veil” (PCV) and hold shareholders personally liable if they
1) Have abused the privilege of incorporating and if
2) Fairness demands that the shareholders not have limited liability
PCV is extraordinary. Why?
Because the corporation is supposed to be liable for what it does, not the individual shareholders, but here they are because they abused the corporation and fairness demands they be held liable
Holding Shareholders Liable for Debts of Corporation Continued
B. Why might NY courts PCV?
To prevent fraud or to achieve equity
To prevent the use of the corporation as a cloak for illegality
1) Alter ego (a/k/a: identity of interests, agency, excessive domination)
X and Y are the shareholders of C Corp. X is also the chief executive officer. X commingles personal and corporate funds, uses the corporate car as her own, and uses the corporate credit card for personal purchases. Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y?
State the general rule (about shareholders generally not liable fro debts or acts of corporation), and state the PCV standard and explain PCV. Then:
There is no PCV if the corporation has any mind, existence, or will of its own
For example, a dummy corporation, where shareholders carry on business in personal capacity or for purely personal, not corporate, ends or
A parent corporation completely dominating a subsidiary
If a court did PCV, who would be liable – X or Y or both?
X and only X because only X abused the corporation
2) Undercapitalization
S is a shareholder of Glowco, Inc. G, a corporation that hauls and disposes of nuclear waste. G does not carry insurance. G has an initial capitalization of $1,000. V is injured when one of G’s trucks melt down. Can V sue S?
State the general rule that shareholders are not liable for corporate debts and PCV standard and explain PCV. Here, the corporation was undercapitalized when formed. Why?
Because shareholders failed to invest enough to cover prospective liability
Is undercapitalization enough for PCV in NY?
Apparently not by itself. Also need excessive domination or fraud or illegality.
As a general rule, do we expect PCV more readily in tort or contract cases?
Tort (since in contract other side can look into the corporation)
C. Wages
In a close corporation, the 10 largest shareholders are personally liable for what?
For the wages and benefits to the corporation’s employees
Shareholder Management of Corporation
A. Remember that generally board of directors (not shareholders) manage the corporation. There is a public policy that the Board must exercise the management power, and that shareholders should not encroach directly on that power. There is a trend away from that public policy in some instances.
B. Shareholders can manage the business directly in a close (or “closely held”) corporation. What is a close corporation?
It has few shareholders and the stock is not publicly traded
Most corporations are close corporations and you can either have a board OR shareholders can manage the corporation
How is power vested in the shareholders to manage a close corporation?
A provision in the certificate can restrict or transfer Board power to shareholders or others. Ok if:
1) All incorporators or shareholders (voting and nonvoting) approve it;
2) All subsequent shareholders have notice;
3) It is conspicuously noted on front and back of all shares; and
4) Shares are not listed on an exchange or regularly quoted over-the-counter
In a close corporation run by shareholders, who owes the duties of care and loyalty?
Managing shareholders – those who are actually calling the shots
In a close corporation, there is a trend toward imposing fiduciary duties on shareholders in their dealings with each other.
Especially, controlling shareholders cannot use their power for personal gain at expense of minority shareholders or the corporation or to oppress minority shareholders or the corporation (see Fact Pattern 6). They owe a duty of utmost good faith.
Shareholder Management of Corporation Continued
C. Professional service corporations. Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation, usually abbreviated “P.C”
Must shareholders in a PC be licensed professionals?
YES and officers and directors must also be licensed professionals
Regular employees don’t have to be professionals
Are the professionals liable for their own malpractice?
YES, but not for that of others in the group
Are the professionals liable for contracts entered by the entity or for rent due on leases in the PC’s name?
NO, the entity is liable for those, the individuals are not
In general, the PC is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of PC and must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession.
What happens if one of the shareholders dies or is disqualified from the practice?
The PC must purchase his shares