Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

231 Cards in this Set

  • Front
  • Back
What is required to form a corporation
People, Paper, and Act. Incorporatores, Certificate of Incorporation, and 2 acts for incorporation
What are the responsibilities of Incorporators?
They must
1) Execute the certificate and deliver it to the department of state, and
2) hold an organizational meeting.
How many incorporators do you need to form a corporation?
Who can be an incorporator?
Only adult human beings in NY (not corporations)
What is the Purpose of the Certificate of Incorporation?
1) Its a contract b/w corporation and shareholders, and

2) its a contract b/w corporation and state
What information goes into the certificate of incorporation?
1) Names and Addresses
2) May make a statement of duration
3) Statement of Corporate Purpose
4) Capital Structure
What names and addresses need to be included in the certificate of incorporation?
1) Name of corporation (must have incorporated/corporation/limited in it)

2) Address - NY County of office of corp (ned not be where business is actuallly done).

3) Designated people for Service of PRocess.
a) NY Secretary of State is designated as the corporation's agent for service of process by law.
b) also need to include REAL ADDRESS of corporation for forwarding process, and
c) Corporation can (need not)include the name of a registered agent for service of process

4) Name and address of each incorporator
What information about Statement of Duration needs to be included in the certificate of incorporation?
Whatever company wants to include - if none is included, corporation has perpetual existence.
What Information about Corporate Purpose need to be included in the certificate of incorporation?
It can be either general or specific statement.

If specific statement, but corporation later sells other things outside scope of initial statement -- this is an ultra vires act (beyond scope of certificate).
What is the rule pertaining to ultra vires acts by corporations?
Ultra vires contracts are valid. They are enforceable, and are not void (used to void them at CL).

But, shareholders can try to seek an injunction to stop them.

And, responsible officers and directors are liable to corporation for ultra vires losses. So, if corp goes into ultra vires activity, and corp loses money, responsible ODs are LIABLE to corp for ultra vires losses.
What is authorized stock?
maximum number of shares corporation can sell
What is issued stock?
Number of shares corp actually sells.
What is outstanding stock?
number of shares that have been issued, and not reacquired by the corporation
What Information about Capital Stock need to be included in the certificate of incorporation?
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 shares (sub-class)

BUT note that at least one class of stock or bonds must have unlimited voting rights and at least one class of sotck must have unlimited dividends.
What Acts need to occur for the Certificate of incorporation to be valid?
1) Each incorporator signs certificate and acknowledges it before notary (executes it) then delivers it to dept. of state. If it conforms with law, and filing fees are paid, Dept. files the Certificate.

Once Certificate is filed by Dept. of State this is CONCLUSIVE evidence of formation. A De Jure (legal) corporation exists!

2) Then incorporators hold an organizational meeting (or can do this through written consent) where they
a) adopt any by-laws
b) elect board of directors to take over management.

NOTE that directors were not named in the certificate!
What is the legal significance of formation of a corporation?
1) Internal affairs (duties, relationships among directors, officers, shareholders) of NY Corporation are governed by NY Law. EVEN if corporation is doing business in Thailand - NY law governs internal affairs.

2) Corporation is separate legal person. It has broad powers by statute, including power to enfroce contracts, transfer property, buy and sell securities (its own or others) and sue or be sued

3) Because corporation is separate entity, people who run it (Officers and directors) are generally not liable for its obligations. Shareholders/owners only have limited liability - must pay for stock, but not any corporate liability.
POINT - corporation itself is liable for corporate debts and obligations This is the key benefit of the corporate form of business
As a separate legal person what can a corporation do? Can it Make political contributions?
Yes, but no more than $5k per year per candidate or organization
As a separate legal person what can a corporation do? Can it Make charitable donations?
YES. No statutory ceiling exists.
As a separate legal person what can a corporation do? Can it guaranty a loan that is not in furtherance of corporate business?
YES. If approved by 2/3 of shares entitled to vote.
What happens if a business fails to achieve de jure corporate status, but nonetheless is treated as a corporation?
It is a de facto corporation!
What are the requirements for a De Facto Corporation
1) there is relevant incorporation statute (exists in NY)
2) Parties made a good faith, colorable attempt to comply with it
3) Some exercise of corporate privileges.

If all three of these are met, a corporation will be treated as a de jure corporation for all actions except actions by the state
What is the status of de jure corporations in NY?
Thought to be abolished by legislature, but case law suggests it might be alive in very limited circumstances.

If incorporators put together proper certificate, deliver it to dept. of state, and dept. fails to file it (without rejecting it) - you can argue a de facto corp has been met.
What is corporation by estoppel?
theory that one dealing with a business as a corporation, may be estopped from denying business' corporation status. So, such a person Cannot sue individual proprietors.

BUT - this is abolished in NY.

POINT - if you don't have a de jure corporation in ny, you're fucked.
Do corporations need to have bylaws?
No. De jure corp can exist without bylaws. Bylaws are not a condition precedent to formation of a corporation. But, almost all corporations have them.
Why do corporations have bylaws? What are they?
They establish internal procedures and responsibilities of people like officers, notice of meetings.
What happens if bylaws are inconsistent with the certificate of incorporation? Which document controls?
Certificate! It always wins! Much more important document!
Are bylaws filed with the state?
Are outsiders bound by bylaws?
No! Internal document
Who adopts the initial bylaws?
Incorporators at initial meeting. These initial bylaws have the status of shareholder adopted bylaw.
Who can amend/repeal bylaws? or adopt new ones?
Can the Board ever amend/repeal bylaws or adopt new ones?
Only if the Certificate, or Shareholders themselves, allow. So if certificate, or bylaws themselves allow directors to do this.

very unlikely on bar - generally certificate/bylaws are silent as to this.
Pre-Incorporation Contracts -- What is a promotor?
Someone acting on behalf of the corporation before it is formed. (e.g. she might enter into contract with 3P on behalf of corp, not yet formed).
Pre-Incorporation Contracts -- What is a corporations liability for pre-incorporation contracts?
None! corporation is not liable for pre-incorporation contracts, until it ADOPTS them. It is never automatically liable.
Pre-Incorporation Contracts -- How can a company adopt a pre-incorporation contract?
1) Express adoption - Board takes an act to adopt the contract

2)Implied adoption - arises from the corporation's knowing acceptance of the benefit of contract -- adoption by conduct!**

So, if corp moved into a lease premises (negotiated through pre-incorp K) and then used it - we would have implied adoption!
Pre-Incorporation Contracts -- What is the liability of the Promotor?
Generally, unless K clearly indicates that parties do not intend promotor to be laible, the promotor remains liable on pre-incorporation contract, until there has been a novation.

Until novation, promotor is liable on deals!
Pre-Incorporation Contracts -- What is a novation?
Agreemetn of the promotor, corporation and other contracting party, tha tcorporation will replace promotor uner K.
Pre-Incorporation Contracts -- Is promotor liable if corporation is never formed?
YES. It doesn't matter. Promotor is liable!
Pre-Incorporation Contracts -- Will promotor be laible if company is formed and adopts the lease?
YES. Promotor is liable until novation. If no novation, promotor is still liable.

Even with adoption (and thus corporate liability) doesn't erase Promotor's liability.
Pre-Incorporation Contracts -- So, who is liable if Corporation has adopted the pre-incorporation K?
Both corporation and promotor are jointly and severally liable here.

Corporation is liable b/c adopted K.

Promotor is liable b/c no novation.
Pre-Incorporation Contracts -- What is the secret profit rule?
Promotor cannot make a secret profit on her ealings with the corporation. NOTICE - she can make a profit, just not a secret profit!
Pre-Incorporation Contracts -- Secret Profit Rule -- What situations are there secret profits in?
1) Promotor sells property corporation that he acquired BEFORE becoming a promotor -- look to see if price sold for is FMV!! if corp is paying FMV, then no secret profit!

2) Promotor purchases something after beginning work as promotor, and then later sells it to corporation for a profit. Clearly a profit here, BUT promotor is only liable to corporation, if profit was SECRET.
What is a foreign corporation?
One incorporated outside of NY (NJ, Ct corps are foreign).
What is rule pertaining to foreign corporations 'doing business' in NY?
They must qualify by applying to NY Dept. of State and designating secretary of state as agent for service of process and must pay fees to NY for privilege of doing business here.
What constitutes 'doing business' for a foreign corporation?
Regular course of intrastate business activity - have to be doing it here, in NY. Not just occassional or sporadic business (e.g. having meetings in NY).
What do foreign corporations need to do to 'qualify'?
Must give NY Dept of State
1) information from its certificate, and
2) proof that it has good standing in its home state
What happens if a foreign corporation does business in NY without qualifying?
1) The corporation is penalized whenever it does qualify.

2) Until it qualifies, it cannot sue in NY, although it can be sued. There is a liability here for penalty.
What is a stock issuance
Issuance of stock occurs whenever corporation sells/trades its own stock.
Why does a corporation issue stock?
It is a way for the corporation to raise capital. Investors buy stock and then become holders of an equity security.
What are stockholders?
They are owners of corporation - their equity interest brings with it rights we will see.
What is a bond issuance?
With a bond, investors make a LOAN to the corporatoin to be repaid (usually with interest) as agreed in the contract.

So, bondholder is CREDITOR, not an owner, of the corporation. She holds a debt security!
What is a debenture?
A type of loan that is not secured by corporate interests.

A type of bond.
What is a Subscription?
A written, signed offer to buy stock from a corporation.
Can a Pre-Incorporation subscription be revoked?
Pre-Incorporation subscriptions are irrevocable for 3 months unless it says otherwise, or all subscribers agree.

This rule exists b/c corporations need to rely on money being there when they form a corporation.
Can a Post-Incorporation subscription be revoked?
YES - until acceptance
when do corporations and subscribers become obligated under subscription?
When board accepts the offer. Then we can no longer revoke, and we have a deal
Can a corporation decide to sell to some subscribers and not others?
No. Sale must be uniform within each class or series of stock.
What happens if a corporation accepts an offer, and then a subscriber defaults on payments?
1) If Subscriber has paid less than 1/2 of purchase price, and fails to pay rest within 30 days of written demand, corp can keep money paid and canel his shares. The shares then become authorized, and unissued.

2) If subscriber has paid half or more, and fails to pay rest within 30 days of written demand, the corp must try to sell stock to someone else for cash (or a binding obligation to pay cash).
a) If no one will pay remaining balance, default subscriber forfeits what he has paid and shares are cancelled
b) if someone will pay MORE than balance due then defaulting subscriber can recover any excess over what he agreed to pay (but corporations expenses in re-selling should be deducted)
What forms of consideration can a corporation accept for Stock when it issues stock?
1) Money (cash or check)
2) tangible or intangible property
3) services already performed for the corporation
4) a binding obligation to pay in the future in cash or property (a note)
5) binding obligation to perform future services having an agreed value.

Anything else is technically a prohibited form, but this is virtually nonexistant in NY.
What if someone pays for an issuance in an improper way?
"Unpaid stock" - treated as water
Amount of Consideration -- What is "Par"?
The minimum issue price.

If C Corp issues 10,000 shares of $3 par stock, it must receive at least $30k.

BUT - par is a MINIMUM, corp can always get MORE.
Amount of Consideration -- How much can no-par stock be sold for?
No minimum issuance price for no par stock. Can sell for any price.
Who sets the value of no-par stock?
Board, unless the certificate says that shareholders do.
What is treasury stock?
Stock that has previously been issued and has been reacquired by corporation. When corp resells it, its called treasury stock.
What par does Treasury stock have?
NO PAR! It doesn't matter what par was when it was initially sold.

So, $3 par treasury stock, has no par!!!!
Who determines the value of consideration for an issuance?
The Board. And this determination is conclusive, in the absence of fraud.
What happens if par stock is issued for less than par value (i.e. watered stock)?
Corp (or creditors) can sue for difference in PAR-ACTUAL - "water".
Who is liable for paying for "Water" that results in par stock being issued for less than par value?
1) Directors are directly liable for water if they knowingly authorized issuance.

2) guy who purchased watered stock! there are no defenses here - you are on notice of par value (shareholder liable!)

3) If watered stock is transferred to third paryt, that third party is NOT liable if she acted in GOOD FAITH and didn't know about water (got it as gift, in exchange for money, etc)
What is a preemptive right?
Right of existing shareholdter to maintain her percentage of ownership (not diluted) by buying stock whenever there is a new issuance of common stock for money (including cash or checks).
What is included in new issuances?
new issuance does NOT include sale of treasury stock (unless certificate says so).

New issuance does NOT include sale of shares authorized by original certificate and sold within TWO YEARS of formation.

Does NOT include issuances for property, etc. Only for cash/check.
If a certificate of incorporation is silent regarding pre-emptive rights, how do you know if they exist?
DEPENDS upon WHEN corporation was formed.

1) for corp formed before 2-22-98, YES - automatic preemptive rights.

2) for corp formed ON OR AFTER 2-22-98, there are NO automatic preemptive rights. They exist ONLY if certificate allows.
How many directors do there have to be? and how is the number of directors set?
There must be 1 or more natural persons as Directors.

Number is set
1) in bylaws
2) by shareholder act
c) by board if a shareholder adopted bylaw allows the board to do that.

If none of these methods is used to establish the # of directors, then by default, there is ONE director
Incorporators elect the initial set of directors, but after that, who is responsible for electing directors?
Shareholders -- at the annual meeting?
Do new directors have to be elected every year?
NO! there can be a classified (staggered board) with 2, 3, 4 classes of directors with one class elected each year.
If a Classified/Staggered Board is created, how many directors need to be in each class?
A minimum of three.
Can shareholders remove a director FOR CAUSE?
Can Board members remove a director FOR CAUSE?
Only if explicitly permitted to do so by the Certificate or Bylaws. If both are silent, then they cannot!
Can anyone remove a Director WITHOUT Cause?
Shareholders only and only if certificate or bylaws allows them to.
How is a Vacancy on the Board filled (e.g. director dies, resigns, or is removed)?
Remaining directors select a person to serve out the remainder of the term.

EXCEPT - shareholders select person who will serve out remainder of term in rare case where a director is removed by shareholders without cause (which can only happen if certificate/bylaws allow shareholder to remove director without cause)
How can board of directors make an action?
1) Unanimous written consent to act w/o a meeting

2) a meeting (need not be in NY; conference call is a meeting so long as directors can hear all participants simultaneously)

So, if neither of these is met, an action taken is VOID unless later ratified by a valid act
What are the notice requirements for a board meeting?
Notice is not required for regular meetings, as time and place is usually laid out in the bylaws.

BUT, notice IS required for "Special Meetings" (how this is done can be set in bylaws, but is not required).
What happens if the required notice needed for a special meeting is not given to a director?
Any action taken at that meeting is void unless the director not given notice WAIVES the defect either
1) in writing, signed at any time
2) or by attending meeting without objection.
Can a Director give a proxy for director voting?
NO! void as against public policy. (shareholders can vote by proxy, directors cannot)
Can directors enter voting agreements on how they will vote as a director?
No, void against public policy.

Again, shareholders are different.
To do business, how many members of the board are required?
Quorum. We must have a Majority of "The Entire Board" (duly constituted board - that means number of positions if NO VACANCIES).

NOTE - if someone leaves a meeting, resulting in less than a quorum - quorum is broken and can no longer do business

Once there is a quorum, and business can be done, passing a resolution (which is how board takes action at a meeting) only requires a majority of those PRESENT.
Can a corporation decrease a quorum to be less than a majority of directors?
YES - by certificate or bylaws - BUT it can NEVER be LESS Than 1/3 of total directors.
Can Corp decrease the requirement that passing a resolution requires a majority of the directors present?
Can corp increase a quorum to greater than a majority of directors (e.g. that 90% of board must be present to do business)?
YES - but this can only be changed in the CERTIFICATE. not in the bylaws.
Can corp require a supermajority vote to pass resolution (e.g. 70% of directors present)?
YES - but this can only be changed in the CERTIFICATE. not in the bylaws.
What is the role of the board of directors?
To set policies, monor and supervise officers, declare dividends and other distributions, and decide when a corp will issue stock, recommend fundamental corporate changes.
Can a majority of the entire board delegate substantial management functions to a committee of one or more board of directors?
YES! IF certificates or bylaws allow! BUT . . . Board cannot delegate all powers and responsibilities to a committe.
What CAN'T a committee of the board of directors do?
1) it cannot amend, repeal, or adopt bylaws

2) submit a fundamental change to shareholders

3) fill aboard vacancy.

4) set director compensation

BUT committe CAN recommend that these things be considered for a full board action -- very common!

Committees are often used for shareholder derivative suits.
What is the duty of care for a director?
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.
What if a director does nothing? Nonfeasance? Attends none of the board meetings, and doesn't keep abreast of business in any way - is that violating duty of care?
Apply duty of care standard - ordinarily prudent person would attend some meetings - so there IS a breach of duty of care.

BUT director is only LIABLE if his breach caused a loss to the corporation!!!

So, very tough to win a nonfeasance case b/c you have to show that company lost money b/c he wasn't present at meetings.

Exception - think antitrust specialist who is board member and doesn't show up and then company gets fined for antitrust violation.
What if the board does something that harms the corporation? Misfeasance? is that violating duty of care?
Apply the Business Judgment Rule (BJR) to determine liability; if director meets BJR, he is not liable even if causation is present, and idea turns out to be a bad one.

Business Judgment Rule - no requirement that business people are right, just that they are PRUDENT in making decisions. Prudent people do appropriate homework - duty of care says you have to be like a prudent person, inquire, deliberate -- very fact intensive judgment call.

KEY - under BJR, court will not second-guess a business decision if it was made in good faith, was reasonably informed and had a rational basis. Only in trouble if irrational, or grossly negligent. Duty of care does NOT require you to be right.
What is the Duty of Loyalty for directors? (conflict of interest cases)
Director must act in Good FAITH and with conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries.
What happens with Interested Director Transactions (that is any deal b/w corp and one of its directors, or a business which the director is an O,D or has a substantial financial interest in?
RULE - Interested Director transactions will be set aside UNLESS director shows either

1) transaction was fair and reasonable to corporation when approved, or

2) the material facts and her interest were disclosed or known and deal was approved by
a) shareholders
b) board approval by sufficient vote not counting interested directors
c) unanimous vote of disinterested directors, if disinterested directors are insufficient to constitute an act of the board.

NOTE - interested directors ocunt toward quorum of the board. They can participate in meeting, just can't vote.
How Can board set the compensation of directors?
In any capacity, unless certificate or bylaws say they can't.

compensation must be reasonable and in good faith.

If excessive, it is a waste of corporate assets, and breaches Duty of Loyalty.
What if a corporation wants to give an Officer/Director/Employee stock options as an incentive for service? How can this be done for public and private companies?
Public - such use of options must be authorized under exchange policies

Private -- use of options must be approved by shareholders
What happens if a director engages in a competing venture?
Duty of Loyalty standard - good faith, conscientiousness - Director cannot go into competition with corporation!

If she does,
1) corportion gets constructive trust on director's profit, and
2) corp may get damages for harm caused by competition.
What if directors learn about a corporate opportunity? Can they use it for personal investments?

Corporate Opportunity - "something corporation needs, has an interest or tangible expectancy in or that is logically related to its business"
NO! Director cannot USURP a corporate opportunity! Only way to take advantage of it would be to tell the board, and have the board reject the opportunity for the corporation!
What if D does usurp a corporate opportunity? What is the remedy?
If there is a USURPTION by D, usual remedy is a "constructive trust"

If D still has it, he must sell it to corporation at cost.

If D has sold it at profit, corp gets that profit.
Can Board of Directors vote to lend a director of the corp funds or guarantee a director's personal obligation?
Approval of this depends upon when corporation was FORMED.

corporation formed on or before 2-22-98, shareholder vote in which a quorum is a majority of disinterested shares, unless certificate allows board to decide that a loan benefits the corp.

Corps formed after 2-22-98, need board conclusion that loan benefits the corporation (this new rule is better for company, don't need shareholder approval).
If Directors are held liable for something, which directors are liable?
Rule - A director is presumed to have concurred with board aciton unless her dissent is noted in writing in corporate records (oral dissent is not good enough).

Director can do this
1) in minutes
2) in writing to corp secretary at meeting
3) registered letter to corp.

***A director cannot dissent if voted for resolution in meeting.
Are there any exceptions to the general rule about what Directors can be liable for actions of Directors?
1) if Director misses a meeting and board approves something that day. Director is not liable if she registers written dissent within reasonable time period of learning of the action. She does this by delivering the dissent or sending it by registered mail to the corporate secretary, assuring that the dissent is filed with the minutes for the meeting.

2) Good faith reliance on information opinions reports or statements by,
a) officers or employees of the corp whom the director or officers think are competent and reliable,
b) lawyers or public accountants whom the director or officer believes are acting within their competence, or
c) a committe of which the person relying is not a member as to matters within its designated authoirty (think improper distributions)
What duties do OFFICERS owe a corporation?
Same duties of care and loyalty as directors. All of these cases apply as much to officers, as directors.
What is the Status of Officers?
They are agents of the corporation, so they can bind corporation to deals if they have agency to do so (look at cross-over with agency).
What types of officers can the Board Select?
Pres, VPs, Secretaries, Treasurers, etc. Anyone who Board determines, or for which bylaws provide.
Can one person hold multipe Offices at once?
Who selects and removes officers?
Directors, unless certificate allows shareholders to elect them (this has never shown up on exam, certificate is usually silent and answer is only directors)
What can an officer do if he is removed from his position by the board?
Can sue for breach of K for Damages -- no reinstatement.
Think through hierarchy.

1) Who fires and hires directors?

2) who fires and hires officers?
1) shareholders fire and hire directors

2) directors fire and hire officers
Is there any other way to remove an officer for cause?
AG or owners of holders of 10% of all shares may sue for a judgmetn removing an officer for cause.

Court can then bar reappointment of a person so removed from office
Who sets compensation of officers?
What rules pertaining to indemnifcation apply to directors and officers sued in their capacity as directors or officers, on behalf of the corporation? That is, if she incurs costs/attorneys fees/judgment, can she get reimbursement from company?
Three Possibilities

1) REimbursement prohibited -- if D or O was held Liable to corporation (not just accusation)

2) Of Right -- corporation MUST reimburse D or O if she was successful in defending the case on the merits or otherwise -- i.e. she wins the judgment

BUT note - if corp doesn't automatically pay her reimbursement of right, and sh ehas to sue to force corporation to do so - she can't recovery for attorney's fees in this latter law suit! She must pay her own fees and expenses

3) Permissive. In situations not fitting the Prohibited or Of Right categories, the corporation MAY reimburse the O or D. To do so, she must show that she acted in Good Faith and for a purpose reasonably believed to be in the corp's best interest.

reimbursements in the permissive category can include settlement amount, expenses, attorney's fees (not a judgment though).

NOTE - Certificate or bylaws can provide indemnification by resolution of board or shareholders by agreement, UNLESS D or O acted in bad faith, was deliberate and dishonest in a way material to case or wrongfully profited.
For Permissive Indemnification of an O or D, who determines eligibility?
1) the Board (with quorum of directors being non-parties) or if there is no such quorum,

2) shareholders or a quorum of thos eciredtors who are disinterested or

3) the board pursuant to report from independent legal counsel.
Can the Court in which O or D was sued ORDER the corporation to reimburse the O or d for litigation expenses or attorneys fees?
YES - if it finds O or D is reasonably entitled to it. So, court where you get sued has a lot of power here.

But, while court can order company to pick up litigation tab, it cannot order corp to pay a judgment against O or D.
Can corporation advance litigation expenses to Ds or Os?
YES, but must be repaid if it turns out she's not entitled to reimbursement.
Can corporation buy insurance to cover O and D liability?
Can certificate provide for elimination of director liability to the corporation or shareholders for damages due to Breach of Duty?

1) when director acted in bad faith

2) with intentional misconduct, or

3) received an improper financial benefit, or approved an unlawful distribution or loan.

**Every time you have a director being sued, add "By the way, certificate may provide elimination . . . "
Is a shareholder liable for the debts of a corporation?
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) abused the privilege of incorporation, and

2) fairness demands that shareholders not escape liabilility.

PCV is an extraordinary remedy b/c corporation is generally liable for what it does.
Why might NY Courts Pierce the Corporate Veil?
To prevent fraud, and achieve equity. Courts will use it to prevent use of a corporation as a cloak for illegalities.
1) What if X and Y are shareholders, X is also CEO and commingles corporate/personal funds, uses corp car and credit card as her own, etc. Can creditor of the corp who has been unable to collect from corp, collect from X or Y
General Rule - shareholders are generally not laible for debts or acts of corp. PCV will let courts pierce corporate veil to achieve equity and hold shareholders personally liable. BUT there is no PCV if corporation has any mind, existence, or will of its own. So here, not clear at all that we'll get a PCV

PCV much more likely where there is a dumjy corporation. Where shareholders carry on business in purely personal capacity, not for corporate ends.

If you could get anyone here with PCV, it would be X, not Y.
Is undercapitalization of a corporation (meaning, not enough invested to cover prospective liabilities) enough to warrant PCV?
NO. not in nyc. need excessive domination or fraud or illegality.
In a "Close Corporation" what are the ten largest shareholders personally liable for?
Wges and benefits to corporation's employees.
Do shareholders ever manage corporations?
Generally no - board of directors (not shareholders) mangage corporation.

EXCEPT - with Closely held corporations!!! Shareholders can manage the business directly in a close, or closely held corporation.
What is a closely held corporation
1) corp with few shareholders where stock is not publicly traded

2) close corp can have either a board of directors or shareholders can take over management

3) most corps are close corps, particularly on exam.

4) piercing the corporate veil only happens with close corporations (not publicly traded)
How is power vested in a shareholders to manage a close corporation?
A provision in the certificate can restrict or transfer Board power to shareholders or others IF

1) all incorporators or shareholders (voting or nonvoting) approve it,

2) it is conspicuously noted on front and back of all shares

3) all subsequent shareholders have notice

4) shares arenot listed on an exchange or regularly quoted over the counter
In a closely held corporatoin run by shareholders, who owes the duty of care and the duty of loyalty?
Managing shareholders! those actually running the corporation! (liability possibility!)
What are the duties between controlling shareholders and minority shareholders?
There is an increasing move to imposing fiduciary duties on shareholders in their dealings with one another.

controlling shareholders cannot use their power for personal gain at the expense of minority shareholders, or the corporation, or to oppress minority shareholders or the corporation. They owe a duty of utmost good faith.

So, there is a Liability possibility if controlling shareholders and corporations oppress minority shareholders!
Why are courts increasingly willing to protect minority shareholders in a close corporation?
1) b/c they have no way out of the corporation! no public market for stock, cannot sell, no way out!
What is a Professional Service Corporation?
Members of licensed professions (doctors/lawyers) cannot practice professsion through general business corporation. Rather, they can form a professional service corporation "P.C"
Who can be Officers, Directors, and Shareholders in a P.C?
Only Professionals! Corp can hire non-professionals, of course as employees. But, can't be D,O,S.
Are professionals in a P.C. liable for malpractice
YES - but not the malpractice of others in the group.

This is an advantage over a partnership, where you are liable for the malpractice of other professionals in the group
Are professionals liable for Ks entered into by entity or for rent due on leases in P.C's name?
NO. Entity is only thing liable. (may be another advantage over a partnership)
Are P.C.'s governed by the same rules as a business corporation?
Generally, yes.

The PC is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of “P.C.” 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 or officer is licensed to practice the profession
What happens if a shareholder in a PC dies or is disqualified from practice?
PC must purchase his stock.
What is a shareholder derivative suit?
A suit where a shareholder is suing to enforce the corporation's claim, not her own personal claim.

A case where a corporation is not pursuing its own claim, so a shareholder steps in.
How do you know if something is a shareholder derivative suit?
Ask - coudl corporation have brought suit? If so, then its a derivative suit! We're vindicating corporatin's claim.
What are some examples of a derivative suit?
1) S sues board of corp for usurping corporate opportunities and violating duties of loyalty and care owed to corporation

2) sues regarding waste of corporate assets- breach of duty of loyalty and derivative suit
what are not examples of derivative suits
S sues board of directors for issuing new stock without honoring her preemptive rights (this is a suit for S's personal claim!)
What are the consequences of a successful derivative suit brought by S?
1) Corporation gets the judgment/recovery in a successful derivative suit (remember it is corporations claim S is vindicating!).

2) S receives costs and attorneys fees (usually from judgment won for corporation).

3) while damages generally go to corporation, S could arguably recover if returning money to corp would return money exactly to guys who just lost lawsuit (no yes or no here, arguable).
What are the consequences of an unsuccessful derivative suit?
1) S CANNOT recover costs and expenses

2) S is Probably ALSO liable to the Defendants for their costs.

3) other shareholders are barred from suing same defendant on same transaction (res judicata).
What are the requirements for bringing a shareholder derivative suit?
1) Stock ownership when claim arose (or can have recieved it through operation of law, i.e. inheritance or divorce decree, from someone who did own it at time claim arose) through time when action is brought and judgment is entered.

2) shareholders must adequately represent the interests of the corporation and the shareholders

3) P shareholder an be required to post security for costs unless P owns 5% or more of any class of stock or her stock is worth more than $50k

4) P must also make a demand that directors bring suit unless it would be FUTILE. P must also plead, with particularity, her efforts to get the board to sue or why her demand is excused b/c of futility

Demand might be futile if
a) **a majority of the board is interested or under the control of interested directors, or
b) board did not inform itself of transaction to the extent reasonable under circumstances, or
c) transaction is so egregious on its face that it could not be the result of a sound business judgment.

5) If demand is made, and Board refuses, S can only bring suit if she can show tha ta majority of the board is intrested or its procedure was incomplete or inadequate (very hard to do)
What S brings a derivative suit and the corporation eants it dismissed?
Corporation can move to dismiss derivative lawsuit. Such a motion is based on the findings of independent directors (or a committee of independent directors, sometimes called a special litigation committee) that the suit is not in the corporation's best interests.
What does the court look at when deciding whether to dismiss a S derivative suit b/c of a corporation's MTD?
1) independence of those making the investigation

2) sufficiency of investigation
In a S derivative suit, Corporation must be joined as a party - but on what side?
As a defendant (makes no sense, b/c we're vindicating corporations rights, but thats how it works) - b/c D could have brought suit and didn't.
Can parties dismiss or settle a derivative suit?
1) only with court approval
2) court may notify shareholders whose interests may be substantially affected.
In addition to an S, can a D or O bring a derivative suit, if D or O meets all other requirements?
YES. Corp or D or O can sue D or O to compel her to account for her violation of duties.

Such a D or O will usually sue in her own name without alleging representative capacity - does not have to meet derivative suit requirements.
Shareholder voting - who votes?
Record owner (person shown as owner in corp. records) as of record date (voter eligibility cut off, set no fewer than 10 and no more than 60 days prior to the meeting) has right to vote.

1)even if it is record owner on record date, corporation does not vote on its treasury stock

2) If an S dies after record date, but before meeting, S's executors can vote the shares.

3) Proxies can be used. A proxy is
a) a writing (fax or email is considered a writing here)
b) signed by record shareholder or authorized agent
c)directed to secretary of corporation
d) authorizing another to vote the shares.

NOTE - proxies are good for 11 months (unless state otherwise).

NOTE - proxies can be revoked, even if say "irrevocable proxy" UNLESS irrevocable proxy is given to someone with an interest in the shares (e.g. someone who purchased shares after record date) - REQUIRES 1) says irrevocable, AND 2) the proxy-holder has some interest in the shares other than voting (need not be ownership).

NOTE - proxies CANNOT be used for voting for Directors - realize that same person can be both a S and a D, but can only use proxies in S situations.
What are the requirements for a Voting Trust by S's?
1) written trust agreement controlling how shares wil be voted

2) copy to corporation

3) transfer legal title of shares to voting trustee, and

3) original shareholders receive voting trust certficates and retain all shareholder rights except for voting.

Voting trusts have a 10 Year Time MAXIMUM. (but w/i 6 months of expiration they can be extended for another term of 10 years).
What are the Requirements for a voting agreement (pooling agreeement)?
1) Shareholders can enter, not directors though.

2) it must be in writing and signed.

3) voting agreements are NOT specifically enforceable (cannot get specific performance for them in NY)

4) BUT a proxy given subject to a voting agreement IS irrevocable if it says so
So, can two directors, who are also shareholder, agree to vote to elect eachother as Directors?
YES! Because electing directors is something that shareholders do!

BUT, upon being directors, they CANNOT agree on what actions they will take - this would violate the rule against voting agreements between directors (unless they are only two shareholders, of course).

General rule - directors cannot agree with one another about how they will vote as directors.
Where do Shareholders Act? What are the only two ways that shareholders can take a valid act?
1) written consent signed by the holders of all voting shares to act without a meeting, or

2) a meeting!
What are the rules pertaining to the annual shareholder meeting?
1) It can be held anywhere

2) court can order one held if not scheduled.

3) it is where shareholders elect directors - so its important!
What are the rules pertaining to a special shareholder meeting?
1) The Board, or anyone provided for in the certificate, can call a special meeting of shareholders.

2) A special meeting to elect directors MUST be called by teh Board if there is a failure to elect a sufficient number of directors to conduct the business of the corporation. If the Board fails to call such a meeting, the holders of 10% of the voting shares may demand in writing that the corp hold the meeting. In this case, the corp. secretary must give notice of the meeting. If corp secretary fails to do so, shareholders may give notice.
What notice is required to shareholders for all meetings (annual or special)?
1) must be written notice (email is okay)

2) must be given b/w 10 and 60 days prior to meeting

3) contents of notice - it must state when and where meeting will be.
a) also if proposed action would entitle shareholders to appraisal rights and why, including statute about appraisal rights
b) notice of special meeting must state who called it and purpose of meeting - the only business that can be transacted at the meeting is that listed in the purpose notice
c) realize shareholder meetings can never be to remove officers - that isn't the role of shareholders!
What are the consequences of failure to give proper notice to shareholders?
Action taken at the meeting is VOID unless those not receiving notice WAIVE the notice defect.

Waiver of notice defect can be
1) express - in writing, signed at any time, or
2) implied - if attend meeting without objection
How do shareholders vote?
There must be a quorum represented at meeting.

Determination of quorum focuses on # of SHARES represented, not # of shareholders.

Generally, a quorum requires a majority of outstanding shares.
Can the Quorum required for S meetings be reduced to less than a majority?
YES - by the certificate or bylaws can reduce a quorum to less than majoirty, but never fewer than 1/3 of shares entitled to vote.
Can the requirement of majority of S approval be reduced?
NO! Requirement for Majority approval, though, can NEVER be reduced.
Can we require a supermajoirty of shares entitled to vote to be represented to constitute a quorum?(say to 90%)
YES. Can Increase % of shares entitled to vote to represent a quorum (say to 90%) but only by the Certificate (not bylaws).

Same rule as for Directors.
Is it possible to require a supermajority vote of the shares at the meeting to pass a resolution?
Yes. but only by the certificate, not by the bylaws.
If a quorum is met, how many generally must agree on an action to bind the corporation?
A majority. A majority of shares ACTUALLY VOTING in favor or against the proposals (abstentions don't count)

So if there are 120,000 shares outstanding. 62,000 shares are represented at meeting, but only 50,000 shares vote on a particular proposal, how many must vote in favor of the proposal for the proposal to pass?

25,001! majority of voters, not those present.
Once a quorum is established at a shareholder meeting, can it be lost if Shareholders leave the meeting?
NO!!!! Different from rule for Directors and Director meetings.
How and when do shareholders use Cumulative Voting
Only available in voting for directors. Device to help small shareholders get represetnation on the board.

Cumulative voting is only allowed if certificate explicitly allows for it

E.g. if you have 1000 votes, and 9 director positions are up for vote - you can put 9000 votes towards one director, if you want.
Can a shareholder sell her stock?
YES - that is the great thing it is transferable
How much must she sell stock for? What is the amount of consideration?
Whatever S wants to sell it for.

Par Value does not matter - that is an issuance rule. Issuance rules only apply when corporation is selling its own stock. They do not apply when shareholders are selling to one anohter.
Where would stock transfer restrictions be found?
1) in a certificate or a bylaw or by agreement.

2) these are COMMON in close corporations.
When Standard will courts use to determine if stock transfer restrictions will be upheld?
If they are REASONABLE under the circumstances. That is, not an undue restraint on alienation.
Stock Transfer Restrictions -- Is a Rights of First Refusal acceptable?
YES - so long as the price offered is reasonable (offering to match offer of potential buyer)
Stock Transfer Restrictions -- Can corporation require approval before S sells stock?
Maybe not b/c this would allow corp to refuse to allow sale for no reason whatsoever - and that is an undue restraint on trade.
Stock Transfer Restrictions -- Are there any restrictions on when a REASONABLE (valid) stock transfer restriction will be enforced?
Even if reasonable and thus valid, stock transfer restriction cannot be invoked against transferee, unless
1) it is conspicuously noted on the stock certifiate, or
2) transferee had actual knowledge of restriction.
What are the Rights of a shareholder (in person or by agent) to inspect (or copy) the books and records of the corporation?
1) Statute gives S's the right to inspect and copy a) minutes of the S proceedings and b) the record of shareholders.

2) Any shareholder can demand access to these things on five days written demand.
Can corporation demand anything from S for looking at books/records of corps?
YES - can demand that S give affidavit stating that his purpose is not against the interest of the corporation, nor has he tried to sell any list of shareholders within 5 years.

Corporation cannot demand any more detail in the affidavit, that is it.
What if S refuses to furnish an affidavit, demanded by corporation, about S's interests in looking at corporations books?
If Shareholder refuses to furnish such an affidavit after the corporation demands it, the corporation may deny access to the S.
What else does an S have the right to look at?
1) S can make written requrest for corp's latest annual balance sheet, profit and loss statement, and latest interim statements distributed to shareholders or public. corp must provide documents and can do so by mail.

2) different statute gives a right to inspect and copy a list of the current Ds and Os. Any shareholder can demand this on 2 days notice.

3)S's also have a CL right to inspect records at reasonable time and proper place for a propoer purpose - unclear how broad this is.
Does a D have a right to inspect corporate books and records
YES - she has unfettered aces, she does not have to satisfy any statutory requirements.
What forms of distribution (payments) to S can be made?
1) dividends

2) payments to repurchase shares

3) payment to redeem shares (forced sale to corp at price set in certificate)
What are distributions, and what are shareholders rights to them?
Distributions are declared at the Board's discretion. There is no shareholder right to a distribution until declared (once declared, S has rights).

Court will only order a distribution, and interfere with board's discretion, if there is a showing of bad faith or dishonest purpose. VERY tough to win.
What is a stock split? Is it a distribution?
NO! stock split gives shareholder more shares than she has now, but reduces value of each proportionately. S will have same value worth of stock - so not a distribution.
Which S's get dividends?
1) Preferred stock with dividend preference is paid first (before anyone else)

2) remaining dividend is paid out equally to remaining stock holders (divide total by number of common shares)
What if the Preferred Stock is "participating" - how do you treat these shares?
Participating means pay again --

preferred stock that is participating gets paid TWICE - once off the top, and then again these prefered are added to total shares that rest of dividend is divided by.
What if the Preferred Stock is "cumulative" - how do you treat these shares? E.g. shares of $2 preferred stock that is cumulative?
cumulative means add them up. For all the years in which no dividend was paid, cumulative holders dividend is added up. So, corporation will owe these cumulative holders for the prior years (where dividend wasn't paid), PLUS this years declared dividend -- $8 per person.

Then remaining dividend is split among common.
What funds may be used for any distributions (dividends, repurchase, redemption)
If board pays distributions (it doesn't have to) - distribution amount must come from Surplus.

Surplus =assets-liabilities-stated capital (or net assets-stated capital)

NOTE - Stated Capital cannot be used for distributions (stated capital is the par value of the issuance; any excess, say through treasury stock sale or non par stock is surplus!)
What portion of no-par stock goes to surplus v. stated capital?
Within 60 days after issuance, the board can allocate any part, but not all, to surplus.

If board does nothing within 60 days of issuance, it all goes to stated capital.
Can corporation make distributions if it lost money last year? What if its insolvent?
YES - can make distributions if lost money last year.

CANNOT make distributions if insolvent (that is if corp is unable to pay its debts as they come due in ordinary course of business
What if distributions are made unlawfully? Who is liable?
Directors are personally liable.

As are shareholders who knew distribution was unlawful when received it
Who would sue to recover unlawful distributions against D's and shareholders?
CORPORATIONS! This is a corporation's cuase of action. Corporation can sue, or cannot.

If Corporation does not sue, you could have a Shareholder Derivative Suit.

Or, Os and Ds may sue other Os and Ds.

However, of course, D's could have a possible Good Faith Reliance Defense.
What are repurchases?
Individually negotiated and can discriminate EXCEPT in close corporation, where must give equal opportunity to all shareholders
What are redemptions?
They are set in the certificate and must be done proportionately within each class of stock.
What is a fundamental corporate change?
changes that are so fundamental that most of them require both taht the directors approve and that shareholdres approve.

In addition, usually the corporation must notify the dept of state by delivering a document which the dept files.
What is a "right of a appraisal"?
right of dissenting shareholder to force the corporation to buy her shares at fair value.
When does a S have a dissenting S right of appraisal?
1) some amendments to the certificate
3) corporation transfers substantially all of its assets
4) corporation's shares are acquired in a share exchange

BUT NOTE that these things do not entitle an S to a right of appraisal if PUBLICLY traded company (public market for dissenting S to sell stock to)
What actions must an S take to perfect her right of appraisal?
1) before shareholder vote, file a written objection and intent to demand payment

2) abstain or vote against proposed change, AND

3) after vote, make written demand to be bought out.
What happens if the S and the corp can't agree on a fair value for the stock when the S executes her right of appraisal?
Corp can sue, and Court determines the value.

In setting the value of the stock, the court cannot impose a minority discount (that is discount the value to reflect the fact that minority shares may be worth less than controlling shares b/c carry no control over corporation)
Who makes amendments to the certificate of incorporation? What about minor changes (office location, registered agent, etc)?
Made by the Board
Who makes amendments to the certificate of incorporation? Change of name, purpose or duration, increase or decrease of shares of par, creation of new classes of stock, denial/grant of preemptive rights, etc?
Must be approved by
1) Director action, and then recommendation to the shareholders,
2) A Majority of the shares ENTITLED TO VOTE (note - this is different - majority of those entitled to vote!)

Same rule, regardless of when corp was formed.
Who makes amendments to the certificate of incorporation? What about amendments to change or strike a supermajority quorum or voting requirements or to strike a provision restricting board authority?
Complicated rule. Definitely need Board Approval, but also -

1) if amendment will change or strike a supermajority quorum or voting requirement for a Board of Director voting or will strike a provision restricting Board Authority, in addition to board approval, you need
a) for corps formed on or before 2-22-98 - need Board Approval AND approval by 2/3 of shares entitled to vote

b) for corps formed after 2-22-98, must get Board approval AND a Majority of the shares entitled to vote (1/2).

BUT if the amendment will change or strike a supermajority quorum or voting requirement for SHAREHOLDER (not director) voting, in addition to director approval, the amendment must be approved by 2/3 of shares entitled to vote. REGARDLESS of when corporation was formed.
Once an amendment is approved, what happens?
Certificate of amendment is delivered to the dept of state for its filing.
Do dissenting shareholders (to the amendments) have rights of appraisal?
YES! If amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights.
What sort of approval is required for Mergers (A merges into B) or Consolidations (A and B form C)?
1) Board of Directors to dopt a plan of merger or consolidation, AND
2) Shareholder approval -
a) for corps formed on or before 2-22-98, 2/3rds of shares entitled to vote
b) for corps formed after 2-22-98, we need a majority of shares entitled to vote.
Is shareholder approval required for a Short-form merger? I.e. one where a parent corp owns 90% or more of each class of stock of the subsidiary that is merged into the parent?
Once a merger/consolidation has been approved by Directors and Shareholders, what needs to happen?
The certificate of merger or consolidation needs to be deliverd and filed with the deprtment of state.
Are there dissenting shareholder rights of appraisal associated with an approved merger or consolidation?
YES! for shareholders of the corporation that disappeared!! So, if you're corp survives a merger, you don't get rights of appraisal.
Do dissenting shareholders of subsidiary in short-form merger have a right of appraisal?
YES. even though they didn't get to vote, they do have right of appraisal in short form merger.
What are the effects of mergers and consolidations in terms of rights and liabilities?
Surviving corporation or new corporation has all the rights and liabilities of its constituents. "Successor Liability"
What about the transfer (not mortgage) of all or substantially all of the assets of a company (not a transfer in the ordinary course of business)? Or a Share Exchange (one company acquires all outstanding shares of one or more classes of stock of another corporation)? Are these fundamental corporate changes?
Only for selling corporation.

Not for buying corporation.
What sort of approval is required in a Transfer or STock Exchange?
1) Each corporation's board of directors authorizes the deal, AND

2) There is approval by the SELLING corporation's shareholders.
a) For corpos formed on or before 2-22-98, 2/3 of shares entitled to vote
b) for corps formed after 2-22-98, Need a majority (1/2) of shares entitled to vote

REalize - Buyer Corp's shareholders need not approve sale.
Once approval has been met, what needs to happen?
For share exchange, deliver plan of exchange to dept of state.

for asset transfer, no such filing is requried.
Are there dissenting shareholders rights of appraisal for transfers/share exchange?
YES. For shareholders of seling corporation only, not for shareholders of buying corporation
Is the Buying (Acquiring) company liable for the torts of the company's whose assets it acquires?
NO. unless
1) deal provides otherwise,
2) purchasing company is a mere continuation of the selling
3) deal was entered fraudulently to escape obligations

NOTE - different from a merger, b/c corporation that sold assets still exists and so don't need successor liability.
Is dissolution a fundamental corporate change?
What type of approval is acquired for a Dissolution.
1) Voluntary- No Board vote necessary.

2) Shareholder approval required
a) for corporations formed before 2-22-98, 2/3rds of shares entitled to vote
b) for corps formed after 2-22-98, Majority (1/2) shares entitled to vote
Once approval is granted, what must happen?
Certificate of dissolution must be delivered and filed with the state.
Can dissolution happen involuntarily? I.e. can a court be asked to order dissolution? In what circumstances?
1) by board resolution, or resolution of majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabiliites or that dissolution would be beneficial to shareholders.

2) 1/2 or more of shares entitled to vote may petition if directors 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 are unable to elect directors for two annual meetings.

4) 20% or more of voting shares in corporation whose shares are not traded on public market may petition on either of these grounds
a) **management's illegal, oppressive or fraudulent acts toward the complaining shareholder -- oppressive is conduct that substantially defeats the expectations of minority shareholders, OR
b) management's wasting, diverting, or looting assets (managemetn is directors or managing shareholders, whoever is running closely held corp).
When can a court deny involuntary dissolution?
If there is some other way for the complaining shareholder to obtain a fair return on his investment (e.g. by ordering buy out).

Court will consider whether liquidation is necessary to protect petitioners and is only way for them to get a fair return on their investment.
What can a corporation or non-complaining shareholders do to try to avoid involuntary dissolution?
Within 90 days of petition to court, buy the petitioner's share at fair value on terms approved by the court.
Does a dissolution end the corporation's existence?
NO! it is a proces, not event. Corporation stays in existence through "windup"
What are the steps in "Winding up"
1) gather all assets
2) convert to cash
3) pay creditors (who had been given notice earlier)
4) distribute remainder to shareholders, pro-rata by share unless there's a dissolution preference (which would be laid out in certificate - just means who is paid first in dissolution BUT shareholders cannot agree to be paid before creditors).
Do shareholders generally owe a fiduciary duty to the corporation or to one another?
No, outside closely held corp, they do not owe a fiduciary duty - can act in own self interst.
What about a controlling shareholder (one who also occupies control position, such as director; or whose ownership is such that she has working control over corporation) - do controlling shareholders owe any duties?
YES! controlling shareholders owe a fiduciary duty to minority shareholders and, sometimes, to others (including corporation).

She cannot use a dominant position for individual advantage at the expense of minority shareholders of the corporations. (liability possibility)

This is most likely to happen in close corporation, but could happen in publicly traded corp.
Are there any rules pertaining to a controlling shareholders sale of her interest?
1) If she sells shares at premium (b/c of controlling interest), she gets to keep the money - no liability here (unless something sketchy happened too).

2) But, shareholder must make a reasonable investigation as to who she is selling stock to. E.g. if she sells to someone who then loots corporation, you would disgorge her profit and seller is probably also liable for all damages done to corp.
What if a controlling shareholder de facto sells a corporate asset?
1) all shareholders should share in premium paid by guyer, and

2) disgorge seller's profit - this person is interested in corporate assets, not running corporation.
What if a controlling shareholder sells a board position?
Fiduciaries cannot sell their position! Disgorge the profit.
What is a freeze out merger?
A merger aimed solely at cashing out minority shareholders unfairly. Usually majority shareholders cause corporation to merge with anohter corporation that they own. Minority shareholders shares are purchased for cash, so they have no interest in either corporation now. Courts are increasingly protecting of minority.

REALIZE - all mergers must hae a legitimate corporate purpose, even if approved by requisite number of shares
What will a court look to in evaluating a freeze out merger?
The transaction as a whole - assess the price, and the course of dealing.

1) whether deal is tainted by self-dealing or fraud
2) whether minority shareholders are dealt with fairly
3) whether there is legitimate business reason for merger.
What happens if a director or officer engages in market trading of corporations stock based on inside information?
D or O has breached duty to the Corporation by doing this!

Corporation can sue to recover her profit.
What is the "Nondisclosure of special facts/circumstances" Rule?
All Ds and Os (and probably controlling Ss) owe an affirmative duty not to trade on special facts in a securities transaction with a non-insider. They cannot trade on secrets. I.e. NO INSIDER TRADING

They must abstain or ensure disclosures so others are on the same footing.

Applies to all types of corporations, public, private, closely held, etc.
What constitute special facts for the nondisclosure rule?
Those a reasonable investor would consider important in making an investment decision.
Who can sue for nondisclosure of special circumstances?
A shareholder with whom teh D or O deals and violates the special facts doctrine.
What is the measure of damages for violation of disclosure of special facts rule?
Difference b/w price paid and value of stock at reasonable time after public disclosure.