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249 Cards in this Set

  • Front
  • Back
Certificate of Incorporation must include
1. Corporation’s Name and Addresses
2. Service of Process (NY SOS as corp's agent for service of process + forwarding address)
----MAY name a registered agent for service of process
3. Name and Address of Each Incorporator
4. Corporate Purpose
5. Capital Structure
--Authorized stock
--Number of shares per class
--Information on (1) par value and (2) rights, preferences, limitations of each class
--Information on any series (subclass) of preferred shares
“engage in all lawful activity, after first obtaining necessary state agency approval”

is this an acceptable corporate purpose?
YES
ultra vires act
when the corporation engages in some activity that is beyond the scope of the purpose stated in the certificate
are ultra vires contracts valid in NY?

what relief?
YES

--shareholders can seek an injunction to enjoin the activity outside of the scope
--responsible officers and directors are liable to corporation for ultra vires losses
who is liable to corporation for ultra vires losses?
responsible officers and directors
can all classes of stocks or bonds have limited voting rights?
NO
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
can all classes of stock have limited dividend rights?
NO
at least one class of stock MUST have unlimited dividend rights
Authorized stock definition
maximum number of shares the corporation can sell
Issued stock definition
the number of share the corporation actually sells
Outstanding stock
stock that the corporation has issued and has not reacquired
Incorporators
one or more adult humans with legal capacity
incorporator’s tasks
--Each incorporator executes the certificate of incorporation and acknowledges it before a notary

--Incorporators deliver the certificate of incorporation to New York Department of State and pay filing fees

--Department files certificate of incorporation → this is conclusive evidence of valid legal formation

--Incorporators hold the organizational meeting (or by written consent) to do the following:
-----Adopt bylaws (not necessary)
-----Elect the initial board of directors → BOD then takes over management
can a corporation make political contributions?
YES, NO more than $5000 per year per candidate/organization
Who is Liable for What the Corporation Does?
--Directors and officers are NOT liable
--Shareholders are NOT liable (SHs have limited liability: only liable for the price of their stock)
can a corporation guaranty loans?
yes, but if they're NOT in furtherance of the corporate business, guaranty must be approved by 2/3 of the shares entitled to vote
Corporation by Estoppel
ABOLISHED IN NY

theory that one dealing with and treating a business as a corporation may be estopped from denying business’s corporate status (i.e., estopped from suing individual proprietors) → ABOLISHED IN NY
De Facto Corporation: under what circumstances will the business be treated as a corporation for all purposes EXCEPT in an action by the state
if
(1) there is a relevant incorporation statute
(2) the parties made a good faith, colorable attempt to comply with it, and
(3) the business is being run as a corporation
are bylaws necessary?
NO
are bylaws filed with the state?
NO
are outsiders bound by the bylaws?
NO, b/c they’re an internal document
Certificate of Incorporation v. Bylaws if they are inconsistent
Certificate of Incorporation > Bylaws if they are inconsistent
Incorporators adopt initial bylaws at the organizational meeting

do these have the status of bylaws general or shareholder bylaws?
these initial bylaws have the status of shareholder bylaws
what can shareholders do w/r/t bylaws?
(1) amend OR
(2) repeal the bylaws OR
(3) adopt new ones
can the BOD
(1) amend OR
(2) repeal the bylaws OR
(3) adopt new ones?
YES, but ONLY if the certificate of incorporation or a shareholder bylaw allows it
can shareholders can amend or repeal any director-adopted bylaw?
YES
Promoter
a person acting on behalf of a corporation NOT YET FORMED (e.g., promoter might enter a contract with a third party on behalf of the corporation not yet formed)
when is the corporation liable for preincorporation contracts?
ONLY IF corporation ADOPTS the preincorporation contract

Express Adoption: via board action

Implied Adoption: arises w/ corporation’s knowing acceptance of benefit of the contract
how can a corporation adopt a preincorporation contract?
Express Adoption: via board action

Implied Adoption: arises w/ corporation’s knowing acceptance of benefit of the contract
when is the promoter liable for preincorporation contracts?
unless the contract clearly states otherwise, liable UNTIL NOVATION (an agreement among the promoter, corporation, and the third party that the corporation will replace the promoter under the K)
if the corporation is never formed, is the promoter liable for contracts entered into on behalf of the corporation?
YES, liable even if corporation is never formed
if the corporation is formed AND adopts the preincorporation contract, who is liable on the contract?
both corporation and promoter liable, unless there's been a novation relieving the promoter from liability
what result if promoter makes a secret profit on her dealings w/r/t the corporation?
promoter will be liable and will have to account for the profit (return it to the corporation)
what result if property is acquired by the promoter BEFORE becoming a promoter and is then sold to the corporation, resulting in a secret profit?
--Price paid by the promoter for the property is irrelevant

--Price paid by corporation – fair market value (FMV) = amt promoter must account for IF profit was secret
what result if property is acquired by the promoter AFTER becoming a promoter and is then sold to the corporation, resulting in a secret profit?
Price paid by corporation – price paid by promoter = amt promoter must account for IF profit was secret
How does a foreign corporation qualify to do business in NY?
--Apply to the NY Dept of State with (1) info from cert of inc and (2) proof of good standing in state of inc

--Designate the NY SOS as agent for service of process

--Pay fees
What is the consequence for doing Business in NY w/OUT Qualification?
--Foreign corporation canNOT SUE until it qualifies AND pays fees, taxes, and penalties accrued

--Contracts ARE valid
Debenture
a loan, the repayment of which is NOT secured by corporate assets
Subscription
a written, signed offer to buy stock from the corporation
Are Preincorporation Subscriptions revocable?
IRREVOCABLE for three months UNLESS
(a) otherwise indicated
(b) all subscribers agree to revoke

→ allows corporation to rely on the money to be there
Are postincorporation Subscriptions revocable?
REVOCABLE until acceptance of the offer by the corporation’s BOD, at which point the corporation and subscriber become obligated under the subscription
Uniformity
the corporation MAY NOT decide to sell only to some subscribers and not others → must be uniform w/in each class or series (subclass) of stock
can the corporation decide to sell only to some subscribers and not others?
NO, must be uniform w/in each class or series (subclass) of stock
If Subscriber Defaults on Payment
and
Subscriber has paid less than ½ of the purchase price
and
fails to pay the rest w/in 30 days of a written demand
corporation can keep the money paid
+ cancel the shares
→ stock becomes authorized and unissued, so the corporation can sell it
If Subscriber Defaults on Payment
and
Subscriber has paid ≥ ½ of purchase or more
and
fails to pay the rest w/in 30 days of a written demand
corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash)

-----if NO ONE WILL PAY the remaining balance → corporation can keep the money paid + cancel the shares → stock becomes authorized and unissued, so the corporation can sell it
-----if SOMEONE WILL PAY MORE THAN the remaining balance due → defaulting subscriber recovers any excess over what she agreed to pay (minus the corporation’s expenses in reselling)
Permitted Forms of Consideration
--Money (cash or check)

--Tangible or intangible property

--Services already performed for the corporation (e.g., incorporator)

--a binding obligation to pay in the future w/ money or property (e.g., promissory note)

--a binding obligation to perform future services having an agreed value
If someone pays for an issuance with an improper form
this is unpaid stock and will be treated as water
what does it mean when a stock is "no par"?
no minimum issuance price (i.e., stock can sell for any price)
at what price should no par stock be sold?
BOD sets the price at which no par stock is sold, unless the certificate of incorporation allows shareholders to do this
Treasury Stock
stock that was previously issued and has been reacquired by the corporation → may then be sold as treasury stock, which is always treated as NO PAR (no min. issuance price)
what kind of stock is always treated as no par stock?
Treasury Stock

stock that was previously issued and has been reacquired by the corporation
Par
minimum issuance price (not that stock can be issued for a greater price, just not a price less than par)
Acquiring property w/ par value stock
BOD’s determination of the value of a consideration for an issuance is conclusive if made without fraud

where valuable stock is issued in exchange for much less valuable consideration (e.g., sweeping up the office for one week) → fraud and waste of corporate asserts
Issuing Stock for < Par Vaue =
watered stock

X buys 10,000 shares of $3 par value stock for $22,000 → corporation (or creditors if corporation is insolvent) can sue for the $8000 of water
watered stock
Issuing Stock for < Par Vaue =
who is liable as a result of the sale of watered stock?
• directors are liable if they knowingly authorized the issuance
• buyer of watered stock is liable (no defense b/c charged w/ notice of the par value)
• third party who purchases watered stock from buyer is NOT liable as long as she acted in good faith (i.e., she did not know about the water)
If someone pays for an issuance w/ an improper form of consideration, what result?
this is unpaid stock and, therefore, water
Preemptive Rights
right of an existing shareholder to maintain her percentage (i.e., avoid dilution) of ownership by buying stock whenever there is a NEW ISSUANCE of common stock FOR MONEY (i.e., cash or checks)
how do we know if preemptive rights exist?
ONLY EXIST IF CERTIFICATE SAYS SO
what is not included in a “new issuance” for the purpose of preemptive rights?
--does NOT include sale of treasury stock (stock that was previously issued and then reacquired by corp)

--does NOT includes the sale of shares authorized by original certificate and sold w/in 2 years of formation
what does "for money" mean for the purpose of preemptive rights?
if new issuances are being made in exchange for anything except money or check → NO preemptive rights

e.g., Corporation is issuing stock to G in order to acquire G’s farm → NO preemptive rights
# of Directors Required
One or more adult humans with legal capacity (default), but the order of determinants is
• Bylaws
• Shareholder action
• By BOD if a shareholder bylaw allows
how are directors elected?
• Initially, the incorporators elect directors
• shareholders elect directors at the annual shareholder meeting thereafter
o BOD can be classified, meaning...
that it has 2, 3, or 4 classes of directors (minimum of one director per class), w/ one class elected each year
Removal of Directors (before the natural expiration of their term)

how does this happen?
Shareholders can remove a director
o For cause
o Without cause ONLY IF the certificate or a bylaw general expressly allows

BOD can remove a director
o For cause ONLY IF the certificate or a shareholder bylaw expressly allows
o NOT without cause
can the BOD remove a director?
yes
ONLY for cause (not without cause)
ONLY IF the certificate or a shareholder bylaw expressly allows
can SHs remove a director?
yes

For cause
and
Without cause ONLY IF the certificate or a bylaw general expressly allows
Filling a Vacancy on the BOD (b/c a director dies, resigns, or is removed)
BOD selects the person who will serve the remainder of the term

--Exception: when a director is removed w/OUT cause → shareholders select replacement for remainder
when a director is removed w/OUT cause, who selects the replacement?
shareholders select replacement for remainder
how does the BOD act?
• 1. Unanimous written consent
• 2. OR a BOD meeting
where must the BOD be held?
anywhere on the planet
can a meeting be held by conference call?
yes, as long as everyone can hear all other participants
Notice Requirements for Regular BOD meetings
notice NOT required (time and place usu. set in bylaws)
Notice Requirements for special BOD meetings
notice stating TIME and PLACE required (no form requirements)
If one director does NOT receive notice of special meeting, what happens?
any action taken at the meeting is void UNLESS the director not given notice waives the notice defect either
1. in writing and signed at any time OR
2. by attending the meeting w/OUT OBJECTION
are proxies allowed for director voting?
NO
are voting agreements permitted for director voting
NO
Quorum
# of directors who must be present at a meeting in order for BOD to do business
default quorum requirement
majority of the entire board (# of positions if there were no vacancies)

• Decrease: Corporation can decrease quorum requirement in the certificate or bylaws to a minimum of 1/3 the entire BOD
• Increase: Corporation can increase quorum requirement in the certificate ONLY to a maximum of the entire BOD
can the corporation decrease the quorum requirement for the BOD?
YES

in the certificate or bylaws to a minimum of 1/3 of the entire BOD
can the corporation increase the quorum requirement for a BOD meeting?
YES

to anything by cert
what If directors leave and number present drops below quorum?
BOD canNOT act
what is necessary for the BOD to pass resolutions (act) once there is a quorum, by default?
majority of directors present

• Decrease: Corporation can NOT decrease requirement for passing a resolution
• Increase: Corporation CAN increase the requirement for passing a resolution to a supermajority of those present (e.g., 60%) in the certificate ONLY
Can the corporation decrease the requirement for passing a resolution?
NO
Can the corporation increase the requirement for passing a resolution?
Corporation CAN increase the requirement for passing a resolution to a supermajority of those present (e.g., 60%) in the certificate ONLY
what if directors purport to make an act in some way other than by unanimous written consent or a BOD meeting
act is void UNLESS RATIFIED by a valid act
can BOD delegate substantial management functions, responsibilities, or powers to a committee?

YES
--IF the certificate or bylaws allow
--a majority of an entire BOD can delegate
--SOME (not ALL) substantial management functions, responsibilities, or powers to a committee
--of ONE or more directors
what can a BOD committee do?
Committee canNOT directly do (but CAN recommend) the following:
o Set director compensation
o Fill a BOD vacancy
o Submit a fundamental change in the corporation to shareholders
Duty of Care
DDGFDDCSOPPUSC

a director must discharge her duties in good faith and w/ the degree of diligence, care and skill of an ordinarily prudent person under similar circumstances in like position
what's required to show Nonfeasance?
1. director does nothing (e.g., fails to attend any of the board meetings or keep abreast of business)

and

2. NEED CAUSATION: Even if duty of care was breached, it MUST HAVE CAUSED a loss to corporation
what's required to show Misfeasance?
1. director or BOD does something that hurts the corporation → BJR

2. DO NOT NEED TO SHOW CAUSATION
Business Judgment Rule
Director/BOD is NOT liable for breach of duty of care if their decision met the deferential business judgment rule standard

court will NOT second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis
Duty of Loyalty
GFHCMF required of fiduciaries

a director must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries (memorize): GFHCMF → look for conflict of interest
telltale sign of breach of duty of loyalty
look for conflict of interest
Interested Director Trx definition
any deal b/w the corporation and one of its directors or business in which its director
(1) is also a director or
(2) is an officer or
(3) has a substantial financial interest
what must the director in question show if accused of a director interested trx?
interested director trxs will be set aside UNLESS the director can show either

(1) deal was fair and reasonable to the corporation
OR (2) the material facts of the deal AND the director’s interest in the deal were disclosed/known AND the deal was approved in one of the following ways:
• A. Shareholder action
• B. OR BOD approval by sufficient vote (NOT counting votes of the interested directors)
• C. OR Unanimous vote of disinterested directors if the disinterested directors are insufficient to make an act of the BOD

Interested directors DO count toward a quorum of the board and can also participate, BUT their vote does NOT count
in approving an interested director trx, can interested directors vote?
Interested directors DO count toward a quorum of the board and can also participate, BUT their vote does NOT count
can the BOD set director compensation?
compensation must be
(1) reasonable and
(2) in good faith

If excessive → waste of corporate assets → breach of duty of loyalty
what approvals are needed if corporation wants to grant Director/Officer/Employee Stock Options?
--Publicly traded Stock: grant must be authorized under exchange policies

--Nonpublic Stock: grant must be approved by shareholders
Competing Ventures: when a director has an interest in a competing business

what does this constitute?
breach of duty of loyalty

• Rule: director may NOT start a business that competes with the corporation on whose BOD she sits
• Remedy: corporation gets a constructive trust on competing business’s profit and director must account to corporation for her profits
Corporate Opportunity: when a director of a corporation comes upon an opportunity that the corporation needs, has an interest or tangible expectancy in, or that is logically related to the corporation’s business

What's the rule
director presented with a corporate opportunity canNOT usurp the opportunity for himself until he
(1) tells the BOD
and (2) the BOD rejects the opportunity

• Remedy: corporation gets a constructive trust and director must account to corporation for his profits from the usurped opportunity
o If director still has the opportunity → director must sell it to the corporation at his cost
o If director has sold the opportunity at a profit → corporation gets the profit
can the BOD vote to lend a director corporate funds or guarantee the director’s personal obligation?
YES, ONLY IF the BOD finds that it would benefit the corporation (e.g., director’s college tuition)
how do we know if a director concurred w/ a BOD action?
director is presumed to have concurred w/ BOD action UNLESS her dissent is noted IN WRITING in corporate records

(1) In the minutes
OR (2) in a writing to the corporate secretary at the BOD meeting
OR (3) in a registered letter to the corporate secretary promptly after adjournment

ORAL dissent does the director NO good → liability is presumed

Director canNOT dissent if he voted for the resolution at the meeting
what if the director did not attend the meeting at which the wrongful approval was made?
NOT liable if he

--delivers or sends
--by registered mail
--to the corporate secretary
--w/in a reasonable amount of time
--a written dissent
--AND ensures that the dissent is filed w/ the minutes of the meeting in question
director will not be liable for good faith reliance on information, opinions, reports or statements by the following
(1) officers/employees of corporation whom director/officer believes to be competent and reliable

(2) lawyers or public accountants whom director/officer believes are acting w/in their competence

(3) OR a committee of which director/officer is NOT a member, re: matters w/in its authority
who has a duty of care and loyalty?
officers and directors
can officers bind the corporation to acts they take in the corporation’s behalf?
yes, IF they have AGENCY AUTHORITY
who sets officer compensation?
directors
who selects and removes officers?
BOD

Exception: if certificate of incorporation requires the shareholders to elect officers, then SHs select officers → in this case, ONLY the shareholders may remove the officers (BUT directors can still, for cause, suspend an officer’s authority to act)

• Judicial Action: Attorney general or holders of 10% of all shares may sue for a judgment removing an officer for cause → court can then bar reappointment of a person removed from office
corporation's liability after removal or an officer
corporation may be liable for breach of contract damages
Remember the hiring and firing hierarchy (generally)
• Shareholders hire and fire directors
• Directors hire and fire officers
• Shareholders USU. do NOT hire and fire officers
can the BOD vote to lend a director corporate funds or guarantee the director’s personal obligation?
YES, ONLY IF the BOD finds that it would benefit the corporation (e.g., director’s college tuition)
how do we know if a director concurred w/ a BOD action?
director is presumed to have concurred w/ BOD action UNLESS her dissent is noted IN WRITING in corporate records

(1) In the minutes
OR (2) in a writing to the corporate secretary at the BOD meeting
OR (3) in a registered letter to the corporate secretary promptly after adjournment

ORAL dissent does the director NO good → liability is presumed

Director canNOT dissent if he voted for the resolution at the meeting
what if the director did not attend the meeting at which the wrongful approval was made?
NOT liable if he

--delivers or sends
--by registered mail
--to the corporate secretary
--w/in a reasonable amount of time
--a written dissent
--AND ensures that the dissent is filed w/ the minutes of the meeting in question
director will not be liable for good faith reliance on information, opinions, reports or statements by the following
(1) officers/employees of corporation whom director/officer believes to be competent and reliable

(2) lawyers or public accountants whom director/officer believes are acting w/in their competence

(3) OR a committee of which director/officer is NOT a member, re: matters w/in its authority
who has a duty of care and loyalty?
officers and directors
can officers bind the corporation to acts they take in the corporation’s behalf?
yes, IF they have AGENCY AUTHORITY
who sets officer compensation?
directors
who selects and removes officers?
BOD

Exception: if certificate of incorporation requires the shareholders to elect officers, then SHs select officers → in this case, ONLY the shareholders may remove the officers (BUT directors can still, for cause, suspend an officer’s authority to act)

• Judicial Action: Attorney general or holders of 10% of all shares may sue for a judgment removing an officer for cause → court can then bar reappointment of a person removed from office
corporation's liability after removal or an officer
corporation may be liable for breach of contract damages
Remember the hiring and firing hierarchy (generally)
• Shareholders hire and fire directors
• Directors hire and fire officers
• Shareholders USU. do NOT hire and fire officers
when is the corporation prohibited from indemnifying directors and officers?
Director/officer was HELD LIABLE to the corporation
when must the corporation prohibited from indemnifying directors and officers?
director/officer won a judgment on the MERITS or OTHERWISE
when may the corporation indemnify officers and directors?
if the director/officer if she can show
• 1. That she acted in good faith
• 2. AND for a purpose reasonably believed to be in the corporation’s best interest
what can reimbursement to an officer or director sued in her capacity as an officer or director BY or ON BEHALF OF the corporation include?
can include settlement amount
expenses and attorneys’ fees
but NOT JUDGMENT
Who determines eligibility for D&O reimbursement?
• BOD w/ a quorum of directors being nonparties OR ELSE
• Shareholders OR a quorum of those directors who are disinterested OR
• BOD pursuant to report from independent legal counsel
what if corporation does not reimburse the director or officer?
(except when there’s a judgment against the director/officer), the court in which director or officer was sued can order the corporation to reimburse the officer or director for litigation expenses and attorneys’ fees
can the corporation ADVANCE litigation expenses to the director or officer?
yes, but they must be repaid if it turns out the director/officer is NOT entitled to reimbursement
certificate of incorporation or bylaws MAY allow for elimination of director liability to the corporation or shareholders for damages by resolution of the BOD or shareholders or by agreement EXCEPT if the director/officer
• Acted in bad faith
• OR acted w/ intentional misconduct
• OR received an improper financial benefit
• OR approved an unlawful distribution or loan
Can Shareholders Manage the Corporation?
generally no

o Close Corporations (one with few shareholders and stock that is not publicly traded): can either have BOD managing or shareholders managing the business directly
in a close corporation, shareholder can manage business directly if the following requirements are met
o 1. Provision in the certificate of incorporation restricting or transferring BOD power to SHs (or others)
o 2. All incorporators or shareholders (voting and nonvoting) approve
o 3. Conspicuously noted on the front and back of all shares
o 4. All subsequent shareholders have notice
o 5. Shares are not listed on an exchange or regularly quoted over the counter
managing shareholders owe the duties of care and loyalty?
YES
duty of utmost good faith
• In a close corporation, controlling shareholders canNOT use their power for personal gain at the expense of the minority shareholders or the corporation
o Professional Service Corporations (PC): Members of a licensed profession (e.g., doctors, lawyers) canNOT practice their profession thru a general business corporation; instead use this

Requirements
• Shareholders, directors, and officers in a PC must be licensed professionals
• Professionals are liable for their own malpractice but NOT for that of others
• Professionals are NOT liable for contracts entered by the PC or for rent due on leases in the PC’s name (PC is liable)
• PC is governed by rules of the business corporation
• Certificate of incorporation must show name using PS, indicate the profession to be practiced, include the name and addresses of the original SHs, directors and officers, and certify that each shareholder, director, and officer is licensed to practice the profession
• If a shareholder in a PC dies or is disqualified from the practice, the PC must buy back his stock
Are the Shareholders Liable for What the Corporation Does?
generally, NO b/c the corporation is liable for what it does

exception: piercing the corporate veil
piercing the corporate veil applies to what kind of corporations?
for CLOSE corporations only): Piercing Corporate Veil allows SHs to be held personally liable
when is it necessary to pierce the corporate veil?
to prevent fraud or achieve equality

1. Shareholder(s) must have abused the privilege of incorporating

2. Fairness requires holding the shareholder liable
does piercing the corporate veil apply where the managing shareholder treats the corporate assets as her own?
YES, but courts will not PCV if corporation has any mind, existence, or will of its own

If the court does PCV, only the shareholder who treated corporate assets as her own will be liable
shareholder drives corporate car as her own, uses corporate credit card for personal purchases, commingles personal and corporate funds

is this enough to pierce the corporate veil?
NO, if corporation has ANY mind, will, or existence of its own
what to look out for in PCV situations?
who could the shareholder be?
SH can be another corporation: if a parent forms a sub to avoid its obligations, the court may PCV thru the sub and hold the parent liable
undercapitalization and PCV?
Courts will PCV of a close corporation and hold shareholder(s) liable when
(1) the shareholder failed to invest enough to cover potential liabilities
AND (2) the court finds the existence of excessive domination or fraud or illegality
will courts PCV more readily in cases of tort liability or contract cases
tort liability cases
tagline for PCV
courts may pierce the corporate veil and hold shareholders personally liable when necessary to prevent fraud or achieve equality. Courts will only do this if
1. the SH abused the privilege of incorporating
and 2. fairness requires holding the shareholder liable

in situations where the managing SH is holding corporate assets as her own, courts will be hesitant to PCV unless it finds that the corporation has no mind, will, or existence of its own.
undercapitalization and PCV
Courts will PCV of a close corporation and hold shareholder(s) liable when
(1) the shareholder failed to invest enough to cover potential liabilities
AND (2) the court finds the existence of excessive domination or fraud or illegality
can shareholders be personally liable for the wages and benefits of the corporation’s employees?
YES, in a close corporation, the ten largest shareholders are personally liable for the wages and benefits of the corporation’s employees
Shareholder Derivative Suits arise when
a shareholder sues to enforce the corporation’s claim (not her own personal claim) b/c the corporation will not pursue the claim itself
a SH derivative suit is based in what?
the claim derives from the corporation’s right to sue
derivative or direct suit?
Could the corporation have brought this suit?

If yes → derivative suit (e.g., suit for usurping corporate opportunities, suit re waste of corporate assets)

If no → direct suit (e.g., suit against corporation for not honoring a SH’s preemptive right, suit to compel the declaration of a dividend)
If suing shareholder wins the derivative suit, who recovers?
Corporation recovers b/c it’s the corporation’s claim
If suing shareholder wins the derivative suit, does she get reimbursed for anything?
costs and attorneys’ fees, usu. coming out of judgment won for the corporation
• Suing shareholder MIGHT recover damages directly in a derivative suit if
recovery by the corporation would simply return money to the bad guys (e.g., breaching shareholder would be excluded from recovery)
o If suing shareholder loses the derivative suit, consequence?
• Suing shareholder canNOT recover costs and attorneys’ fees
• Suing shareholder will probably be liable to the defendants for their costs
• Other shareholders canNOT later sue the same defendants on the same trx b/c the claim has already been asserted on behalf of the corporation (res judicata)
Requirements for bringing a shareholder derivative suit
OWN claim, OWN action, REP, JOIN, BOND, how I made a demand/why it was futile

• Stock ownership when claim arose: person bringing suit must have owned stock (or held a voting trust certificate) at the time the claim arose OR have gotten it by operation of law (e.g., inheritance, divorce decree) from someone who owned the stock when the claim arose
• Stock ownership when action is brought: suing shareholder must own the stock from the time when the action is brought through entry of judgment
• Suing shareholder must adequately represent the interests of the corporation and other shareholders
• Corporation must be joined in the litigation as a defendant (even though it’s the corporation’s claim)
• Suing shareholder may be required to post a bond for D’s costs UNLESS suing shareholder owns 5% or more of the stock OR suing shareholder’s stock is worth > $50,000
• Suing shareholder must either plead w/ particularity (1) her efforts in making a demand on the corporation OR (2) why making a demand would have been futile
in bringing a shareholder derivative suit, suing shareholder must plead w/ particularity either...
(1) her efforts in MAKING A DEMAND on the BOD → BOD refuses to bring suit on behalf of the corporation → so in order to bring suit, shareholder must also show:
• 1. Interestedness: the majority of the BOD was interested when it rejected the demand
• OR 2. Sufficiency: BOD’s procedure was incomplete/inadequate

(2) OR why making a demand would have been FUTILE and should be excused:
• Most likely: If majority of the BOD is interested or under the control of interested directors (directors themselves will be the defendants)
• OR BOD did NOT inform itself of the trx to extent reasonable under the circumstances
• OR the trx is so egregious on its face that it could not be the result of sound business judgment
after SH brings a derivative suit, corporation may then...

and court will decide on...
make a motion to dismiss based on a finding of independent directors (or a special litigation committee, made up of independent directors) that the suit is not in the corporation’s best interests (e.g., b/c there’s a low chance of recovery or that cost of suit will exceed recovery); court will grant or deny the motion based on
• 1. Interestedness: independence of those making the investigation
• 2. Sufficiency of the investigation
what's required for parties to dismiss or settle a derivative suit?
ONLY w/ court approval
The court may require notice to shareholders whose interest may be substantially affected
who gets to vote in a shareholder meeting?
The record owner as of the record date has the right to vote
Record owner
the person shown as the owner of the shares in the corporate records
Record date
a voter eligibility cut off, (set b/w 10 and 60 days before the shareholder meeting)
does the corporation get to vote treasury (reacquired) stock?
NO even though the corporation technically owns it
if a shareholder dies, can the executor vote?
YES
Proxy definition:
(1) a writing (includes fax and email)
(2) signed by a record shareholder or authorized agent
(3) directed to secretary of the corporation
(4) authorizing another to vote the shares
how long is a proxy good for?
ONLY good for 11 months, UNLESS proxy indicates otherwise
how can a proxy be revoked?
Proxy can be revoked by the proper execution and submission of a subsequent proxy, EVEN IF the proxy states that it’s irrevocable
how can a proxy be made truly irrevocable?
For proxy to be truly irrevocable, must be a proxy coupled w/ an interest
(1) it must state that it is irrevocable
and (2) the proxy holder must have some interest in the shares other than voting (e.g., SH sells her shares after the record date but before the annual meeting and gives purchaser of the shares an irrevocable proxy to vote the shares at the annual meeting)
SHs agreeing to vote alike thru a trust or agreement

this is called?
block voting, and it's ok
Voting Trust Requirements
--Written trust agreement controlling how the shares will be voted

--Copy to the corporation

--Transfer of legal title of shares to the voting trustee

--Original shareholders receive voting trust certificates and retain all shareholder rights except for voting

--10 year maximum on voting trusts (but can be extended for up to 10 years w/in 6 months of expiration)
Voting (Pooling) Agreement Requirements
o In writing
o Signed
o NOT specifically enforceable
o BUT irrevocable if it says so
o How do shareholders vote?
• UNANIMOUS Written consent signed by the holders of ALL voting shares
• OR at a meeting of shareholders
where must annual SH meetings be held?
anywhere
what if they're not held?
court can order one
how are directors elected at annual SH meetings?
the highest vote-getter for each seat on the board wins that seat, even if she did NOT get a majority of the votes (plurality is all that’s required)
where must Special SH Meetings be held?
anywhere
how are special SH meetings called?
can be called by BOD

OR anyone specified in the certificate of incorporation or bylaws
what if there is a failure to elect a sufficient number of directors to conduct the business of the corporation?
• special meeting to elect directors MUST be called by the BOD

• if BOD fails to call such a meeting, the holders of 10% of the voting shares may demand in writing that the corporation hold the SH meeting

• secretary must give notice of the meeting or, if secretary fails to do so, shareholders may give the notice
Notice of SH meetings (procedure)
• written notice (email OK)
• for every meeting (annual or special)
• to every shareholder entitled to vote
• b/w 10 and 60 days before the shareholder meeting
what if some shareholders are not notified of the meeting?
action taken at the meeting is void UNLESS those not given notice waive the notice
(1) expressly
OR (2) impliedly, by attending the meeting w/out objection
Notice of SH meetings (substance)
notice must
• state When
• state Where
• inform if (and why) the proposed action would entitle shareholders to appraisal rights (must include statute regarding appraisal rights)

Special Meeting additional notice requirements: must state
--who called the meeting
--the purpose of the meeting (canNOT be to remove an officer b/c this is the job of directors)
what additional things must be included in a special meeting notice?
must state
o who called the meeting
o the purpose of the meeting (canNOT be to remove an officer b/c this is the job of directors)
what is required in order to take action at a shareholder meeting?
quorum present at the meeting, as determined by number of SHARES represented (not SHs)

Default quorum requirement: majority of outstanding shares
can corporation decrease the quorum requirement for a shareholder meeting?
certificate of incorporation or bylaws can reduce quorum requirement to no less than 1/3 of shares entitled to vote
can corporation increase the quorum requirement for SH meetings?
certificate of incorporation (NOT bylaws) can increase quorum requirement to anything
is quorum at SH meeting lost if people leave the meeting?
NO (different from BOD rule)
Shareholder approval requirement
majority of shares ACTUALLY voting (abstentions do NOT count)

THIS CANNOT BE REDUCED
can corporation decrease the approval requirement for SH meetings?
NOOOOOOOO
can corporation increase the approval requirement for SH meetings?
certificate of incorporation (NOT bylaws) can increase approval requirement to anything
Cumulative Voting ONLY available when?
ONLY available when voting for directors
ONLY available if expressly provided for in certificate of incorporation
under cumulative voting, the number of votes a SH may cast =
number of shares owned x number of directors to be elected

All votes may be cast for one candidate is desired
CAN SH sell her stock for less than par value?
YES, par value is an issuance rule
how to set Stock Transfer Restrictions
If they are set, they must be set (1) in cert of inc OR (2) bylaws OR (3) OR by agreement
are Stock Transfer Restrictions legal?
will be upheld if they are reasonable (are not an undue restraint on alienation)

e.g., right of first refusal is acceptable as long as the price offered is reasonable

e.g., requirement that SHs get corporation’s approval before selling is NOT reasonable
Requirements for stock transfer restriction
besides reasonableness rqmt, transferee must have notice or knowledge

cannot be invoked against the transferee (e.g., buyer) of the stock UNLESS either
(1) It is conspicuously noted on the stock certificate (notice)
OR (2) the transferee had actual knowledge of the restriction (knowledge)
Any SH can access (1) minutes of SH proceedings and (2) record of SHs...
w/ 5 days notice by written demand

Corporation can then demand that requesting SH provide an affidavit swearing ONLY that
(1) his purpose is not other than in the interest of the corporation and
(2) that he has not w/in five years tried to sell any list of SHs

→ if SH does not provide affidavit, corporation can deny access
Any SH can access a list of current Ds and Os
w/ at least 2 days notice by written demand (NO affidavit required)
o Any SH can demand access (thru a written request) to (1) the corp’s latest annual balance sheet, (2) profit and loss statement, and (3) latest interim statements distributed to SHs or public
corporation can fulfill this request by mail
Common Law Right to Inspect
all shareholders have the right to inspect records at a reasonable time, proper place, and for a proper purpose (related to her role as SH) → unclear which documents this covers
Distributions

Types of Distributions
payments by the corporation to shareholders

Repurchase
Redemption
Dividend
Repurchase: Payment to repurchase shares
Repurchases are individually negotiated

Generally, a corporation can discriminate in repurchases (repurchase some SHs’ stock, but not that of others, BUT a close corporation might have to give equal opportunity to all shareholders)
Redemption
Payment to redeem shares (forced sale to corporation at a price set in certificate)

1. Redemptions are set in certificate
2. Must be done proportionately w/in each class of stock
Is there a right to a distribution?
NO

BOD declares distributions at its own discretion → NO right to a distribution until it has been declared

Court will interfere w/ BOD’s discretion ONLY on a showing of bad faith or dishonest purpose (difficult)
Stock Split
gives SH more shares but reduces the value of each share proportionately → value is same
Funds that may and may NOT be used for ANY distribution
SURPLUS CAN be used for distributions = assets – liabilities – stated capital

STATED CAPITAL (par value of issuance) canNOT be used for distributions = # of shares issued x par value
Surplus
= assets – liabilities – stated capital
NO PAR stock w/in 60 days after issuance...
BOD can allocate any part of it (but not all) to surplus

--if BOD does nothing w/in 60 days after issuance, it ALL goes to stated capital
Stated Capital
--(par value of issuance)

--canNOT be used for distributions = # of shares issued x par value

--excess over par goes to surplus
can the corporation make distributions if it lost money last year?
YES
if corporation is insolvent (unable to pay its debts as they come due in the ordinary course of business), can it make distributions?
NO

canNOT make distributions if insolvent or if the distribution would render it insolvent
who is liable for unlawful distributions?
--Directors are PERSONALLY LIABLE for unlawful distributions

--Shareholders are PERSONALLY LIABLE when they knew distribution was unlawful when they received it

--This is the basis for corporation’s claim → could be a derivative suit

--Remember directors’ possible good faith reliance defense here though
assume BOD declares a dividend of $400K

Outstanding stock = 100K shares of common

dividend is?
$4 per share
assume BOD declares a dividend of $400K

Outstanding stock = 100K shares of common and 20K shares of preferred w/ $2 dividend pref
--20K shares of preferred x $2 preference = $40K paid to preferred holders
--$360K remainder divided by 100K shares of common = $3.60/share to common holders
assume BOD declares a dividend of $400K

Outstanding stock = 100K shares of common and 20K shares of $2 preferred that is participating
--20K shares of preferred x $2 preference = $40K paid to preferred holders
--$360K remainder is divided among 120K shares (common + preferred) = $3.00 per share to holders of common stock and preferred
--preferred holders get a total of $5.00 per share
assume BOD declares a dividend of $400K

o Outstanding stock = 100K shares of common and 20K shares of $2 preferred that is cumulative (and no dividends have been paid in the past three years)
--20K shares of preferred x $2(4 years) preference =$160K paid to preferred holders

--$240K remainder is divided among 100K shares of common = $2.40 per share to holders of common stock
Right of Appraisal (important)
definition and triggered by
right of a dissenting SH to force the corporation to buy her shares at fair value

Triggered by the following actions of a CLOSE corporation (no appraisal right for public corporation):

1. Some amendments to the certificate of incorporation

2. Consolidation

3. Corporation merges with another corporation

4. Corporation transfers substantially all of its assets

5. Corporation’s shares are acquired in a share exchange
once appraisal right has been triggered, actions must be taken by shareholder to perfect the appraisal right
OBJECT, ABSTAIN/VOTE AGAINST, DEMAND

Before the shareholder vote, file a written objection and an intent to demand payment
o AND abstain from voting OR vote against the proposed change
o AND after the vote, make a written demand to be bought out
If the shareholder and the corporation canNOT agree on a fair value
the corporation sues and the court determines the value

--Court canNOT discount the value of the shares to reflect their minority (noncontrolling) status
major amendments to the cert of inc require:

(preference rights, preemptive rights, voting rights are altered)
• 1. BOD Approval: must be approved by director action
• 2. SH Approval: must be approved by a majority of the shares entitled to vote
o Exception: if an amendment will change or strike a supermajority quorum or voting requirement for shareholder (NOT director) voting → must be approved by (1) director action and (2) 2/3 of the shares entitled to vote
• 3. Delivery and Filing: must deliver certificate of amendment to the Department of State for its filing
• 4. Appraisal Right: If amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights → dissenting shareholder right of appraisal
Mergers (A merges into B) or Consolidations (A and B consolidate into C) require
1. BOD Approval: each corporation’s BOD adopts a plan of merger (or consolidation)

2. SH Approval: each corporation’s shareholders must approve by a majority of the shares ENTITLED TO VOTE
• Short-Form Merger Exception: NO shareholder approval is required if a parent corporation owns 90% or more of each class of stock of a subsidiary that is being merged into that parent corporation

3. Delivery and Filing: must deliver certificate of merger or consolidation to the Department of State for its filing

4. Appraisal Right: exists for dissenting shareholders of the disappearing corporation, NOT the surviving corporation
• EVEN dissenting shareholders of the subsidiary in a short-form merger have the appraisal right, despite the fact they did NOT vote

5. Successor Liability: the surviving corporation succeeds to all rights and liabilities of the disappearing corporation
if an amendment will change or strike a supermajority quorum or voting requirement for shareholder (NOT director) voting
must be approved by (1) director action and (2) 2/3 of the shares entitled to vote
is there an appraisal right for mergers and consolidations?
YES for dissenting shareholders of the disappearing corporation, NOT the surviving corporation
In a transfer of All of Substantially All of the Assets, do shareholders need to approve?
SELLING corporation’s shareholders must approve by a majority of the shares entitled to vote

NOT BUYING CORPORATION
In a merger or consolidation, do shareholders need to approve?
YES, each corporation’s shareholders must approve by a majority of the shares entitled to vote
Transfer of Assets
one corporation wants to sell all of its assets to another
Share Exchange
one corporation wants to acquire all outstanding shares of one or more classes of another corporation
Is a delivery and filing required for a transfer of assets?
NO
is a delivery of assets required for a share exchange?
YES, must deliver plan of exchange to the Department of State for its filing
Is there an appraisal right for dissenting SHs in a sale of assets or share exchange?
exists for dissenting shareholders of the selling corporation, NOT the buying corporation
Is there Successor Liability for the buying corporation in a sale of assets or share exchange?
NO Successor TORT Liability for the buying corporation (b/c the selling corporation still exists) UNLESS
o the deal provides otherwise
o OR the buying corporation is a mere continuation of the selling corporation
o OR the deal was entered fraudulently for the purpose of escaping such obligations
BOD Approval in a sale of assets or share exchange?
each corporation’s BOD authorizes the deal
Is there Successor Liability for a merger or consolidation?
YES, the surviving corporation succeeds to all rights and liabilities of the disappearing corporation
Voluntary dissolution (corporation is going out of business)

what is required?
--NO BOD Approval necessary
--Shareholders must approve by a majority of the shares entitled to vote
--Delivery and Filing: must deliver certificate of dissolution to the Department of State for its filing
is BOD approval necessary for voluntary dissolution?
NO
o Involuntary dissolution (defintion)
judicial, meaning that someone is asking for a court order of dissolution
Three scenarios of involuntary dissolution

#1 Resolution
By resolution of the BOD OR resolution of a majority of shares entitled to vote, stating that

(1) the corporation has insufficient assets to discharge liabilities
OR (2) dissolution would benefit SHs
½ or more of the shares entitled to vote may petition for dissolution if
• directors are too divided to manage
• OR shareholders are too divided to elect directors
• OR the magnitude of internal dissention makes dissolution beneficial to shareholders
if SHs are unable to elect directors for two annual meetings...(dissolution)
Any shareholder entitled to vote may petition for a dissolution
KNOW THIS: Holders of ≥ 20% of voting shares in a closely held corp may petition for dissolution on either of these grounds
• Management’s illegal, oppressive, or fraudulent acts toward the SH seeking dissolution (incls. conduct that defeats reasonable expectation of minority SHs)
• OR management’s wasting, diverting, or looting of the corporation’s assets

Note: management = directors OR the managing shareholders
when can court deny a requested dissolution?
Court may deny dissolution if liquidation is unnecessary to protect the petitioners and if there is some other way the complaining shareholder can obtain a fair return on his investment (e.g., by ordering a buyout)
how can the corporation or noncomplaining SHs avoid dissolution?
--by w/in 90 days of the petition
--buying the petitioner’s stock
--at a fair value
--on terms approved by the court
Effect of Dissolution
does NOT end corporation’s existence → corporation stays in existence to wind up (liquidate)
--1. Gather all assets
--2. Convert assets to cash
--3. Pay creditors (who had been given notice earlier)
-------shareholders canNOT agree that they will be paid before the creditors
--4. Distribute remainder to shareholders, pro rata by share, unless there’s a dissolution preference
-------dissolution preference works like a dividend preference → pay preferred holders first (e.g., $2 preferred on dissolution)
controlling shareholder
shareholder who also occupies a control position (e.g., director position) OR whose ownership is such that she has working control over the corporation owes a fiduciary duty to minority shareholders and sometimes to others (incl. the corporation)
controlling shareholder can sell shares at a premium and keep the money UNLESS
1. CSH sells controlling shares to looters w/out making a reasonable investigation (e.g., agent approaches CSH on behalf of an undisclosed principal)

2. CSH de facto sells a corporate asset (by selling her control to someone who is trying to get to the corporation’s assets, not run the corporation)

3. CSH sells a position on the BOD (e.g., CSH sells her controlling interest and agrees that she and the directors under her control will resign from the BOD)
1. CSH sells controlling shares to looters w/out making a reasonable investigation (e.g., agent approaches CSH on behalf of an undisclosed principal)

result?
CSH (1) must disgorge profit and (2) will be liable for all damage to corporation
2. CSH de facto sells a corporate asset (by selling her control to someone who is trying to get to the corporation’s assets, not run the corporation)
all SHs will be able to share in the premium paid by buyer
3. CSH sells a position on the BOD (e.g., CSH sells her controlling interest and agrees that she and the directors under her control will resign from the BOD)
CSH must disgorge profit
besides approval by the requisite number of shares, what is one requirement of all mergers?
must have a legitimate corporate purpose

NOT OK: freeze out mergers aimed solely at cashing out minority shareholders unfairly
in evaluating freeze out mergers, courts will look at...
Freeze outs: Self dealing? treatment of minority SHs fair? legitimate business reason (corporate purpose) for the merger?


o Whether the deal is tainted by self-dealing or fraud
o Whether the minority shareholders are dealt with fairly
o Whether there is a legitimate business reason for the merger
Market Trading on Inside Information

o When a director or officer engages in market trading or the corporation’s stock based upon inside information from the corporation and makes a profit by doing so
this is a breach of a duty to the corporation → corporation has a claim → insider trading can be the basis of a derivative suit
common law insider trading

Nondisclosure of Special Fact or Special Circumstances
trading on inside info w/out disclosing it

Ds, Os, and CSHs must
1. abstain from trading OR
2. ensure disclosure so others are on the same footing


--Special Facts: those a reasonable investor would consider important in making an investment decision

--Who can sue? A shareholder with whom the director or officer deals and violates the special facts doctrine
Insider Trading issues
Market Trading on Inside Information and making a profit --> can be basis of a derivative suit

Nondisclosure of Special Fact or Special Circumstances (common law insider trading): requires Ds Os and CSHs to abstain or disclose to other party so they are on equal footing
Measure of damage for Nondisclosure of Special Fact or Special Circumstances (common law insider trading)
difference b/w price paid and value of the stock a reasonable time AFTER public disclosure

owed to the shareholder with whom the director or officer deals and violates the special facts doctrine