Corporations New York

Front 1

Meaning of a "Corporation"

Back 1

Legal entity separate and distinct from legal personalities of those who own and manage the corporation

Principal characteristics include:

1. Limited Liability (shareholders and managers are ordinarily not liable for corporate indebtedness)

2. Entity powers (e.g., contract in its own name, sue or be sued, own or convey property, and be held criminally liable for crimes it commits)

3. Centralized management (in a board of directors elected by shareholders)

4. Continuity of existence (Duration is perpetual unless limited in certificate)

5. Free transferability of ownership interests; and

6. Managers' authority to act is mainly derived from statutes ("BCL"), case law, and the certificate of incorporation or bylaws

Corporation is a "Person" entitled to Due Process and Equal Protection but not a "Citizen" under the Privileges and Immunities Clause

Front 2

Corporation Distinguished from Partnership

Back 2

Partnership is NOT a separate entity distinct from its owners

Each partner jointly and severally liable for debts of the partnership and has a voice in management.

Existence of partnership and ownership interests are not freely transferable.

Like a Corporation: Partnership can hold property, contract in its own name, and sue or be sued.

Front 3

Corporation Distinguished from Joint Stock Association

Back 3

Like a Corporation, Joint Stock Associations can have continuity of existence, centralized management, and freely transferable ownership interests, but unlike a corporation, owners do not have the benefit of limited liability

Front 4

Corporation Distinguished from Business Trust

Back 4

In a business trust, holders of shares of a beneficial interest in the trust have the advantage of limited liability provided they have no power to control the trustees in management of the trust

Front 5

Duty as Between Promoters

Back 5

Before incorporation, promoters have fiduciary duties of joint venturers.

After incorporation, promoters have only rights, duties, and obligations of shareholders.

Front 6

Promoters Duty as to "Outside" Investors

Back 6

1. Profits Taken After Outsiders Come In

--After outside investors come into picture, promoters must disclose and account to corporation for secret profits and profits from self-dealing

--Unless there is consent or ratification

2. Profits Taken Before Outsiders Come In

--As to profits from self-dealing BEFORE outsiders came in, promoters must account to corporation for these whenever issuance of additional shares to uninformed outsiders was contemplated or the public was invited to become original subscribers

--Exception: Promoters not accountable for profits of which outsiders had notice

3. When Promoters' Fiduciary Duties Terminate

--Fiduciary Duties do not extend to new shareholders after complained-of transactions

--Promoters DO have fiduciary duty to corporation both:

---(a) As to investors who subscribed while promoters were in control; and

---(b) As to transactions that were fixed in their terms while promoters were in control, even if subscribers purchaser, and the trans

Front 7

Preincorporation Contracts: Liability of Corporation

Back 7

Contracts made by Promoter before incorporation not binding on corporation.

Corporation may become liable by ADOPTING contract

Adoption may be express or implied from a knowing acceptance of the contract's benefits

Corporation will also be liable on preincorporation contracts when it takes over completely assets of an unincorporated predecessor and becomes the alter ego of its promoters

Front 8

Preincorporation Contracts: Liability of Promoter

Back 8

Promoter is PERSONALLY LIABLE unless:

1. The intention of the parties was evidently to bind the corporation only; or

2. Novation of contract has occurred between the third party and the corporation

Front 9

Preincorporation Contracts: Enforceability by Corporation

Back 9

Preincorporation contracts are enforceable by the corporation if they expressly or impliedly adopt the contract

Front 10

Incorporators

Back 10

Need one or more natural persons

18 or older

Sign certificate of incorporation and hold an organizational meeting for adoption of bylaws and election of board of directors

Front 11

Contents of Certificate of Incorporation

Back 11

Certificate of Incorporation must include:

1. Name of the corporation ("corporation," "incorporated," or "limited" or an abbreviation thereof must be used);

2. Purposes of the corporation (may be formed for "any lawful purpose")

3. The county in NY where the office of the corporation will be located

4. The number of authorized shares and a description

---aggregate number of shares authorized to be issued;

---par value or no par value;

---details on share classes or series;

---for corporations in existence prior to Feb 22, 1998, any provision limiting or denying preemptive rights

5. Designation of the secretary of state as agent for service of process

6. Name of the registered agent (optional an in addition to secretary of state designation)

7. Duration of the corporation (if not stated--perpetual)

8. Any limitations on Directors' liability to shareholders (provided breach of duty is not found to be in bad faith or due to intentional misconduct, or resulting in financial

Front 12

Execution and Filing

Back 12

Certificate must be signed by incorporators and acknowledged before notary public

Corporate existence begins upon filing of certificate BY the department of state (unless certificate specifies a subsequent date within 90 days of filing)

Filed certificate is CONCLUSIVE evidence that corporation has been formed

Only attorney general can attack validity of formation

Front 13

Minimum Capital Requirement

Back 13

NY has no "minimum capital" requirement before corporation commences doing business

Front 14

De Facto Corporation Doctrine

Back 14

Because filing of certificate of incorporation is CONCLUSIVE proof of validity under the BCL is is QUESTIONABLE whether "De Facto" Corporation Doctrine is available in NY

Traditionally, to have a de facto corporation, there must be:

1. Colorable compliance with the corporation statute

2. Good Faith; and

3. User of corporate privilege

Front 15

De Facto Corporation Doctrine

Back 15

Because filing of certificate of incorporation is CONCLUSIVE proof of validity under the BCL is is QUESTIONABLE whether "De Facto" Corporation Doctrine is available in NY

Traditionally, to have a de facto corporation, there must be:

1. Colorable compliance with the corporation statute

2. Good Faith; and

3. User of corporate privilege

Front 16

Corporation as Separate Entity

Back 16

Corporation generally treated as a separate entity

But a corporation may NOT be formed to defeat EXISTING creditors

Front 17

When Corporate Entity May Be Disregarded

Back 17

A party seeking to pierce the corporate veil must establish that:

1. The defendant exercised complete domination over the corporation in the transaction in question; and

2. Such domination was used to commit a fraud or wrong against the plaintiff that resulted in the plaintiff's injury

(i.e., the defendant abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice)

Factors to be considered in determining whether the owner has "abused the privilege of doing business in the corporate form" include whether there was:

1. A failure to adhere to corporate formalities (i.e., failure to issue stock, elect directors, keep corporate records, and the like that contributed to the plaintiff's loss)

2. Inadequate capitalization when the corporation was formed (generally, shareholders must put in sufficient capital to meet the corporation's prospective liabilities)

3. A commingling of personal and corporate assets; and/or

4. Use of corporate funds for personal e

Front 18

Piercing Parent-Subsidiary Corporations

Back 18

The same factors for determining whether to pierce the corporate veil are applicable in determining whether a parent corporation should be held liable for the obligations of its subsidiary

Front 19

Statutory Powers of Corporation

Back 19

Major statutory powers of a corporation include:

1. The power to transfer or mortgage all or any part of its assets

2. Lend money

3. Buy and sell securities

4. Contract and borrow

5. Compensate employees

6. Participate in other ventures (e.g., act as a promoter or partner)

Corporation has all powers "necessary or convenient" to effect the purposes for which it is formed

May make charitable contributions without regard to corporate benefit

May make political contributions to organization or candidate of not more than $5,000 per year

Front 20

Practice of Law

Back 20

With limited exceptions (professional services corporation), a corporation may not engage in the practice of law

Front 21

Ultra Vires

Back 21

3 situations in which ultra vires may be asserted:

1. An action against an officer or director (for damages due to unauthorized act)

2. In a proceeding by the attorney general (to annul or dissolve the corporation or to enjoin it from doing unauthorized business); and

3. In an injunction action by shareholders to enjoin any unauthorized act or transfer of property by or to a corporation (unless precluded by acquiescence or laches)

Acts or Transfers of Property are NOT invalid by reason of being ultra vires (Corporation cannot get out of contract because it is ultra vires)

Directors are personally liable to corporation for any losses suffered from ultra vires activities

Front 22

Shareholders Rights in Management of Corporation

Back 22

Generally, shareholders have no direct control over the day-to-day management of the corporation

Shareholders can exert indirect control by election of directors, amendment of certificate, and approval of organizational changes

By statute, nonpublic (closely-held) corporations can confer management power on shareholders

Front 23

Shareholders' Meetings: When and Where

Back 23

When:

--Shareholders must meet annually

--Special meetings may be called by Board

--Board must call special meeting for election of directors if there is a failure to elect a sufficient number of director to conduct the business of the corporation, either:

1. For a period of one month after the date fixed for the annual meeting, or

2. For a period of 13 months after the last annual meeting

Where:

Meetings of shareholders may be held anywhere, within or outside the state, as may be fixed by or under the bylaws

Front 24

Shareholders' Meetings: Notice

Back 24

Failure to give notice (in absence of waivers) renders action taken at the meeting VOID

Who: Notice must be given to each shareholder entitled to vote (personally or by mail)

When: Not less than 10 or more than 60 days before date of meeting

What: Must state place, date, and hour of meeting. If special meeting, must indicate who called the meeting and its purpose

Waiver: Notice may be waived:

1. In writing; or

2. By attendance in person or by proxy, without protesting lack of notice prior to conclusion of the meeting

Front 25

Shareholders' Meetings: Eligibility to Vote

Back 25

Every shareholder of record is entitled to one vote for each share held by the shareholder

Eligibility determined as of the "record date"

"Record Date" may not be less than 10 or more than 60 days before date of meeting

If no record date fixed, it is the close of business of the day next preceding the notice date

If no notice given, record date is the day next preceding the meeting date

Front 26

Shareholders' Meetings: Proxy: Form of Authorization

Back 26

BCL does not specify form required to appoint a proxy

--Written proxy signed by shareholder or its authorized officer or agent is valid

--Appointment by telegram or electronic means is valid if accompanied by some means for determining that it was authorized by shareholder

Front 27

Shareholders' Meetings: Proxy: Expiration and Revocability

Back 27

Proxies valid for 11 months from date given, unless otherwise provided in the proxy

Proxy revocable at pleasure of shareholder executing it, unless:

1. It is entitled "Irrevocable Proxy" and states that it is irrevocable, and

2. It is held by a pledgee, a person who has agreed to buy the shares, a creditor of the corporation, an officer whose employment calls for such proxy, or a person designated by a voting agreement

Death or Incompetence of shareholder revokes proxy ONLY IF, before authority is exercised, the officer responsible for the shareholders' list receives written notice

Front 28

Shareholders' Meetings: Termination of Irrevocable Proxy

Back 28

Irrevocable proxy becomes revocable when:

1. Pledge is redeemed,

2. Corporate credit is repaid,

3. Period of employment has ended

4. Voting agreement has terminated

Irrevocable proxies are revocable by purchaser of the shares who lacks knowledge of the proxy, unless reference to existence of irrevocable proxy is conspicuously noted on the shares

Front 29

Shareholders' Meetings: Quorum

Back 29

To constitute a quorum, a majority of the votes of the voting shares must be represented.

A lesser quorum may be provided for by certificate or bylaws (but not less than 1/3)

A greater quorum may be provided ONLY IN THE CERTIFICATE

When a quorum is present, it cannot be broken by withdrawal of any of the shareholders

Front 30

Shareholders' Meetings: Votes Required for Action

Back 30

Election of Directors: Made by PLURALITY of votes cast (unless articles or bylaws provide otherwise)

Other Action: Made by MAJORITY of votes cast

Greater voting requirements may be required for major corporate changes (certificate amendments, merger) or if required by the certificate

Cumulative Voting and Class Voting permitted ONLY IF provided for in the certificate

If any class or series of shares or bonds is entitled to elect directors as a class, removal may be effected only by the electing class

Front 31

Voting Trusts

Back 31

Voting trust is a written agreement of shareholders under which their shares are transferred to a "trustee" who votes the shares per provisions of the agreement

In NY, voting trusts may not exceed 10 years' duration but may be extended for another 10 years.

Voting trustee owes fiduciary duties to beneficial owners of the shares

Front 32

Voting Agreements

Back 32

Two or more shareholders, by a signed writing, may agree that their shares will be voted:

1. As provided in the agreement

2. As they may agree in the future, or

3. As determined by a procedure agreed upon by them

Voting agreements may be supported by an exchange or irrevocable proxies

Front 33

Action Without Meeting

Back 33

Any action that shareholders may take at a meeting may be taken without a meeting by written consent signed by 100% of the shareholders entitled to vote (unless certificate authorizes shareholder action by written consent signed by less than 100% of the shareholders entitled to vote)

Front 34

Inspection of Books and Records

Back 34

Every shareholder has the right to examine for "any proper purpose" shareholders' minutes and the record of the shareholders.

Shareholder may be required to furnish an affidavit that:

1. His purpose is not other than in the interest of the corporation; and

2. He has not within five years participated in an attempt to sell any list of shareholders

Corporation may not judge the shareholder's purpose

Proper Purpose: inspection of shareholder lists to solicit shareholders for stock tenders or to facilitate a proxy challenge to incumbent directors

Improper: Inspection of records to determine alleged misuse of shareholders' assets and funds (proper remedy being a derivative action)

Front 35

Inspection of Financial Statements

Back 35

On written request of any shareholder, corporation must mail its latest annual balance sheet, profit and loss statement, and any interim statements that have been made to the shareholders or the public

Front 36

Common Law Right of Inspection

Back 36

ALL shareholders have a common law right to inspect corporate books and records at a proper place and reasonable time and for a proper purpose

Front 37

Inspection of List of Directors and Officers

Back 37

Shareholders also have statutory right, on two days' written demand, to inspect at the corporation's office a current list of the corporation's directors and officers

Front 38

Shareholders' Fiduciary Responsibilities

Back 38

Generally, shareholders have no fiduciary duty to corporation or other shareholders

Controlling shareholders owe fiduciary duty to minority shareholders to exercise "utmost good faith"

Controlling shareholder free to sell controlling interest at a premium without sharing with minority shareholders, unless:

1. Looting of corporate assets

2. Conversion of corporate opportunity

3. Fraud or other bad faith

If controlling shareholders exercise bad faith, profits of sale "disgorged" to the corporation

Front 39

Bylaws

Back 39

Initial bylaws adopted by the incorporators

Bylaws are contract among the shareholders (outsiders have no standing to complain about violation of bylaws)

Bylaws are subject to law and the Certificate

Shareholders may Amend: Shareholders entitled to vote in election of Directors may, by majority vote, adopt, amend, or repeal by laws.

Board: Board may adopt, amend, or repeal bylaws when it is so provided by the:

--1. Certificate, or

--2. Bylaw adopted by the shareholders

Front 40

Powers and Qualifications of Directors

Back 40

Directors must be at least 18 (certificate or bylaws may prescribe other qualifications)

Restrictions on Board in Certificate

--Management authority may be restricted or transferred to one or more shareholders (even if it would otherwise be unlawful) if:

--1. Allowed in the certificate

--2. All incorporators or shareholders of record have authorized such provision

--3. All subsequent shareholders have notice of such provision; and

--4. No shares are listed on an exchange or are regularly quoted over the counter

Bylaws may restrict Directors' powers if consistent with law and the Certificate and do not prevent directors from acting with their best judgment

Front 41

Number of Directors

Back 41

BCL requires only 1 director

Any number may be set by:

1. The bylaws

2. The shareholders

3. The Board of Directors (if the shareholders have adopted a bylaw giving the directors such power)

If no number is set, board will be 1 director

Front 42

Election of Directors

Back 42

Initial board elected by the incorporators at the organizational meeting

At each annual meeting, directors are elected to hold office until next annual meting

Classified Board:

--Certificate or Incorporation or Bylaw adopted by shareholders may divide Board into classes and provide that only one class will be elected at each annual meeting.

--Directors may be divided into 2, 3, or 4, classes, as nearly equal in number as possible

Vacancies

--Vacancies on the board and newly created directorships may be filled by a vote of the Board

--Replacing directors removed without cause must be by a vote of the shareholders (unless board has the power in the certificate or a bylaw adopted by shareholders)

--If a specific class of shareholders is entitled to elect a director, a vacancy of that directorship is to be filled by a majority vote of the directors elected by that class

Front 43

Removal of Directors for Cause

Back 43

Directors may be removed for cause by vote of the shareholders

Board can only remove Directors for cause pursuant to certificate or a bylaw adopted by the shareholders

Directors elected by class vote or cumulative voting may NEVER be removed by the Board

Front 44

Removal of Directors without Cause

Back 44

Only shareholders may remove a director without cause, and then only if the certificate or bylaws so provides

Front 45

Special Voting Requirements for Removal

Back 45

If the corporation uses Cumulative Voting, no director may be removed if the votes cast against removal would be sufficient to elect the director at election of the entire board.

If the corporation elects directors by classes, no director may be removed except by vote of the class that elected the director

Front 46

Removal of Directors by Judicial Action

Back 46

Attorney General or holders of 10% of the shares (voting or nonvoting) may sue for judgment removing a director for cause.

Court may also bar reelection of a director so removed

Front 47

Formalities of Board Action

Back 47

Board may take action without a formal meeting by UNANIMOUS CONSENT IN WRITING (unless restricted by Certificate or Bylaws)

Directors may participate in meeting by means of a conference call, etc.

Action of a corporation lacking formal director action may be binding on corporation as against third parties if grounds exist for finding ratification or acquiescence by the directors

Front 48

Place, Time, and Notice of Directors' Meetings

Back 48

May be held within or outside of NY

Regular meetings may be held without notice if the time and place are fixed by the bylaws or by the Board

Notice is required for special meetings

Notice does NOT need to state purpose of meeting

Notice may be waived by:

1. Signed, written waiver before or after the meeting; or

2. Attendance without protest prior to commencement of the meeting

Where notice of the meeting is required but is not given (and not waived), actions taken at the meeting are invalid, absent ratification

Front 49

Quorum and Vote for Board of Directors

Back 49

Quorum: Majority of the entire Board

--Unless certificate or bylaws provide for a lesser quorum (not less than 1/3)

--Greater quorum requirement must be in Certificate (Bylaws cannot increase quorum requirement)

If quorum present, vote of a majority of Directors present constitutes an act of the Board

Action by the board changing the number of directors constituting the entire board or designating any committee of directors requires a vote of a majority of the entire board (i.e., number of directors authorized by certificate or bylaws)

Directors may not vote by proxy

Interested directors may count toward a quorum

Front 50

Exam Tip

Back 50

Director enters into an extraordinary contract with another entity on the corporation's behalf, either on his own accord or with the approval o some of the directors, or with the approval of all of the directors, who were called individually, etc.

Remember: A director does not have the power to bind the corporation on EXTRAORDINARY CONTRACTS unless there is actual authority to act.

Actual authority can arise only if:

1. Proper notice was given for a directors' meeting

2. A quorum was present, and

3. A majority of the directors approved the action.

Authority can also arise from unanimous written consent or ratification or acquiescence by the board

Front 51

Directors' Committees

Back 51

If certificate or bylaws so provide, Board may designate one or more directors to constitute a committee of the Board.

Need a resolution adopted by a majority of the entire Board.

Committee has all the powers of the Board subject to limitations in the bylaws or certificate and limitations imposed by the BCL

Front 52

Inspection Right of Directors

Back 52

Director in office has ABSOLUTE RIGHT to inspect the corporation's books and records.

Former Director has only QUALIFIED RIGHT to inspect (limited to the period of the person's directorship)

Front 53

Loans to Directors from Corporation

Back 53

Corporation may make loans to Directors

Process required for approving the loan depends on date Corporation formed:

1. Formed On or Before February 22, 1998: BOTH the Board and Shareholders must approve the loan (unless certificate allows Board to approve loan on its own upon a finding that it benefits the corporation)

2. Formed After February 22, 1998: No shareholder approval is required; Board may approve loan, upon a finding that it benefits the corporation

Front 54

Officers, In General

Back 54

Board may elect or appoint Officers (certificate may provide that officers elected by shareholders, instead)

Unless certificate or bylaws provide otherwise, officers hold office until:

1. The first directors' meeting after the next annual shareholders' meeting, or

2. The next annual meeting of shareholders (if the officers are elected by shareholders).

Ordinary rules of Agency determine authority of officers as against outsiders (express, implied, and apparent authority).

Unauthorized acts of officers may be ratified by express resolution of the Board or through acquiescence or acceptance of the benefits of the acts with knowledge of the facts

Front 55

Particular Officers

Back 55

President: Power to enter into ordinary contracts on behalf of the corporation

Secretary: Power to keep and maintain corporate records

Treasurer: Power to act in respect to finances (but no power to indorse notes merely by virtue of his position)

General Manager: General power to do anything necessary to carry on the corporation's business from day to day

Front 56

Removal of Officers

Back 56

Officer elected or appointed by the Board may be removed by the Board with or without cause

Officer elected by shareholders may not be removed by the Board, but his authority to act may be suspended by the Board for cause

Officer elected by shareholders may be removed with or without cause by a vote of the shareholders

Attorney general or holders of 10% of votes of all outstanding shares may sue for judgment removing an officer for cause

Removal of an officer without cause is without prejudice to his contract rights, if any

Front 57

Removal of Officers

Back 57

Officer elected or appointed by the Board may be removed by the Board with or without cause

Officer elected by shareholders may not be removed by the Board, but his authority to act may be suspended by the Board for cause

Officer elected by shareholders may be removed with or without cause by a vote of the shareholders

Attorney general or holders of 10% of votes of all outstanding shares may sue for judgment removing an officer for cause

Removal of an officer without cause is without prejudice to his contract rights, if any

Front 58

Duty of Care

Back 58

Directors and Officers must discharge their duties in good faith and with that degree of care and skill that an ordinarily prudent person would exercise under similar circumstances in like positions.

Director or Officer entitled to rely, if acting in good faith, on information, opinions, reports, or statements prepared by officers or employees, counsel, public accountants, or a committee of the Board upon which she does not serve.

Courts will not second-guess the business judgment of Directors if exercised in good faith and on available information.

Even if Director fails to exercise duty of care, recovery may be had only for loss proximately caused by her negligence.

Director need not personally benefit to be held liable for violation of her duty of care

Front 59

Duty of Loyalty

Back 59

Directors must act in good faith

1. Interested Director Transactions (Conflicts of Interest)

2. Corporate Opportunity Doctrine

3. Competition with Corporation

4. Insider Trading

5. Sale of Office

Front 60

Interested Director Transactions

Back 60

BCL supplies two tests for interested director transactions. If either test is met, the transaction cannot be avoided merely because one or more directors are interested therein:

1. Approval Test

2. Fairness Test

Front 61

Interested Transactions: Approval Test

Back 61

An interested director transactions is not voidable if:

1. The Board approves the transaction by a sufficient vote without counting votes of interested directors,

2. The Board approves the transaction by unanimous vote of the disinterested directors, where votes of interested directors must be counted in order to establish a quorum; or

3. Shareholders approve the transaction by vote, provided in each case that material facts as to the director's interest are disclosed or known to those voting on the approval

Front 62

Interested Transactions: Fairness Test

Back 62

A transaction not approved (by the Approval Test) may be avoided by the corporation unless the parties thereto affirmatively establish that the transaction was fair and reasonable to the corporation at the time it was approved

Front 63

Compensation and Loans to Directors

Back 63

Board has authority to fix compensation of directors in any capacity, unless restricted by the certificate or bylaws.

Corporations formed on or before Feb 22, 1998, require shareholder approval for loans to Directors

In corporations formed after Feb 22, 1998, loans may be approved by the directors after a finding that the loan benefits the corporation

Front 64

Exam Tip on Interested Transactions

Back 64

Remember, if a director will benefit from a transaction her corporation is about to enter into, the director must disclose this information to the board (or to the shareholders).

Disinterested directors (or the shareholders) must then approve the transaction.

If there is no disclosure, the transaction can be set aside, unless it is fair to the corporation

Front 65

Corporate Opportunity Doctrine

Back 65

Neither directors, officers, nor controlling shareholders may acquire or divert to themselves property or opportunities that the corporation needs or is seeking, or as to which it has a tangible expectancy or that they were otherwise under a duty to acquire from the corporation.

Corporate opportunity doctrine does not affect:

1. Acquisitions that the corporation has refused

2. Opportunities that it would not have been able to take advantage of, or

3. Opportunities that are not appropriate or logically related to the corporation's business.

Front 66

Exam Tip on Corporate Opportunity Doctrine

Back 66

Whenever the facts of a question mention that a director learns of a business opportunity, be sure to consider whether her corporation would be interested.

If so, she must present the opportunity to her corporation, disclosing all material facts, and can take advantage of the opportunity personally only if the corporation decides not to pursue it.

If the corporation is not given a chance to take advantage of the opportunity, the director can be forced to turn over the opportunity and/or any profits derived from the opportunity to the corporation

Front 67

Competition with Corporation

Back 67

A corporation is entitled to freedom from competition by those charged with promotion of its interests.

However, it may not impose a covenant not to compete, unbounded by time or geography, that deprives one of the opportunity to earn a livelihood.

Front 68

Insider Trading

Back 68

1. State Law:

--Any shareholder may acquire and dispose of shares as his self-interest dictates

--Where a shareholder is also a director or officer, he has a fiduciary duty to the corporation and to noninsider shareholders and may not trade on undisclosed inside information.

--If director or officers profits from insider trading, he must account for such profits to the corporation

2. Federal Law:

--Section 16(b) of the Securities Exchange Act allows corporate recovery for profits made by directors, officers, or 10% shareholders from purchases and sales (or sales and purchases) of the corporation's shares made within 6 months of one another.

--Rule 10b-5 allows virtually anyone injured by fraud or manipulation in the sale or purchase of securities to recover from persons whose wrongs caused the injury

Front 69

Sale of Office

Back 69

An officer or director must account to the corporation for amounts received as payment for turning over his corporate office to another

Front 70

Statutory Liabilities of Directors

Back 70

Directors are jointly and severally liable to the corporation (or its creditors and shareholders) if they "vote for or concur in" any one of the following:

1. Declaring a dividend or other distribution contrary to the BCL or certificate;

2. Repurchasing by the corporation of its own shares contrary to the BCL or certificate;

3. Distributing assets after dissolution without adequately providing for known liabilities of the corporation; or

4. Making any loan to a director without the required shareholder approval.

Liability is limited to the extent of the injury as a result of prohibited actions

Any director against whom a claim is asserted is entitled to contribution from other directors who are liable. Also, shareholders who knowingly received improper distributions or payments from shares may be liable to such directors

Front 71

Statutory Liabilities of Directors: Meaning of "Vote for or Concur in"

Back 71

A director who is present at a meeting where prohibited action was taken is presumed to have concurred in the action, unless:

1. His dissent is entered in the minutes of the meeting;

2. His written dissent is presented to the secretary of the meeting before adjournment thereof; or

3. His written dissent is delivered or sent by registered mail to the secretary of the corporation promptly after adjournment.

Exception: Directors who voted for the action may not dissent

Front 72

Suits Against Officers and Directors for Misconduct

Back 72

An action may be brought against an officer or director, unless the certificate limits such relief, for misconduct

(e.g., to compel an accounting for neglect or violation of duties in managment and disposition of assets, or for waste or misappropriation of corporate assets; to set aside an unlawful transfer of corporate assets; or to enjoin a proposed unlawful transfer of corporate assets)

Front 73

Who May Bring a Statutory Action?

Back 73

The following may bring an action:

1. The corporation;

2. A receiver, trustee in bankruptcy, or judgment creditor of the corporation;

3. An officer or director of the corporation; or

4. A shareholder or voting trust certificate holder, provided conditions for a derivative action are met.

Front 74

Indemnification of Officers or Directors--No Right

Back 74

No right to indemnification under certificate or bylaws if director or officer:

1. Acted in bad faith;

2. Was dishonest in the actions that were material to the cause of action; or

3. Wrongfully personally gained

Front 75

Indemnification of Officers or Directors: When Permitted

Back 75

Corporation may indemnify for reasonable expenses in defense of suit brought by or in the right of the corporation (including derivative suits) unless the director or officer is adjudged to be liable to the corporation.

Even where there is liability, the court may find the director reasonably entitled to indemnity

For actions other than by or in the right of the corporation, a corporation may indemnify IF:

1. The director or officer acted in good faith for a purpose reasonably believed to be in the best interests of the corporation; and

2. In criminal cases, the director or officer had no reasonable cause to believe that his conduct was unlawful

Front 76

Indemnification of Officers or Directors: Matter of Right

Back 76

Indemnification is a matter of right if the director or officer successfully defends the action

(However, in any case, indemnification is prohibited if inconsistent with a provision of the certificate, bylaws, or board or shareholder resolution or agreement in effect at the time of accrual of the alleged cause of action)

Front 77

Indemnification of Officers or Directors: Who may Order Payment?

Back 77

If a director or officer has been wholly successful in his defense on the merits or otherwise, ordinary corporate action suffices to authorize payment

If a director or officer was not wholly successful in his defense, indemnification by corporate action requires authorization by either:

1. The board (with a quorum consisting of directors who are not parties) upon finding that the applicable standard of conduct was met; or failing this,

2. The shareholders, upon a finding that the applicable standard of conduct was met; or

3. The board upon written opinion of independent legal counsel that indemnification is proper because the applicable standard of conduct was met

(In any event, indemnification may be awarded by a court upon application in the case in question or in a separate proceeding)

Front 78

Derivative Actions by Shareholders: Who May Bring Action?

Back 78

A record or beneficial holder of shares, or a voting trust certificate holder, may bring a derivative action provided that the plaintiff:

1. Is such a holder when the action is brought; and

2. Also was such a holder at and from the time of the complained-of transaction, or her shares must have devolved upon her by operation of law.

Shareholder must demonstrate that she would fairly and adequate represent interests of shareholders and the corporation.

Shareholder must be pursuing a corporate (not individual) right to procure a judgment in the corporation's favor.

Complaint must set forth with particularity the plaintiff's efforts to secure initiation of action by the board or reasons for not making such effort

Derivative actions may not be discontinued or settled without approval of the court.

Court may award plaintiff's reasonable expenses if the plaintiff is successful

Front 79

Derivative Actions by Shareholders: When Demand will be Deemed Futile

Back 79

Demand will be considered futile and excused only if the complaint alleges that:

1. A majority of the Board of directors is interested in the transaction

2. The board of directors did not inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances; or

3. The challenged transaction was so egregious that it could not have been the result of sound business judgment

Front 80

Derivative Actions by Shareholders: Security for Expenses

Back 80

The corporation may require the plaintiff to give security for reasonable expenses that may be incurred by it or by other defendants whom the corporation may be required to indemnify unless:

1. The plaintiff holds, on record or beneficially, 5% or more of any class of shares; or

2. Plaintiff's shares exceed $50,000 in fair value

(This is to deter strike suits)

Front 81

Derivative Actions by Shareholders: Res Judicata Effect

Back 81

Dismissal on the merits of a derivative action is res judicata if:

1. The first action was neither collusive nor fraudulent;

2. The second shareholder was not excluded from participation in the first action; and

3. Both actions arose out of the same transactions or series of transactions

Front 82

Derivative Actions by Shareholders: Rights after Dissolution

Back 82

Dissolution of the corporation does not deprive the shareholders of their derivative remedy

Front 83

Corporate Finance: In General

Back 83

The authorized number of shares and classes of shares may be modified by amendment of the certificate.

Shares have par value or no par value.

Certificate may deny or limit voting rights and dividend or liquidation rights of any class, provided:

1. One or more classes of shares or bonds, singly or in aggregate, has unlimited voting rights; and

2. One or more classes of shares, singly or in aggregate, has unlimited dividend rights

Front 84

Corporate Finance: Preferred Shares

Back 84

Shares entitled to a preference in distribution of either dividends or assets

Front 85

Corporate Finance: Subscription for Shares

Back 85

A subscription for shares must be in writing and signed by the subscriber to be enforceable.

Subscriptions for shares are irrevocable for 3 months from their date unless:

1. The subscription agreement provides otherwise, or

2. All other subscribers consent to revocation.

Calls for payment must be uniform as to holders of the same class.

If a subscriber defaults on payment, the corporation may proceeds as in collecting any other debt, or the board may declare a forfeiture (30 days after written demand is made for payment)

Front 86

Corporate Finance: Consideration and Valuation

Back 86

Shares may be paid for in money or other property (tangible or intangible), labor or services received by or performed for the corporation, a binding obligation to pay the purchase price in cash or property in the future, or a binding obligation to perform for the corporation in the future services having an agreed value.

Consideration for shares with a par value is as fixed by the board (but cannot be less than par value)

Consideration for no par shares is as fixed by the Board (unless the certificate reserves such right to shareholders)

Judgment of the Board (or of shareholders, in a proper no par case) as to value of consideration received for shares is conclusive in absence of fraud in the transaction

Expenses for formation, reorganization, and sale of shares may be paid out of consideration received for shares

Front 87

Corporate Finance: Computation of Stated Capital

Back 87

Stated capital is defined as the sum, in dollars, of:

1. Consideration received for par value, in aggregate, of par shares (excess consideration over par value goes to surplus);

2. Consideration received, in aggregate, for no par shares (except the board may allocate part, but not all, to surplus within 60 days after issue); and

3. Amounts transferred by the board (all or part of surplus may be transferred) to stated capital

Front 88

Corporate Finance: Reduction of Stated Capital

Back 88

Stated capital may be reduced by the board in four ways:

1. By eliminating amounts previously transferred from surplus

2. By reducing or eliminating any amount of stated capital represented by issued shares having a par value exceeding the aggregate par value of such shares;

3. By reducing the amount of stated capital represented by issued shares without par value; or

4. By applying to an otherwise authorized purchase, redemption, conversion, or exchange of outstanding shares some or all of the stated capital represented by the shares being purchased, redeemed, etc.

Front 89

Corporate Finance: Share Certificates

Back 89

Shares certificates may not be issued until:

1. The consideration that will be allocated to stated capital has been paid in the form of cash, property, or services rendered; and

2. The consideration for the balance (i.e., sums not going to stated capital), if any, has been provided

Note: even though shares issued in exchange for future obligations may be fully paid and nonassessable, the corporation may place such shares into escrow until the obligation has been performed, or make other arrangements to restrict their transfer

Front 90

Share Certificates: Signatures and Content

Back 90

Share certificates must be signed by two officers as follows:

1. Either chairman (or vice chairman) of the Board, or president or a vice president; and

2. Either secretary or an assistant secretary or treasurer or an assistant treasurer.

Unless the share certificates conspicuously note the existence of any irrevocable proxy or any transfer restrictions, purchasers without knowledge will not be bound

Front 91

Corporate Finance: Scrip and Fractional Shares

Back 91

The corporation may (but is not obligated to) issue fractional shares giving the holder fractional voting, dividend, and liquidation rights.

In the alternative, the corporation may issue scrip exchangeable into full shares but not carrying any rights as a shareholder until exchanged.

In the alternative, the corporation may pay fair value of fractions in cash

Front 92

Corporate Finance: Liability of Subscribers and Shareholders

Back 92

Sole obligation of a shareholder or subscriber is to pay any unpaid portion of his subscription

Front 93

Corporate Finance: Effect of Assignment or Transfer on Liability of Subscribers and Shareholders

Back 93

A transfer of shares or assignment of subscription does not relieve the transferor/assignor of liability as a shareholder or subscriber unless, at the time, the corporation's property has sufficient fair value to pay its debts and inability to pay its debts is not imminent.

The assignee of a subscription or transferee of shares in good faith and without knowledge or notice that full consideration has not been paid is not personally liable for any unpaid portion

Front 94

Corporate Finance: Other No Liability Situations for Subscribers and Shareholders

Back 94

Fiduciaries are not personally liable as shareholders, but the estate or funds held by them are subject to liability.

Persons holding shares as collateral are not liable; the pledgor of shares remains liable.

Front 95

Corporate Finance: Liability of Shareholder for Wages

Back 95

The 10 largest shareholders of a corporation whose shares are neither listed on an exchange nor regularly traded over-the-counter are personally liable, jointly and severally (subject to contribution), for all debts for services, wages, and the like owed by the corporation to its employees

Front 96

Corporate Finance: Preemptive Rights

Back 96

At common law, whenever a corporation issued new shares of stock for cash, the current shareholders were given a preemptive right to purchase a sufficient number of the shares to maintain their proportional ownership interest in the corporation.

For corporations in existence prior to Feb 22, 1998, such preemptive rights apply to all shares having either unlimited dividend rights after payment of preferences, or voting rights, unless the certificate denies preemptive rights.

For corporations formed on or after Feb 22, 1998, there are no preemptive rights unless the certificate of incorporation expressly provides them

Note: All other BCL sections which are affected by the Feb 1998 date distinguish between corporations FORMED AFTER Feb 22, 1998. But the section for preemptive rights is different. It distinguishes between corporations formed on or after Feb 22, 1998, and those in existence before Feb 22, 1998.

Front 97

Corporate Finance: Preemptive Rights: Terms of Preemptive Right

Back 97

The number of securities each shareholder is entitled to purchase under preemptive rights is such as would preserve her relative unlimited dividend rights and voting rights.

Price may not be less favorable than the proposed issue price to others

Front 98

Corporate Finance: Preemptive Rights: When Right Not Applicable

Back 98

Absent express provision in the certificate granting them, no preemptive rights exist as to:

1. Treasury shares;

2. Shares offered for consideration other than cash;

3. Shares subject to certain options;

4. Shares authorized in the original certificate and sold or optioned within two years of filing; or

5. Reorganization shares under an Act of Congress

Front 99

Corporate Finance: Preemptive Rights: Expiration

Back 99

After expiration of the time allotted for acting on preemptive rights, the corporation may sell the shares to anyone else not having preemptive rights at a price not less than that offered to the preemptive rights holder.

If the stock is not sold within one year, the preemptive rights reattach

Front 100

Corporate Finance: Corporate Bonds

Back 100

A corporation may issue bonds at par or otherwise for money, property (tangible or intangible), or services actually rendered; or for promises to pay or perform services in the future.

Bondholders' rights are generally governed by contractual terms of the instrument under which the bonds are issued.

Front 101

Corporate Finance: Convertible or Exchangeable Shares and Bonds

Back 101

Unless the certificate provides otherwise, a corporation may issue shares or bonds convertible or exchangeable into shares of any other class or series, or into cash, other property, indebtedness, or other securities of the corporation or another corporation.

The shares or bonds may be made convertible or exchangeable at the option of the holder, the corporation, or another person, or upon the happening of a specified event.

When shares or bonds have been converted or exchanged, they are canceled

Front 102

Dividends: Shareholder "Right" to Receive Dividends

Back 102

The Board of Directors may declare dividends payable in cash or in the corporation's bonds, property (including stocks or bonds of other corporations), or its own shares

Directors have discretion when and to what extent dividends will be declared. However, once dividends are lawfully declared, shareholders take the status of creditors

Front 103

Dividends: Preferred Shares

Back 103

Holders of preferred shares are generally entitled to have stipulated dividends declared on their shares before any dividends are declared on junior (usually common) shares.

The corporation must pay up preferred arrearages before declaring dividends on common shares.

Accumulated undeclared dividends may be eliminated by amendment to the certificate

Front 104

Dividends: Who is Entitled to Payment?

Back 104

To determine shareholders entitled to receive a dividend, the board may fix in advance a record date (must be not more than 60 days before date of payment).

If no record date is fixed, then the close of business on date of the board's resolution to pay the dividend will be the record date.

Front 105

Dividends: Legality of Payment

Back 105

No dividend may be paid if the corporation is insolvent or payment would make it insolvent (i.e., unable to pay debts as they become due in the usual course of debtor's business).

Neither may a dividend be paid if it is contrary to any restriction in the certificate.

Cash or property dividends may be paid only out of surplus (i.e., total assets minus total liabilities and stated capital).

After a dividend, net assets must at least equal stated capital.

Stated capital, plus surplus, plus total liabilities equals total assets.

Front 106

Dividends: Stock Dividends

Back 106

Stock dividends are dividends in the corporation's own authorized but unissued shares or treasury shares.

For distribution of newly issued shares, the corporation must transfer to stated capital from surplus an amount equal to:

1. The aggregate par value o the newly issued par value shares; or

2. The aggregate amount of stated capital represented by the newly issued no par shares, as fixed by the Board.

No transfers to stated capital are required in cases of distribution of treasury shares

Front 107

Dividends: Split Up or Combination of Shares

Back 107

In a stock split, authorized and issued shares are divided into a greater number of shares of the same class.

In a combination, authorized or issued shares are combined into a lesser number of shares of the same class.

If the split or combination does not increase the aggregate stated capital represented by the shares, no transfer from surplus to stated capital is required.

Front 108

Dividends: Dividends Paid in Bonds

Back 108

If a corporation's own bonds are distributed to shareholders, the corporation must transfer to liabilities from surplus an amount equal to the principal amount of the bonds, plus any accrued interest on the bonds.

Front 109

Reacquisition of Corporation's Own Shares

Back 109

A New York corporation has the power to repurchase its own shares, subject to any restrictions in certificate and BCL restrictions noted below:

1. Limitations on Repurchase

2. Treatment of Reacquired Shares

3. Agreement by Corporation to Repurchase Shares

Front 110

Reacquisition of Corporation's Own Shares: Limitations on Repurchase

Back 110

A corporation may not repurchase or redeem shares if it is insolvent or if repurchase or redemption would cause insolvency.

A corporation may repurchase its own stock only out of surplus

Front 111

Reacquisition of Corporation's Own Shares: Treatment of Reacquired Shares

Back 111

Reacquired shares must be canceled if:

1. Purchased, redeemed, or otherwise reacquired out of stated capital;

2. Converted into other shares; or

3. The certificate requires such cancellation.

Reacquired shares not required to be canceled may be retained as "treasury shares" until resold or subsequently canceled by the Board.

Treasury shares are not "assets" of the corporation, and are not treated as "issued" but not "outstanding" shares.

Proceeds from resale increase surplus, not stated capital.

Front 112

Reacquisition of Corporation's Own Shares: Agreement by Corporation to Repurchase Shares

Back 112

An agreement by a corporation to repurchase its own shares is enforceable by the corporation and by the shareholder as long as repurchase is permissible under insolvency or surplus requirements of the BCL

Front 113

Share Transfer Restrictions: In General

Back 113

NY forbids unreasonable restraints on alienation of shares. However, reasonable share transfer restrictions are valid.

Restrictions requiring the selling shareholder to first offer his shares to the corporation or other shareholders are valid if otherwise reasonable.

Where the selling shareholder before sale is required to obtain consent of other shareholders or the corporation, and where consent may be withheld for any reason or no reason at all, restraints are not enforceable.

Exceptions: Shares in professional service corporations and tenant-shareholders of cooperative apartment corporations are subject to consent-type restrictions

Front 114

Share Transfer Restrictions: Price

Back 114

The price at which the selling shareholder must sell under a first option restriction must be reasonable.

Front 115

Share Transfer Restrictions: Location of Restrictions

Back 115

Share transfer restrictions may be contained in the certificate of incorporation, the bylaws, or a separate agreement

Front 116

Share Transfer Restrictions: Notice

Back 116

Unless conspicuously noted on the share certificate, issuer-imposed restrictions are not enforceable against persons not having actual knowledge of them

Front 117

Share Transfer Restrictions: Agreements to Repurchase

Back 117

An agreement by a corporation to purchase its own shares is enforceable by the corporation and by the shareholder.

An agreement by a shareholder to purchase shares of another shareholder should be enforced as an ordinary contract.

Front 118

Major Corporate Changes: Basic Procedures

Back 118

Effectuation of fundamental changes has two basic steps:

1. Such change must be authorized (by board, shareholders, or board and shareholders) and

2. Filed by the department of state

Front 119

Amendments to Certificate of Incorporation

Back 119

A corporation may amend its certificate but it may insert only provisions that would be lawful in an original certificate at the time of amendment

Front 120

Amendments to Certificate of Incorporation: Amendments that May be Made by the Board

Back 120

The Board may make certain amendments without shareholder consent.

These include:

1. Changes relating to office location

2. Address for process and registered agent

3. Establishing series of a class of preferred shares

4. Increasing authorized shares to satisfy rights under options and convertibles

5. Removing reacquired shares

6. Removing restrictions on director management authority that have become invalid

Front 121

Amendments to Certificate of Incorporation: Amendments Requiring Shareholder Authorization

Back 121

Most amendments require authorization by the vote of the majority of the shares entitled to vote.

Amendments requiring a special vote include:

1. Changes in supermajority voting for shareholders (must be authorized by a minimum of 2/3 of votes of the shares entitled to vote);

2. Changes in supermajority voting for directors in corporations in existence on Feb 22, 1998 (must be authorized by a minimum of 2/3 of the shares entitled to vote);

3. Restrictions on Directors' management authority (must be authorized by ALL SHAREHOLDERS or all incorporators)

4. Amendment that adds, changes, or strikes out a provision for dissolution by less than a 2/3 vote of shares must be authorized by ALL SHAREHOLDERS (voting or nonvoting) or a majority of shareholders if the certificate so provides;

5. Amendment adversely affecting any class or series requires, in addition to other required votes, a majority of the votes of the outstanding shares of the affected class, whether or not voting shares (and a certi

Front 122

Amendments to Certificate of Incorporation: Procedure

Back 122

A certificate of amendment is signed, verified, and delivered to the department of state for filing and is effective when the certificate is filed by the department of state

Front 123

Amendments to Certificate of Incorporation: Appraisal Rights

Back 123

Adversely affected shareholders who dissent from an amendment are entitled to receive payment of fair value of their shares (i.e., appraisal rights) if the amendment:

1. Alters or abolishes an existing preferential right (e.g., changing shares into shares of another class);

2. Makes changes concerning redemption of their shares;

3. Alters or abolishes a preemptive right of the holders; or

4. Limits or excludes voting rights.

Shareholders intending to enforce appraisal rights must give written objection to the corporation before a vote is taken (unless action is by written consent), and written election to exercise their appraisal rights after being notified by the corporation that the action has been taken.

Front 124

Mergers and Consolidations: Procedure

Back 124

Requires:

1. Board approval

2. Shareholder approval, and

3. Filing with the department of state

Front 125

Mergers and Consolidations: Shareholder Authorization

Back 125

For corporations in existence on Feb 22, 1998, the merger or consolidation must be approved by 2/3 of the vote of all outstanding voting shares.

For corporations formed after that date, the plan must be approved by the votes of a majority of all outstanding shares entitled to vote.

Nonvoting shares may vote when the terms of merger or amendment substantially affect their interest

Front 126

Mergers and Consolidations: Certificate of Merger/Consolidation

Back 126

Certificate of merger or consolidation is signed, verified, and delivered to the department of state and is effective upon filing by the department of state.

For a foreign constituent corporation, there must be compliance with the laws of its home jurisdiction

Front 127

Mergers and Consolidations: Legal Effect

Back 127

The legal effect of merger or consolidation is that the surviving or consolidated corporation has all rights, powers, immunities, properties, liabilities, and penalties of constituent corporations

Front 128

Mergers and Consolidations: Legal Effect

Back 128

The legal effect of merger or consolidation is that the surviving or consolidated corporation has all rights, powers, immunities, properties, liabilities, and penalties of constituent corporations

Front 129

Mergers and Consolidations: "Short-Form" Merger

Back 129

Where a parent corporation owns 90% of the outstanding shares of each class of the subsidiary, the subsidiary may be merged into the parent without authorization of shareholders of either corporation

Front 130

Mergers and Consolidations: Appraisal Rights

Back 130

A shareholder of a NY corporation entitled to vote who does not assent to merger or consolidation is entitled to payment of fair value of his shares, except:

1. In a short-form merger, shareholders of the surviving corporation;

2. In a regular merger, shareholders of surviving corporation unless the merger affects amendments to the certificate that would entitle a shareholder to appraisal rights; and

3. Any holder of the shares listed on a national securities exchange or NASDAQ

Note: Shareholders of the subsidiary in a short-form merger have appraisal rights if they file a notice of intent to dissent, and shareholders not entitled to vote with respect to a plan of merger or consolidation have appraisal rights if their shares will be canceled or exchanged for consideration other than shares of the surviving or consolidated corporation or another corporation

Front 131

Mergers and Consolidations: Combination with Interested Shareholder Generally Prohibited

Back 131

A corporation may not engage in any business combination with an interested shareholder within five years of his acquisition of the corporation's stock, unless approved by the Board of Directors or majority vote of disinterested shareholders.

However, corporations may opt out of this prohibition.

Where such a combination is permitted, it must meet a certain price, consideration, and stock conditions

Front 132

Mergers and Consolidations: Share Exchanges

Back 132

A corporation may enter into a binding share exchange with another corporation where one corporation acquires all outstanding shares of one or more classes of the subject corporation's stock.

Procedure:

1. Boards of the acquiring and subject corporation adopt a plan of exchange;

2. For corporations in existence on Feb 22, 1998, the plan is approved by a 2/3 vote of the shares of the subject corporation entitled to vote (by a majority of the votes of all outstanding shares entitled to vote for corporations formed after that date); and

3. Unless abandoned, each corporation signs and verifies the plan and delivers it to the department state.

It is effective upon filing by the department of state.

A foreign corporation may engage in a share exchange, but only if the laws of the state of its incorporation permit it.

A shareholder entitled to vote who does not assent to a share exchange is entitled to payment of the fair value of his shares IF his shares are to be acquired in the exchange.

Front 133

Sale or Other Disposition of Assets

Back 133

Any sale, lease, exchange or other disposition of all or substantially all of the corporation's assets, other than in the usual or regular course of business actually conducted by the corporation, requires shareholder approval

Front 134

Sale or Other Disposition of Assets: Procedure

Back 134

The Board authorizes the proposed sale and directs its submission to the shareholders.

For corporations in existence on Feb 22, 1998, the sale of assets must be approved by 2/3 of the vote of all outstanding voting shares.

For corporations formed after that date, the sale must be approved by a majority of the votes of all outstanding shares entitled to vote.

This fundamental change does not, in itself, carry any filing requirement.

A shareholder entitled to vote who does not assent to a sale or other disposition of assets that requires shareholder approval is entitled to payment of the fair value of her shares, except in transactions wholly for cash where shareholder approval is conditioned on dissolution and asset distribution within one year

Front 135

Sale or Other Disposition of Assets: Tort Liability

Back 135

A corporation acquiring the assets of another is not liable for torts of its predecessor unless:

1. It expressly or impliedly assumed such liability;

2. There was a consolidation or merger of seller and purchaser;

3. The purchasing corporation was a mere continuation of the selling corporation; or

4. The transaction is entered into fraudulently to escape such obligations

Front 136

Dissolution: Nonjudicial (Voluntary) Dissolution

Back 136

There is no requirement of any authorization or approval by the Board

For corporations in existence on Feb 22, 1998, dissolution must be approved by 2/3 vote of all outstanding voting shares.

For corporations formed after that date, dissolution must be approved by a majority of the votes of all outstanding shares entitled to vote.

A certificate of dissolution is signed, verified, and delivered for filing by the department of state.

Consent of the state tax commission is required.

The corporation is dissolved upon filing of a certificate of dissolution

Front 137

Judicial Dissolution

Back 137

An action for dissolution of a corporation may be brought by:

1. The attorney general (based on formation through fraud, abuse of powers, ultra vires actions, illegal or fraudulent course of business, or violation of law calling for charter forfeiture); or

2. A majority of the Board or a majority of the votes of all outstanding shares entitled to vote (stating that the corporation has insufficient assets to discharge its liabilities, or that dissolution will be beneficial to shareholders).

Front 138

Judicial Dissolution: In Case of Certain Deadlocks

Back 138

Holders of 1/2 of the votes of all voting shares may bring an action for dissolution if directors are too divided to manage, shareholders are too divided to elect directors, or if the magnitude of the internal dissension makes dissolution beneficial to shareholders.

Holders of more than 1/3 of the votes of all voting shares may bring an action if the certificate of incorporation calls for supermajority votes.

Any voting shareholder may bring an action if divisions among the shareholders prevented election of directors for a period encompassing two annual meeting dates

Front 139

Judicial Dissolution: Special Circumstances

Back 139

Holders of 20% of the voting shares may petition for dissolution if:

1. The directors or those in control of the corporation have been guilty of illegal, fraudulent, or oppressive actions toward the complaining shareholders; or

2. Assets of the corporation are being looted, wasted, or diverted by directors, officers, or those in control.

The court must consider whether liquidation is:

1. The only feasible way to achieve a fair return on the petitioners' investment; and

2. Reasonably necessary to protect the petitioners or any substantial number of shareholders

Front 140

Effect of Dissolution

Back 140

After dissolution, the corporation must wind up its affairs and carry on no business except winding up, and must distribute its assets to shareholders according to their respective rights.

Claims of creditors are barred if not timely filed unless litigation is pending or the court allows the tardy claim.

Front 141

Exam Tip

Back 141

Note the distinction between shareholder voting on regular issues and shareholder voting on fundamental changes--regular issues can be approved by a majority of the shares VOTED AT THE MEETING, as long as there is a quorum, whereas fundamental corporate change generally must be approved by 2/3 of ALL OUTSTANDING SHARES entitled to vote--not just those represented at a meeting

Front 142

Professional Corporations: Introduction

Back 142

Historically, professionals were not allowed to form corporations.

However, NY allows professionals to incorporate their practice in order to take advantage of certain federal tax laws and to limit their personal liability OTHER THAN FOR MALPRACTICE.

Front 143

Professional Corporations: Formation

Back 143

One or more individuals licensed to practice THE SAME PROFESSION may form a professional service corporation by filing a certificate of incorporation with the state. The certificate must comply with the requirements of the BCL generally and must also:

1. State the profession to be practiced by the corporation;

2. State the names and addresses of the individuals who will be directors, officers, and shareholders (all must be licensed in the profession); and

3. Include copies of the license certificates of the professionals.

Such corporations are generally under the supervision of the regents of the University of New York

One Profession Limitation: Generally, a professional corporation may be formed to engage in only one profession

Corporate Name: The name of a professional corporation generally may contain any word that would be allowed in the name of a partnership formed to practice the profession for which the corporation is formed and cannot include a word that such partnership could not i

Front 144

Professional Corporations: Shareholders, Directors, and Officers

Back 144

Only persons who are licensed to practice the profession for which the professional corporation was formed may be shareholders, directors, or officers of the corporation

Front 145

Professional Corporations: Professional Relationships and Liabilities

Back 145

Generally, the shareholders, directors, and officers of a professional corporation are NOT personally liable for the obligations of the corporation.

However, each shareholder, employee, or agent of a professional corporation is personally and fully liable for any negligent or wrongful act or misconduct committed by him or by any person under his direct supervision and control while rendering professional services for the corporation