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360 Cards in this Set

  • Front
  • Back
What does an Incorporator (= a person) do? 2 Things
(1) Execute the certificate & deliver it to the Dept of State
(2) Hold the Organization meeting
How many incorporators do you need?
Just need 1 or more incorporators
Who can be an incorporator?
In NY adult human beings ONLY (no entities!)
What is a certificate of incorporation?
= K btw corporation & S
= K btw Corporation & the state
What goes in the certificate of incorporation? 4 Things
(1) Names & Addresses
(2)Statement of duration (don't have to & then assumed perpetual)
(3) Corporate purpose (required statement).
(4)Capital structure (stock)
What falls under Names & Addresses in the Certificate of Incorporation? 4 things (potential 5th)
- MUST have 1 of these words in Name: Corporation, Incorporated, or Limited (spelled or abbreviated)
- Give county in NY where you have your office or corporation (do not need a street address)(it does not have to be the place you do business out of)

- Designate NY Secretary of State as agent for service of process
- Address for forwarding process to Corp
- You also may (but don’t have to) name a Corp agent for service of process
In its statement of purpose, what if certificate indicates that purpose is to sell biscuits & Corp later sells t-shirts as well? CL & the 3 Things You must Know for NY
• Selling T-shirts is ultra vires act (beyond scope of certificate) & at CL could be voided

NY =
(1) ultra vires Ks are NOW valid
(2) S can seek an injunction to stop it
(3) Responsible Officer & Dir are liable to the Corp for ultra vires losses
What "Theory" do the 3 things you have to know for a Statement of Purpose that doesn't list all of the Company's activities fall under?
Define Authorized stock.
= max # of shares the Corp can sell.
Define Issued stock.
= # of shares Corp actually sells.
Define Outstanding stock.
= shares that have been issued and not reacquired by Corp.
What must be included under the Capital Structure (stock)in the certificate of Incorporation? 4 Things
(1) Authorized Stock
(2) # of shares per class
(3) Info on par value, RTs, preferences & limitations of each class
(4) Info on any series of preferred shares (if you subdivide a class into subparts = series) (rarely on bar)
What are 2 types of classes that you must have in the Capital Structure?
BUT 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.
Who signs the certificate of incorporation, how do they sign it, & then what do they do w/ it?
• Each incorporator signs certificate & acknowledges it before a notary. They then deliver it to NY Dept of State.
What does the NY Dept of State do w/ the Certificate of Incorp.?
If it conforms w/ law, & filing fees are paid, the DEPARTMENT FILES the Certificate.
What is the filing of the Certificate of Incorp. evidence of?
Filing = conclusive E of valid formation (at that moment you are a de jure Corporation in the eyes of the law)
What 2 things are done at the incorporation mtg?
(1) Adopt any by-laws
(2) Elect the initial BoD (then the BoD takes over management)
What is the legal significance of a corporation being formed w/in NY?
Internal affairs (duties, relationship among directors, officers, shareholders, etc.) of a NY Corp = governed by NY law.
How does the law view a Corp & what does that mean in a practical sense? 4 Powers
= a separate legal person.

It has broad powers by statute, including the power to:

(1) enter contracts,
(2) transfer property,
(3) buy and sell securities (its own or others’), AND
(4) to sue or be sued.
Can a corporation make political contributions?
Yes, but no more than $5,000 per yr per candidate OR per org
Can a corporation make charitable contributions?
Can make charitable contributions & NO statutory ceiling on this
Can a Corp guarantee a loan that is not in furtherance of corporate business?
Yes, if it is approved by 2/3 of the shares entitled to vote
What is limited liability?
Because the corporation is a separate entity, generally, the people who run it (directors and officers) are not liable for its obligations. And the owners (the shareholders) generally enjoy “limited liability,” which means that a shareholder only has to pay for her stock, and not any corporate liability.
Who enjoys limited liability?
Shareholders, directors, & officers
So who is liable for corporate debts and obligations?
Corporation = liable (b/c has entity status)

= big advantage over a partnership
Why do we have the De Facto Corporations Doctrine & Corporation by Estoppel?
B/c they are doctrines by which a business failing to achieve de jure corporate status nonetheless is treated as a corporation (so shareholders will not be personally liable for business debts).
What are the 3 factors of the De Facto Corporation Doctrine?
De Facto Corporation: 1)there is a relevant incorporation statute; 2) the parties made a good faith, colorable attempt to comply with it; and 3) some exercise of corporate privileges. If applicable, treated as corporation for all purposes except in an action by the state, so it’s as good as being de jure (except in an action by the state).
What is the status of the De Facto Corp Doctrine in NY?
Because the Department of State’s filing the certificate is conclusive proof of formation, the doctrine was thought to be abolished.
BUT case law suggests it may be alive, at least in limited circumstances.
For example, say the incorporators put together a proper certificate and deliver it to the Department of State, but the Department failed to file it (without rejecting it). Not de jure, because not filed. Can argue de facto corporation if meet the test.
What is corporation by estoppel?
= theory is that one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business’s corporate status. So such a person, under this theory, cannot sue the individual proprietors. BUT = ABOLISHED IN NY!
Why do Corps have by-laws? Are they required to have them?
De jure corporation can exist without bylaws; adoption of bylaws is not a condition precedent to formation of a Corp.

But almost every corporation has them.
What can by-laws do?
They can establish internal procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.
Who is bound by the by-laws?
= Outsiders are NOT bound b/c they are an INTERNAL doc
Are bylaws filed with the state?
By-laws are NOT filed w/ the state
If bylaws are inconsistent with the certificate, which document controls?
Certificate controls if there is a conflict btw By-laws & certificated b/c certificate = K
Who adopts the initial bylaws?
Incorporators initially adopt by-laws at 1st org mtg
(Initial ones have status of S by-laws)
Who can amend or repeal the bylaws or adopt new ones?
Shareholders = can adopt new ones, amend or repeal
When does the BoD ever get to amend or repeal bylaws or adopt new ones?
- BoD gets to amend/repeal/adopt new ONLY if the certificate or a S by-law allows

(S can amend or repeal any director-adopted bylaw)
What is a promoter?
A promoter is a person acting on behalf of a corporation not yet formed. For example, she might enter a contract with a third-party on behalf of the corporation-not-yet-formed.
When is a Corp liable for preincorporation Ks?
A corporation is not liable on preincorporation contracts until it adopts the contract.
What are the 2 ways for a Corp to adopt a preincorporation K?
(1) Express adoption = by Director(s)’ action
(2) ***Implied Adoption = by Corp knowing acceptance of a benefit of the K
(E.g. moved into lease premises, uses leased premises, etc)
When is a promoter liable for preincorporation Ks?
Generally, unless the contract clearly indicates that the parties do not intend the promotor to be liable, the promoter remains liable on preincorporation contracts until there has been a novation.
What is a novation?
= an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.
What is the Secret Profit Rule w/ regards to promoters?
Promoter cannot make a secret profit on her dealings with the corporation. (She would have to cough it up if she had)
What are the 2 Fact Patterns/equations to determine if Promoter made a Profit?
(1) Property she had before becoming a promoter... profit = price paid by the Corp MINUS fair mkt value (FMV)
- What the promoter PAID = IRRELEVANT

(2) Property acquired after becoming a promoter... profit = price paid by Corp MINUS price paid BY PROMOTER
What is the rule for foreign corporations?
Foreign corporations doing business in NY must qualify.
What qualifies as a foreign corp? What about NJ?
Foreign = 1 incorporated outside NY
• NJ Corp = foreign
• NY Corp = domestic
What counts as "doing business" in NY? what is it NOT?
Doing business means the regular course of intrastate, not interstate, business activity. Not occasional or sporadic business. Not just having meetings in New York, etc.
How can a foreign corp qualify in NY?
The foreign corporation can qualify by applying to the N.Y. Department of State and designating the Secretary of State as agent for service of process + paying fees every year.
In applying to qualify, what kind of information does the foreign corporation give the N.Y. Department of State? 2 Things
(1) Info from its certificate AND
(2) Proof of good standing in its home state
What happens if a foreign corporation does business in N.Y. without qualifying? 2 Consequences
(1) Penalty when the Corp does qualify (LIABILITY)
(2) Until it qualifies it CANNOT sue in NY BUT it can BE SUED
= when a Corp sells its own stock
What is the significance of an issuance for the Corp & for the purchaser?
Issuance of stock is one way a corporation can raise capital. Investors buy stock and thereby become equity holders -- owners of the corporation. Their equity interest brings with it various rights.
How does the isssuance of a bond differ from the issuance of stock? How is it different for a purchaser of a bond (i.e. their title/position vis-a-vis the Corp)?
With a bond, the investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the contract. The holder of a bond is a creditor (not an owner) of the corporation.
What is a “debenture”?
= loan the repayment of which is NOT secured by Corp assets
What is a subscription?
A subscription is a written, signed offer to buy stock from the corporation.
Can a subscription be revoked? If so, why?
= a pre-incorporation prescription = irrevocable for 3mths unless it says otherwise OR all subscribers agree.
Rule exists so that people forming the Corp can rely on the $ being there
Are post-incorporation subscriptions revocable?
• Yes it can be revoked until acceptance
When do the corporation and the subscribers become obligated under a subscription?
Become obligated when BoD accepts the offer – at that point there is an agreement (there is a deal & can’t walk out)
Can the corporation decide to sell only to some subscribers and not others?
No MUST be uniform w/in each class or series of stock
If the corporation accepts the offer and the subscriber defaults on payment, what happens? What happens to the shares? 2 Alternatives
(1) If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. The shares then become authorized and unissued.

(2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash).
What happens if no one will pay the remaining balance?
Defaulting subscriber forfeits what he has paid and the shares are canceled.
What happens if someone will pay more than the remaining balance due?
If someone will pay, defaulting subscriber recovers the excess over what he agreed to pay BUT deduct from that Corp’s expenses in selling
What must the Corp receive when it issues stock?
What are the five permitted forms of consideration for an issuance?
(1) $ (cash or its equivalent like a check)
(2) Tangible or intangible property
(3) Labor or services already performed for the Corp
(4) A binding obligation to pay in the future in cash of property
(5) A binding obligation to perform future services having an agreed value
***Can the Corp issue stock to somebody for performing services in forming the Corp?
Yes, by statute, it meets 3rd option listed (considered labor or services performed for Corp)
What are prohibited forms of consideration?
Anything other than the five permitted forms of consideration.
What happens if somebody “pays” for an issuance with an improper form?
= unpaid stock & all treated as water
What is "par"?
Par means “minimum issuance price.”
Can you get more than par?
Can you have no par? What does that mean?
No par = no min issuance price & can be sold for any price
Who sets the price at which to sell no par stock?
= BoD unless certificate allows shareholders to do so
(if silent, BoD sets)
What is treasury stock? what par does it have?
Treasury stock is stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock.

ALWAYS treat treasury stock as NO par, even though it was originally par.
How does the BoD value the consideration? Can shareholders?
The board always values the consideration in a par issuance. In no-par, board [sets the value] values the consideration unless certificate allows shareholders to do so.
When the BoD determines the value of the consideration for an issuance, is its determination of value conclusive?
BoD’s determination = conclusive if it is made in the absence of fraud
What is "watered stock"?
= par stock issued for less than par value
What are the consequences of issuing par stock for less than par value; i.e., "watered stock"?
Corp can sue for the missing $/value/worth of the stock
Are the directors be liable for the water?
YES if they knowingly authorized the issuance
Is X (the guy who bought the watered stock) liable?
Yes, guy who bought it for less than par (=shareholder) is liable; you are charged w/ notice of the par value
What if X buys the watered stock and transfers it to a third-party (TP)?
If it is transfered to 3rdP, the 3rdP is NOT liable if she acts in good faith (i.e. she did not know about the water)
If X transfers it to a 3rdP, is X still liable?
Yes, 3rdP’s status has no effect on liability of X and the directors.
***What is a Preemptive RT?
= RT of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money (which includes cash or checks).
***Does "new issuance" include sale of treasury stock (when discussing preemptive RTs)?
If certificate is silent, it does NOT include treasury stock (not a new issuance & so RT does not attach)
***Does "new issuance" include sale of shares authorized by the original certificate and sold within two years of formation?
If certificate of incorporation is silent regarding preemptive RTs, do they exist?
Answer depends upon date Corp formed
- Before Feb 22, 1998, Yes there are preemptive RTs
- After that date, no they exist only if the certificate says so
Suppose the certificate provides for preemptive rights and C Corp. is issuing stock to G to acquire Green Acres from G? Are there preemptive rights?
NO b/c this is not an issuance for $! Preemptive RTs ONLY EXIST if there is an issuance FOR MONEY (here it is for property)
How many directors must there be in the Corp?
One or more adult natural persons.
How is the number set? 3 Alternatives
(1) In By-laws OR
(2) By S action OR
(3) By BoD if a shareholder adopted by-law allows
What if no # of Directors is set?
Then there is only 1 director
Who elects the initial directors?
Incorporators elect initial directors.
Do we have to elect all new directors every year?
No, there can be a "classified board," w/ 2, 3, or 4 classes of directors, with one class elected each year.
How many directors must be in a class?
At least 3 Directors MUST be in each class
When exactly is the intial BoD selected? After that 1st time?
Incorporators elect initial BoD but AFTER that S elect them at the annual mtg
What is the timing of the Directors selection process if there is 0 class vs. 3 classes?
If we had 9 directors, we could elect all 9 each year and they would have one-year terms. OR we could have 3 classes of 3 directors each, and each year we would elect 3 directors; they would serve 3-year terms.
Can shareholders remove a director before her term expires for cause?
S can do it ANYTIME for cause
Can the BoD remove a director for cause before her term expires?
BoD can remove for cause only if certificate or by-laws allow for it.

(If cert & by-laws are silent, only S can)
Can anyone remove a director without cause?
= S only & even then only if cert or by-laws allow it

(if cert is silent = can’t do it)
General rule: who selects the person who will serve the remainder of the term after a Director has been removed or has retired/died?
Remaining directors select/appoint the person
Special rule: who selects the person who will serve the remainder of the term when a director is removed by shareholders without cause?
Shareholders only
What are the only two ways in which the BoD can take a valid act?
(1) Unanimous & written consent to act w/o a mtg OR
(2)A Mtg
What happens is an act is not done in one of the two valid ways?
If neither is met, the “act” taken is void unless later ratified by a valid act.
If there is a meeting, must it be held in NY?
Anywhere in the world is ok
Is a meeting by conference call - where official acts are taken - OK?
Yes if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meetings are allowed).
Is notice required for regular meetings?
Time & place are usually set in the by-laws so no notice required
Is notice required for special meetings?
YES & method of giving notice can be set in the by-laws
(it's not in the BCLR)
What if notice is not given to a director?
Action taken at that mtg = void unless Director waives notice defect
How can a Director waive lack of notice? 2 Alternatives
(1) In writing & signed anytime
(2) By attending the mtg w/o objection
Can a director give a proxy for director voting?
- NO not such thing as a proxy for director voting
- BUT for S you can have proxy voting
Can directors enter voting agreements on how they will vote as directors?
No, void for public policy reasons
How many directors have to be present to do business at a mtg? How many in order to pass a resolution?
To do business, there must be a majority of "entire board" (= quorum).

Once there is a quorum, to pass a resolution requires only a majority vote of those present.
What is a resolution?
= how the board takes an act at a mtg
Suppose there are nine directorship positions on the board, but two of the directors have resigned and no successors have been selected. So there are only seven directors actually serving now. How many must show up at a meeting to constitute a quorum?
- Need at least 5
- Not a majority of the positions actually filled
- Need a majority of the entire BoD
- Suppose there are nine directorship positions on the board. Five of the directors show up at a properly called meeting, but then one of them leaves the meeting. Can the board continue to do business?
BoD cannot do business b/c quorum has been broken
Can the corporation decrease a quorum to less than a majority of directors?
Yes, by the certificate OR the by-laws BUT it can never be fewer than 1/3 of the Directors
Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?
NO! The voting requirement can NEVER be decreased
Can the corporation increase a quorum to greater than a majority of directors (e.g., two-thirds of the entire board must be present to do business)?
Yes they can increase a quorum to greater than a majority of directors BUT ONLY in the certificate AND NOT the by-laws
Can the corporation require a supermajority vote to pass a resolution (e.g., two-thirds of the directors present must approve the resolution)?
Yes they can BUT ONLY in the certificate AND NOT the by-laws
What does the BoD do?
Generally, board of directors manages business of corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc.
Can a BoD delegate its powers? If so, to who? & is there any limitation?
If the certificate or bylaws allow, a majority of the “entire board” can delegate substantial management functions to a committee of ONE or more directors. But, the board cannot delegate all powers and responsibilities to a committee.
***What can a committee NOT do? 4 Things
(1) Amend, repeal or adopt by-laws
(2) Submit a fundamental change to S
(3) Fill a Board vacancy
(4) Set Director compensation
Can a committee make reccomendations on any of its "forbidden actions/areas" for full board action?
Yes, compensation
What is a particularly important area in which committees are used?
S derivative suits
***What is the standard of care required for a Director?

A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position.

Emphasis on ordinarily prudent person under similar circumstances
What is nonfeasance?
= director does nothing
A director may breach the standard of care BUT he is liable only if:
ONLY IF his breach caused a loss to the Corp!!

• Very tough to show causation (that is caused the loss of $)
What are the 2 ways to raise the issue of a director breaching the standard of care?
(1) Nonfeasance
(2) Misfeasance
What is misfeasance?
= BoD does something that hurts the Corp - this involves the business judgment rule (BJR).
What is the business judgment rule (BJR)?
= A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

In other words, only in trouble if it was irrational or grossly negligent
How do you evaluate whether a BoD committed misfeasance? (Phrase to help you remember!)
Prudent People Do Appropriate Homework
• Look to see if they deliberated, if they analyzed, if they did what a prudent person would do… if so, then not liable
• If they did NOT investigate at all prior to investment then they may be liable
• You don’t have to be perfect or right, you just have to be prudent!!!
***What is the Duty of Loyalty Standard?
= a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.
Why does the BJR not apply in duty of loyalty cases?
B/c these involve conflicts of interest... BJR goes right out the window for the Director
What does a director breach if steals money?
Stealing $ = breach of duty of loyalty
What is an Interested Director Transaction?
= any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest).
How would you state the duty of loyalty standard in a problem involving an interested director transaction? Includes 2 things the Interested Director must show & 3 potential approval situations
Interested director transactions will be set aside UNLESS the director shows either
(1) the deal was fair and reasonable to the corporation when approved OR (2) the material facts and her interest were disclosed or known and the deal was approved by any of these
(1) S action OR
(2) BoD approval by sufficient vote NOT counting the votes of interested directors OR
(3) Unanimous vote of disinterested directors if disinterested directors are insufficient to constitute an act of the BoD
Do interested directors count toward a quorum of the board?
Yes, & interested director(s) can even participate in the discussion but their vote does NOT matter
There are nine directors. Five of them are interested in an interested director transaction. All nine attend the meeting to consider approving the deal. After appropriate disclosure, what vote could approve the deal?
Majority = interested, so need all 4 disinterested directors to vote yes
Who sets compensation of directors? What is it called if it is excessive?
Board can set compensation of directors in any capacity, unless certificate or bylaw says they can’t. Compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets & Breach of Duty of Loyalty.
Can a Corp give directors & officers stock options?
Can give a director or officer stock options as an incentive to service.
What if the stock offered as an incentive is listed on a stock exchange?
If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies.
What if the stock offered as an incentive is not listed on a stock exchange?
If not listed, this use of options must be approved by a S vote
What if a director wants to start a Corp. that competes w/ the one she is serving on the BoD for?
Director cannot go into competition with her corporation.
What happens if a director does go into competition w/ her current Corp.?
Original Corp gets a constructive trust on her profits
What happens if a Director finds out about an opportunity that would be good for the Corp but takes it for himself [personally] instead?
Director cannot USURP a corporate opportunity.

= Cannot take it until he tells BoD about it & waits for BoD to reject it
What qualifies as a corporate opportunity?
• Something Corp needs or has an interest or tangible expectancy in OR that is logically related to its business
***If there is usurpation, what is the usual remedy?
If there is usurpation, the usual remedy is a constructive trust. So if Director still has it, he must sell it to the corporation at his cost. If Director has sold it at a profit, the corporation gets the profit.
What are 4 state law bases for Director Liability?
(1) Ultra vires acts
(2) Watered stock
(3) Improper loans
(4) Improper distributions
BoD votes to lend a director $100,000 of corporate funds. = OK?

For corporations formed on or before February 22, 1998: shareholder vote (in which a quorum = a majority of disinterested shares), unless the Cert allows BoD to decide that a loan benefits the Corp.

After Feb 22, ONLY need BoD conclusion that the loan benefits the Corp; do not need S approval!
*** For these or any other thing a director can be liable for, exactly which directors are liable?
General rule = a director is presumed to have concurred w/ BoD action unless her dissent is noted in writing in corporate records.
How does the director note their dissent in writing in the Corp records? ONLY 3 ways...
(1) In the Minutes OR
(2) In writing to Corp secretary at the mtg OR
(3) Registered letter to Corp promptly after adjournment
What happens if a Director orally dissents?
= NO good; ineffective when it comes to liability
What happens if Director votes for a resolution & then wants to dissent?
Director cannot dissent if voted for the resolution at the meeting.
= Harsh rule!
What are the exceptions to the general rule of holding Directors liable for BoD action? 2 Exceptions
(1) Director missed a mtg (e.g. he was sick) = he is not liable if he registers written dissent w/in a reasonable time of learning of the action
(done by deliver/sending it by registered letter to Secretary, & ensuring that it is filed w/ minutes)
(2) Good Faith reliance on any of the stuff by
• Officers or Employees of the Copr who you believe competent
• Lawyers or public accountants whom the Director or officer believes are acting w/in competence
• A Committee of which the person relying is not a member, as to matter w/in its designated authority
(especially likely in a case involving improper distributions!)
What are the officers duties to the Corp?
• OWE DUTY OF CARE & OF LOYALTY!!!! Exactly the same as Directors
What is the status of the Officers of the Corp?
= agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so. (Watch for a cross-over with agency.)
What are common Officer positions & who selects the people holding them?
BoD may select a president, one or more vice-presidents, a secretary, a treasurer, and any others the Board may determine OR for which the bylaws provide.
Can one person hold multiple officer positions simultaneously?
Yes, can occupy more than one position at one time
Who selects and removes the officers?
BoD unless cert allows S to do so
(silent = Bod)

(BUT if the S elect them, only the S can fire them. Even then, if for cause, directors can suspend an officer’s authority to act.)
Who hires and fires directors?
As a general rule, S hire & fire Directors
Who hires and fires officers?
Directors hire & fire officers
Who may sue for a CT judgment removing an officer for cause? 2 Alternatives
NY Attorney General or holders of 10% of all shares may sue for a judgment removing an officer for cause. Ct can bar reappointment of a person so removed from office.
Who sets compensation of officers?
• Directors set compensation of officers.
A person is sued in her capacity as officer or director and incurs costs, attorneys’ fees, maybe even fines, a judgment or settlement; she seeks reimbursement from the corporation.

In an action by or on behalf of the corporation, there are three possibilities. Name them.
(1) Prohibited
(2) Of RT
(3) Permissive
When is reimbursement prohibited?
Reimbursement is prohibited if officer or director was held liable to the Corp
When is reimbursement a RT?
Corp MUST reimburse if she was successful in defending the case on the merits OR otherwise
Suppose a director or officer is successful in defending a suit against her, so she qualified for reimbursement of right from Corp. But the Corp refuses to reimburse her. Now she sues the Corp to force it to reimburse her, & wins. Can she recover the attorney’s fees of this suit against the Corp?
No! She cannot recover attorneys’ fees of suing Corp
What 2 things must a director/officer show for permissive reimbursement?
must show that:
(1) she acted in good faith AND
(2) for a purpose reasonably believed to be in the Corp’s best interest
Reimbursement in the “permissive” category can include what? What can it NOT include?
settlement amount, expenses and attorney’s fees.
NOT any judgment!
For permissive reimbursement, who determines eligibility? 3 Alternatives
(1) The Board (with a quorum of directors being non-parties); OR, if there is no such quorum,
(2) Shareholders or a quorum of those directors who are disinterested; OR
(3) BoD pursuant to report from independent legal counsel
Can the court in which the officer or director gets sued order the corporation to reimburse the officer or director for litigation expenses and attorney’s fees?
Yes, a CT can order it if it finds that she is reasonably entitled to it BUT CANNOT include a judgment against her
Can indemnification for a director or officer be decided on as part of Corp policy? When can there not be indemnification?
Yes, certificate or bylaws can provide for indemnification by resolution of BoD or S or by agreement, unless the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited.
Can the corporation advance litigation expenses to the director or officer?
Yes, can advance litigation expenses
***Certificate may provide for elimination of director liability to the Corp or to S for damages for breach of duty EXCEPT in 4 circumstances:
(1) When director acted in bad faith OR
(2) W/ intentional misconduct OR
(3) Received an improper financial benefit OR
(4) Approval an unlawful distribution or loan
When may a CT pierce the Corporate veil & hold S liable?
CT may “pierce the corporate veil” (PCV) & hold S personally liable if they have abused the privilege of incorporating & if fairness demands that the shareholders not have limited liability.
Why is PCV extraordinary?
= extraordinary b/c Corp is supposed to be liable for what it does (that’s why we incorporated!)
Why might NY courts PCV? 3 Reasons
(1) To prevent fraud OR
(2) To achieve Equity OR
(3) To prevent the use of the Corp as a cloak for illegality
What are the 2 main classifications/rationales behind PCV?
(1) Alter ego
(2) Undercapitalization
What does it mean for the Corp to be an altar ego & how do you recognize it? What is the standard in NY?
= a.k.a. identity interest, excessive domination
- Person(s) commingles personal & corporate funds
- Looking for abuse of privilege of having a Corp
- First thing we do is state the General Rule... in NY we say there is NO PVC if the Corp has any mind, existence, or will of its own (= fairly tough standard)
... never entirely sure if it is met but we argue it
If you have a dummy Corp OR a parent Corp completely dominating a subsidiary, then there is a strong possibility of PVC... in that case, who would be liable if CT did PCV?
Only go after the active wrongdoer = the person(s) who are carrying out the abuse
When is there undercapitalization?
B/c S failed to invest enough to cover prospective liabilities
Is undercapitalization enough in NY?
Not by itself... also need excessive domination or fraud or illegality
***As a general rule, do we expect PCV more readily in tort or contract cases?
***CTs more likely to PVC (much more likely) in tort rather than in K cases (always throw this sentence into an Answer)
In a close corporation, the ten largest S are personally liable for what?
*** In a close Corp the 10 largest S are liable for the wages & benefits to the Corp’s employees… only in a close Corp though.
Who manages the corp & why?
Remember that generally BoD (not shareholders) who manage the corp. There is a public policy that BoD must exercise the management
power, and that shareholders should not encroach directly on that power. There
is a trend away from that public policy in some instances.
When can S manage the Corp?
Shareholders can manage the business directly in a close (or "closely held") corporation.
What is a close corporation?
= has few S AND stock is NOT publicly traded
= mom & pop Corp

Most Corp in this world = close corp (& most Corps on BEX!)
Who can manage a close Corp?
Either BoD OR S can manage it
How is power vested in the S to manage a close corporation?
A provision in the certificate can restrict or transfer BoD power to shareholders or others.
when is it ok to vest in the shareholders the power to manage a close corp? 4 Requirements
OK if:
(1) all incorporators or shareholders (voting and nonvoting) approve it;
(2) all subsequent S have notice;
(3) it is conspicuously noted on front and back of all shares; AND
(4) shares are not listed on an exchange or regularly quoted over-the-counter
In a close corporation run by S, who owes the duties of care and loyalty?
= managing... CHECK
Why might CTs be increasingly willing to protect minority shareholders in a close corp? What duties are imposed on S, especially on controlling S?
= willing to protect b/c they have NO WAY OUT of Corp (can’t sell stock b/c not public)

In a close corporation, there is a trend toward imposing fiduciary duties on S in their dealings with each other. Especially, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the Corp or to oppress minority shareholders or the Corp. They owe a duty of utmost good faith.
What are professional service corporations?
Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation, usually abbreviated "P.C."
Must shareholders in a P.C. be licensed professionals?
Shareholders & Officers & Dirs MUST ALL be licensed professionals...
But employees don’t have to be professionals
Are the professionals in a P.C. liable for their own malpractice?
YES but NOT for others in the group (may be better than a partnership as a result)
Are the professionals liable for Ks entered by the entity and for rent due on leases in the P.C.’s name?
NO the entity is liable & the individuals are not
What is the P.C. generally governed by? What is additionally required?
In general, the P.C. is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of "P.C." & must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession.
What happens if one of the shareholders dies or is disqualified from the practice?
P.C. must purchase his shares (a buy back)
***What is a derivative suit?
In a derivative suit, a shareholder is suing to enforce the Corp’s claim, not her own personal claim. It’s a case in which the Corp is not pursuing its own claim, so a S steps in to prosecute the claim.
What should you always ask when there is a lawsuit in corporations?
• ALWAYS ASK – Could the Corp have brought this suit?
If yes, then it’s probably a derivative suit
***S sues the BoD of a Corp for usurping Corp opportunities. Derivative suit?
***YES – duties of care & loyalty are OWED TO THE CORP
A breach of one of those duties hurts the Corp
S of Corp. sues X for breaching its K with Corp. Derivative suit?
YES, b/c C Corp. could sue X for this breach.
S sues BoD of Corp for issuing new stock w/o honoring her preemptive rights. Derivative suit?
NO, this is a "direct suit," for S’s personal claim.
S sues regarding waste of corporate assets. Derivative suit?
Yes, it is derivative (ALWAYS derivative b/c = breach of duty of loyalty)
S sues to compel declaration of dividend. Derivative?
Probably not. But maybe if it could arguably be based upon a breach of duty to the Corp
- Trying to get $ in her pocket, so probably not
- It might be derivative if it’s part of mismanagement by the Directors
***What are the consequences of a successful derivative suit? Generally who gets the recovery of a successful suit?
Corp gets the judgment!!!
***What does S receive in a successful derivative suit?
Costs & attorney’s fees usually from the judgment won for the Corp.
We know the damages generally go to the Corp. But can S ever recover the damages directly in a derivative suit?
Maybe if recovery by the Corp will return $ to the bad guys

E.g. A close Corp w/ 3 shareholders, each of whom owns 1/3 of the shares & participates in management. One breaches the duty of loyalty by engaging in a competing venture. In a derivative suit, Corp wins a judgment to recover the bad guy’s profits. But giving the recovery to the Corp will return 1/3 of it to the bad guy. CT might let the other S recover directly, although it is a derivative suit.
What are the consequences of an unsuccessful S' derivative suit?
- S pays her own tab & cannot recover costs & expenses
- S will probably be liable to Corp for their costs (usually winner recovers costs)
Can other shareholders later sue the same defendants on same transaction?
NO – res judicata
What are the 3 (maybe 4)requirements for bringing a shareholder derivative suit? (Keep in mind, a director or officer can sue another director or officer on behalf of the Corp to compel her to account for violating duties without making these showings.)
1. Stock ownership
2. Must adequately represent the interests of Corp & S.
3. Must also make a demand that directors bring suit unless it would be futile.
4. The plaintiff S can be required to post security for costs unless plaintiff owns 5% or more of any class of stock or her stock is worth more than $50,000.
What is involved in the stock holding requirement for bringing a derivative suit? When must they own it? How can they have gotten it?
- The person bringing suit must have owned stock or held a voting trust certificate or have gotten it by operation of law from someone who owned the stock WHEN the claim AROSE
(e.g. = Inheritance OR Divorce decree).
- MUST also own stock when the action is brought & through entry of judgment.
When might a demand for the directors to bring suit be futile? 3 Circumstances
If (1) majority of the board is interested or under the control of interested directors; OR
(2) the board did not inform itself of the transaction to the extent reasonable under the circumstances; OR
(3) the transaction is so egregious on its face that it could not be the result of sound business judgment.
What is the special pleading requirement in a derivative suit?
= P must plead w/ particularity her efforts to get the BoD to sue OR why demand was excused
If demand is made and refused, can S sue?
- Only if she can show that a majority of the BoD is interested OR
- Its procedure was incomplete or inadequate
Suppose S brings a derivative suit, and the corporation wants it dismissed. What can it base its move to dimiss on?
It can move to dismiss, based upon the finding by independent directors (or a committee of independent directors, sometimes called a “special litigation committee”) that the suit is not in the corporation’s best interests (e.g., low chance of recovery, or cost of suit will exceed recovery).
What does the court look at in deciding whether to dismiss? 2 Things
(1) Independence of those making the investigation AND
(2) The sufficiency of the investigation (THAT’S IT!)
In a derivative suit, the Corp must be joined as a party, but on what side?
• Corp must be joined as a Defendant
Can the parties dismiss or settle a derivative suit?
• Ps can settle DS (or dismiss) BUT ONLY w/ CT approval
- CT may notify S who will be substantially affected by discontinuance of the action
Can an officer or Director bring a derivative suit?
- A Dir or Officer can bring an action against another Dir or Officer on behalf of Corp to compel her to account for violating duties
- Does NOT have to make the showing that a S has to do for a DS
Who votes?
General rule = record owner of stock as of record date has the RT to vote
Who is the record owner?
= the person shown as the owner in the Corp records.
What is the record date?
= a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.
What are the exceptions to the general rule that record owner or record date votes?
(1)*** even if it is the record owner on the record date the Corp does NOT vote treasury stock
(2) Death of a S (his executor can vote the shares)
(3) Voting by proxy
What is a proxy?
= a 1) writing, 2) signed by record shareholder or authorized agent, 3) directed to secretary of corporation, 4) authorizing another to vote the shares.
Is a fax or an email a "writing" for proxy voting purposes?
Fax or email = OK for writing requirement
Is proxy voting OK for directors? What if a person is both a S & a director?
- Proxies OK for S voting but NOT director voting
- If both, then depends on the mtg she’s going to
How long does proxy authorization last?
generally CANNOT vote at next annual Mtg b/c only good for 11mths unless it says otherwise
Is a proxy revocable?
yes, S can revoke the person’s proxy
Can S revoke a proxy authorization even though it says it is irrevocable?
How can you have/create a truly irrevocable proxy? 2 Ways
(1) If S sells her shares to another after record date & proxy says it is irrevocable, then can’t revoke it
(2) Proxy + interest = irrevocable
- Does not have to be ownership
- Could be option to buy or a pledge
Can shareholders decide to vote together in advance? how?
S can decide that they can increase their influence on corporate policy by "block voting" through voting trusts &/or voting agreements
What are the 4 requirements of a voting trust?
(1) Has to be a WRITTEN trust agreement
(2) Have to give a copy to Corp
(3) Actually transfer shares to voting trustee AND
(4) Original shareholders receive trust certificates & retain all other shareholder RTs except for voting
Is there a time limit on voting trusts?
= 10yr max (but w/in 6mths of expiration it can be extended for another term of up to 10yrs)
What are the 2 requirements for a voting agreement (or “pooling” agreement)?
(1) In writing AND
(2) Signed
Are voting agreements specifically enforceable?
Apparently not specifically enforceable in NY
What's special about a proxy given subject to a voting agreement?
= it is irrevocable IF IT SAYS SO!!!!
Can 2 shareholders agree to vote to elect each other as directors?
That’s OK, because electing directors is something shareholders do.
What if 2 S's agree about what actions they will take once they are directors? What if they are the only 2 S in the Corp? What if they only agree to try & use their influence to get the Corp to go in a certain direction?
= violates rule against voting agreements by Dir’s HOWEVER OK if they are the ONLY 2 S in the Corp
AND IT IS OK to agree to use best efforts to cause the Corp to act in a particular way
What are the only 2 ways the shareholders can take a valid act?
(1) Written consent SIGNED by the holders of voting shares to act w/o a Mtg OR
(2) A Mtg
What is required before the S can take a valid action w/o a mtg?
IF CERT ALLOWS, can take action w/o meeting if there is agreement in writing of the holders of enough shares to pass a resolution if all voting shares were present and voting at a meeting.
Where is the annual mtg held? What if it is not held?
Annual meeting can be held anywhere.
CT can order one if it is not held.
What is so important about the annual meeting?
= important b/c this is where the S elect directors
Who can call a special meeting of the shareholders? 2 Options
1) board OR
2) anyone provided in the certificate
When MUST a special mtg be called by the BoD? what happens if they don't call it?
= to elect directors if there is a failure to elect a sufficient number of directors to conduct the business of the Corp. If BoD fails to call such a meeting, the holders of 10% of the voting shares may demand in writing that the Corp hold the meeting.
What is the notice requirement for meetings? What is the time frame for the notice?
= must give written notice (e-mail is OK) to EVERY S entitled to vote, for EVERY meeting (annual or special) between 10 and 60 days before the Mtg.
What MUST the content of the notice be? What extra is required if it's a special mtg?
(1) MUST state when & where the Mtg will be
(2) Also must inform if the proposed action would entitle S to appraisal RTs and tell why (and even include the statute about appraisal RTs).
- For a Special Mtg MUST state who called it & the purpose of the Mtg
Why is the statement of purpose important in the notice for a special mtg?
= important b/ that is the ONLY business that can be transacted at that Mtg
Suppose a proper person calls a special mtg of the shareholders, and the stated purpose of the meeting is to remove a particular officer. Is everything ok with that scenario?
No good b/c S do not remove officers
What is the consequence of failure to give proper notice to all shareholders?
= action taken at the mtg is void unless those not receiving notice waive the notice defect.
How does a S waive it if improper notice is given to him? 2 Ways
(1) Express = in writing and signed anytime; OR
(2) Implied = if attend the meeting without objection.
What is required for a S vote?
There must be a quorum represented at the meeting.
How is quorum determined for S votes? What is it typically?
Determination of a quorum focuses on the number of shares represented, not the number of shareholders.

Generally, a quorum requires a majority of outstanding shares.
X Corp. has 120,000 shares outstanding. X Corp. has 700 shareholders. What’s a quorum?
Need at least 60,001 shares
Can the certificate or bylaws reduce a shareholder quorum to less than a majority?
Cert or bylaws can reduce – BUT it can never be fewer than 1/3 of share entitled to vote
Can the cert or by-laws reduce the requirement of majority shareholder approval?
NO - NEVER can reduce the requirement of majority approval
Is it possible to require a supermajority (e.g., 90%) of the shares entitled to vote to be represented to constitute a QUORUM?
Yes, can be done in the Certificate BUT NOT via the bylaws
Is it possible to require a supermajority vote of the shares at the meeting to PASS A RESOLUTION?
YES can increase # of votes required to pass a resolution BUT IN CERT & NOT in the bylaws
= exactly the same as w/ Directors
If quorum is met, what is required to bind a Corp?
= a majority
What qualifies as a "majority" for voting at a S meeting?
Majority means majority of the shares actually voting in favor or against the proposal. (Abstentions don’t count.)
Once a quorum is established at a shareholders’ meeting, can it be lost if people leave the meeting?
NO!!! Different from the BoD quorum!!!!!
How and when do shareholders use cumulative voting?
= Only available when voting for Directors... Multiply # of shares times # of Directors to be elected
Why have cumulataive voting for shareholders?
Used to help small sahreholders get rep on BoD
You own 1,000 shares of stock in C Corp. C Corp. has nine directorships open for election. You believe that Derek Jeter should be director of C Corp. Under cumulative voting, how many votes can you cast for Derek?
9,000 votes
The certificate of C Corp. is silent as to whether shareholders can vote cumulatively. Can C's shareholders still vote cumulatively?
NO!!!!! Only exists if the Cert allows
What is the formula for electing a director through cumulative voting?
% of shares required
to elect 1 director if cumulative voting is in place... you need 1 share more than this %:
100/(X plus 1) where (X is the number of directors being elected)
So if 9 directors are being elected, what would you need to elect one director under the cumulative voting system?
= 100 / (X+1) = 100 / 10 = 10% so need one share more than 10%
• Much tougher w/ classified BoD
How transferable is stock?
a benefit of stock = the free transferability of the ownership interest

You can give your stock away or, if you can find a buyer, you can sell it.
Can a shareholder sell her stock for less than par value?
Yes – par is an issuance rule & applies only when Corp selling its own stock
Are stock transfer restrictions are permissible?
Yes - & they will be upheld if they are reasonable under the circumstances… i.e. it is not an undue restraint on alienation
Where are stock transfer restrictions set? 3 options
(1) Cert OR
(2) Bylaws OR
(3) Agreement
When is it common to have stock transfer restrictions? In what kind of situation?
Very common in a close Corp
Is a RT of 1st refusal considered an unreasonable restraint on alienation?
A RT of first refusal is acceptable so long as the price offered is reasonable.
Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either 1 of 2 things:
1) it is conspicuously noted on the stock certificate OR 2) the transferee had actual knowledge of the restriction.
By statute, there is a RT to inspect and copy what 2 things of the Corps? & who exactly can inspect & copy? What do they have to do?
(1) minutes of shareholder proceedings AND
(2) the record of shareholders.

- Any S can demand access if 5 days notice & it is a written demand
What can the Corp demand of the S who wants to inspect/copy?
Corp can demand that the shareholder give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders.
Can Corp demand more detail in the affidavit than a statement that his interest is not against the Corp & that he has not tried to sell any S list in last 5yrs?
No, NEVER. CANNOT demand more detail in the affidavit
What happens if the S refuses to furnish such an affidavit after the Corp demands it?
•If S refuses to provide affidavit, then Corp can deny access
What can the S make a written request for the Corp to provide to him? 3 Things
A shareholder can make a written request for
(1) the corporation’s latest annual balance sheet,
(2) profit and loss statement AND
(3) latest interim statements distributed to shareholders or public.

Corporation must provide the documents; can do so by mail.
Can a S demand to inspect & copy a list of directors & officers? If so, how/when?
Yes, a different statute gives a right to inspect & copy a list of the current directors and officers.

Any S can demand that on 2 day’s written demand.
What documents does the CL RT to inspect cover?
CL right but must be for a proper purpose (related to your role as S)

= Unclear how broad this is
When & how can a director inspect?
Director's have unfettered access
What are distributions? What 3 types are there?
= payments to shareholders
& can be
(1) a dividend OR
(2) a payment to repurchase shares OR
(3) to redeem shares [forced sale to corporation at price set in certificate]
When are dividends declared?
Distributions are declared in the Board’s discretion.
Does a S have a RT to dividends?
There is NO S "right" to a distribution until it is declared. Once it's declared, affected shareholders have a RT to it.
Will a CT interfere w/ BoD’s discretion & order a distribution?
Only on a showing of bad faith or dishonest purpose (very tough to show)
Don’t confuse a distribution with a stock split, which gives a shareholder more shares than she now has but reduces the value of each share proportionately. (See e.g. on back)
For example, say Sally owns 100 shares of Drew Carey Hairstyle Inc. The shares are selling at $40 per share. If the stock splits 2-for-1, Sally will end up with 200 shares, worth $20 per share. So the economic effect is nothing -- she has $4000 worth of stock either way.
BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common stock?
$4 per share
BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of preferred with $2 dividend preference?
Preferred means pay first. So those 20,000 preferred shares must be paid their $2 preference first, before anybody else gets anything. 20,000 shares multiplied by $2 equals a total preference of $40,000. So we skim off $40,000 and pay that to the preferred holders first. That leaves $360,000. Who gets the $360,000? Goes to the common shares – get $3.60 per share
BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred that is participating?
Participating means pay again. So these 20,000 shares get paid twice -- once as preferred and again because they are participating. Do the preferred exactly as in hypo 2. 20,000 shares multiplied by $2 preference equals $40,000 (just like above). Pay that first, because it’s preferred (just like above). That leaves $360,000 (just like above.) But here, the $360,000 gets divided by 120,000 shares.
BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends in the three prior years)?
Cumulative means add them up -- for the years in which no dividend was paid, the cumulative holders’ dividend is adding up. So the corporation owes these cumulative holders for the three prior years (because there have been no dividends over those years) PLUS there’s this year, the year the dividend is declared. So the corporation owes the cumulative holders for four years of their $2 preference.
***How is surplus computed?
• Surplus = assets – liabilities – stated capital OR
• = Net assets – stated capital
***Can surplus be used for distributions?
Yes but up to BoD if you get a distribution
What is stated capital?
= par value
& Excess over par goes up into surplus
Can stated capital be used for distributions?
NO never use for distribution!!!
C Corp. has issued 10,000 shares of $2 par stock for $50,000 and 4,000 shares of no par stock for $70,000. $20,000 goes to stated capital and $30,000 goes to surplus. Why?
$20, 000 goes to stated capital b/c stated capital = par value & excess over par goes up into surplus (= $30,000)
What if no par stock is issued? What part is allocated as stated capital & what part is surplus?
W/in 60 days after issuance, BoD can allocate any part, but not all, to surplus. If BoD does not do this, it is all stated capital.
***If a Corp loses money, can it still distribute?
Corp can make distributions even though it lost money last year
***When can a Corp NOT make distributions?
CANNOT make distributions if it is insolvent or if the distribution would render it insolvent.
What does "insolvent" mean?
= unable to pay its debts as they come due in the ordinary course of business
Who is liable for unlawful distributions? What kind of liability do they incur?
Directors are personally liable for unlawful distributions, as are shareholders who knew the distribution was unlawful when they received it.
Who would sue to recover when unlawful distributions were made?
Can be a Derivative Suit
***Will there be a defense to unlawful distributions?
*** possible defense of good faith reliance (most likely to come up in this type of case... b/c relied on what financial people told me)
Describe redemptions.
= set in certificate, and must be done proportionately within each class of stock.
Describe repurchases.
= individually negotiated, and can discriminate except in close Corp, where must give equal opportunity to all shareholders.
What is the significance & consequences of a fundamental Corp change?
= so fundamental that, most of them require both director & shareholder approval.
For most of them, the Corp must notify the Dept of State by delivering a document which the Department then files.
****What is the dissenting shareholders’ RT of appraisal?
= RT of a S to force the Corp to buy her shares at fair mkt value.
When will a S have a dissenting shareholder RT of appraisal? What are 5 triggers you should be aware of & should automatically associate w/ the RT?
If she disagrees w/ a fundamental change...think RT of appraisal whenever you see:
(1) Some amendments to Cert
(2) Consolidation
(3) Merger into another Corp
(4) That the Corp transfers substantially all of its assets
(5) Your Corp’s shares are acquired in a share exchange
Even if there is a trigger, when is there no RT to appraisal & why?
No right of appraisal if the company is listed on a national securities exchange or NASDAQ b/c there is a public Mkt for the stock
*** What actions are taken by S to perfect the RT to appraisal? HAVE TO DO ALL 3!
(1) before S vote, file written objection & intent to demand payment;
(2) abstain or vote against proposed change; AND
(3) After the vote make a written demand to be bought out
What happens if the S & the Corp cannot agree on fair value?
Corp sues & CT determines the value.
In setting the value of the stock, can the court discount the value to reflect the fact that minority shares may be worth less than controlling shares, because they carry no control over corporate affairs?
No, no minority discount in NY
Who makes minor changes in the Corp?
Minor changes, such as those relating to office location, registered agent, etc. are made by BoD.
What happens if the Corp wants to make more substantive changes to the Certificate? What is the 2 step process?
Other amendments, such as change of name, purpose or duration, increase or decrease of shares or par, creation of new classes of stock, denial or grant or limitation of preemptive rights, must be approved by
(1) director action AND
(2) a majority of the shares entitled to vote.
what if the amendment will change or strike a supermajority quorum or voting requirement for BoD voting or will strike a provision restricting board authority? what is the approval process?
If formed ON OR BEFORE before Feb 22, 1998, must get BoD approval AND approval by 2/3 of shares entitled to vote.

If formed AFTER Feb 22, 1998, must get Board approval AND approval by a majority o shares entitled to vote.
What if the amendment will change or strike a supermajority quorum or voting requirement for shareholder (not director) voting?
= director approval + approval by 2/3 of the shares entitled to vote. Does NOT matter when Corp formed
What happens if an amendment is approved?
= deliver certificate of amendment to Department of State for its filing.
Are there dissenting shareholder rights of appraisal when there is an amendment? What 4 situations would qualify?
Yes, if the amendment (1)alters or abolishes a preference, (2) changes redemption rights, (3) alters or abolishes a preemptive right OR (4)limits voting rights.
What do you need for a consolidation or a merger to go forward?
Need each company’s BoD to adopt plan of consolidation/merger & need S approval from each Corp
A Corp. has 6,000 outstanding shares entitled to vote. How many shares must vote for the proposed merger of A Corp. into B, Inc.?

• before Feb 22nd 1998, at least 4,000 shares (2/3 entitled to vote)
• After Fed 22nd, at least 3,001 b/c all you need is a majority of shares entitled to vote
What is a "short-form" merger & what kind of shareholder approval does it require?
No shareholder approval required in "short-form" merger = where a parent corporation owns 90 percent-or-more of each class of stock of a subsidiary that is merged into a parent corporation.
What action must be taken after there is a merger or consolidation?
Must deliver certificate of merger (or consolidation) to Department of State for filing.
***Are there dissenting shareholders' RTs of appraisal?
yes, RT of Appraisal for the Shareholders of a Corp that DISAPPEARED either in a merger or a consolidation
BUT NOT FOR S of surviving Corp
***What about for shareholders of the subsidiary in a short-form merger? Rts of appraisal?
YES they have RT of appraisal even though they did not get to vote
***What is the effect of merger or consolidation?
effect = surviving Corp succeeds to all RTs & liabilities of the constituents (= successor liability)
What are 2 fundamental Corp changes that are treated alike?
What is share exchange?
one company acquires all the outstanding shares of one or more classes of another Corp
For which company are these fundamental corporate changes - (1) transfer or sale or substantially all of the assets not in course of ordinary business & (2) share exchange?
= fundamental corporate changes for the SELLING Corp ONLY - NOT for the BUYING Corp.
What is the # of shares of seller Corp that must approve the 2 fundamental change situations?
- On or before Feb 22, 1998 need at least 2/3 of the shares entitled to vote
- After then, all you need is a majority
Number of shares of buying Corp that must approve the sale?
zero - they do not vote b/c not a fund change for the buyer
What sort of filing is required for share exchanges & transfers of assets involving a buying & selling Corp?
In the share exchange, deliver plan of exchange with the Department of State for filing. In the transfer of assets, no such filing is required.
Are there dissenting shareholders' RTs of appraisal for share exchanges & transfers of assets involving a buying & selling Corp?
Yes, for shareholders of the selling corporation only. Not for the shareholders of the buying corporation (because it is not a fundamental corporate change for the buyer).
What is the one exception to the S RT of appraisal in selling Corps?
NO RT of appraisal even for shareholders of selling corporation if a sale of assets is for cash & the company will dissolve & distribute cash to shareholders within one year. Such a Corp is essentially dissolving.
What is the general rule for acquiring tort liability when a company is acquiring assets?
General rule, the company acquiring assets will not be liable for the torts of the company whose assets it acquired
What are the 3 exceptions to the general rule for acquiring tort liability?
(1) the deal provides otherwise, OR
(2) the purchasing company is mere continuation of the seller, OR
(3) the deal was entered fraudulently to escape such obligations.
Is the rule for acquiring tort liability when acquiring assets different from the rule for merger? Why or why not?
- Yes it is different from the merger
- Here we do not expect successor liability
- Reason = company that sold its assets is still in existence (still there)
***What is the ultimate fundamental Corp change?
What are the 3 types of dissolution?
(1) Voluntary
(2) Involuntary
(3) Winding up (liquidating)
What approval is required for a voluntary dissolution?
NO BoD vote necessary at all; only need S approval which =
ON OR BEFORE Feb 22nd = 2/3
& after Feb 22nd = majority of shares entitled to vote.
Either way, certificate of dissolution delivered to the Department of State for its filing.
What is involuntary dissolution?
= judicial - someone is asking for a CT order of dissolution
What are the 4 ways a dissolution can come about?
(1) By BoD resolution or resolution of majority of shares entitled to vote, stating that Corp has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders.
(2) 1/2 or more of shares entitled to vote may petition if directors too divided to manage or S too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders.
(3)Any S entitled to vote may petition if shareholders unable to elect directors for 2 annual meetings.
(4) 20%+ of voting shares in Corp whose shares are not traded on a securities market may petition on either of two grounds
What are the 2 grounds that twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition on?
(1)Management’s illegal, oppressive or fraudulent acts toward complaining S OR
(2) Management’s wasting, diverting, or looting assets.
Who is "management" when talking about wasting, diverting or looting assets?
= directors or managing S in a closed Corp
When will a CT consider denying dissolution & what will a CT look at in making its decision?
CT may deny dissolution if there is some other way the complaining S can obtain a fair return on his investment, e.g., by ordering buy out. CT will consider whether liquidation is necessary to protect the petitioners & is the only way for them to get a fair return on their investment.
***How may the Corp or non-complaining shareholders try to avoid dissolution?
w/in 90 days of the petition, buy the petitioner’s shares at fair mkt value.
Terms MUST be approved by the CT!!!
What are the 4 steps for winding up (liquidating)?
1) gather all assets,
2) convert to cash,
3) pay creditors, AND
4) distribute remainder to S, pro-rata by share unless there's a dissolution preference.
How does a dissolution preference work?
- works like a dividend preference… = pay first
- Must say in Cert if it is a dissolution preference or a distribution preference
Can shareholders agree that they will be paid before creditors?
S CANNOT agree that they will be paid before creditors
What is the CL rule for shareholder's fiduciary duties?
Outside the close Corp, shareholders generally do NOT owe fiduciary duties to each other or to the Corp. They can act in their own self-interest.
Is there a duty for a controlling S?
A shareholder who also occupies a control position (such as a 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 (including the corporation). She cannot use a dominant position for individual advantage at the expense of minority shareholders or the corporation.
***Most likely to happen in a Close Corp situation
Because of her control, the shareholder may be able to sell her shares at a premium. If she does, can she keep the money?
Yes typically
***What are 3 situations where a CT might impose liability on a controlling S who sold her shares?
(1) controlling S sold to looters (who come in & loot the Corp) w/o making a reasonable investigation (reasonable person standard). If happens, disgorge Seller’s profit AND that Seller is probably liable for ALL damage done to that Corp.
(2) Controlling shareholder de facto sells a corporate asset. If she does, all S should share in the premium paid by the buyer.
(3)Controlling shareholder sells a corporate office, e.g., a position on the Board. Fiduciaries cannot sell their position. E.g., controlling shareholder sells controlling interest and agrees that she and "her" directors will resign from the board. It is one thing to have the new controlling shareholder elect new directors. It is another, though, to sell seats on the board. Disgorge the profit.
What is the general rule for mergers?
All mergers must have a legitimate corporate purpose, even though approved by the requisite number of shares.
What is a freeze-out merger & what are its implications?
aimed solely at cashing out minority shareholders unfairly. Usually, majority shareholders cause their corporation to merge with another corporation which they own. The minority shareholders’ shares are purchased for cash, so they have no interest in either corporation. CTs may be increasingly protective of minority.
What will the CT look to when analyzing whether a freeze-out merger or not? 3 Things
(1) whether deal = tainted
(2) Whether minority S dealt w/ fairly AND
(3) Whether legit business reason for the merger
Suppose a director or an officer engages in market trading based upon inside information from the corporation. She makes a profit by doing so. What is the liability because of & what are the repurcussions?
In New York, the director or officer has breached a duty to the corporation by doing this AND Corp can sue to recover her profit
What is involved in the prohibition on nondisclosure of "special facts"(or "special circumstances")?
All directors and officers (and probably controlling shareholders) owe an affirmative duty to disclose special facts in a securities transaction with a non-insider. So they cannot trade on secrets; they must disclose or abstain from dealing.
What are special facts?
Those a reasonable investor would consider important in making an investment decision. They bear on potential value of the securities.
Who can sue for nondisclosure of special facts?
A shareholder w/ whom the director or officer deals & violates the special facts doctrine.
What is the measure of the damage?
= difference btw price paid & value of that stock after news goes public & has time to digest
***David is a director of X Corp., and has just learned that the company has developed a new machine that will revolutionize the market. The company's stock is now selling at $10 per share. Reports indicate that the stock will go to $50 per share within weeks of the announcement of the new machine. Bobbitt, a shareholder, calls David to complain about the company, and says he wishes he'd never bought stock. David offers to take the stock off Bobbitt's hands for $20 per share. Bobbitt sells. After the announcement, the stock goes up to $50. Can Bobbitt sue David?
It is D (= David) who will get in trouble but under CL it was NOT fraud b/c no affirmative misrepresentation. BUT can sue under Special Facts Doctrine b/c CLEARLY a special fact... i.e. reasonable investor would consider it important
Bobbitt is a shareholder, who does not know the inside information. David
is a director, who has inside information. David traded on that inside info without disclosing it. He thereby breached a duty to Bobbitt. What damages can Bobbitt recover from David?
- Breached a duty b/c traded on insider knowledge
- Damages = difference in price paid & price when goes public (= $30 per share)
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