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195 Cards in this Set
- Front
- Back
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What is required for Organization of New York Corporations?
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1- People: One or more incoporator, in NY adult humans, no entities
2- Paper: Certificate/Articles of Incorporation 3- Act- a-Each incorporator signs certificate and acknowledges it before a notary, deliver it to the NY dept of St., must conform with law and filing fees are paid, the Dept files the certificate b- Organizational meeting i- adopt any bilaws ii- Elect the initial board of directors who then takes over management |
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What does an incorporator do?
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1- execute the certificate
2- Deliver it to the Dept of State 3- Hold the organizational meeting |
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What are the Purposes of the Certificate of Incorporation?
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1- A contract between corporation and SH
2- A contract between corp and state |
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What information goes into the certificate?
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1- Names and addresses:
a- Corporate name- must have Corporation, Incorporated or Limited in the title b- Address- the county in NY of the office of corporation, not a street address, does not have to be a place where corp actually does business c- Corporation's agent for the service of process- The NY Secretary of State and an address for forwarding process to the corp (street address) d- Name and address of each incorporator 2- Duration- if none, perpetual existence 3- Corporate purpose statement 4- Capital structure, stock |
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What is an ultra vires act?
How was it handled at CL? How is it handled today? |
Beyond the scope of the certificate.
CL: K is voided Today: 1- UV K's are valid 2- SH can seek injunction 3- Responsible managers are liable to the corp for UV losses |
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Stock Definitions:
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Authorized stock is the maximum number of shares the corporation can sell
issued stock is the number of shares the corporation actually sells Outstanding stock is stock that the corporation has sold and has not reqcquired |
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What must be included in the certificate about the corporation's stock
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1- Authorized Stock
2- Numbere of shares per class 3- Info on par value preferences, rights, and limitations of each class 4- Info on any services of preferred shares (subclass) * At leeast one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights |
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What is the effect of the Dept of State filing?
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it is conclusive evidence of valid formation- de jure corp
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Why does it matter that somebody formed a corporation?
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1- The internal affiars of a NY corp are governed by NY law
2- A corporation is a separate legal person. It has broad powers by statute including the power to enter contracts, transfer property, buy and sell securities, and sue or be sued, make political contributions (no more than $5K per year per candidate or organization in NY0, charitable contribution, guarantee a loan that is not in furtherance of corporate business if approved by 2/3 of the shares entitled to vote 3- Liability for what the corporation does- corporation! |
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What is a de facto corporation?
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Proprietors fail to form a de jure corporation, business is treated as a corporation so SH are not personally liable for what the business did.
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What must a de facto corporation show?
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1- theree is a relevant incorporation statute (BCL)
2- the parties made a good faith, colorable attempt to comply with it and 3- the business is being run as a corporation If applicable, the business is treated as a corp for all purposes except in an action by the state |
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What is the status of de facto corporation in NY
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thought to be abolished BUT case law suggests it is alive in limited circumstances (dept fails to file without rejecting)
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What is corporation by estoppel?
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One dealing with a business as a corpiration, treating it as a corporation may be estopped from denying the business's corporate status BUT this is abolished in NY, proprietors are personally liable if no de jure corporation
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Can we have a corporation without bylaws?
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Yes, but almost every corporation has them
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If bylaws are inconsistent with the certificate which document controls?
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The certificate b/c it is a K with the state
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Are bylaws filed with the state?
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No
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Are outsiders bound by bylaws
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No
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Who adopts the initial bylaws?
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the incorporators at the organizational meeting. These have the status of a SH bylaw
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Who can amend or repeal the bylaws or adopt new ones?
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SH
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When does the BoD ever get to amend or repeal bylaws or adopt new ones
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Only if the certificate or SH bylaw allows
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What is a promoter?
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A person acting on behalf of a corp not yet formed
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Is the corporation labile on pre-incorporation contracts?
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Only if it adopts the K. NEVER automatically liable.
1- Express adoption: board action 2- Implied adoption: if the corp knowingly accepts a benefit of the contractor |
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Is the Promoter liable on pre-incorporation contracts?
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Yes, unless the K clearly indicates otherwise, until there is a novation (agreement among the promotor, corp, and other King party that the corp will replace the promoter under the K)
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Will P be liable if corp is never formed?
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Yes
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Will P be liable if corp is formed and adopts the K?
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Yes, P is liable until Novation
The adoption makes the corp liable too, but does not relieve P |
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What is the Secret Profit Rule?
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A promoter cannot make a secret profit on her dealings with the corp. If she does, she is liable and has to account for the profit, return it to the corp
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Is P liable for sale to corp of property acquired before becoming promoter?
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Profit equals price paid by the cor minus FMV, if FMV no profit, ok
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Is promotor liable for sale to corp or property acquired after becoming promoter?
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Profit equals price paid by corp minus price paid by promoter- Liable only if profit was SECRET
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What is a foreign corp?
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incorporated outside NY
Foreign corp doing business in NY must qualify |
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What does "doing business" mean?
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the regular course of intra-state business activity
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How can the corp qualify?
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by applying to the NY Dept of St and designating the Sec of St as agent for service of process. It also has to pay fees to NY for the privilege of doing business here
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In applying to qualify, what kind of information does the foreign corp give the NY Dept of St?
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1- Info in certificate of corp
2- Proof of good standing |
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What happens if a foreign corp does business in NY w/o qualifying?
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Cannot sue in NY until it qualifies and pays fees, taxes, penalties, and interest accrued
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When does issuance of stock occur?
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when a corp sells its own stock
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What is the difference between stock and bond?
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Issuance of stock is one way a corp can raise capital. investors buy sotck and become holders of an "equity security" - beocme owners of the corp. comes with rights
With a bond, the investor makes a loan to the corp, to be repaid 9usually with interest) as agreed in the K. The holder of a bond is a creditor 9not an owner) of the corp. She holds a "debt security." |
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What is "debenture"?
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A loan, the repayment of which is not secured by corporate assets, a bond, debt security
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What is a subscription?
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a written, signed offer to buy stock from the corp
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Are pre-incorporation subscriptions revocable?
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No, Irrevocable for 3 months UNLESS the subscription provides otherwise or all subscribers agree to let you revoke
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Are post-incorporation subscriptions revocable?
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Yes, until accepted by the corp (the board accepts the offer)
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Can the corp decide to sell only some subscribers and not others?
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No it must be uniform w/in each class or series of stock
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What must the corp receive when it issues stock?
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Consideration
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What are the 5 permitted forms of consideration for an issuance?
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1- Money: cash or it's equivalent (check)
2- Tangible or intangible property 3- Services already performed for the corp 4- Binding obligation to pay in the future in money or property (prommissary note is ok) 5- a binding obligation to perform future services having an agreed value |
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What are prohibited forms of consideration?
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Anything other than the 5 permitted forms of consideration
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What happens if somebody "pays" for an issuance with an improper form?
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It is unpaid stock, all treated as water
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What does "par" mean?
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minimum issuance price
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What does "No Par" mean?
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No minimum issuance price, can sell for any price
Bd sets price to sell par unless the certificate lets SH do it |
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What is treasury stock?
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Previously issued and has been required by the corp. The corp may then sell the treasury stock.
-No minimum, ALWAYS NO PAR - However, no fraud either |
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What are the consequences of issuing par stock for less than par value?
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The corp or creditors if the co is insolvent, can sue for the "water"
- directors are liable if they knowingly authorized the issuance -Buyer is liable, charged with notice of par value - TP is not liable if acts in good faith |
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What are Pre-emptive rights?
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The right of an existing SHer 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
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If the certificate is slient, does "new issuance" include sale of treasury stock?
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No
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If the certificate is silent, does "new issuance" include sale of shares authorized by the original certificate and sold w/in 2 years of formation?
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No, dates always matter
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If the certificate is silent regarding preemptive rights, do they exist?
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No, we have these only if the certificate says so
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Do pre-emptive rights apply to issuance for property?
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No, only for money! no services, etc
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How is the number of directors set?
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1- In the bylaws or
2- by shareholde act or 3- by the board if a SH bylaw allows |
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What if no number of directors is set in any such way?
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There is 1 director
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Incorporators elect initial directors. After that, who elects directors?
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SH at the annual meeting
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Do we have to elect all new directors every year?
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No the certificate or SH bylaw can establish number or classes of directors, with one class elected each year- called a classified board.
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Can HS remove a director for cause?
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Always
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Can the board remove a director for cause?
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Only if the certificate or SH bylaw allows
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Can anyone remove a director w/o cause?
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SH only and only if the certificate or bylaws allow
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When a director dies, resigns, or is removed, who selects the person who will serve the remainder of the term?
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The board
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Who elects the person who will serve the remainder of the term in the rare case when a director is removed by SH w/o cause?
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SH
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What are the only two ways in which the board can take a valid act?
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1- Unanimous, written consent OR
2- a meeting |
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if the directors purport to take an act in some other way, what is the effect of such an act?
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The act is void unless ratified by a valid act
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Must BoD meetings be held in NY
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NO, can be done by conference call, assuming everyone can hear all other participants
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Is notice required for regular meetings of the board?
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No, if the time and place are set in the bylaws or by the board
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Is notice required for special meetings of the board?
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Yes, it must state the time and place but it does not have to state the purpose
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What happens if required notice for a special meeting is not given to a director?
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Any action taken at the meeting is void unless the director not given notice waives the notice defect in writing and signed any time or by attending the meeting w/o objection
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Can a director give a proxy for director voting?
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No void as against public policy
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Can directors enter voting agreements on how they will vote as directors?
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No void as against public policy
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What is required for a meeting?
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Quorum. To do business, we must have a majority of the entire board (duly constituted board- that means the number of positions if no vacancies). Once we have a quorum, passing a resoolution (which is how the board takes an act at a meeting) requires majority vote of those present.
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What if a quorum is met, but one leaves, resulting in a non-quorum?
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The quorum has been broken and the board cannot now do anything
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What if there are empty seats on the board?
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Must have a majority of the entire board including empty positions
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Can the corporation decrease a quorum to less than a majority of directors?
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Yes, in the certificate or bylaws, but never to fewer than 1/3 of the entire board
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Can the corp decrease the requirement that passing a resolution requires a majority of the directors present?
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No
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Can the corporation increase a quorum to greater than a majority of directors?
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Yes, but in the certificate ONLY - NOT in the board delegate bylaws **
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What does the board of directors do?
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Generallly, BoD manages business of corporation. Sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corporation will issue stock, recommends fundamental corporate changes, etc
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Can a majority of the entire board delegate substantial mgt fxs to a committee of one or more directors?
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Yes, but the board cannot delegate all pwrs of responsibility to a committee
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What can a committee NOT do?
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1- Set director compensation
2- Fill a board vacancy 3- Submit a fundamental change to SHers 4- Amend bylaws But a committee can recommend these things for full board action |
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What is a particularly impt area in which committees are used
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SHer derivative suits
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What is the duty of care standard?
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A director must discharge her duties in good faith and with a degree of diligence, care and skill that an ordinary prudent person would exercise under similar circumstances in like position
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What happens in the case of nonfeasance?
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Director does nothing.
"A director must discharge her duties in good faith and with the degree fo diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in like position. AN ORDINARILY PRUDENT PERSN WOULD ATTEND SOME MEETINGS AND STAY ABREAST OF THE BUSINESS." But there is liability only if the breach caused a loss to the corporation |
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What happens in the case of misfeasance?
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Board does something that hurgs the corporation- this involves the business judgement rule (BJR)
A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily purdent person would exercise under similar circumstances in like position. However, not liable if under the BJR |
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What is the BJR?
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A court will not second-guess a business decision if it was made in good faith, was reasonably informed and had a rational basis. Prudent people do appropriate homework. A director is not a guantor of success.
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What is the duty of loyalty standard?
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A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.
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Why does the BJR not apply in duty of loyalty cases?
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Cannot apply when there is a conflict of interest. Act in good faith and with the contentiousness, fairness, morality and honesty that the law requires.
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What is an interested director transaction?
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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)
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What is the interested director standard?
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A director must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinarily purdent person woudl exercise under similar circumstances in like position.
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: a- SH action b- BD approval by a sufficient vote, not counting votes of interested directors c- Unanimous vote of disinterested directors iF disinterested directors are insufficient to take an act of the board |
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Do interested directors count toward a quorum of the board?
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Yes, and they can participate in the meeting
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What is the standard for director compensation?
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Must be reasonable and in good faith. If excessive it is waste of corporate assets
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If a corporation wants to give a director or officer or employee stock options as an incentive to service, what must we look at?
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If the stock is listed on the stock exchange, such use of options must be authorized under exchange policies.
If the stock is not listed on a stock exchange it must be approved by shareholders |
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What is the rule on competing ventures
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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.
A director cannot compete with the corporation. If a director does, the corporation gets a constructive trust on the director's profit. Director must account for her profits. |
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What is the directors duty in corporate opportunity?
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A director must discharge her duties in good faith, and with that degree of diligence, care and skil that an ordinarily prudent person would exercise under similar circumstances in like position.
A director cannot USURP a corporate opportunity. He must tell the board about the opportunity and wiat for the bord to reject. |
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What qualifies as a corporate opportunity?
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Something the corporation needs, has an interest or tangible expectancy in or that is logically related to its business
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Is it a defense if the corporation could not afford the opportunity?
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Probably not, he should help the company get financing
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If there is usurpation, what is the usual remedy
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Consturctive trust.
The director has to account for it. If he still has it, he must sell it to the corporation at his cost. If he sold it at a profit, the corporation gets the profit |
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Can the board lend a director corporate funds to guarantee a director's personal obligation?
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Only if the board finds taht it benefits the corporation
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What is the Searbanes-Oxley Act?
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Restricts loans to executives in registered (publically traded) corporations. It requires the board of such a large corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports
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For those or any other tings a director can be lieable for, exactly which directors are liable?
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a director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records
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How does a director get her dissent into writing
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1- in the minutes
2- in writing to the corp secretary at the meeting 3- registered letter to the secretary promptly after adjournment ORAL DISSENT ALONE IS NO GOOD - DIRECTOR CANNOT DISSENT IF VOTED FOR THE RESOLUTION AT THE MEETING |
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What are exceptions to the general rule of director liability?
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1- missed meeting and registered written dissent win a reasonable time of learning of the action
2- Good Faith reliance on information, opinions reports or statements by officerrs or employees of the corp whom the director or officer believes competent and reliable, lawyers or public accountants whom the director or officer believes are acting within their competence, ro a comittee of which teh person relying is not a member, as to matters w/in its designated authority |
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What duties do officers owe the corporation?
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the same duties of care and loyalty as the directors
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Can officers bind teh corporation to acts that they take in the corporation's behalf?
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Yes if they have authority to do so
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Can one person hold several offices simultaneously?
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Yes, no limit
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Who selects and removes the officers?
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the board unless the certificate allows SH to elect them
If SH elect, only SH can fire. Even then, for cause, directors can suspend an officer's authority to act - If board fires officer- may be liable for breach of K |
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Who hires and fires directors?
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SH
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Who hires and fires officers?
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Board
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Do SH fire and hire officers
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NO as a general rule
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Who sets compensation for officers?
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The board
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How can judicial action be used to remove an officer?
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The AG or holders of 10% of all shares may sue for a judgment removing an officer for cause. Court can bar reappointment of a person so removed from office
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If a person is sued in her capacity as officer or director by or onbehalf of the corporation, incurs costs attorneys' fees fines judgment or ssettlement and seeks reimbursement from the corporation, what happens?
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1- Prohibited if she was held liable to the corporation in a final judgment
2- The corporation must reimburse the director or officer if she won one a judgment on the merits or otherwise *If corp refuses and she sues corp to force reimbursement, seh cannot recover atty's fees of this suit against the corp 3- In any case not satisfying 1 or 2, the corp may reimburse the officer or director fi it is shown that she acted in good faith and for a purpose reasonably believed to be in the corp's best interst |
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What does reimbursement include?
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settlement amount, expenses and attorney's fees, not any judgment though
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For permissive recovery, who determines eligibility?
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1- The board (with a quorum of directors being non-parties); or if there is no such quorum
2- SH or a quorum of those directors who are disinterested or 3- The borad pursuant to report from the independent legal counsel |
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Can teh court in which the officer or director was sued order the corporation to reimburse her for litigation expenses and attorney's fees?
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Yes, if it finds that she reasonably entitled to it
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Can the corporation advance litigation expenses to the director or officer?
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Yes, but they must be repaid if it turns out she is not entitled to reimbursement
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Can the corporation buy insurance to cover director and officer liability?
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Yes
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Can the certificate or bylaws provide for indemnification by resolution of board or SH or by agreement?
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Yes, unless the director or officer acted in bad faith , was deliberate and dishonest in a way material to the case or wrongfully profited
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Anytime you see a director arguably breaching a duty, say this:
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The certificate may eliminate director liability to the corporaition or SH for damages for breach of duty EXCEPT when the director 1- acted in bad faith; 2- with intentional isconduct;3- received an improper financial benefit; or 4- approved an unlawful distribution or loan.
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Can SH manage the corporation?
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Generally, no bc the board is supposed to manage
EXCEPT in a close (closely held) corporation |
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What is a close corporation
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1- few SHers
2- Stock is not publically traded - you do not HAVE to have SH mgt. YOu can have a BoD |
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What do you need if you want to have SH mgt?
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A provision in the certificate restricting or transferring board pwr to SH
1 - All incorporators or SH (voting and nonvoting) approve it 2 - It is conspicuously noted on front and back of all shares 3- All subsequent SH have notice AND 4- Shares are not listed on an exchange or regularly quoted over-the-counter |
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In a close corp run by SH, who owes toe duties of care and loyalty?
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Managing SH to the corp
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What is the duty of close corp SH to each other?
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Fiduciaries, especially controlling SH cannot use their pwr for personal gain at the expense of minority SH or the corp or to oppress minority SH or the corp. They owe a duty of utmost good faith.
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Why might courts be increasingly willing to protect minority SH in a close corp
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to give a remedy when oppression defeats a SH reasonable expectation
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What is a Professional service corp?
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members of a licensed profession (doctors, lawyers) cannot practice the profession through a general business corp, but they can form a professional service corp
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Must SH in a PC be licensed professionals
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Yes, and so must officers and directors
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Are the professionals liable for their own malpractice in a PC?
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Yes, but not for that of others
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Are the professionals liable for Ks entered by the entity or for rent due on leases in the PC's name?
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No, the entities are liable
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What is the PC governed by?
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rules of the business corp.
Certificate must meet the general corp requirements except for the use of "PC" and must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officerrs. There must also be certification that each SH, director, and officer is licensed to practice by the profession |
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What happens if a SH in a PC dies or is disqualified from the practice?
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The PC must buy back his stock
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Are the SH liable for what the corp does?
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No, the corp is liable for what it does
But a SH might be personally liable for what the corp did if the court "pierces the corporate veil" (PCV) |
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PCV can only happen in what kind of corp?
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Close Cor[
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what do you need to PCV and hold SH personally liable?
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1- they must have abused the privilege of incorporation AND
2- Fairness must require holding them liable |
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Why might require PCV?
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If SH exercises complete domination over Corp and abuses the corp form to perpetrate fraud, wrong, and injustice
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Can a SH be another corporation?
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Yes, so if a parent corp forms a subsidiary to avoid its obigations, the court might PCV through the subsidiary and hold the parent laible
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Can a SH be liable for an alter ego?
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Generally, the corporation is liable for what it does but a SH might be personally liable for what the corp did if the court PCV. In NY no PCV if the corp has any mind, existence or will of its own.
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Can a SH be liable for undercapitalization?
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Generally, the corporation is liable for what it does, but a SH might be personally liable for what the corp did if the court pierces the corp veil. If the corporation was clearly undercapitalized when formed in NY, it is not enough for PCV. Excessive domination or fraud or illegality is also needed
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As a general rule, do we expect PCV more readily in tort or contract cases?
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Tort
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in NY ONLY, In close corporation, the ten largest SH are liable for what?
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Wages and benefits to the corps employees
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What is a SH derivative suit?
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SH as Plaintiff
In a derivative suit, a SH is suing to enforce the corp's claim, not her own personal claim. It's a case in which the corp is not pursuing it's own claim so a SH steps in to prosecute the claim. |
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What happens if hte SH wins the derivative suit?
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-Corp generally gets the judgment
-SH receives costs and atty's fees, usually from the judgement won for the corp -In small close corps, may let good guy SHers keep money directly to keep it out of bad guy's hands |
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What happens if S looses the derivative suit?
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-SH cannot recover costs and expenses
- S is probably liable to the D for their costs - Other SH cannot later sue the same d's on the same transaction |
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What are the requirements for bringing a SH derivative suit
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1- Stock ownership when claim arose: owned stock or held a voting trust certificate or gotten it by operation of law from someone who owned the stock when the claim arose (inheritance and divorce decree); in addition, she must own stock when the action is brought through entry of judgment
2- Adequately represent the interests of the corp and SHers 3- S can be required to post a bond for the D's costs. She does not have to though, if she owns 5% or more of the stock or her stock is worth more than $50K 4- S must make a demand on directors that the corp sue -Unless it would be futile: majority of the board is interested or under teh control of interested directors; or the board did not inform itself of the transaction to the exten treasonable under the circumstances; or the transaction is so egregious on its face that it could not be the result of sound business judgment 5- Special pleading requirement: P must plead with particularity her efforts to get the board to sue or why the demand was futile 6- The corp must be joined in the litigation as a defendant |
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If S makes the demand and the board refuses to have the corp sue can S now bring the derivative suit anyway?
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Only if she shows that a majority of the board is interested or its procedure was incomplete or inadequate
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If S brings a derivative suit, what can corp do?
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Move to dismiss. the motion is based on a finding by independent directors (or a committee of independent directors, sometimes called "special litigation committee" that the suit is not in the corp's best interests
Court looks at 1- the independence of those making the investigation 2- sufficiency of the investigation Parties can only dismiss or settle derivative suit with court approval |
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Can a director or officer bring a derivative suit?
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A Dir or Ofr can sue another Dir of Ofr to compel hr o account for breach of duties or misappropriation of assets
Does not have to meet the same requirements b/c she sues in her own name but the recovery goes to the corp |
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Who votes?
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General rule is that the record owner as of record date has the right to vote.
The record owner is the person shown as the owner in the corp records. The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting |
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What are exceptions to the general rule that the record owner on record date votes?
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1- Nobody votes treasury stock
2- Death of a SH: if SH dies after teh record date executor can vote 3- Proxies: a) writing, b) signed by record SH or authorized agent, c) directed to secretary of corp, d) authorizing another to vote the shares (email is a writing for this purpose) - Good for 11 months unless otherwise stated -can revoke previous proxy in writing or by attending the meeting and voting -Can revoke proxy even though it states that it is irrevocable -A proxy coupled w/ an interest is irrevocable |
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What are the requirements for a voting trust?
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1- Written trust agreement controlling how the shares will be voted
2-copy to corporation 3- Transfer legal title of shares to voting trustee; and 4- Original SH receive voting trust certificates and retain all SH rights except for voting - 10 year maximum under BCL, but w/in 6 months of expiration, can extend for another term of up to 10 years |
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What are the requirements for voting agreements (or pooling agreement)
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1- SH can enter into voting agreements
2- In writing and signed 3- Not specifically enforceable 4- It is irrevocable if it says so -NO voting agreements among Directors |
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What are the only two ways the SH can take a valid act?
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1- Written consent signed by the holders of all voting shares OR
2- a meeting |
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What are the requirements for annual and special SH meetings?
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1- do not need to be held in NY
2- Annual meeting: SH elect directors, the highest vote getter for each vote wins (plurality, not majority); the hightest vote-getter for each seat on the board wins, even if she did not get a majority of the votes; If the annual meeting is not held, the court can order one 3- Special meeting: can be called by board or anyone provided in the certificate or bylaws |
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What is the notice requirements for SH vote?
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Must give written notice to everySH entitled to vote, for every meeting between 10 and 60 days before meeting
1- must tell time and place 2- If action proposed at the meeting is something on which SH would have appraisal rights, the notice must say so and tell why (and even include the staute about appraisal rights) 3- Notice off a special meeting must state who called it and the purpose of the meeting. This is impt b/c you cannot do anything else 4- Special megive notice must be for a proper purpose 5- If the corp does not give notice to everyone entitled to vote, action taken at the meeting is VOID BUT action could be upheld if those not given notice wiave the notice: express in writing and signed anytime or Implied: attend meeting w/o objection |
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How do SHers vote?
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There must be a quorum represented at the meeting. 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.
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Can the certificate or bylaws reduce a voting quorum to less than a majority?
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Yes, but it can never be fewer than 1/3 of the shares entitled to vote
BUT we can never reduce the requirement of majority approval It is possible to require a supermajority of the votes entitled to vote to be represented to constitute a quorum, in the certificate ONLY, NOT bylaws - It is possible to require a supermajority vote of shares at the meeting to pass a resolution in Certificate ONLY not Bylaws |
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What does majority mean?
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Majority of the shares actually voting in favor or against the proposel
- Once a quorum is established at a SH meeting it is not lost if people leave the meeting (different from directors meetings) |
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How and when do SH use cumulative voting?
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Cumulative voting is only available when SH are voting to elect directors. It is a device to help small SH get representation on the board.
- Multiply number of shares times number of directors to be elected -Exists only if it is in the certificate - Percentage of shares required to elect one director if cumulative voting is in place: You need one share more than 100/X plus 1; X= the number of directors being elected |
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Where are restrictions on transferrability set?
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Certificate bylaws or by agreement
- Will be upheld if they are not an undue restraint on alienation - a right of first refusal is acceptable so long as the price offered is reasonable - Cant have an undue restriction on transfer (approval to sell) -Can have a restriction requiring a sale of one's stock to the corp when the SH dies or retires from working for the company |
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What do we need to know about action against the transferee of stock?
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Knowledge and notice
Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either 1- it is conspicuously noted on the stock certificate OR 2- the transferee had actual knowledge ofthe restriction |
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Regarding (1) minutes of SH proceedings and (2) the record of SH, who can demand access to these?
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Any SH on 5 days written demand
- The corp can demand that the SH give an affidavit that his purpose is not other than in the interest of the corp and he has not w/in 5 years tried to sell any list of SH - Corp can never demand more detail in the affidavit - If the SH refuses to furnish such an affidavit after the corp demands it the corp can deny access |
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Regarding the list of the current directors and officers, any SH can demand it on how many days written notice?
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2
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Regarding (1) the corporation's latest annual balance sheet, (2) profit and loss statement and (3) latest interim statements distributed SH or public what is requird?
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Any SH can make a written request and the corp must provide the documents, can do so by mail
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What is the CL right to inspect?
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For all SH to inspect records at a reasonable time and proper place for proper purpose (related to her role as a SH). Unclear how broad "proper purpose" goes
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Can the director inspect corporate books and records?
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Yes, unfettered access
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What are distributions?
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payments by the corp to SH- can be
- dividend or -payment to repurchase shares or 3- to redeem shares (forced sale to corporation at price set in certificate Distributions are declared in theh Board's discretion. There is no SH right to a distribution until it is declared. Once it's declared the SH affected have a right to it. A court will interfere with the Board's discretion and order a distribution only on a showing of bad faith or dishonest purpose |
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Which SH get dividends?
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-Preferred means pay first
-Participating means pay again -Cumulative means add them up- for the years in which no dividend was paid, the cumulative holders' dividend is adding up |
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Which funds may be used for any distribution?
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1- Surplus- assets = Liabilities - stated capital; Can be used for distributions
2- Stated capital- Never used for distributions |
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What if a corp is insolvent?
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Corp is unable to pay its debts as they come due in the ordinary course of business
Corp can make distributions even though it lost money, corp cannot make distributions if it is insolvent or if the diestribution would render it insolvent |
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Are directors personally liable for unlawful distributions?
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Yes, so are SH who knew the distribution was unlawful when they received it. This is a corp's claim, could be a derivative suit.
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What are redemptions?
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Set in certificate and must be done proportionately w/in each cass of stock. Repurchases are individually negotiated. The corp can discriminate in repurchases, except it might have to give equal opportunity to all sSH i the close corp
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What counts as a fundamental corporate change
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Require both that the directors approve and that the SHapprove. The corp must notify the Dept of State by delivering a document which the Dept files
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What is the dissenting SH right of appraisal?
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The right to force the corp to buy your stock at fair value.
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What actions by the corp trigger the SH right of appraisal?
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1- Some amendments to the certificate
2- consolidation 3- Your corporation merges into another corp 4- Your corp transfers substantially all of its assets or 5- your corp's shares are acquired in a share exchange BUT even if the corp is doing one of these things, there is no right of appraisal if the corp is listed on teh nat'l securities exchange or NASDAQ. If there is a public market for the stock, you do not need the right of appraisal. This exists in close corp. |
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What actions are taken by the SH to perfect the right
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1- Before the SH vote, file written objection and your intent to demand payment
2- abstain on vote against the proposed change AND 3- Make a written demand to be bought out |
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If the SH and the corp cannot agree on fair value what happens?
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The corp sues and the court determines value
In setting the value of the stock, the court cannot discount the value to reflect that minority shares may be worth less than controlling shares, b/c they carry no control over corporate affairs |
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What is a minor amendment to the certification of incorporation?
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Minor changes such as those relating to office location, registered agent, can be made by board alone
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Other amendments to the certification are approved how?
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1- Director action and
2- Majority of the shares entitled to vote -the directors approve the amendment and recommend it to the SH |
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If the amendment will change or strike a supermajority quorum or voting requirement for SH (not director) voting, you need director approval plus what SH vote?
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2/3 of shares entitled to vote, only to change quorum
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If an amendment is approved, what needs to be doen?
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delvier certificate of amendment to Dept of State for its filing
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Are there dissenting SH rights of appraisal?
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Yes, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights
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How does a Merger or Consolidation form?
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1- Each company's Bod Adopts a plan of merger and
2- SH approval from each corp -NO SH a pproval is required if parent corp owns 90% or more of each class of stock of a subsidiary that is merged into a parent corp- called a short form merger 3- Deliver cert of merger or consolidation to Dept of St for filing 4- Dissenting SH have a right of appraisal for the SH of a corp that disappeared but not for SH of the survivor - dissenting SH of the subsidiary in a short-form merger have the right of appraisal even though they didn't vote |
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What is the effect of merger or consolidation?
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The surviving co succeeds to all rights and liabilities of the disappearing co, called successor liability
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What happens in a transfer (not just mortgage) of all or substantially all of the assets not in the ordinary course of business or share exchange
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One company acquires all the outstanding shares of one or more classes of another corp.
These fundamental corporate changes for the selling corporation only, not for the buying corporation |
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How does transfer of all or substantially all of the assets happen?
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1- Each corp's bod authories the deal AND
2- Approval by selling corp's SH - Number of shares: majority entitled to vote - Other do not vote, not a fundamental change for the buyer 3- dissenting SH rights of appraisal fo rsH of the selling co 5- In the share exchange delver plan of exchange to the Dept of St for filing. In the transfer of assets, no filing is required |
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What is the general rule for transfer of all or substantially all the asssets not in the ordinary course of business or share exchange?
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The co acquiring assets will not be liable for the torts of the co whose assets it acquired UNLESS 1- the deal provides otherwise or 2- the purchasing co is mere continuation of the seller, or 3- the deal was entered fradulently to escape such obligations. This is different from a merger because we do not expect successor liability her eb/c the selling co assets still exist.
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What happens in a voluntary dissolution?
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No board vote necessary, majority of the shares entitled to vote. Then the certificate of dissolution delivered to the dept of St for its filing
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What happens in an involuntary dissolution?
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judicial- someone is asking for a court order of dissolution
1- By Board resolution or resolution of majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders 2- One half or more of shares entitled to vote may petition if directors roo divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dossioution beneficial shareholders 3- Any SH entitled to vote may petition if SH unable to elect directors for two annual meetings 4- 20% or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds a- Mgt's illegal oppressive or fradulent acts towards the complaining SH b- Mgt's wasting, diverting or looting assets * Mgt here is Bd or Managing SHers |
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May a court deny dissolution
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Yes if there is some other way the complaining SH can obtain a fair return on his investment (ordering a buy out). Court will consider whether liquidation is necessary to protect the petitioners and is the only way for them to get a fair return on their investment
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how may the corp or non-complaining SH try to avoid dissolution?
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w/i 90 days of the petition, buy th epetitioner's stock at FMV on terms approved by court
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What are the steps to winding up?
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Dissolution does not end the corporation's existence, it stays in existence until winding up, liquidationg
1- gather all assets 2- convert to cash 3- pay creditors (they had been given notice earlier) and 4-distribute remainder to SH , pro-rata by share unless there is a dissolution preference (pay first Creditors must be paid first!!! |
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What is the traditional rule on Controlling SH?
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Outside the close corp, SH generally do not owe fiduciary duties to each other or to the corp. They can act in their own self-interest
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What are the responsiblities of a controlling SH?
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1- owes a fiduciary duty to minority SH and someimes to others.
2- Sale of CSH interest- may be able to sell at a premium b/c of control, generally can keep the money, but courts may impose liability if something else happened to a- CSH sold to looters w/o reasonable investigation- disgorge the seller's profit and SH is probably liable for damages to the corp b- CSH de facto sells a corp asset, f she does all SH should share in the premium pd by the buyer. Somebody bought controlling interest not to run corp, but to get assets c- CSH sells a position on the board |
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What is a freeze out?
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All mergers must have a legitimate corp purpose, even though approved by the requisite numbers of shares. FO merger aimed solely at cashing out minority SH unfairly. Usually, majority SH cause their corp to merge with another corp which they own. The minority SH shares are purchased for cash, so they have no interest in either corp. Courts may be increasingly portective of the minority.
Factors: 1- Whether the deal is tainted by self dealing or fraud 2- Whether the minority SH are dealt with fairly 3- Whether there is a legitimate business reason for the merger |
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What is the consequence of market trading on inside info?
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In NY, the director or officer has breached a duty to the corp by doing this, so the corp can sue to recover her profit
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What is nondisclosure of special facts/circumstances?
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All directors and officers and CSH owe a duty not to trade on special facts in a securities transaction with a non-insider. So they cannot trade on secrets, they must abstain or ensure disclosure so others are on the same footing. This is CL insider trading
1- special facts are those a reasonable investor would consider impt in making an investment decision 2- A SH with whom the driector or officer deals and violates the special facts doctrine can sue 3- Measure of damage is the difference between price paid and value of stock a reasonable time after public disclosure, direct suit by SH against director/officer, not debtor |
