Ny Bar Exam Corporations 2007

Front 1

Who can be an incorporator?
What does an Incorporator do?
How many do you need?

Back 1

Who: In NY, ONLY adults over 18 can be incorporators (NOT entities!)
What: An incorporator:
(1) Executes the certificate and delivers it to the NY Dept of State; AND
(2) Holds the Organization meeting.

How many: Need one or more incorporators.

Hint 1

None

Front 2

What is the purpose of the certificate of incorporation?

Back 2

The Certificate of Corporation is:
(1) a K between the corporation & SH; and,
(2) a K between corporation & NY State.

Hint 2

None

Front 3

What 4 things go in the certificate of incorporation?

Back 3

(1) Names & Addresses;
(2) Statement of duration (don't have to have one and if NOT then assumed perpetual);
(3) Corporate Statement of Purpose (required statement);
(4) Capital structure (stock)

Hint 3

None

Front 4

What falls under Names & Addresses in the Certificate of Incorporation? 4 things (potential 5th)

Back 4

MUST have 1 of these words in Name: Corporation, Incorporated, or Limited;
County in NY of the office or corporation (it does not have to be the place you do business out of);
Must designate the NY Sec. of State as corporation's agent for service of process;
Name and address of each incorporator

Hint 4

None

Front 5

In its statement of purpose, what if certificate indicates that purpose is to sell biscuits & Corp later sells t-shirts as well?

Back 5

Selling T-shirts is ultra vires act (beyond scope of certificate) and at CL could be voided.
In NY:
(1) ultra vires Ks are NOW valid;
(2) SH can seek an injunction to stop it;
(3) Responsible Officer & Dir are liable to the Corp for ultra vires losses.

Hint 5

None

Front 6

Define Authorized stock.

Back 6

Maximum number of shares the corporation can sell.

Front 7

Define Issued stock.

Back 7

Number of shares the corporation actually sells.

Front 8

Define Outstanding stock.

Back 8

Shares that have been issued and not re-acquired by the company.

Front 9

What four things must be included under the Capital Structure (stock) in the certificate of Incorporation?

Back 9

(1) Authorized Stock;
(2) # of shares per class;
(3) Info on par value, Rights, preferences and limitations of each class;
(4) Info on any series of preferred shares (if you subdivide a class into subparts = series) (rarely on bar)

Hint 9

None

Front 10

What are 2 types of classes that you must have in the Capital Structure?

Back 10

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.

Front 11

Who signs the certificate of incorporation, how do they sign it, and what do they do with it? What happens after that?

Back 11

Each incorporator signs and acknowledges the certificate it before a notary and then they deliver it to the NY Dept. of State.
If it conforms to law and filing fees are paid, the Dept. of State files the certificate.

Hint 11

None

Front 12

What is the filing of the Certificate of Incorp. evidence of?

Back 12

Filing the Certificate of Incorporation is conclusive evidence of the valid formation. At that moment you there is a de jure Corporation in the eyes of the law.

Front 13

What do the incorporators do at the first organization meeting they hold?

Back 13

(1) Adopt any by-laws; AND
(2) Elect the initial Board of Directors (then the BoD takes over management).

Note that Directors are NOT named in the Certificate of Incorporation.

Hint 13

None

Front 14

What is the legal significance of a corporation being formed w/in NY? What powers does that corporation have?

Back 14

Internal affairs (duties, relationship among directors, officers, shareholders, etc.) of a NY Corp. are governed by NY law.

A corporation is a separate legal entity and has broad powers by statute including the power to enter contracts, transfer property, buy and sell securities, and to sure or be sued.

Hint 14

None

Front 15

Can a corporation make political contributions? How about charitable contributions?

Back 15

Yes, but no more than $5,000 per year per candidate OR per political organization.
A corporation can make unlimited charitable contributions (within fiduciary duties).

Hint 15

None

Front 16

Can a Corp guarantee a loan that is NOT in furtherance of corporate business?

Back 16

Yes, if it is approved by 2/3 of the shares entitled to vote

Front 17

What is limited liability?

Back 17

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.

Front 18

Who enjoys limited liability? Who is liable for corporate debts and obligations?

Back 18

(1) Shareholders, directors, & officers have limited liability.
(2) As a legal entity, the Corporation is liable for corporate debts and obligations.

Hint 18

None

Front 19

By what doctrines/theories can a business failing to achieve de jure corporate status nonetheless be treated as a corporation? (So SHs will not be personally liable for business debts.)

Back 19

(1) De Facto Corpoation AND
(2) Corporation by Estoppel

Hint 19

None

Front 20

What are the 3 factors of the De Facto Corporation Doctrine?

Back 20

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, de factor Corp. is treated as corporation for all purposes except in an action by the state, so it is as good as being de jure (except in an action by the state).

Hint 20

None

Front 21

What is the status of the De Facto Corp Doctrine in NY?

Back 21

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.

Front 22

What is corporation by estoppel?

Back 22

Corporation by estoppel is a theory that one dealing with a business as a corporation and treating it as a corporation, may be estopped from denying the business' corporate status. So such a person, under this theory, cannot sue the individual proprietors.

BUT IT IS ABOLISHED IN NY.

Hint 22

None

Front 23

Why do Corps have by-laws? Are they required to have them? What can they do?

Back 23

By laws can: establish internal procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.

A de jure corporation can exist without bylaws and the adoption of bylaws is not a condition precedent to formation of a Corp. But almost every corporation has them.

Hint 23

None

Front 24

Are bylaws filed with the state?

Back 24

By-laws are NOT filed w/ the state

Front 25

If bylaws are inconsistent with the certificate, which document controls?

Back 25

The Certificate of Incorporation controls if there is a conflict bewteen the By-laws & certificated because the certificate is a K.

Front 26

Who adopts the initial bylaws?

Back 26

Incorporators initially adopt by-laws at the 1st organizational meeting. (Initial ones have status of SH by-laws).

Front 27

Who can amend or repeal the bylaws or adopt new ones?

Back 27

Shareholders can adopt new by-laws, amend or repeal by-laws.

Front 28

When does the BoD ever get to amend or repeal bylaws or adopt new ones?

Back 28

Board of Directors gets to amend/repeal/adopt new by-laws ONLY if the certificate of incorporation or a SH by-law allows. (SHs can amend or repeal any director-adopted bylaw).

Front 29

What is a promoter?

Back 29

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.

Front 30

When is a Corporation liable for pre-incorporation Ks?

Back 30

A corporation is not liable on preincorporation contracts UNLESS it adopts the contract.

Front 31

What are the 2 ways for a Corporation to adopt a pre-incorporation K?

Back 31

(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)

Hint 31

None

Front 32

When is a promoter liable for pre-incorporation Ks?

Back 32

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 of the K.

Front 33

What is a novation?

Back 33

A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace (take over) the promoter under the contract.

Front 34

What is the Secret Profit Rule regarding to promoters?

Back 34

Promoter cannot make a secret profit on her dealings with the corporation. Promoters can make a p0rofit, but it cannot be secret. (She would have to cough it up if she had).

Front 35

What are the 2 Fact Patterns/equations to determine if Promoter made a Profit?

Back 35

(1) Sale to corporation of property acquired before becoming a promoter. [Profit equals the price paid by a corporation minus fair market value] What the promoter PAID is IRRELEVANT

(2) Property acquired after becoming a promoter... profit = price paid by Corp MINUS price paid BY PROMOTER

Hint 35

None

Front 36

What is the rule for foreign corporations?

Back 36

Foreign corporations doing business in NY must qualify.

Front 37

What qualifies as a foreign corporation? What about NJ? What is the rule regarding foreign corporations?

Back 37

A Foreign Corporation is a corporations incorporated outside of NY. A NY Corp is a domestic corporation. Rule: Foreign corporations doing business in NY must qualify to do business in NY.

Front 38

What counts as "doing business" in NY? what is it NOT?

Back 38

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.

Front 39

How can a foreign corporation qualify in NY? What information must it provide to the NY Dept. of State?

Back 39

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 and paying fees every year.

**The foreign corporation must give the DoS:
(1) Information From its certificate; and
(2) Proof of good standing in its home state

Hint 39

None

Front 40

What happens if a foreign corporation does business in N.Y. without qualifying? 2 Consequences

Back 40

(1) Penalty when the Corp does qualify (LIABILITY);
(2) Until it qualifies it CANNOT sue in NY BUT it can BE SUED

Hint 40

None

Front 41

WHAT IS ISSUANCE OF STOCK?

Back 41

Issuance of stock is when a Corporation sells or trades its own stock.

Front 42

What is the significance of an issuance of stock for the Corporation and for the purchaser of the stock?

Back 42

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.

Front 43

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)?

Back 43

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.

Front 44

What is a debenture?

Back 44

A debenture is a loan the repayment which is not secured by Corporate assets.

Front 45

What is a subscription?

Back 45

A subscription is a written (never just oral), signed offer to buy stock from the corporation.

Front 46

***Can a subscription be revoked? If so, why?

Back 46

***A subscription is a pre-incorporation prescription. IT IS IRREVOCABLE FOR 3 MONTHS unless it says otherwise OR all subscribers agree. The Rule exists so that people forming the Corporation can rely on the capital being there.

Front 47

Are post-incorporation subscriptions revocable?

Back 47

Yes, they can be revoked until acceptance.

Front 48

When do the corporation and the subscribers become obligated under a subscription?

Back 48

Corporations and subscribers become obligated when BoD ACCEPTS the offer. At that point there is an agreement to sell to the subscriber (there is a deal and cannot walk out).

Front 49

Can the corporation decide to sell only to some subscribers and not others?

Back 49

The corporation must be uniform within each class or series of stock. All common SHs must be treated the same as each other, as must the preferred SHs.

Front 50

If the corporation accepts the offer and the subscriber defaults on payment, what happens? What happens to the shares?

Back 50

(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).

Hint 50

None

Front 51

What happens if no one will pay the remaining balance?

Back 51

Defaulting subscriber forfeits what he has paid and the shares are canceled.

Front 52

What happens if someone will pay more than the remaining balance due?

Back 52

If someone will pay, defaulting subscriber recovers the excess over what he agreed to pay BUT deduct from that Corporation's expenses in selling

Front 53

What must the Corp receive when it issues stock?

Back 53

Consideration

Front 54

What are the five permitted forms of consideration for an issuance?

Back 54

A Corporation must receive consideration for its stock. Consideration can be:
(1) money (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 or property;
(5) A binding obligation to perform future services having an agreed value

Hint 54

None

Front 55

***Can the Corp issue stock to somebody for performing services in forming the Corp?

Back 55

Yes, by statute, it meets 3rd option listed (considered labor or services performed for Corp)

Front 56

What happens if somebody "pays" for an issuance with an improper form?

Back 56

If someone pays for an issuance with an improper form that it is unpaid stock and treated as water.

Front 57

What is "par" value?

Back 57

Par means the "minimum issuance price."

Front 58

Who sets the price at which to sell no par stock?

Back 58

The Board of Director's determines the price at which to sell no par stock unless the certificate allows shareholders to do so (if silent, BoD sets)

Front 59

What is treasury stock? What par does it have?

Back 59

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.

Front 60

How does the BoD value the consideration? Can shareholders set the value?

Back 60

The board always values the consideration in a par issuance. In no-par, the board [sets the value] values the consideration unless certificate allows shareholders to do so.

Front 61

What is "watered stock"? What are the consequences of issuing watered stock? Who is liable?

Back 61

Par stock issued for less than par value is known as watered stock. The Corporation (or creditors of the corporation) can sue for the missing value/worth of the stock. The directors may be liable for the water if they knowingly authorized the issue of the watered stock. NExt card for purchaser liability.

Front 62

Is the purchaser of the watered stock liable? What if the purchaser buys the watered stock and transfers it to a 3rd-party?

Back 62

Yes, the purchaser of stock for less than par value is "charged with notice" (must see the existence) of the water. He is charged with notice of the par value. If he transfers the stock to a 3rd party the 3rd party is not liable if he acted in "good faith." Good faith means he did not know about the water. Also the 3rd party does not have to pay value for the stock or be a BFP, he can be a donee.

Hint 62

None

Front 63

***What is a Preemptive RT?

Back 63

Preemptive Right is a right 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).

Front 64

***Does "new issuance" include sale of treasury stock (when discussing preemptive RTs)?

Back 64

If certificate is silent, it does NOT include treasury stock (not a new issuance & so RT does not attach)

Front 65

***Does "new issuance" include sale of shares authorized by the original certificate and sold within two years of formation?

Back 65

No!!!!!

Front 66

If certificate of incorporation is silent regarding PREEMPTIVE RIGHTS, do they exist?

Back 66

Answer depends upon the date the Corporation was formed:
(1) Before Feb 22, 1998, there ARE preemptive Rights;
(2) After 2/22/98, preemptive rights exist only if the certificate specifies

Hint 66

None

Front 67

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?

Back 67

NO. Because this is not an issuance for money. Preemptive eights ONLY EXIST if there is an issuance FOR MONEY (here it is for property)

Front 68

How many directors must there be in the Corporation?

Back 68

One or more adult natural persons.

Front 69

How is the number of directors set for the corporation? (3 Alternatives)

Back 69

NUmber of Directors is set by:
(1) In By-laws OR
(2) By S action OR
(3) By BoD if a shareholder adopted by-law allows

Hint 69

None

Front 70

What if the number of Directors is NOT set?

Back 70

Then there is only 1 director.

Front 71

Who elects the initial directors and when? After that who elects directors and when?

Back 71

The Incorporators elect the initial directors at the orgnizational meeting. After that Shareholders elect directors at the annual meeting.

Front 72

Do shareholders have to elect all new directors every year?

Back 72

No, there can be a "classified board," (staggered) with 2, 3, or 4 classes of directors, with one class elected each year.

Front 73

How many directors must be in a class?

Back 73

At least 3 Directors MUST be in each class

Front 74

Can shareholders remove a director before her term expires FOR CAUSE?

Back 74

SHAREHOLDERS can ALWAYS remove a director at ANYTIME for cause.

Front 75

Can the BoD remove a director FOR CAUSE before her term expires? (i.e., Fire one of their own?)

Back 75

BoD can remove a director FOR CAUSE IF and ONLY IF certificate or by-laws allow for it. If the certificate and by-laws are silent, only the shareholders can remove the director FOR CAUSE.

Front 76

Can anyone remove a director WITHOUT CAUSE?

Back 76

In NY, onlu SHs can remove a director WITHOUT CAUSE and even then ONLY IF certificate or by-laws allow it. If the certificate is silent then SHs cannot remove the director WITHOUT CAUSE.

Front 77

Can a director be removed if cumulative voting is in effect and the number of votes cast against removal would have elected her?

Back 77

NO.

Front 78

General rule: Who selects the person who will serve the remainder of the term after a Director dies or resigns or is removed?

Back 78

The Remaining directors select/appoint the person

Front 79

Special rule: who selects the person who will serve the remainder of the term when a director is removed by shareholders WITHOUT CAUSE?

Back 79

Shareholders only

Front 80

What are the only two ways in which the BoD can take a valid act?

Back 80

(1) Unanimous written consent to act without a meeting
OR
(2) A Meeting

Hint 80

None

Front 81

What happens is an act is not done in one of the two valid ways?

Back 81

If neither is met, the "act" taken is void unless later ratified by a valid act.

Front 82

Where must a meeting be held? Is a meeting by conference call --where official acts are taken -- valid?

Back 82

(1) A meeting can be held ANYWHERE in the world.
(2) Unless forbidden by the certificate or the by laws, a meeting by conference call is VALID if the directors can hear all the participating directors simultaneously.

Hint 82

None

Front 83

Is notice required for regular meetings? Is notice required for special meetings?

Back 83

(1) Usually the time and place are specified in the by-laws so no notice is required.
(2) Notice is required for special meetings as required by the by-laws, it is notin BCL. (Notice could be two minutes before meeting, by conference call, no minimum requirements, etc.)

Hint 83

None

Front 84

What if notice is not given to a director?

Back 84

If no notice is given to a director, then any action taken at that meeting is void unless Director waives the notice defect.

Front 85

How can a Director waive lack of notice? 2 Alternatives

Back 85

(1) In writing and signed at anytime;
OR
(2) By attending the meeting without objection

Hint 85

None

Front 86

Can a director give a proxy for director voting?

Back 86

NO. This is void because it is against public policy. SHs can give proxies and and it is likely the director owns share, BUT his director votes cannot be by proxy.

Front 87

Can directors enter voting agreements on how they will vote as directors?

Back 87

NO. Void for public policy reasons.

Front 88

***How many directors have to be present to do business at a mtg? How many in order to pass a resolution?

Back 88

Quorum for a Meeting.

To do business, there must be a majority of "entire board" (meaning the duly constituted board without vacancies).

Once there is a quorum, to pass a resolution requires only a majority vote of those present.

Hint 88

None

Front 89

How does the board take an act at a meeting?

Back 89

By passing a resolution.

Front 90

***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?

Back 90

(1) Need at least 5;
(2) Not a majority of the positions actually filled
(3) Need a majority of the entire BoD

Hint 90

None

Front 91

***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?

Back 91

NO. The Board of Directors cannot do business because the quorum has been broken.

Front 92

***Can the corporation decrease a quorum to less than a majority of directors?

Back 92

Yes, by the certificate OR the by-laws BUT it can never be fewer than 1/3 of the Directors.

Front 93

***Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?

Back 93

NO! The voting requirement can NEVER be decreased

Front 94

***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)?

Back 94

Yes, they can increase a quorum to greater than a majority of directors BUT ONLY in the certificate AND NOT the by-laws.

Front 95

***Can the corporation require a supermajority vote to pass a resolution (e.g., two-thirds of the directors present must approve the resolution)?

Back 95

Yes they can BUT ONLY in the certificate AND NOT the by-laws

Front 96

What does the BoD do?

Back 96

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.

Front 97

Can a BoD delegate its powers? If so, to who? & is there any limitation?

Back 97

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.

Front 98

***What can a committee NOT do? 4 Things

Back 98

***A Committee CANNOT:
(1) Amend, repeal or adopt by-laws;
(2) Submit a fundamental change to Shareholders
(3) Fill a Board vacancy
(4) Set Director compensation.

Note: it is common for a committee to make recommendations for full board action on these issues.

Hint 98

None

Front 99

What is a particularly important area in which committees are used?

Back 99

Shareholder derivative suits

Front 100

***What is the standard (Duty) of care required for a Director? MUST BE IN YOUR ANSWER!

Back 100

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. (Focus on what an ordinarily prudent person would do.)

Front 101

What is nonfeasance? What is misfeasance?

Back 101

Nonfeasance is when the director does nothing.

Misfeasance is when the Board does something that hurts the Corporation. Misfeasance involves the business judgment rule (BJR).

Hint 101

None

Front 102

A director may breach the standard of care BUT he is liable only if:

Back 102

ONLY IF his breach caused a loss to the Corporation!! Very tough to show causation (that is the breach caused the loss of money).

Front 103

What are the 2 ways to raise the issue of a director breaching the standard of care?

Back 103

(1) Nonfeasance OR
(2) Misfeasance

Hint 103

None

Front 104

What is the business judgment rule (BJR)?

Back 104

Business Judgment Rule: A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis. To fail the BJR, you need irrational or grossly negligent action.

Front 105

How do you evaluate whether a BoD committed misfeasance? (Phrase to help you remember!)

Back 105

Prudent People Do Appropriate Homework.
(1) Look to see if they deliberated, if they analyzed, if they did what a prudent person would do, if so, then not liable
(2) If they did NOT investigate at all prior to investment then they may be liable
(3) You do nott have to be perfect or right, you just have to be prudent!!!

Hint 105

None

Front 106

***What is the Duty of Loyalty Standard?

Back 106

A director MUST act IN good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.

Front 107

Why does the BJR not apply in duty of loyalty cases?

Back 107

Because the duty of loyalty is about a conflicts of interest.

Front 108

What do we call a 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)?

Back 108

An Interested Director Transaction.

Front 109

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

Back 109

State Duty of Loyalty then
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 OR
(b) BoD approval by sufficient vote NOT counting the votes of interested directors OR
(c) Unanimous vote of disinterested directors if disinterested directors are insufficient to constitute an act of the BoD

Hint 109

None

Front 110

Do interested directors count toward a quorum of the board?

Back 110

Yes, & interested director(s) can even participate in the discussion but their vote does NOT count.

Front 111

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?

Back 111

The majority of the Board is interested, so need all 4 disinterested directors to vote for the deal.

Front 112

Who sets compensation of directors? What is it called if it is excessive?

Back 112

Board can set compensation of directors in any capacity, unless certificate or bylaw says they can not. Compensation must be reasonable and in good faith. If excessive, it is Waste of Corporate Assets and a Breach of the Duty of Loyalty.

Front 113

Can a Corporation give directors and officers stock options?

Back 113

YES. A Corporation can give a director or officer stock options as an incentive to service.

Front 114

What if the stock offered as an incentive is listed on a stock exchange? What if the stock offered as an incentive is not listed on a stock exchange?

Back 114

(1) If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies.

(2) If not listed on a stock exchange, then the use of options must be approved by a Shareholder vote.

Hint 114

None

Front 115

What if a director wants to start a Corp. that competes with the corporation on which she is on the BoD? What is the consequence if she does go into competition with her current Corporation?

Back 115

It is a violation of the duty of loyalty. A Director cannot go into competition with her corporation. If she does go into competition with her corporation, her original corporation is awarded a constructive trust on her profits and may be eligible for damages.

Front 116

What happens if a Director finds out about an opportunity that would be good for the Corp but takes it for himself [personally] instead?

Back 116

It is a violation of the duty of loyalty. A Director cannot USURP a corporate opportunity. A director cannot take the opportunity until:
(1) he tells BoD about the opportunity AND
(2) the BoD rejects the opportunity.

Hint 116

None

Front 117

What qualifies as a corporate opportunity?

Back 117

Something the Corporation needs or has an interest in or a tangible expectancy in OR that is logically related to its business.

Front 118

***If there is usurpation, what is the usual remedy?

Back 118

If there is usurpation, the usual remedy is a constructive trust. So if the 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.

Front 119

What are 4 state law basis for Director Liability?

Back 119

(1) Ultra vires acts
(2) Watered stock
(3) Improper loans
(4) Improper distributions

Hint 119

None

Front 120

Can the BoD vote to lend a director $100,000 of corporate funds?

Back 120

The loan depends on when the Corporation was formed.
(1) For corporations formed on or before February 22, 1998 (2/22/98): Shareholder vote is required (in which a quorum is a majority of disinterested shares), unless the Certificate allows BoD to decide that a loan benefits the Corp.

(2) After Feb 22, 1998 all that is required is the BoD's conclusion that the loan benefits the Corporation. SH approval is NOT required!

Hint 120

None

Front 121

*** Exactly which directors are liable for improper distributions or loans?

Back 121

General rule: a director is presumed to have concurred with BoD action unless her dissent is noted in writing in corporate records.

Front 122

How does the director note their dissent in writing in the Corporation's records? What 3 ways? Is oral dissent acceptable?

Back 122

(1) In the Minutes OR
(2) In writing to Corp secretary at the mtg OR
(3) Registered letter to Corp promptly after adjournment.

**Oral dissent is NOT effective when it comes to liability.

Hint 122

None

Front 123

What happens if Director votes for a resolution and then wants to dissent?

Back 123

A director cannot dissent if he voted for the resolution at the meeting. Harsh rule!

Front 124

What are the two exceptions to the general rule of holding Directors liable for BoD action?

Back 124

(1) Director missed a meeting (e.g. he was sick). He is not liable if he registers written dissent within a reasonable time of learning of the action. (He does this by delivering a registered letter to the corporate secretary and ensuring that dissent is filed with the minutes for the meeting);
***(2) Good Faith reliance on any of the information, opinions, reports, or statements by:
(a) Officers or employees of the Corp. who director believes competent and reliable;
(b) Lawyers or public accountants whom the Director or officer believes are acting within their competence; or
(c) A Committee of which the person relying is not a member, as to matter within its designated authority. (This exception (a-c) is especially likely in a case involving improper distributions.)

Hint 124

None

Front 125

What duties to officers owe to the coproation?

Back 125

Corporate officers owe the same duty of care and loyalty as Directors.
(1) Duty of Care Standard: “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 or face liability.”
(2) 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 or face liability."

Hint 125

None

Front 126

What legal status do officers of the corporation have?

Back 126

Officers are agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so.

Front 127

Can one person hold multiple officer positions simultaneously?

Back 127

Yes, can occupy more than one position at one time

Front 128

Who selects and removes the officers?

Back 128

BoD selects and removes officers, unless the certificate allows SHs to do so. If the certificate is silent then it falls to the BoD. BUT if the SHs elect them, only the SHs can fire them. Even then, directors can suspend an officer's authority to act for cause.

Front 129

Who hires and fires directors? Who hires and fires officers? Who sets compensation for officers?

Back 129

(1) As a general rule, SHs hire and fire Directors.
(2) Generally, as a rule, directors (not SHs) hire and fire officers;
(3) Directors set compensation for officers.

Hint 129

None

Front 130

Who may sue for judicial action to remove an officer for cause?

Back 130

(1) NY Attorney General OR
(2) holders of 10% of all shares may sue for a judgment removing an officer for cause.

The Court can bar reappointment of a person so removed from office.

Hint 130

None

Front 131

In an action by or on behalf of the corporation, 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. What are the 3 possible outcomes?

Back 131

(1) Prohibited: reimbursement is prohibited if the officer or director was held liable to the corporation. (2) Of Right, the corporation must reimburse the D/O if he was successful in defending the action on the merits or otherwise (e.g. SoL ran); (3) Permissive: (not 1 or 2) the corporation may reimburse the D/O if she (1) acted in good faith (b) For a purpose reasonable believed to be in the corporation's best interest. Permissive is determined by the BoD (quorum of disinterested Ds)

Front 132

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, and wins. Can she recover the attorney's fees of this suit against the Corporation?

Back 132

No! She cannot recover attorneys' fees for suing the Corporation. It should be noted that the Court could decide to award attorney's fees.

Front 133

What 2 things must a director/officer show for permissive reimbursement?

Back 133

Must show that:
(1) she acted in good faith AND
(2) for a purpose reasonably believed to be in the Corp's best interest

Hint 133

None

Front 134

Can INDEMNIFICATION for a director or officer be decided on as part of Corporate policy? When can there not be indemnification?

Back 134

Yes, certificate or bylaws can provide for indemnification by resolution of BoD or SH or by agreement, unless the director or officer: (a) acted in bad faith; (b) was deliberate and dishonest in a way material to the case; or (c) wrongfully profited.

Front 135

***Certificate may provide for ELIMINATION of director liability to the Corporation or to Shareholders for damages for breach of duty EXCEPT in 4 circumstances:

Back 135

(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

Hint 135

None

Front 136

When may a Court pierce the Corporate veil and hold the SH liable for the debts or acts of the corporation?

Back 136

The Court may PIERCE THE CORPORATE VEIL (PCV) and hold the SH personally liable if they have abused the privilege of incorporating and if fairness demands that the shareholders not have limited liability.

Front 137

Why might NY Courts Pierce the Corporate Veil (PCV)?

Back 137

NY Courts may PCV to:
(1) Prevent fraud or achieve Equity
(2) Prevent the use of the Corp as a CLOAK FOR ILLEGALITY.

Hint 137

None

Front 138

What are the 2 main classifications/rationales behind PCV?

Back 138

(1) Alter ego (identity, interest, commingling of funds)
(2) Undercapitalization

Hint 138

None

Front 139

Is undercapitalization enough in NY?

Back 139

Not by itself... also need excessive domination or fraud or illegality

Front 140

***As a general rule, do we expect PCV more readily in tort or contract cases?

Back 140

***Courts more likely to PVC (much more likely) in tort rather than in K cases (always throw this sentence into an Answer)

Front 141

In a closely held corporation, the ten largest SHs are personally liable for what?

Back 141

*** In a close Corp the 10 largest SHs are personally liable for the wages and benefits to the Corporation's employees only in a closely held Corp.

Front 142

Who manages the corporation and why?

Back 142

Remember that generally BoD (not SHs) manages the corporation. 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.

Front 143

When can SH manage the Corporation?

Back 143

Shareholders can manage the business directly in a close (or "closely held") corporation.

Front 144

What is a close corporation?

Back 144

A closely held corporation is a corporation that:
(1) has few shareholders AND
(2) stock is NOT publicly traded.

Most Corporations in this world and on the bar exam are closely held corporations.

Hint 144

None

Front 145

Who can manage a close Corporation? How is the power vested in the managers of a close Corporation? Who has the duties of care and loyalty?

Back 145

Either BoD OR SHs can the Close Corporation. A provision in the certificate of incorporation can restrict or transfer BoD power to shareholders or others. The Managing SHs in a closely held corporation owe a duty of care and loyalty to the shareholders.

Front 146

When is it acceptable to vest in the shareholders the power to manage a close corp? 4 Requirements

Back 146

Management power can be vested in SHs if:
(1) all incorporators or shareholders (voting and nonvoting) approve it;
(2) all subsequent SHs 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.

Hint 146

None

Front 147

Why are courts increasingly sensitive and willing to protect minority shareholders in a close corporation? What duties are imposed on SHs, especially on controlling SHs?

Back 147

Courts are sensitive to and willing to protect minority shareholdes rights because they have NO WAY OUT of Corporation (there is little market for their stock!)

In a close corporation, there is a trend toward imposing fiduciary duties on SHs in their dealings with each other. Especially, controlling shareholders.

Hint 147

None

Front 148

What are professional service corporations?

Back 148

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."

Front 149

Must shareholders in a P.C. be licensed professionals?

Back 149

Shareholders AND Officers AND Directors MUST ALL be licensed professionals. But employees do NOT have to be professionals. Employees cannot share in bonuses such as stock options, but they can share in 401k programs.

Front 150

Are the professionals in a P.C. liable for their own malpractice? Are the professionals liable for Ks entered by the entity and for rent due on leases in the P.C.'s name?

Back 150

(1) YES professionals in the P.C. are liable for their own malpractice but NOT for the others in the group (may be better than a partnership as a result).

(2) The entity (P.C.), not the individuals, is liable for Ks and leases entered into in the name of the P.C.

Hint 150

None

Front 151

What is the P.C. generally governed by? What is additionally required?

Back 151

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.

Front 152

What happens if one of the shareholders in a P.C. dies or is disqualified from the practice?

Back 152

P.C. must purchase his shares (a buy back).

Front 153

***What is a derivative suit?

Back 153

In a derivative suit, a shareholder is suing to enforce the Corporation's claim, not her own personal claim. It is a case in which the Corp. is not pursuing its own claim, so a SH steps in to prosecute the claim.

Front 154

What should you always ask when there is a lawsuit in corporations?

Back 154

ALWAYS ASK: "Could the Corporation have brought this suit? If yes, then it is probably a derivative suit.

Front 155

*** SH sues the BoD of a Corp for usurping Corporate opportunities. Derivative suit?

Back 155

***YES The duties of care and loyalty are owed to the corporation. A breach of one of those duties hurts the corporation and thus a SH can pursue a derivative suit.

Front 156

*** SH of Corporation sues X for breaching its K with the Corporation. Derivative suit?

Back 156

YES, it is a derivative suit because the Corporation could sue for this breach.

Front 157

SH sues BoD of Corporation for issuing new stock without honoring her preemptive rights. Derivative suit?

Back 157

NO, this is a "direct suit," for Shareholder's personal claim.

Front 158

SH sues regarding waste of corporate assets. Derivative suit?

Back 158

Yes, it is ALWAYS derivative because it is a breach of the duty of loyalty.

Front 159

SH sues to compel declaration of dividend. Derivative suit?

Back 159

Most of the time it will not be a derivative suit, but it might be if it could arguably be based upon a breach of duty to the Corporation. The SH is trying to get money in her pocket, so probably not. It might be a derivative suit if it is part of mismanagement by the Directors

Front 160

***What are the consequences of a successful derivative suit? Generally who gets the recovery of a successful suit?

Back 160

Corporation gets the judgment!!! But the Shareholder can get costs and attorney fees if they won.

Front 161

We know the damages generally go to the Corporation, but can SH ever recover the damages directly in a derivative suit?

Back 161

The SH may recover damages directly if recovery by the Corporation will return money to the bad guys. E.g. A close Corp w/ 3 SHs, 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, Corporation 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. Court might let the other SH recover directly, although it is a derivative suit.

Front 162

What are the consequences of an unsuccessful SH derivative suit?

Back 162

(1) SH pays her own tab and cannot recover costs and expenses
(2) SH will probably be liable to Corporation for their costs (usually winner recovers costs)

Hint 162

None

Front 163

Can other shareholders later sue the same defendants on same transaction?

Back 163

NO. They are barred by res judicata.

Front 164

What are the requirements for bringing a SH 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.)

Back 164

(1) Stock ownership;
(2) SH must adequately represent the interests of Corporation and SH, merely owning stock does not fulfill this requirement;
(3) Must also make a demand that directors bring suit unless the demand would be futile;
(4) The plaintiff SH 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.

Hint 164

None

Front 165

What is involved in the stock holding requirement for bringing a derivative suit? When must they own it? How can they have gotten it?

Back 165

(1) 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
(2) WHEN the claim AROSE (e.g. Inheritance OR Divorce decree)
(3) MUST also own stock when the action.

Hint 165

None

Front 166

When might a demand for the directors to bring suit be FUTILE?

Back 166

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.

Hint 166

None

Front 167

What is the special pleading requirement in a SH derivative suit?

Back 167

Plaintiff SH must plead with particularity her efforts to get the BoD to sue or why demand was excused.

Front 168

If demand is made and refused, can SH sue?

Back 168

(1) Only if she can show that a majority of the BoD is interested
OR
(2) Its procedure was incomplete or inadequate

Hint 168

None

Front 169

Suppose S brings a derivative suit in NY, and the corporation wants it dismissed. What can it base its move to dimiss on?

Back 169

In NY the Corporation can move to dismiss a derivative suit based upon the:
(1) Finding by independent directors or a committee of independent directors, sometimes called a special litigation committe that the suit is not in the corporation's best interests (e.g., low chance of recovery, or cost of suit will exceed recovery). The Court will look at the:
(1) independence of the investigation AND
(2) the sufficiency of the investigation.

Hint 169

None

Front 170

In a derivative suit, the Corporation must be joined as a party, but on what side?

Back 170

Corporation must be joined as a Defendant.

Front 171

Can the parties dismiss or settle a derivative suit?

Back 171

Plaintiff SHs can settle Derivative Suite (or dismiss) BUT ONLY with the Court's approval. The Court may notify SHs who will be substantially affected by discontinuance of the action.

Front 172

Can an officer or Director bring a derivative suit?

Back 172

A Director or Officer can bring an action against another Director or Officer on behalf of Corporation to compel her to account for her violations of duty. Note that the D or O does not have to meet any requirements such as those a SH must meet to bring a derivative suit.

Front 173

Who votes shares?

Back 173

General rule: record owner of stock as of record date has the right to vote

Front 174

Who is the record owner? What is the record date?

Back 174

The record owner is the person shown as the owner IN the Corporate Records. The record date is a voter eligibility cut-off set no fewer than 10 and no more than 60 days before the meeting.

Front 175

What are the exceptions to the general rule that record owner or record date votes?

Back 175

(1)***Even if the corporation is the record owner on the record date the Corp. does NOT vote treasury stock;
(2) Death of a SH (his executor can vote the shares);
(3) Voting by proxy

Hint 175

None

Front 176

What is a proxy?

Back 176

A PROXY is a:
(1) writing (can be a fax or email);
(2) signed by record shareholder or authorized agent;
(3) directed to secretary of corporation;
(4) authorizing another to vote the shares.

Hint 176

None

Front 177

Is proxy voting allowed for directors? What if a person is both a SH and a Director?

Back 177

Proxies are OK for Shareholder voting but NOT for director voting. If someone is noth a shareholder and a director, then it depends on the meeting the person is going to.

Front 178

How long does proxy authorization last? Is a proxy revocable?

Back 178

A proxy is good for 11 months unless it says otherwise. A Shareholder can revoke her proxy even if the proxy says that it is irrevocable.

Front 179

How can you have/create a truly irrevocable proxy? 2 Ways

Back 179

You can create a truly irrevocable proxy by:
(1) If SH sells her shares to another after record date and proxy says it is irrevocable, then it cannot be revoked;
(2) If the Proxy holder has some interest in the shares other than voting (Proxy coupled with interest.) (Does not have to be ownership. Could be option to buy or a pledge.)

Hint 179

None

Front 180

Can shareholders decide to vote together in advance? How?

Back 180

SHs can increase their influence on corporate policy by "block voting" through voting trusts and/or voting agreements

Front 181

What are the 4 requirements of a voting trust?

Back 181

(1) Has to be a WRITTEN trust agreement;
(2) Have to give a copy to Corporation;
(3) Actually transfer shares to voting trustee and;
(4) Original shareholders receive voting trust certificates and retain all other SH rights except for voting

Hint 181

None

Front 182

Is there a time limit on voting trusts?

Back 182

Voting trusts have a maximum life of 10 years. But within 6 months of expiration they can be extended for another term of up to 10 years.

Front 183

What are the 2 requirements for a voting (pooling) agreement? Are voting agreements specifically enforceable in NY?

Back 183

Voting or Pooling Agreements must be:
(1) In writing and
(2) Signed

In NY voting agreeements are NOT specifically enforceable.

Hint 183

None

Front 184

Can 2 shareholders agree to vote to elect each other as directors?

Back 184

Yes. Tweo shareholders can agree to elect each other as directors because electing directors is something shareholders do.

Front 185

What if 2 SH's agree about what actions they will take once they are directors? What if they are the only 2 SHs in the Corporation? What if they only agree to try and use their influence to get the Corporation to go in a certain direction?

Back 185

Violates rule against voting agreements by Directors. HOWEVER it is acceptable if they are the ONLY 2 SHs in the Corporation. AND IT IS OK to agree to use best efforts to cause the Corporation to act in a particular way

Front 186

What are the only 2 ways the shareholders can take a valid act?

Back 186

The two ways a SH can take a valid act is by:
(1) Unanimous written consent signed by the holders of all voting shares to act without a Meeting OR
(2) A Meeting.

(This is the same as directors)

Hint 186

None

Front 187

What is required before the SH can take a valid action without a meeting?

Back 187

If the certificate allows it, can take action without a 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.

Front 188

What is so important about the annual meeting?

Back 188

The annual meeting is important because it is where the SHs elect directors.

Front 189

Who can call a special meeting of the shareholders?

Back 189

The following can call a special meeting:
(1) The BoD OR,
(2) anyone provided in the certificate.

Hint 189

None

Front 190

When MUST a special meeting be called by the BoD? What happens if they don't call it?

Back 190

A special meeting must be called by the BoD to elect directors if there is a failure to elect a sufficient number of directors to conduct the business of the Corporation. If BoD fails to call such a meeting, the holders of 10% of the voting shares may demand in writing that the Corporation hold the meeting.

Front 191

What is the notice requirement for meetings? What is the time frame for the notice?

Back 191

Notice must be written notice (e-mail/fax is OK) to EVERY SH entitled to vote, for EVERY meeting (annual or special) between 10 and 60 days before the Meeting.

Front 192

What MUST the content of the notice for a meeting? What extra is required if it's a special meeting?

Back 192

(1) MUST state when & where the Meeting will be;
(2) Also must inform if the proposed action would entitle SH to appraisal Rights and tell why (and even include the statute about appraisal Rights).

For a Special Mtg MUST state who called it & the purpose of the Mtg

Hint 192

None

Front 193

Why is the statement of purpose important in the notice for a special meeting? What is the consequence of failure to give proper notice to all SHs?

Back 193

The announcement of the purpose of the special meeting is important because that is the ONLY business that can be transacted at that special meeting. If the notice was not given than any action taken at the special meeting is void unless those not receiving notice waive the notice defect.

Front 194

How does a Shareholder waive notice if he was given improper notice?

Back 194

A SH can waive notice by:
(1) Express: in writing and signed anytime; OR
(2) Implied: by atttending the meeting without objection.

Hint 194

None

Front 195

Suppose a proper person calls a special meeting of the SHs, and the stated purpose of the meeting is to remove a particular officer. Is everything OK with that scenario?

Back 195

NO!!!. Because SHs do not remove officers.

Front 196

*** What is required for a SHAREHOLDER vote?

Back 196

There must be a quorum represented at the meeting.

Front 197

How is quorum determined for S votes? What is it typically?

Back 197

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.

Front 198

X Corp. has 120,000 shares outstanding. X Corp. has 700 shareholders. What is a quorum?

Back 198

Need at least 60,001 shares

Front 199

Can the certificate or bylaws reduce a shareholder quorum to less than a majority?

Back 199

Certificat or bylaws can reduce quorum requirements BUT it can never be fewer than 1/3 of the shares entitled to vote. BUT the certifcate and by-law can NEVER reduce the requirement of majority approval.

Front 200

Can the certificate or by-laws reduce the requirement of majority shareholder approval?

Back 200

NO. By-laws and certificate can NEVER reduce the requirement of majority approval.

Front 201

Is it possible to require a supermajority (e.g., 90%) of the shares entitled to vote to be represented to constitute a QUORUM?

Back 201

Yes, can be done in the Certificate BUT NOT via the bylaws

Front 202

Is it possible to require a supermajority vote of the shares at the meeting to PASS A RESOLUTION?

Back 202

YES can increase number of votes required to pass a resolution BUT only in the certificate NOT in the bylaws. Exactly the same as with Directors.

Front 203

If the quorum of shareholders requirement is met, what is required to bind the Corporation?

Back 203

A majority.

Front 204

What qualifies as a "majority" for voting at a SH meeting?

Back 204

Majority means majority of the shares actually voting in favor or against the proposal. (Abstentions do not count.)

Front 205

Once a quorum is established at a shareholders' meeting, can it be lost if people leave the meeting?

Back 205

NO!!! Different from the BoD quorum!!!!!

Front 206

How and when do shareholders use cumulative voting?

Back 206

Cumulative voting is only available when voting for Directors. It helps small SHs get representation on the board. Multiply # of shares times # of Directors to be elected.

Front 207

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?

Back 207

9,000 votes

Front 208

The certificate of C Corp. is silent as to whether shareholders can vote cumulatively. Can C's shareholders still vote cumulatively?

Back 208

NO!!!!! Only exists if the Certificate specifies it.

Front 209

What is the formula for electing a director through cumulative voting?

Back 209

You need 1 more share that the % of shares required to elect 1 director if cumulative voting is in place. Formula is 100/(X plus 1) where (X is the number of directors being elected)

Front 210

Are stock transfer restrictions are permissible? Where are they common?

Back 210

Yes. Stock transfer restrictions are permissible and they will be upheld if they are REASONABLE UNDER THE CIRCUMSTANCES. (i.e. it is not an undue restraint on alienation.) They are common in a close corporation.

Front 211

Where are stock transfer restrictions set?

Back 211

Stock Restirctions are Set in:
(1) Certificate OR
(2) Bylaws OR
(3) Agreement

Hint 211

None

Front 212

Is a RT of 1st refusal considered an unreasonable restraint on alienation?

Back 212

A Right of first refusal is acceptable so long as the price offered is reasonable.

Front 213

Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either:

Back 213

1) it is conspicuously noted on the stock certificate OR 2) the transferee had actual knowledge of the restriction.

Front 214

By statute, a shareholder has a right to inspect and copy what things of the Corporation? Who exactly can inspect and copy? What do they have to do?

Back 214

A shareholder has the right to inspect and copy:
(1) minutes of shareholder proceedings AND
(2) the record of shareholders.

Any SH can demand access if they give 5 days notice and it is a written demand.

Hint 214

None

Front 215

What can the Corporation demand of the Shareholder who wants to inspect and/or copy the records? Can the Corporation demand more?

Back 215

Corporation 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. The corporation can NEVER demand more than this. If the SH refuses, the Corporation can deny the SH access.

Front 216

What financial document can the Shareholder request for the Corporation to provide to him?

Back 216

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.

Hint 216

None

Front 217

Can a Shareholder demand to inspect and copy a list of directors and officers? If so, how/when?

Back 217

Yes, a different statute gives Shareholders a right to inspect and copy a list of the current directors and officers. Any SH can demand a list of directors and officers with 2 days written demand.

Front 218

When & how can a director inspect?

Back 218

Director's have unfettered access

Front 219

What are distributions? What 3 types are there?

Back 219

Distributions are payments to shareholders and 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]

Hint 219

None

Front 220

When are dividends declared? When does a SH have right to a distribution?

Back 220

Distributions are declared in the Board's discretion. There is no SH right to a distribution until it is declared.

Front 221

Will a Court interfere with a Board's discretion and order a distribution such as a dividend?

Back 221

OnlThe Court will only order a distriibution such as a dividendupon a showing of BAD FAITH or DISHONEST PURPOSE (very tough to show).

Front 222

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?

Back 222

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

Front 223

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?

Back 223

Participating means pay again. So these 20,000 shares get paid twice -- once as preferred and again because they are participating. The preferred get 20,000 shares multiplied by $2 preference equals $40,000. Pay that first, because it is preferred. That leaves $360,000, but the $360,000 gets divided by 120,000 shares because the preferrred also participate so each share (pref and common) get $3. (pref. Part end up with $5 per share)

Front 224

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)?

Back 224

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.

Front 225

***How is surplus computed?

Back 225

Surplus = assets - liabilities - stated capital OR Surplus = Net assets - stated capital

Front 226

***Can surplus be used for distributions?

Back 226

Yes, surplus ca be used for distribution but it is up to the BoD if you get a distribution.

Front 227

What is stated capital? Can stated capital be used for distributions?

Back 227

Stated capital is the par value of shares multiplied by the number of shares outstanding. Any excess value over par goes up into surplus capital. Stated Capital can NEVER be used for distiributions.

Front 228

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. How much is stated capital and how much is surplus?

Back 228

$20,000 goes to stated capital (10,000 shares at $2- par value = $20,000). The remainder ($30,000) is surplus capital. As for the $70,000 within 60 days after issuance, BoD can allocate any part, but NOT ALL, to surplus capital. If BoD does not do this, it is all stated capital.

Front 229

***If a Corp loses money, can it still distribute?

Back 229

Yes. Corporation can make distributions even though it lost money in a given year.

Front 230

***When can a Corp NOT make distributions?

Back 230

CANNOT make distributions if it is insolvent or if the distribution would render it insolvent.

Front 231

What does "insolvent" mean?

Back 231

Insolvent means that a corporation is:
"UNABLE TO PAY ITS DEBT AS THEY COME DUE IN THE ORDINARY COURSE OF BUSINESS."

Hint 231

None

Front 232

Who is liable for unlawful distributions? What kind of liability do they incur?

Back 232

Directors are personally liable for unlawful distributions, as are shareholders who knew the distribution was unlawful when they received it.

Front 233

Who would sue to recover when unlawful distributions were made?

Back 233

Can be a Derivative Suit

Front 234

***Will there be a defense to unlawful distributions?

Back 234

*** Possible defense of good faith reliance (most likely to come up in this type of case... Because relied on what financial people told me)

Front 235

What is a stock redemption?

Back 235

A redemption is the forced sale of shares at a price set in the certificate. Redemptions are set in certificate, and must be done proportionately within each class of stock.

Front 236

What is a stock repurchase?

Back 236

A repurchase is the buyback of shares. Repurchases are individually negotiated, and can discriminate except in close corporation, where must give equal opportunity to all shareholders.

Front 237

What is the significance and consequences of a fundamental corporate change?

Back 237

A fundamental corporate change is a change that is 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.

Front 238

****What is the dissenting shareholders' right of appraisal?

Back 238

The dissenting shareholders' right of appraisla is the right of a SH to force the Corporation to buy her shares at fair market value.

Front 239

When will a SH have a dissenting shareholder Right of appraisal? What are 5 triggers you should be aware of & should automatically associate w/ the RT?

Back 239

The dissenting SH will havea right of appraisal if she disagrees with 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 Corporation's shares are acquired in a share exchange

Hint 239

None

Front 240

Even if there is a trigger, when is there NO right to appraisal? Why?

Back 240

There is NO right of appraisal if the company is listed on a national securities exchange or NASDAQ because there is a public market for the stock.

Front 241

*** What actions are taken by SH to perfect the right to appraisal? HAVE TO DO ALL 3!

Back 241

A SH must do the following to perfect the right to appraisal:
(1) before SH vote, file written objection and intent to demand payment;
(2) abstain or vote against proposed change; AND
(3) After the vote make a written demand to be bought out

Hint 241

None

Front 242

What happens if the SH and the Corporation cannot agree on fair value?

Back 242

The corporation sues and the Court determines the fair value.

Front 243

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?

Back 243

No, no minority discount in NY

Front 244

Who makes minor changes in the Corporation?

Back 244

Minor changes, such as those relating to office location, registered agent, etc. are made by BoD.

Front 245

What happens if the Corp wants to make more substantive changes to the Certificate?

Back 245

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.

Hint 245

None

Front 246

What if the amendment will change or strike a supermajority quorum or voting requirement for BOARD OF DIRECTOR voting or will strike a provision restricting board authority? What is the approval process?

Back 246

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 of shares entitled to vote.

Front 247

What if the amendment will change or strike a supermajority quorum or voting requirement for SHAREHOLDER (not director) voting?

Back 247

Amendment will require:
(1) Director approval; AND,
(2) Approval by 2/3 of the shares entitled to vote.

Does NOT matter when Corp formed.

Hint 247

None

Front 248

What happens if an amendment is approved?

Back 248

If the Amendment is approved then the Certificate of Amendment must be delivered to the Department of State for its filing.

Front 249

Are there dissenting shareholder rights of appraisal when there is an amendment? What 4 situations would qualify?

Back 249

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.

Hint 249

None

Front 250

What do you need for a consolidation or a merger to go forward?

Back 250

Each company's:
(1) BoD adopts a plan of consolidation/merger AND
(2) Needs SH approval from each Corporation

Hint 250

None

Front 251

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.?

Back 251

DEPENDS ON WHEN FORMED:
If formed before Feb 22nd 1998, at least 4,000 shares (2/3 entitled to vote);

If Formed After Fed 22, 1998 at least 3,001 because all you need is a majority of shares entitled to vote

Hint 251

None

Front 252

What is a "short-form" merger and what kind of shareholder approval does it require?

Back 252

No shareholder approval is required in a "short-form" merger which is a 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.

Front 253

What action must be taken after there is a merger or consolidation?

Back 253

Must deliver certificate of merger (or consolidation) to Department of State for filing.

Front 254

***Are there dissenting shareholders' RTs of appraisal?

Back 254

Yes, Right of Appraisal for the SHs of a Corporation that DISAPPEARED either in a merger or a consolidation BUT NOT FOR SH of surviving Corporation.

Front 255

***What about for shareholders of the subsidiary in a short-form merger? Rights of appraisal?

Back 255

YES. The SHs of the subsidiary have a right of appraisal even though they did not get to vote.

Front 256

***What is the effect of merger or consolidation?

Back 256

Effect: surviving Corp succeeds to all Rights and Liabilities of the constituents (aka successor liability)

Front 257

What are 2 fundamental Corporate changes that are treated alike?

Back 257

(1) Transfer of all or substantially all of the assets not in the ordinary course of business
OR
(2) Share Exchange

Hint 257

None

Front 258

What is share exchange?

Back 258

In a share exchange, one company acquires all the outstanding shares of one or more classes of another Corporation.

Front 259

Are the (1) transfer or sale or substantially all of the assets not in course of ordinary business and (2) share exchange, fundamental corporate changes for the selling corporation? Buying corporation?

Back 259

(1) transfer or sale or substantially all of the assets not in course of ordinary business AND
(2) share exchange, fundamental corporate changes for the selling corporation

Are Fundamental corporate changes for the SELLING CORP. ONLY not for the buying Corp.

Hint 259

None

Front 260

What is the number of shares of seller Corporation that must approve the two fundamental change situations?

Back 260

To approve a Fundamental Corporate Change:
On or before Feb 22, 1998 need at least 2/3 of the shares entitled to vote.

After Feb. 22, 1998, all you need is a majority of votes.

Hint 260

None

Front 261

Number of shares of buying Corp that must approve the sale?

Back 261

Zero - they do not vote because it is not a fundamental change for the buyer

Front 262

What sort of FILING is required for share exchanges & transfers of assets involving a buying and selling Corporation?

Back 262

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.

Front 263

Are there dissenting shareholders' RTs of appraisal for share exchanges and transfers of assets involving a buying & selling Corporation?

Back 263

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).

Front 264

What is the one exception to the SH right of appraisal in selling Corps?

Back 264

NO RT of appraisal even for shareholders of selling corporation if a sale of assets is for cash AND the company will dissolve AND distribute cash to shareholders within one year. Such a Corporation is essentially dissolving.

Front 265

What is the general rule for tort liability when a company is acquiring assets? What are the exceptions?

Back 265

General rule: the company acquiring assets will not be liable for the torts of the company whose assets it acquired unless:
(1) the deal provided otherwise;
(2) the purchaser is a mere continuation; or
(3) the deal was entered fraudulently to escape such obligations.

Hint 265

None

Front 266

Is the rule for acquiring tort liability when acquiring assets different from the rule for merger? Why or why not?

Back 266

Yes, it is different from the merger because we do not expect successor liability . The company that sold its assets is still in existence (still there).

Front 267

What are the 3 types of dissolution?

Back 267

(1) Voluntary dissolution;
(2) Involuntary dissolution;
(3) Winding up (liquidating)

Hint 267

None

Front 268

What approval is required for a VOLUNTARY dissolution?

Back 268

VOLUNTARY Dissolution:
In NY Board vote is NOT required, only need a SH vote.

On or Before Feb 22, 1998 2/3 of shares entitled to vote.

After Feb. 22, 1998: Majority of shares entitled to vote.

Either way, certificate of dissolution delivered to the Department of State for its filing.

Hint 268

None

Front 269

What is INVOLUNTARY dissolution?

Back 269

Judicial Dissolution.

Front 270

What are the 4 ways INVOLUNTARY DISSOLUTION can come about?

Back 270

4 Involuntary Disollution Methods:
(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

Hint 270

None

Front 271

What are the 2 grounds on which twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition for involuntary dissolution?

Back 271

(1)Management's illegal, oppressive or fraudulent acts toward complaining Shareholders
OR
(2) Management's wasting, diverting, or looting assets.

Hint 271

None

Front 272

When will a Court consider denying dissolution? What will a Court look at in making its decision?

Back 272

Court may deny dissolution if there is some other way the complaining SH can obtain a fair return on his investment, e.g., by court orderied buy out. Court will consider whether liquidation is necessary to protect the petitioners and is it the only way for them to get a fair return on their investment.

Front 273

***How may the Corp or non-complaining shareholders try to avoid dissolution?

Back 273

Within 90 days of the petition, buy the petitioner's shares at fair mkt value. The Terms MUST be approved by the Court!!!

Front 274

What are the 4 steps for winding up (liquidating)?

Back 274

Four steps for winding up (liquidating):
1) gather all assets;
2) convert to cash;
3) pay creditors, AND
4) distribute remainder to SHs, pro-rata by share unless there's a dissolution preference.

Hint 274

None

Front 275

How does a dissolution preference work?

Back 275

Works like a dividend preference (pay first). Must say in Certificate if it is a dissolution preference or a distribution preference

Front 276

Can shareholders agree that they will be paid before creditors?

Back 276

SH CANNOT agree that they will be paid before creditors.

Front 277

What is the common law rule for shareholder's fiduciary duties?

Back 277

Outside the close Corporation, shareholders generally do NOT owe fiduciary duties to each other or to the Corporation. They can act in their own self-interest.

Front 278

Is there a duty for a controlling Shareholder?

Back 278

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

Front 279

Because of her control, the shareholder may be able to sell her shares at a premium. If she does, can she keep the money?

Back 279

YES. Typically

Front 280

***What are 3 situations where a court might impose liability on a controlling shareholder who sold her shares?

Back 280

(1) Controlling SH sold to looters (who 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 SH de facto sells a corporate asset. If she does, all SHs should share in the premium paid by the buyer;
(3) Controlling SH 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.

Hint 280

None

Front 281

What is the general rule for mergers?

Back 281

All mergers must have a legitimate corporate purpose, even though approved by the requisite number of shares.

Front 282

What is a freeze-out merger and what are its implications?

Back 282

A freeze-out mergere is 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. Courts may be increasingly protective of minority.

Front 283

What will the CT look to when analyzing whether a freeze-out merger or not? 3 Things

Back 283

The Court will look at the transaction as a whole and assess the price and entire course of dealing, specifically:
(1) whether deal is tainted by self-dealing or fraud;
(2) Whether minority SHs are dealt with fairly and
(3) Whether there is a legitimate business reason for the merger

Hint 283

None

Front 284

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 this and what are the repurcussions?

Back 284

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

Front 285

What is involved in the prohibition on nondisclosure of "special facts"(or "special circumstances")?

Back 285

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.

Front 286

What are special facts or insider information?

Back 286

Those a reasonable investor would consider important in making an investment decision. They bear on potential value of the securities.

Front 287

Who can sue for nondisclosure of special facts?

Back 287

A shareholder with whom the director or officer deals & violates the special facts doctrine.