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366 Cards in this Set

  • Front
  • Back
What are the six possible corporation fact patterns on the bar?
1) Organization of corporations;
2) Issuance of stock;
3) Directors and officers;
4) Shareholders;
5) Fundamental corporate changes;
6) Controlling shareholders (and related topics)
What is required for formation of a NY corporation?
1) Incorporators (people);
2) Certificate of incorporation (paper); and
3) Signature of certificate by each incorporator and acknowledgement before notary, then delivery to NY Department of State, who files it (acts)
What does an incorporator do?
1) Execute the certificate and deliver it to the Department of State;
2) Hold the organizational meeting.
How many incorporators do you need?
One or more.
Who can be an incorporator?
Adult humans ONLY - no entities.
*Note: this is unusual b/c in most states an entity could be an incorporator, but not in NY.
What are the purposes of the certificate of incorporation?
1) It's a contract b/t corporation and s/h's;
2) It's also a K between corporation and state.
What information goes into the certificate?
1) Names and address;
2) MAY make a statement of duration;
3) MUST make statement of corporate purpose;
4) Capital structure (stock)
What names and addresses go into the certificate?
1) Corporate name;
2) The county in NY of the "office of corporation";
3) MUST Designate NY Secretary of State as corporation's agent for service of process;
4) MUST give address for forwarding process;
5) MAY (but don't have to) name a registered agent for service of process;
6) Name and addresses of each incorporator.
What restrictions apply to the choice of corporation's name?
Must have one of these words, or an abbreviation thereof: corporatoin, incorporated, or limited.
Does the office of corporation have to be a place where the corporation actually does business?
No.
What if the statement contains no statement of duration?
We presume perpetual existence.
What are the possibilities for the corporate statement of purpose?
1) Could be a general statement of purpose (such as, "to engage in all lawful activity, after first obtaining necessary state agency approval");
2) Could be a specific statement of purpose.
What is the result if a corporation includes in its certificate a specific statement of purpose, and then does something outside that purpose?
The later act is an "ultra vires act" - beyond the scope of the certificate. At common law, that would mean that the contract could be voided as beyond the capacity of the corporation.
How do we handle ultra vires today?
1) Ultra vires Ks are VALID;
2) S/h's can seek an INJUNCTION;
3) Responsible OFFICERS AND DIRECTORS are LIABLE to the corporation for ultra vires losses.
When should you be on the lookout for ultra vires issues?
Whenever a question gives you a specific statement of purposes.
What is authorized stock?
The maximum number of shars the corporation CAN SELL.
What is issued stock?
The number of shares the corporation ACTUALLY SELLS.
What is outstanding stock?
Shares that have been ISSUED AND NOT REACQUIRED by the corporation.
What must be included in the certificate with respect to capital structure?
1) Authorized stock;
2) Number of shares per class;
3) Information on par value, rights, preferences, and limitations of eac class;
4) Information on series of preferred shares
What is a series?
A subclass of stock.
What is required of the classes of stocks?
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.
What is the effect of the filing of the certificate by the NY Department of State?
The Department's filing is CONCLUSIVE EVIDENCE of VALID FORMATION. At that moment, you have a de jure corporation.
What is required after the certificate is filed?
The incorporators hold an organizational meeting (or they can do it by written consent).
What do they do at the organizational meeting?
1) Adopt any bylaws;
2) Elect the initial directors.
At that point, the board of directors will take over management.
What is the legal significance of formation of a corporation?
1) Internal affairs (duties, relationship among directors, officers, shareholders, etc.) of a NY corporation are governed by NY law (regardless of where corporation is doing business);
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 securitie (its own ow others') and to sue or be sued;
3) 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.
Can the corporation guarantee a loan not in the furtherance of corporate business?
Yes, but only with the approval of 2/3 of the shares entitled to vote.
Can a corporation make political contributions?
Yes, but no more than $5000 per year per candidate or organization (under election law, not BCL).
Can a corporation make charitable contributions?
Yes. There's no statutory ceiling here.
Who is liable for corporate debts and obligations?
The corporation. It has entity status, so that if our corporation breaches a contract, commits a tort, or defaults on a debt, IT is liable and not the s/hs.
What are the de facto corporation/ corporation by estoppel doctrines?
Doctrines by which a business failing to achieve de jure corporate status nonetheless is treated as a corporation (so s/hs will not be personally liable for business debts).
When will the de facto corporation doctrine be applied and what is the result where it is?
1) There is a relevant incorporation statute (there is, the 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, treated as corporation for all purposes except in an action by the state.
What is the status of the de facto corporation doctrine in NY?
B/c the Department of State's filing the certificate is conclusive proof of formation, the doctrine was thought to be abolished. BUT, case law suggests that it may be alive, at least in limited circumstances, such as where the incorporators put together a proper certificate and delivered it to the Department of State, but the Department failed to file it (without rejecting it)
What is corporation by estoppel?
Theory is that one dealing with a business as a corporation, treating it as a corporation, may be estopped from denying the business's corporate status. So, such a person, under this theory, cannot sue the individual proprietors.
What is the status of the corporation by estoppel doctrine in NY?
Exists in a lot of states, but abolished in NY.

So proprietors are liable if the corporation is not de jury (PAP) b/c all you have is a partnership.
Can a de jure corporation exist without bylaws?
Yes. Adoption of bylaws is NOT a condition precedent to formation of a corporation. But, almost every corporation has them b/c they can establish internal procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.
If the bylaws are inconsistent with the certificate, which document controls?
The certificate, because the certificate is a contract with the state; it is a more important document.
Are bylaws filed with the state?
No.
Are outsiders bound by bylaws?
No. They are an internal document.
Who adopts the initial bylaws?
The incorporators, at the organizational meeting.
What is the status of the intial bylaws?
They have the status of a s/h bylaw.
Who can amend or repeal the bylaws or adopt new ones?
The shareholders.
When does the board of directors ever get to amend or repeal bylaws or adopt new ones?
Only if the certificate or a shareholder bylaw allows.
Who can amend or repeal director-adopted bylaws?
Shareholders.
What is a promoter?
A person acting on behalf of a corporation not yet formed.
What is the corporation's liability on preincorporation contracts?
A corporation is NOT liable on preincorporation contracts until it ADOPTS the contract.
How can adoption happen?
1) Express adoption;
2) Implied adoption
What is express adoption?
Board action
What is implied adoption?
Arises if the corporation knowingly accepts a benefit of the contract. (i.e. moves into leased premises)
What is the liability of the promotor with respect to preincorporation contracts?
Generally, unless the K clearly indicates that the parties do not intend the promotor to be liable, the promotor remains liable on preincorporation contracts until there has been a novation (agreement among the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract).
Will the promotor be liable on the lease if the corporation is formed and adopts the contract?
Yes. The promotor is liable until novation and here, we have no novation. But, the adoption makes the corporation liable as well, so here both the promotor and the corporation would be liable.
What is the rule with respect to a promoter dealing with the corporation itself?
Secret profit rule - promoter cannot make a secret profit on her dealings with the corporation. If she does, she is liable and has to account for the profit (return it to the corporation).
How is profit measured where the sale to corporation by promoter is of property acquired

before becoming a promotor?
Profit equals the price paid by the corporation minus fair market value (FMV). What promoter paid is irrelevant.
How is profit measured where the sale to corporation by promoter is of property acquired after becoming promoter?
Profit equals price paid by corporation minus price paid by promoter.
When is the promoter liable to the corporation for the profit?
Only if it was secret. NOT if board consents or ratifies the profit. It all depends on the corporation's knowledge.
What is a foreign corporation?
One incorporated outside NY.
What is a NY corporation called?
A domestic corporation.
What must foreign corporations doing business in NY do?
Foreign corporations doing business in NY must qualify.
What does "doing business" mean?
The regular course of INTRAstate, not interstate, business activity. Not occasional or sporadic business. Not just having meetings in NY, etc.
How can a foreign corporation qualify?
By applying to the NY Department of State and designating the Secretary of State as agent for service of process.
In applying to qualify, what kind of information does the foreign corporation give the NY Department of State?
1) Information from its certificate;
2) Proof of good standing in its home state.
What happens if a foreign corporation does business in NY without qualifying?
1) There's a penalty when the corporation DOES qualify and it must pay fees, taxes, penalties and interest
2) Until it qualifies, the foreign corporation cannot sue in NY, but it CAN be sued.
What is an issuance of stock?
Occurs when a corporation sells its OWN stock.
What is the difference between the issuance of stock and the issuance of bonds?
In an issuance of stock, investors buy stock and thereby become equity holders - owners of the corporation. Their equity interest brings with it various rights. Stock holders have "equity security"

With a bond, the investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the K. The holder of a bond is a creditor (not an owner) of the corporation. She holds a "debt security"
What is a debenture?
It is a lone, the repayment of which is not secured by corporate assets.
When do the rules under this fact pattern (#2) apply?
ONLY when the corporation is selling its own stock - not when we buy stock on market, etc.
What is a subscription?
A subscription is a written, signed offer to buy stock from the corporation. One important consideration is whether a subscription can be revoked.
What is the rule with respect to revocation of preincorporation subscriptions?
A preincorporation subscription is irrevocable for three months unless it says otherwise or all subscribers agree.
What is the purpose of that rule?
So that the people forming the corporation can rely on the money being there.
Are post-incorporation subscriptions revocable?
Yes, until acceptance.
When do the corporation and the subscribers become obligated under a subscription?
When the board accepts the offer. At that point, there is an agreement to sell to this subscriber.
Can the corporation decide to sell only to some subscribers and not others?
Corporation must be uniform within each class or series of stock.
If the corporation accepts the offer and te subscriber defaults on payment, what happens?
1) If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. The shares then become authorized and unissued.
2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash).
What happens in the latter scenario if no one will pay the remaining balance?
Defaulting subscriber forefeits what he has paid and the shares are canceled.
What happens if someone will pay more than the remaining balance due?
The defaulting subscriber recovers any excess over what he agreed to pay, but we deduct from that the corporation's expenses in selling.
What type of consideration must the corporation reeceive when it issues stock?
Five permitted forms of consideration for an issuance:
1) Money (includes cash or equivalent, such as check);
2) Tangible or intangible property;
3) Labor or services ALREADY PERFORMED for the corporation;
4) A binding obligation to pay in the future in cash or property (i.e. a promissory note);
5) A binding obligation to perform future services having an agreed value.
Can the corporation issue stsock to somebody for performing services in forming the corporation?
Yes. This is OK.
What are PROHIBITED forms of consideration?
Anything other than the five permitted forms of consideration.

(Hard to imagine because the categories are so broad, but it could happen if, for example, the corporation issued stock to someone for no consideration at all.)
What happens if somebody "pays" for an issuance with an improper form?
It is unpaid stock, which means it is all treated as "water"
What does par mean?
Minimum issuance price.
What does no par mean?
There is no minimum issuance price - can sell for any price.
Who sets the price at which to sell no par stock?
The board, unless the certificate reserves the right to shareholders.

(On BE- the certificate will usually be silent, so the board would set the price.)

What is treasury stock?
Stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock.
What is the par value of treasury stock?
There is no minimm. You always treat treasury stock as no par. The par of the stock when originally issued is irrelevant.
What is the rule where a corpoartion issues par value stock in exchange for property other than cash?
The property must be worth at least the combined par value of the shares issued for it.
Who values the consideration in a par issuance?
The board.
Who values consideration in a no-par issuance?
The board, unless certificate allows shareholders to do so.
When the board determines the value of the consideration for an issuance, is its determination of value conclusive?
Yes, if it is made without fraud.
What happens when the board determines the value of services rendered in exchange for stock and they grossly overvalue those services?
It will likely be considered fraud. And the directors will be liable for wasting corporate assets.
What are the consequences of issuing par stock for less than par value, i.e. watered stock?
The corporation can sue for the difference b/t the par value of the stock and the price received - the "water."
Are the directors liable for the water?
Yes, if they knowingly authorized the issuance.
Is the s/h who bought the watered stock liable?
Yes. You're charged with notice of the par value.
What if the buyer buys the watered stock and transfers it to a third-party?
The TP is not liable if she acted in good faith, meaning that she didn't know about the water.
Does the third party have to pay value for the shares transfered to her?
No. Doesn't have to be a BFP; she could have gotten it as a gift.
Does third party's status have any effect on liability of the original purchaser of the watered stock and the directors?
No.
What are preemptive rights?
The 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).
Does the new issuance include sale of treasury stock?
No, unless the certificate says otherwise, the sale of treasury stock is not a new issuance for preemptive purposes.
Does the new issuance include sale of shares authorized by the original certificate and sold within two years of formation?
No, unless the certificate says otherwise.
If the certificate of incorporation is silent regarding preemptive rights, do they exist?
No. So if the NY BE wants us to talk about preemptive rights it will have to say so.
Do preemptive rights apply where corp is issuing stock to acquire Green Acres?
No. Only in new issuance for money.
What is the statutory requirement with respect to number and identity of directores?
One or more adult natural persons.
How is the actual number of directors set?
1) In the bylaws;
2) By shareholder action;
3) By the board, if a shareholder bylaw allows;
What if no number of directors is set in any such way?
Then there is one director.
Who elects initial directors?
Incorporators.
After that, who elects directors?
The shareholders at the annual meeting.
Do you have to elect all new directors every year?
No. There can be a "classified board" (staggered board) with 2, 3, or 4 classes of directors, with one class elected each year.
Can shareholders remove a director for cause?
Yes.
Can the board remove a director for caue?
No, UNLESS it is permitted in the certificate or a shareholder bylaw.
Can anyone remove a director without cause?
Shareholderrs only and ONLY IF the certificate or bylaws allow. So, on bar exam, most often, the answer will be no.
When can a director not be removed?
If cumulative voting is in effect and the number of votes cast against removal would have elected her at the election of the entire board.
What is the general rule with respect to filling a vacancy on the board (e.g. where a director dies or resigns or is removed)?
The general rule is that the remaining directors select the person who will serve the remainder of the term.
What is the special rule with respect to filling a vacancy on the board when a director is removed by the shareholders without cause?
When a director is removed by shareholders without cause, shareholders select the person who will serve the remainder of the term. *BUT, remember that this will be extremely rare b/c they can only remove without cause if the certificate or bylaws allow, and they usually will not.

Are individual directors agents of the corporation?

No. So individual directors have no power to bind the corporation to anything. Instead, the directors must act as a group.
How does the board of directors act?
There are only two ways in which the board can take a valid act:
1) Unanimous, written consent to act without a meeting; or
2) Have a meeting
*Note, if all board members talk to one another one at a time and all agree, it won't be valid act.
What is the result if an act is purportedly taken but neither of the above methods is followed?
The act taken is void unless later ratified by a valid act.
If there is a meeting, must it be held in NY?
No. It can be held anywhere in the world.
Is a meeting by conference call OK?
Yes, if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meeintgs are allowed).
Is notice required for regular meetings?
No, if the time and place of regular meetings are set in the bylaws or by the board.
Is notice required for special meetings?
Yes. You must give notice of a special meeting specifying the time and place. You need not state the purpose. The method for giving notice is set in the bylaws.
What happens if required notice for a special meeting is not given to a director?
Any action taken at the meeting is void unless the director not given notice waives the notice defect.
How can she waive the notice defect?
1) In writing and signed, any time at all;
2) By attending the meeting without objection.
Can a director give a proxy for director voting?
No. This is void. Directors owe non-delegable fiduciary duties to the corporation. We do not allow directors to give proxies for director voting.
Can directors enter voting agreements on how they will vote as directors?
No. This is void. Directors owe non-delegable fiduciary duties to the corporation. The whole point is that we want a director's independent judgment.
What is the quorum required for a meeting?
To do business, we must have a majority of "entire board" (duly constituted board).
What is a duly constituted board?
The number of positions if no vacancies. (So, it's a majority of the directorship postions on the board that must be present for a quorum.)
Once we have a quorum, what is required to pass a resolution (to be a valid act)?
Majority vote of THOSE PRESENT.
What happens if there is a quorum at a meeting, but then one director leaves the meeting? Can the
The board cannot continue to do busines. The quorum has been broken, and we cannot do business.
What if there are unfilled vacancies on the board?
Still need a majority of the total directorship positions to constitute a quorum.
Can the corporation decrease a quorum to less than a majority of directors?
Yes, by certificate or bylaw. But, it can never be fewer than 1/3 of the directors.
Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?
No. We can never reduce that.
Can the corporation increase a quorum to greater than a majority of directors (e.g., two-thirds of the entire board must be present to do business)?
Yes, in the certificate only, not in bylaws.
Can the corporation require a supermajority to pass a resolution (e.g., 2/3 of the directors present must approve the resolution)?
Yes, but in the certificate only, and not in the bylaws.
What does the board of directors do?
Generally, the board of directors manages business of corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc.
What is the rule with respect to delegation of management function by the board?
If the certificate or bylaws allow, a majority of the entire board can delegate substantial managment functions to a committee of ONE or more directors. But, the board cannot delegate ALL powers and responsibilities to a committee.
What can a committee NOT do?
1) Amend, adopt, or repeal bylaws;
2) Fill a board vacancy;
3) Set director compensation;
4) Submit a fundamental corporate change to shareholders
Can a committee recommend any of these things for full board action?
Yes.
What is a particularly important area in which committees are used?
Shareholder derivative suits.
What sentence must be in your answer whenever there is a duty of care fact pattern?
The 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.
What are the ways to raise the duty of care?
1) Nonfeasance (director does nothing);
2) Misfeasance (board does something that hurts the corporation - involves BJR)
What is the rule with respect to nonfeasance?
First, state the duty of care standard. Then state whether or not the director breached the duty of care and why (apply the facts). Then state: BUT, he is liable only if his breach caused a loss to the corporation (difficult to do).
What is the rule for misfeasance?
State the duty of care standard. Then state that a director is not liable if she meets the business judgment rule (BJR).

Prudent people do appropriate homework, deliberate and analyze. If you do this, not liable under BJR.
What is the 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.

A director is not a guarantor of success.
When can you be in trouble even under the BJR?
Only if it was irrational or grossly negligent (e.g. buying a property without having ANY inspection of the property at all).
What sentence must be in your answer if there's a duty of loyalty fact pattern?
Duty of Loyalty Standard: A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.
Why does the BJR not apply in duty of loyalty cases?
Because these cases always involve conflicts of interest and the BJR cannot apply when the director has a conflict of interest.
What are the classic fact patterns in duty of loyalty cases?
1) Interested Director Transactions;
2) Competing Ventures;
3) Corporate Opportunity.
What is the interested director transaction?
Any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest).
What is the rule in interested director transactions?
First, state the duty of loyalty standard. Then state that 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) Shareholder action; b) Board approval by sufficient vote NOT counting the vote of interested directors; or c) Unanimous vote of disinterested directors if disinterested directors are insufficient to take a board act.
Do interested directors count toward a quorum of the board?
Yes. And they can participate in the meeting but their votes will not count.
Who sets directors' compensation?
Board can set compensation of directors in any capacity, unless certificate or bylaw says they can't. Compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets, and that is breach of the duty of loyalty.
What is the rule with respect to the corporation giving a director or officer stock options as an incentive to service?
If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. But, if the stock is not listed on a stock exchange, than the use of options must be approved by shareholder vote.
What is the rule where a director wants to start a venture in the same area as the corporation (competing ventures)?
First, state the duty of loyalty standard. Then state that director cannot go into competition with his corporation.
What happens if a director does go into competition with his corporation?
The corporation gets a constructive trust on her profits (the director must account to the corporation for her profits).
What is the rule with respect to corporate opportunities?
First, state the duty of loyalty standard. Then state that director cannot USURP a corporate opportunity, meaning he cannot take it until: 1) he tells the board; and 2) waits for the board to reject it.
What qualifies as a corporate opportunity?
Something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its business.
What is the remedy where there is usurpation?
The usual remedy is a constructive trust.

The corporation might recover damages if the usurpation hurt the company.
What are the other state law bases of director liability?
1) Ultra vires acts;
2) Watered stock;
3) Improper loans of corporate funds;
4) Improper distributions;
What is the rule with respect to loans to directors?
A board vote to lend a director corporate funds or to guarantee a director's personal obligation is permissible if approved by shareholders of if the board finds that the loan benefits the corporation.
For things a director can be liable for, exactly which directors are liable?
The general rule is that a director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records.
How does the director have her dissent noted in writing in corporate records?
Three ways:
1) In the minutes;
2) In writing, to the corporate secretary, at the meeting; or
3) Registered letter to the corporate secretary promptly after adjournment.

*An oral dissent is NOT enough.
Can a director dissent if he voted for the resolution at the meeting?
No.
What are the exceptions to the general rule?
1) Director is not liable IF she registers written dissent within a reasonable time after learning of the action (e.g. if she could not attend the meeting).
2) Good faith reliance on information, opinions, reports, or statements by: a) officers or employees of the corporation whom the director or officer 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 matters within its designated authority.
When might the second exception be especially likely?
In a case involving improper distributions.
How can a director register written dissent?
By delivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes for the meeting.
What duties do officers owe the corporation?
Officers owe the same duties of care and loyalty as the directors. So, all of the duty of care and loyalty fact patterns can also come up in the context of officers.
What is an officer's status?
Officers are agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so.

[Example: The president has the inherent authority to sue on behalf of the corporation or bind the corporation to contracts entered into in the regular course of business.]
What officers may the board select?
A president, one or more vice-presidents, a secretary, a treasurer, and any others the Board may determine or for which the bylaws provide.
Can one person hold multiple offices simultaneously?
Yes.
Who selects and removes the officers?
The board, unless the certificate allows the shareholdrs to elect them.

[If the shareholders elect them, only the shareholders can fire them. Even then, for cause, directors can suspend an officer's authority to act.]
What are the consequences if the directors appoint a president and later fire him?
The president will be gone, but the corporation may be liable for breach of contract damages. Damages is all the fired president can get - can't get his job back.
So, as a general rule, who hires and fires directors?
The shareholders.
Who hires and fires officers?
The directors
Do shareholders, as a general rule, hire and fire officers?
No.
How else may an officer be removed? (MC)
By judicial action. The attorney general or holders of 10% of all the shares may sue for a judgment removing an officer for cause. The court can bar reappointment of a peerson so removed from office.
Who sets officers' compensation?
The board.

The directors monitor the officers - hire, fire, set compensation.
What is the reimbursement (indemnification) situation?
A person is sued in her capacity as officer or director and incurs costs, attorney's fees, maybe even fines, a judgment or settlement; she seeks reimbursement from the corporation.
What are the three categories of reimbursement?
1) Prohibited: reimbursement is prohibited if the officer or director was held liable to the corporation (not just accused);
2) Of right: the corporation must reimburse the director or officer if she won a judgment on the merits or otherwise;
3) Permissive: Situation not satisfying (a) or (b), the corporation may reimburse the officer or director.
Where a director or officer qualifies for reimbursement of right from corporation, but corporation refuses to reimburse her, and she sues the corporation to force it to reimburse her and wins, can she recover the attorney's fees of this suit against the corporation?
No. Even though the case was made necessary by the corporation's failure to give her indemnification of right.
Where permissive reimbursement applies, what must the officer or director show in order to be reimbursed?
That she acted in good faith and for a purpose reasonably believed to be in the corporation's best interest.
What can reimbursement in the "permissive" category include?
Settlement amount, expenses and attorney's fees (but not any judgment)
For permissive, who determines eligibility?
1) The Board (with a quorum of directors being nonparties);
2) Shareholders or a quorum of those directors who are disinterested; or
3) The Board pursuant to report from independent legal counsel.
In a civil or criminal action other than by or in the right of the corporation, when is reimbursement permitted?
If the director or officer shows she acted in good faith and for a purpose reasonably believed to be in the best interest of the corporation.

In a criminal case, must also show that she had no reason to believe her conduct was unlawful.
What can reimbursement include in that case?
Judgment, settlement, expenses, and attorney's fees.
Can the court in which the officer or director was sued order the corporation to reimburse the officer or director for litigation expenses and attorney's fees?
Yes, if it finds she is reasonably entitled to it.
Note: It could not include a judgment against her.
How else may indemnification be provided for?
Certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case, or wrongfully profited.
Can the corporation advance litigation expenses to the director or officer?
Yes, but she must repay them if it turns out she's not entitled to reimbursement.
May corporation buy insurance to cover D and O liability?
Yes.
WRITE IN ESSAY anytime a director arguably breaches a duty.
The certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty EXCEPT, when he 1) acted in bad faith or with intentional misconduct; 2) received an improper financial benefit; or 3) approved an unlawful distribution or loan.
What is required before a court may pierce the corporate veil (PCV) and hold shareholders personally liable?
They must have abused the privilege of incorporating and if fairness must require holding them liable.

*This is a tough standard.
Why might fairness require PCV?
If a shareholder exercises complete domination and control over the business to perpetrate fraud or injustice.
What is an alter ego?
Where there is identity of interests, agency, and excessive domination.
What facts indicate that a corporation is being used as an alter ego?
1) S/h commingles personal and corporate funds;
2) Uses the corporate car as her own; and
3) Uses the corporate credit card for personal purchases.
If you get a PCV question, how to answer?
First, state the general rule (about shareholders generally not liable for debts or acts of corporation); and state the PCV standard and explain PCV. Then, conclude that there is no PCV if the corporation has any MIND, EXISTENCE, or WILL of its own. In NY, this is a VERY tough standard to meet - usually veil will not be pierced.
In what types of situations might a NY court PCV?
1) A dummy corporation, where sharehodlers carry on business in personal capacity or for purely personal, not corporate ends.
2) A parent corporation that so controls the daily operations of a subsidiary as to act as true prime movers behind the subsidiary's action.
3) Where a group of separate corporations are operated as one, so they are so dominated by one that they have no mind, existence, or will of their own.
If a court does PCV, against whom would they do so?
Only against the shareholder who is treating the corporation as his alter ego - not others.
What answer where the question involves an undercapitalization fact pattern?
First, state the general rule and PCV standard and explain PCV. Then note whether the corporation was undercapitalized when formed (meaning that shareholders failed to invest enough to cover prospective liabilities - therefore abusing the privilege of incorporating.)
Is undercapitalization enough for PCV in NY?
Apparently not by itself. Also need complete domination to perpetrate fraud or injustice.
What else should you always say in a PCV case?
As a general rule, courts are generally more willing to PCV in tort cases than K cases.
In a close corporation, the ten largest shareholders are personally liable for what?
Wages and benefits to the corporation's employees.
What is the general rule with respect to shareholder managment of the corporation?
Generally, the shareholders cannot manage the corporation. The board of directors and not the shareholders manage the corporation.
When can shareholders manage the business directly?
In a close or closely held corporation.

Note: In CC you do not have to have shareholder management. You can have a board of directors.
What is a close corporation?
(1) It has few shareholders, and

(2) The stock is not publicly traded.
How is power vested in the shareholders to manage a close corporation?
Requires a provision in the certificate restricting or transferring board power to shareholders, AND:
1) All incorporators or shareholders (voting and nonvoting) approve it;
2) All subsequent shareholders have notice;
3) It is conspicuously noted on the front and back of all shares; and
4) Shares are not listed on an exchange or regularly quoted over the counter.
In a close corporation run by shareholders, who owes the duties of care and loyalty?
The managing shareholders (those who actually run the corporation)
What is the trend in close corporations?
Toward imposing fiduciary duties on shareholders in their dealings with each other. Especially, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the corporation or to oppress minority shareholders or the corporation. They owe a duty of utmost good faith.

Why do courts protect minority shareholders?

To give them a remedy for behavior that defeats their reasonable expectations.


(They have no way out because there is no market for their shares)

What are reasonable expectations of most people who invest in a CC?

1. A job


2. A voice in management


3. Some return on investment
What is a processional service corporation?
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, "PC."
Must shareholders, officers, and directors in a PC be licensed professionals?
Yes. But can hire nonprofessionals as employees.
Are the professionals liable for their own malpractice?
Yes, but not for that of the others.
Are the professionals liable for contracts entered by the entity and for rent due on leases in the PC's name?
No. The entity is liable, not the individuals shareholders.
By what rules is the PC governed?
In general, the PC is governed by rules of the business corporation. Certificate must meet the general corporation 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 officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession.
What happens if one of the shareholders dies or is disqualified from the practice?
The PC must buy back his shares.
Who is suing in a derivative claim and why?
In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute the claim.
What must you ask to determine if a suit is a derivative suit?
Always ask: could the corporation bring this suit? If yes, probably a derivative suit.
What types of suits are always derivative?
Where s/h sues regarding waste of corporate assets. This is a breach of fiduciary duty to the corporation.
What are the consequences of a successful derivative suit?
Generally, the recovery in any successful derivative suit goes to the corporation. S/h receives costs and attorney's fees, usually from the judgment won for the corporation.
Can s/h ever recover the damages directly in a derivative suit?
Maybe if recovery by the corporation would return money to the bad guys - the people who are breaching duties. *All you have to do is make the argument here - it's not clear what the court would actually do.
What are the consequences of an unsuccessful shareholders' derivative suit?
S/h cannot recover costs and expenses and is probably liable to Ds for costs b/c winner usually recovers costs from loser. But, s/h would probably NOT be liable to Ds for attorney's fees b/c the statute is silent.
Can other shareholders later sue the same defendants on the same transaction?
No. This is res judicata.
What are the requirements for bringing a shareholder derivative suit?

Be mechanical. Walk through the requirements.
1) Stock ownership when claim arose, when action is brought and through judgment;
2) Must adequately represent the interests of corporation and shareholders;
3) Must also make a demand that directors bring suit unless it would be futile;
4) The P shareholder can be required to pose security (a bond) for costs unless P owns 5% or more of any class of stock or her stock is worth more than $50,000;
5) If demand is made and refused, in order for s/h to show, she must show a majority of the board is interested or its procedure was incomplete or inadequate.
When is it not necessary to make the showings required for a derivative shareholder suit?
A director or officer can sue another director or officer on behalf of the corporation to compel her to account for violation of duties or misappropriation of corporate assets.
What is the stock ownership requirement?
The person bringing suit must have owned stock (or held a voting trust certificate) at the time the claim arose OR have gotten it by operation of law from someone who owned the stock when the claim arose. In addition, she must own stock when the action is brought and through entry of judgment.
What are examples of "operation of law"?
Inheritance and divorce decree.
When might a demand be futile?
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. E.g., board continued to give financial support to defendant director even after he admitted guilt.
What is the special pleading requirement?
P must plead with particularity her efforts to get the board to sue or why demand is excused.
What if s/h brings a derivative suit, and the corporation wants it dismissed?
It can move to dismiss, based upon the finding by independent directors (or a committee of independent directors, sometimes called a "special litigation committee") that the suit is not in the corporation's best interests (e.g., low chance of recovery, or cost of suit will exceed recovery).
What does the court look at in deciding whether to dismiss?
1) Independence of those making the investigation; and
2) The sufficiency of the investigation.
In a derivative suit, what role does the corporation have?
The corporation must be joined in the litigation as a defendant.
Can the parties dismiss or settle a derivative suit?
Only with court approval. The court may notify shareholders whose interest will be substantially affected.
What is the general rule with respect to voting?
The general rule is that the record owner as of record date has the right to vote
Who is the record owner?
The person shown as the owner in the corporate records.
What is the record date?
The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.
What are the exceptions to the general rule that the record owner on record date votes?
1) Even if it is the record owner on the record date, corporation does not vote treasury stock (treasury stock is not outstanding);
2) Death of a shareholder - the executor of the s/h's estate can vote the shares;
3) Proxies.
What is a proxy?
1) A writing;
2) Signed by record shareholder or authorized agent;
3) Directed to secretary of corporation;
4) Authorizing another to vote the shares.
Is a fax a writing for proxy purposes?
Yes, and so is email.
Can you have proxies in director meetings?
No.
How long is a proxy good?
For 11 months, unless it says otherwise.
Can proxies be revoked?
Yes. A proxy can be revoked in writing or by s/h attending the meeting and voting.
Can a proxy be revoked even though it states that it is irrevocable?
Yes.
When can a proxy not be revoked?
When:
1) It says it is irrevocable; and
2) The proxy-holder has some interest in the shares other than voting.
What is this called?
It is called a proxy coupled with an interest.
What are the requirements for a voting trust?
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 shareholders receive voting trust certificates and retain all shareholder rights except for voting.
Is there a time limit on voting trusts?
Yes. 10 year maximum, but within 6 months of expiration, can extend for another term of up to 10 years.
What are the requirements for a voting agreement (or "pooling" agreement)?
Agreement must be in writing and signed.
Are shareholder voting agreements permissible?
Yes.
Are voting agreements specifically enforceable?
Apparently not in NY. Can't get specific enforcement.
What's special about a proxy given subject to a voting agreement?
It is irrevocable if it says so.
May 2 shareholders agree to vote to elect each other as directors?
Yes, because electing directors is something shareholders do.
May 2 shareholders agree about what actions they will take once they are directors?
No. This is void as against public policy. No voting agreements for directors.
What are the only two ways the shareholders can take a valid act?
1) Unanimous written consent signed by the holders of all voting shares; or
2) A meeting
What is the rule with respect to the annual meeting and what happens there?
1) Can be held anywhere;

2) Elect directors
3) Court can order one if not held.
Where can special meetings be held and who can call a special meeting of shareholders?
Can be held anywhere. Board or anyone provided in the certificate can call a special meeting.
When MUST a special meeting to elect directors be called by the board?
If there is a failure to elect a sufficient number of directors to conduct the business of the corporation.
What happens if the board fails to call such a meeting?
The holders of 10% of the voting shares may demand in writing that the corpoartion hold the meeting. In this case, the corporate secretary must give notice of the meeting. If the secretary fails to do so, the shareholders may give the notice.
What is the notice requirement for meeings?
Must give WRITTEN notice (email is OK) to every shareholder entitled to vote, for every meeting (annual or special) b/t 10 and 60 days before teh meeting.
What must the notice include?
Must state:
1) when and where meeting is;
2) must inform if the proposed action would entitle shareholders to appraisal rights and tell why (and even include the statute about appraisal rights);
3) notice of special meeting must state who called it and the purpose of the meeting.
What is the significance of the statement of purpose?
It limits the business that can be done at the meeting.
Can the stated purpose of the meeting be to remove a particular officer?

ALWAYS TESTED.
No. Because the meeting must be for a proper shareholder purpose and removing an officer is not a proper shareholder purpose. Removing a director its a proper shareholder purpose.
What is the consequence of failure to give proper notice to all shareholders?
Action taken at the meeting is void unless those not receiving notice waive the notice defect.
How does waiver occur?
Express: in writing and signed anytime; or

Implied: if attend the meeting without objection.
*Exactly the same as with directors.
How is a quorum determined in a shareholder meeting?
Determination of a quorum focuses on the number of SHARES represented, not the number of shareholders.

*Every time the s/hs vote, must have a quorum represented at the meeting.
What does a quorum require?
Generally, a quorum requires a majority of outsstanding shares.
Can the certificate or bylaws reduce a quorum to less than a majority?
Yes, but it can never be fewer than 1/3 of the shares entitled to vote.
Can the certificate or bylaws reduce the requirement of majority approval?
No.
Is it possible to require a supermajority (e.g. 90%) of the shares entitled to vote to be represented to constitute a quorum?
Yes, but in the certificate only, not in the bylaws.
Is it possible to require a supermajority vote of the shares at the meeting to pass a resolution?
Yes, but it must be in the certificate only, not in the bylaws.
If a quorum is met, what vote is required to act?
1. To elect a director: plurality

2. Other matters: majority of the shares that actually vote on the issue.


3. Different rule for fundamental corporate change.
Once a quorum is established at a shareholders' meeting, can it be lost if people leave the meeting?
No. That is different from the board. With the board, we can lose the quorum if people leave.
When is cumulative voting used?
Cumulative voting is only available in voting for directors. It's a device to help small shareholders get representation on the board.
How do you calculate cumulative voting?
Multiply number of shares times number of directors to be elected.
If the certificate is silent as to whether shareholders can vote cumulatively, can they?
No. This exists ONLY if the certificate allows.
Can a shareholder sell par value stock that she holds for less than par?
Yes, because par is only an issuance rule.
Where are stock transfer restrictions set?
In the certificate, or bylaws, or by agreement.
What is the rule with respect to the validity of stock transfer restrictions?
Stock transfer restrictions will be upheld provided that they are reasonable under the circumstances, which means not an undue restraint on alienation.
Is a right of first refusal restriction acceptable?
Yes, so long as the price offered is reasonable.
Can the corporation require the s/h to get its approval to sell his stock?
Maybe not. Because this would allow the corporation to refuse for no reason at all. So, probably an undue restraint.
What is required for a valid stock transfer restriction to be invoked against a transferee?
Must look for her knowledge or notice. Even if the restriction is reasonable and thus valid, it can't be invoked against the transferee unless either:
1) it is conspicuously noted on the stock certificate; OR
2) The transferee had actual knowledge of the restriction.
What is a shareholder's statutory right to inspect and copy the books and records of the corporation?
Statute gives a right to inspect and copy:
1) Minutes of shareholder proceedings; and
2) The record of shareholders.
Who can demand access to these?
Any shareholder on five days written demand.
Can the corporation require the s/h to prove anything first?
The corporation can demand that the shareholder give an affidavit that his purpose is not other than in the interest of the corpoartion and he has not within 5 years tried to sell any list of shareholders.
Can the corporation demand more detail in the affidavit?
No.
What happens if the s/h refuses to furnish such an affidavit after the corporation demands it?
The corporation can deny access.
What else can a shareholder request?
S/h 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.
What other statutes give s/h's access?
A different statute gives a right to inspect and copy a list of the current directors and officers. Any shareholder can demand that on two day's written demand.
What other right to inspect do shareholders have?
Common law right to inspect. For all shareholders, to inspect records at a reasonable time and proper place for a proper purpose (related to her role as a shareholder).
What documents does this cover?
It is unclear how broad this is. It may allow access to more stuff than the statutes.
What type of distributions may the corporation make to the shareholders?
Can be:
1) Dividend; or
2) Payment to repurchase shares; or
3) To redeem shares (forced sale to corporation at price set in certificate).
When are distributions declared?
They are declared in the Board's discretion. There is no shareholder "right" to a distribution until it is declared. Once it is declared, the s/hs affected have a right to it.
Will a court interfere with the Board's discretion and order a distribution?
Only on a showing of bad faith or dishonest purpose. It is very difficult to prevail on a claim like this.
What is a stock split?
Gives s/h more shares than she now has but reduces the value of each share proportionately. Economic effect is nothing.
Who gets what dividends where the outstanding stock is 100,000 shares of common?
Split the amount declared evenly b/t all common shares.

$400K dividend = $4/share
Where dividend declared is $400,000, and there are 100,000 shares of common stock and 20,000 shares of preferred stock with a $2 dividend preference?
Preferred is paid first. So, those 20,000 preferred shares are paid their $2 preference first, before anybody else gets anything. The remaining $360,000 is split evenly amongst the common shares, so $3.60/share.
Where there are 100,000 shares of common and 20,000 shares of $2 preferred that is also participating.
Participating means pay again. So, these 20,000 shares get paid twice - once as preferred and again b/c they are participating. So, after the initial payout to the preferreds, the remainder is split evenly amongst the common AND the preferreds.
Whre there are 100,000 shares of common and 20,000 shares of $2 preferred that is also cumulative (and no dividends in the three prior years)
Cumulative means add them up. For the years in which no dividend was paid, the cumulative holders' dividend is adding up. So, corporation owes these cumulative holders for the three prior years (b/c there have been no dividends over those years). PLUS there's this year, the year the dividend is being declared, so the corporation owes the cumulative holders for four years of their $2 preference. The rest is divided amongst common shares.
Which funds may be used for any distribution?
Only surplus, never stated capital.
What is surplus?
Surplus = assets - liabilities - stated capital (Net assets - stated capital)
How is stated capital computed?
Stated capital is the par value and the excess over par goes into surplus. On no-par stock, within 60 days after issuance, the board can allocate any part, but not all, to surplus. If the board does not do this, it is all stated capital.
Can a corporation make distributions if it lost money the last year?
Yes.
Can the corporation make distributions if it is insolvent or if the distsribution would render it insolvent?
No.
What does insolvent mean?
Insolvent means the corporation is unable to pay its debts as they come due in the ordinary course of business.
Who is liable for unlawful distributions?
Directors are personally liable for unlawful distributions, as are shareholders who knew the distribution was unlawful when they received it.
Who would sue to recover for an unlawful distribution?
The corporation can sue, which means it could be a derivative suit. Also, by statute, a director or officer can sue on behalf of the corporation.
What defenses might directors have in such an action?
Good faith reliance
How are redemptions done?
They are set in certificate, and must be done proportionately within each class of stock.
How are repurchases done?
They are individually negotiated, and can discriminate except in close corporation, where might have to give equal opportunity to all shareholders.
What is required where a corporate change is considered fundamental?
1) Both director and shareholder approval;
2) Notification of the Department of State by delivering a document which the Dept files.
What is the dissenting shareholders' right of appraisal?
The right of a shareholder to force the corporation to buy her shares at fair value.
What actions by corporation trigger the shareholder's right of appraisal?
1) Some amendments to the certificate;
2) Consolidation;
3) Your corporation merges into another corporation;
4) Your corporation transfers substantially all of its assets; or
5) Your corporation's shares are acquired in a share exchange.
Where one of those things is present, do s/hs always have a right of appraisal?
No, not if the company is listed on a national securities exchange or NASDAQ.
What actions are taken by shareholder to perfect the right of appraisal?

Keep it mechanical.
1) Before shareholder vote, file written objection and intent to demand payment;
2) Abstain or vote against the proposed change; AND
3) After the vote, make written demand to be bought out.
Who sets the value of the shares?
If the shareholder and corporation cannot agree on fair value, then the corporation sues and the court determines the value.
In setting the value of the stock, can the court discount the value to reflect the fact that minority shares may be worth less than controlling shares, b/c they carry no control over corporate affairs?
No. There is no minority discount in NY.
Who makes minor changes to the certificate of incorporation and what constitutes a minor change?
The board makes minor changes, such as those relating to office location, registerd agent, etc.
Who makes other amendments to the certificate of incorporation?
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 (not a majority of those that actually vote)
What is required for amendments to change or strike a supermajority quorum or voting requirement for shareholder voting?


If the amendment will change or strike a supermajority quorum or voting requirement for shareholder (not director) voting, it requires director approval and must be approved by 2/3 of the shares entitled to vote.
What must be done if an amendment is approved?
Deliver certificate of amendment to Dept. of State for its filing.
Are there dissenting shareholder rights of appraisal?
Yes, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights.
What is required for mergers and consolidations?
1) Each company's board of directors adopts a plan of merger or consolidation; and
2) Shareholder approval in each corporation
*NOTE: no shareholder approval required in short-form merger.
3) Deliver certificate of merger or consolidation to department of State for filing.
How many shares are required for approval of the proposed merger?
Majority of outstanding shares entitled to vote.
What is a short-form merger?
Where a parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into a parent corporation.
What is the effect of merger or consolidation?
Successor Liability: The surviving company succeeds to all rights and liabilities of the constituent companies, which have disappeared.
What is a share exchange?

NEVER TESTED
One company acquires all the outstanding shares of one or more classes of another corporation.
What types of things are fundamental corporate changes for only one party and which party?
Transfer (not just mortgage) of all or substantially all of the assets not in the ordinary course of business or shares exchange, and these are fundamental corporate changes for the selling corporation ONLY; not for the buying corporation.
What is required for these types of changes?
1) Each corporation's board of directors authorizes the deal AND
2) Approval by selling corporation's shareholderes.
How many of selling corporation's shares are required to approve the sale of all assets by one company to another?
Majority of the shares entitled to vote.
What is required in the share exhange?
Deliver plan of exchange with the Department of State for filing. In the transfer of assets, no such filing is required.
Are there dissenting shareholders' rights of appraisal?
Yes, for shareholders of the selling corporation only. Not for shareholders of the buying corporation (b/c it is not a fundamental corporate change for the buyer).
What is the exception?
No right of appraisal even for shareholdres 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.
Does the acquiring company assume liability of the acquired company?
General rule is that the company acquiring the assets will not be liable for the torts of the company whose assets it acquired unless:
1) the deal provides otherwise; or
2) the purchasing company is mere continuation of the seller, or
3) the deal was entered fraudulently to escape such obligations.
Is this different from the merger?
Yes, in the merger we do presume successor liability, but not here. This makes sense b/c the corporation selling the assets still exists.
What is the requirement for voluntary dissolution?
1) No Board vote necessary
2) Majority of shares entitled to vote,

3) Certificate of dissolution is delivered to Dept of State for its filing.
What is involuntary dissolution?
This is judicial - someone is asking for a court order of dissolution. Very popular.
How does involuntary dissolution happen?
1) By Board resolution or resolution of majority of shares entitled to vote, stating that corporatino has insufficient assets to discharge liabilitise or that dissolution would be beneficial to shareholders;
2) One half or more of shares entitled to vote may petition if directors too divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders;
3) Any shareholder entitled to vote may petition if shareholders unable to elect directors for two annual meetings;
*4) Twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds:
a) Managment's illegal, oppressive, or fraudulent acts toward complaining shareholders; or
b) Managment's wasting, diverting, or looting assets.
Who is "management" referring to here?
The directors or managing shareholders in a close corporation
When may court deny dissolution?
If there is some other way the complaining shareholder can obtain a fair return on his investment, e.g. by ordering 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.
How may the corporation or non-complaining shareholders try to avoid dissolution here?
Within 90 days of the petition, buy the petitioner's shares at fair value on terms approved by the court.
What is winding up and what does the process entail?
Liquidating:
1) Gather all assets;
2) Convert to cash;
3) Pay creditors; and
4) Distribute remainder to shareholders, pro rata by share unless there's a dissolution preference.
How does a dissolution preference work?
It works like a divided preference, it means pay first.
Can shareholders agree that they will be paid before creditors?
No. Debt is always paid before equity.
What is the traditional rule with respect to controlling shareholders?
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.
When does a s/h owe a duty?
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 shareholdres or the corporation.
Where is such a problem most likely?
In the close corporation, although it could also happen in a publicly traded corporation.
If the controlling shareholder sells her shares at a premium, can she keep the money?
Yes. If all she's doing is getting a premium for her control block. BUT, courts may impose liability in this situation IF something else happened too:
1) Controlling shareholder sold to looters without making a reasonable investigation;
2) Controlling shareholder de facto sells a corporate asset (to a buyer who has no interest in running the corporation but buys just to access assets). If she does, all shareholders should share in the premium paid by the buyer;
3) Controlling shareholder sells a corporate office, e.g., a position on the Board.
What kind of facts are most likely to show that controlling shareholder sold to looters wihtout making a reasonable investigation?
Facts that would put a reasonable person on notice of a problem, e.g., agent approaches controlling s/h on behalf of an undisclosed principal.
What is the remedy if the controlling shareholder sells wihtout reasonable investigation to someody who then loots the corporation?
Disgorge the seller's profit AND the seller is probably liable for all damage to the corporation.
What is an example of sale of a corporate office?
Where controlling shareholder sells controlling interest and agrees that she and her directors will resign from the board.
What is the remedy where a controlling shareholder sells a corporate office?
Disgorge the profit.
What is a freeze-out merger and what is the rule with respect to them?
Merger aimed solely at cashing out minority shareholders unfairly. Usually, majority shareholders cause their corporation to merge with another corporation which they own. The minority shareholdrers' shares are purchased for cash, so they have no interest in either corporation.
All mergers must have a legitimate corporate purpose, even though approved by the requisite number of shares. Courts are increasingly protective of minority s/hs.
What would the court probably look at in such a fact pattern?
It will view the transaction as a whole. This means that it will look for fair price AND the entire course of dealing. Factors:
1) Whether the deal is tainted by self-dealing or fraud;
2) Whether the minority shareholders are dealt with fairly;
3) Whether there is a legitimate business reason for the merger.
What is the result if a director or an officer engages in market trading based upon inside information from the corporation and she makes a profit by doing so?
In NY, the director or officer has breached a duty to the corporation by doing this and the corporation can sue to recover the profit he made in market trading.
What is the duty of disclosure?
All directors and officers (and probably controlling shareholders) owe duty not to fade on "social facts" in a securities transaction with a non-insider. In other words, there is an affirmative duty to disclose special facts in a securities transaction with a non-insider. So, they cannot trade on secrets; they must disclose or abstain from dealing.
What are special facts?
Those a reasonable investor would consider important in making an investment decision. They bear on potential value of the securities.
Who can sue?
A s/h with whom the director or officer deals and violates the special facts doctrine.
What is the measure of damage?
The difference b/t price paid and value of stock a reasonable time after public disclosure.
What is the relationship b/t the special facts doctrine and common law fraud.
In some cases that won't qualify for common law fraud b/c there was no affirmative misrepresentation, the special facts doctrine will allow recovery.
What damages can be recovered by a shareholder suing under the special facts doctrine?
Difference b/t the price paid and the price after the market digests the information.

Can directors be held liable to the corporation for voting to declare a dividend contrary to the certificate of incorporation?

Directors are jointly and severally liable to the corporation (or its creditors and shareholders) if they vote for or concur in the declaration of a dividend or other distribution contrary to the New York Business Corporation Law (“BCL”) or the certificate of incorporation, but any director against whom such a claim is asserted is entitled to contribution from the other directors who are liable. Furthermore, shareholders who knowingly received improper distributions or payments for shares may be liable to the directors held liable.

What are the two tests to determine if an interested director transaction can be avoided?

The Business Corporations Law ("BCL") supplies two tests for interested director transactions; a mechanical approval test and a substantive fairness test. If either test is met, the transaction cannot be avoided merely because one or more directors are interested therein.

What is the approval test?

The approval test provides that an interested director transaction is not voidable if: (i) the board approves the transaction by a sufficient vote without counting the votes of interested directors; (ii) the board approves the transaction by unanimous vote of the disinterested directors, where votes of interested directors must be counted to establish a quorum of the board; or (iii) the shareholders approve the transaction by vote. (Provided, in each case, that the material facts as to the directors’ interest are disclosed or known to those voting on the approval.)

What is the fairness test?

The fairness test states that if for some reason, none of the foregoing mechanical tests is met, the transaction may be avoided by the corporation unless the parties thereto affirmatively establish that the transaction was fair and reasonable to the corporation at the time it was approved.

When is a majority of s/h votes entitled to be cast required?

Most amendments to a corporation's certificate of incorporation require a majority of the votes entitled to be cast, not simply a majority of the votes cast. Similarly, approval of a merger, sale of assets, dissolution, or guarantee outside corporate purposes also requires a majority of the votes entitled to be cast.

What is the effect on the shareholders when a court rules that a corporation's corporate veil can be pierced?

When the corporate veil is pierced, the shareholders are held personally liable for all corporate obligations. Even though a corporation may have been validly formed, which typically shields shareholders from personal liability, the corporate entity may be ignored to serve the ends of justice. Two elements must be established to pierce the corporate veil: (i) the defendant(s) exercised complete domination over the corporation in the transaction in question, and (ii) such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury. In other words, the defendant abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice

What must an adverse party prove to pierce the corporate veil?

To pierce the corporate veil, a party must prove the defendant “abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice.”

What are the factors to be considered when determining whether to pierce the corporate veil?

The factors a court will consider are: (i) failure to adhere to corporate formalities like keeping corporate records, (ii) inadequate capitalization when the corporation was formed, (iii) commingling of personal and corporate assets, and (iv) use of corporate funds for personal expenses.

When may holders of 20% of voting shares of a corporation, whose shares are not traded on a securities market, petition for dissolution?

Holders of 20% of voting shares of a corporation whose shares are not traded on a securities market may petition for dissolution if: (i) the directors or those in control of the corporation have been guilty of illegal, fraudulent, or oppressive actions toward the complaining shareholders (not third parties); or (ii) the assets of the corporation are being looted, wasted, or diverted by the directors, officers, or those in control.

What has "oppressive conduct" been held to include?

“Oppressive” conduct has been held to include conduct by majority shareholders that substantially defeats expectations of minority shareholders, which, viewed objectively, were both reasonable under the circumstances and central to petitioner’s decision to join the venture.