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331 Cards in this Set
- Front
- Back
Formation Requirements
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People, Paper, Acts
People: Incorporators Paper: Certificate of Incorporation Acts: Delivery, Filing and Organizational Meeting |
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What does an incorporator do
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1) Execute Certificate
2) Deliver it to NYS Dep't of State 3) Hold Organizational Meeting |
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Necessary Number and Requirements of Incorporators
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a. one or more
b. Adult Humans ONLY - no corporations |
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The Certificate of Incorporation: Necessary Information
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Corporate Name
County of Office of Corporation Designation of Sec. of State as Agent for service of process Forwarding Address for Service of Process Name and Address of Incorporators Corporate Purpose Capital Structure (stock) |
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The Certificate of Incorporation: Optional information
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Registered Agent other than secretary of state for service of process
Statement of Duration |
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Corporate Names: Requirements
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Corporate name must include the words, or abrreviation for, Corporation, Incorporated, or Limited
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Office of Corporation Address
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only COUNTY in which office is established required
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Does an office of corporation have to be a place where the corporation actually conducts business?
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NO
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information for service of process
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Designation of Secretary of State
Forwarding Address for service *optional - name of registered agent for service of process |
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Statement of Duration
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Optional: if not included, default duration is perpetual
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Corporate Purpose
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Can be to engage in all lawful activity, after first obtaining necessary state agency approval, or be more specific
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Ultra Vires Acts: Definition
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When a corporation engages in acts outside the scope of the activities provided for in the certificate
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Rules regarding Ultra Vires Acts
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1) Ultra Vires Acts are valid
2) Shareholders may seek an injunction 3) Responsible managers are liable to the corporation for Ultra Vires losses |
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Authorized Stock: Definition
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the maximum number of shares the corporation can sell
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Issued Stock: Definition
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The number of shares of stock the corporation actually sells
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Outstanding Stock: Definition
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stock the corporation has sold and has not reacquired.
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Information which MUST be included in the Certificate of incorporation about the corporations stock:
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1) Amount of Authorized Stock
2) # of shares per class of stock 3) Info on Par Value, rights, preferences and limitations of each class of stock 4) info on any series of preferred shares. (Series = subclass) * at least one classs of stock or bonds MUST have unlimited voting rights and at least one class must have unlimited dividend rights |
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Acts required to Incorporate:
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Sign certificate and acknowledge before notary, deliver to NYS Dept of State. If it conforms iwhtthe law and filing fees are paid, the Dept. of state files the certificate.
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Effect of filing certificate of incorporation
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Conclusive Evidence of valid corporate formation
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De Jure Corporation: Defintion
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A corporation formed in full compliance with all statutory requirements
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Organizational Meeting: Who holds?
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the incorporators
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Organizational Meeting: What occurs?
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1) Adoption of any bylaws
2) Election of initial directors |
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What Law governs the internal affairs of a corporation:
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The laws of the state in which it was incorporated - NY corporations internal affairs are governed by NY law, even if it does no business here
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Powers of corporation as a separate legal person:
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Enter contracts
Transfer Property Buy and Sell Securities Sue or Be Sued Make political donations Make Charitable Donations Make Loan guarantees |
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Limtiations on Political Contributions by corporations:
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$5,000 per year, per candidate or organization
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Limitations on Charitable contributions by corporations:
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NONE
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Limitations on Loan Guarantees NOT in furtherance of corporate business
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Must be approved by 2/3 of shares entitled to vote
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Are Directors and Officers liable for corporations debts, breaches, or torts?
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NO
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Are shareholders liable for corporations debts, breaches or torts
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No - limited to liability to the extent of the value of their stock
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Who is liable for the corporations acts (generally)
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the corporation itself
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De facto corporations: Defintion
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When the proprietors have faield to form a valid corporation the DFC doctrine can eliminate their liability by allowing the existence of a corporation, even if not properly formed
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De facto Corporation: Required elements
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1) A relevant incorporation statute (NY - BCL)
2) The parties made a good faith, colorable attempt to comply with the statute 3) the business is being run as a corporation |
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Effect of a Finding of a De Facto Corporation:
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treated as a corporation in all cases except in an action by the State
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Status of De Facto Corporation Doctrine in NY
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Practically abolished, only really allowed when, for example, all de jure requirements were met by the parties, by the dept. of state nonetheless failed to file the certificate.
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Corporation by Estoppel:
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If you deal with a business as a corporation, treating it as a corporation, you may be estopped from denying the businesses corporate status and suing individual proprietors - ABOLISHED IN NY
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Are Bylaws necessary for the formation of a corporation:
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NO
but almost every corporation has them |
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Conflict between Bylaws and Certificate
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Certificate Controls: it is a contract with the state
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Are Bylaws filed with the state:
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No
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Are outsiders bound by bylaws
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No
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Who adopts INITIAL bylaws
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Incorporators at organizational meeting.
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Status of Bylaws adopted by incorporators
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Equal to Shareholder bylaws
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Power to Amend, repeal, or adopt bylaws
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Shareholders
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Can Bd. of Directors amend, repeal or adopt new bylaws:
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Only if allowed by certificate or shareholder bylaw*
*even then Shareholders can amned or repeal any directeor adopted bylaw |
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Promoter: Defintion
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a person acting on behalf of a corporation not yet formed
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Is a corporation liable for pre-incorporation contracts?
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Only if it adopts the contract
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Methods of Adopting pre-incorporation contracts:
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1) Express Adoption
2) Implied Adoption |
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Express Adoption of Preincorporation contracts: Defined
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Express adoption is accomplished by Board action
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Implied adoption of preincorporation contracts: Defined
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Implied adoption occurs if the corporation knowingly accepts the benefits of the contract
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Is the promoter liable for pre-incorporation contracts:
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Yes, unless
1) the contract expressly states otherwise OR 2) there is a novation of the contract. Liable if corporation never formed, and even if corporation adopts the contract |
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Secret Profit Rule
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Promoter cannot make a secret profit on dealings with the corporation. If she does, she is liable, and has to account for the profit (return it to the corporation)
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Secret Profit Rule: Property Acquired Before Becoming Promoter - Calculating profit
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Profit= price paid by corporation minus FMV at the time of sale
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Secret Profit Rule: Property Acquired After becoming promoter - calculating profit
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Profit = price paid by corporation minus price paid by promoter.
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Foreign Corporations: definition
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A corporation incorporated in any other state or nation
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Domestic Corporation:
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A corporation incorporated in the state
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Requirement for Foreign Corporations
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To do business in NY they must qualify
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Foreign Corporation "Doing Business" defined
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Foreign corporation engages in a regular course of intrastate business activity
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How to qualify as a foreign corporation:
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1) apply to Dept. of State
2) Designate the Sec. of State for service of process 3) Pay fees to NY for privilege of doing business here |
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Information required from Foreign corporation to qualify:
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1) The info from its certificate of incorporation
2) proof os good standing in its state of incorporation |
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Effect of foreign corporation doing business in NY without qualifying
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It cannot assert any claim in the state until it
1) qualifies 2) pays fees, taxes, penalties, and interest * can still be sued and defend, just not assert a claim |
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Issuance of Stock: Defined
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Issuance of Stock occurs when a corporation sells its own stock
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issuance of Bonds: Defined:
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Investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the contract. Bond holder is a creditor, not an owner. Holds a "debt security)
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Debenture: Defined
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A loan, the repayment of which is not secured by corporate assets
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Subscriptions: Defined
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A written offer to buy stock from corporation
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Revocation of Subscriptions: Pre-incorporation
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Pre-incorporation subscriptions are irrevocable for three months after they are made, UNLESS the subscription provides otherwise, OR all subscribers agree to let you revoke
Assures the not yetformed corporation is can rely on the funds |
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Revocation of Post-incorporation subscriptions:
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Revocable until accepted by the corporation
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Method of accepting a post incorporation subscritpion
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Board acceptance
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May the corporation decide to sell to certain subscribers and not others
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NO - the coproation must treat all subscribers wihtin each class or series of stock uniformly
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Effect of Default by Subscriber after Acceptance: When subscriber has paid Less than hald purchase price
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the corporation may keep the money paid and cancel shares. Stock becomes authorized unissued stock, so corporation can sell it
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Effect of default by subscriber after acceptance: when a subscriber has paid more than half the purchase price
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If subscriber fails to pay balance within 30 days written demand, corp must try and sell to someone else for cash ( or binding obligaiton to pay cash.) if noone else will buy, the corporation may keep the money paid and cancel shares, stock becomes authorized unissued stock and may be sold
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Effect of default by subscriber after acceptance: when a subscriber has paid more than half, and the corporation can collect more than the remaining balance from another purchaser
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The defaulting subscriber recovers any excess over what she agreed to pay, but you deduct from the the corporations expenses in selling to new party
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Permissible Forms of Consideration for Stock
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1) Money (cash or check)
2) Tangible or Intangible Property 3) Services already performed for the corporation (includes services of promoters) 4) Binding obligation to pay money or property in the future 5) Binding obligation to perform future services having an agreed upon value |
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Prohibited Forms of Consideration:
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Basically NO consideration - would be treated as water
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Par Value: Defintion
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Minimum Issuance Price: can be sold for more, but not less per share
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No Par Stock
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No minimum issuance price, can sell for any price
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Who sets price for no-par stock
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The Bd. UNLESS certificate authorizes shareholders to do so
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Treasury Stock: Defined
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Stock previously issued and reacquired by the corporation - it may then be resold
- Treasury stock, even if previosuly par stock, has NO PAR VALUE |
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DEtermination of value of consideration for issuance of stock
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Bd has authority to make determination of value of consideration, it is conclusive absent fraud
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Result of issuing Par stock for less than minimum price (water)
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the corproation (or creditors if corp. insolvent) can sue for missing value (water)
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Parties liable for water
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Directors, if they knowingly authorized the issuance
Purchaser - charged with knowledge of the par value *Third Party who purchases stock from Purchaser NOT liable if he was without knowledge of the water. |
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Preemptive Rights:
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Right of an existing shareholder to maintain percentage of ownership by buying stock whenever there is a NEW issuance of common stock FOR MONEY
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If certificate is silent, does "New Issuance" include sale of treasury stock?
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NO
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If certificate is silent, foes new issuance include sale of shares authorized by the original certificate and sold within two years of formation?
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NO - if stock was authorized in original certificate and sold within two years
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Do Pre-emptive rights exist if certificate is silent on per-emptive rights?
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NO
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Do preemptive rights apply to an new issuance of stock made to acquire greenacre?
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NO - only to issuances for money
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Number of Directors Required
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One or more
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Method of setting number of directors
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1) in the bylaws or
2) by shareholder act or 3) by the board if shareholder bylaw allows |
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Effect of no specification on number of directors
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Only one director
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Who elects intial directors
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incorporators
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After intial directors, who elects?
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Shareholders
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When are directors elected
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At annual shareholders meeting
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Must each director position be elected each year?
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No - can be divided into 1,2,3 or 4 classses, with one class elected each year
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Classified Board: Definition
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A board with 1 or more classes of directors which are subject to longer than single year terms, with each class alternately up for election at shareholder annual meetings
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Can shareholders remove a director for cause
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yes
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Can Board remove a director for cause
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Only if permitted by the certificate or a shareholder bylaw.
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Can anyone remove a director without cause?
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Only shareholders, and ONLY if certificate or bylaws allow
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Filling a vacancy on the board
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Directors select person to serve the remainder of the term
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Who selects person whol will serve remainder of term in case where a director is removed by shareholders without cause
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Shareholders
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Are individual directors agents of the corporation?
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NO
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Methods by which Board can act
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1) unanimous written consent
2) Meeting |
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What is the effect of an act not accomplished properly by the baord
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it is void unless ratified by valid act
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Must Bd. Meetings be held in NY
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NO
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Notice For Regular Board meetings
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Not required, provided the time and place are set in the bylaws or by the board
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Notice for Special Meetings of the Board
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Required - must state time, place, but need NOT state the purpose
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Effect of failure to comply with notice requirement
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Actions taken at meeting is void unless director not given notice waives the notice defect
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Methods of waiving a board meeting notice defect
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1) in writing & signed anytime
2) by attending the meeting without objection |
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Can a director send a proxy for director voting
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NO - a director owes non delegable fiduciary duties
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Can Directors enter into voting agreements
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NO - non delegable fiduciary duities
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Quorum requirement for Board Meetings:
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majority of "entire board" (duly constituted board - means number of positions if no vacancies)
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passing a resolution with a quorum
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requires a majority vote of those present at meeting
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Can quorum be less than a majority of directors?
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Yes, by certificate or bylaws, but never fewer than 1/3 of the entire bd.
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Can corporation decrease requirement that a board resolution must pass by a majority of directors present?
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NO
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Can a corporation increase a quorum to a number greater than a simple majority of directors
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yes, but by certificate ONLY
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Can the corporation require a supermajority vote to pass a resolution
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yes, but by certificate only
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Function of the Bd. or Directors
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Manages business of corp.; sets policy, monitors and supervises officers, declares dividends and other distributions, decides when corporation will issue stock, recommends Fundamantal Corporate changes
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Committees of he Board: Permissible activities
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If certificate or bylaws allow, a majority of the entire bd. can delegate substantial management functions to a committee of one or more directors.
* Often used in shareholder derivative suits |
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Committees of the Board: Impermissible activities
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1) Setting director compensation
2) Filling Board Vacancies 3) Submitting a Fundamental Corp. Change to Shareholders 4) Amend Bylaws * can still recommend each of these for full board action |
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Duty of Care: Standard
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A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances and in like position.
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Breach of Duty of Care: Nonfeasance
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Failure to engage in activities sufficient to meet the Duty of care: Did not go to any board meetings, e.g. To be liable, there must have been harm to the corporation as a result - difficult to prove
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Breach of Duty of Care: Misfeasance
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Board does something that hurts the corporation: Involves application of Business Judgment Rule. Even if it harmed the corproation, if the board did what a prudent person would do - deliberated and analyzed, then they will not be held liable under BJR
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the Business Judgment Rule
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The court will not second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis. the director is not a guarantor of success.
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Duty of Loyalty: Standard
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A director must act in good faith and with the conscientiousness, fairness, morality and honest that the law requires of fiduciaries.
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Does the BJR apply to Duty of Loyalty cases
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NO - it can never apply when the director has a conflict of interest
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Duty of Loyalty: Interested Director transactions:
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Any deal between corporation and one of its directors, or with a business in which its director is also a director or officer or in whcih he has a substantial financial interest.
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Interested Director Transactions - How to handle
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Set aside UNLESS the director can show
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 appropriate means |
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Appropriate means for Approving an interested director transaction
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1) Shareholder Action
2) Bd. Approval by sufficient vote not counting votes of interested director(s) 3) Unanimous vote of disinterested directors if disinterested directors are insufficient in numbers to take a Board action |
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Do interested directors count towards a quorum of the board?
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YES - can participate, but their vote does not count
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Can Bd. set compensation of directors?
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YES - but must be reasonable and in good faith. if excessive, it is a waste of corporate assets
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When can stock options be issued as an incentive to service
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1) if stock is on stock exchange, such use or options must be authorized under the exchanges policies
2) if the stock is not listed on an exchange, it must be approved by the shareholders. |
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Interested Director Transactions: Competing Ventures
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Under Duty of Loyalty, directors can not compete directly with corporation
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what If a director competes directly with corporation ?
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Corporation gets a constructive trust on the directors profits (director must Account for the profit)
Corporation may also be entitledto damages for harm accruing from the competition |
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Interested Director transactions: Corporate Opportunity
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Under duty of loyalty, director may NOT usurp a corporate opportunity
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What qualifies as Usurping?
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taking the opportunity without disclosing it to the board and awaiting board rejection of the opportunity
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What is a corporate opportunity
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Something the corporation needs, has an interest or tangible expectation in, or that is logically related to the business
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Inability to afford opportunity
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Not a defense to usurpation
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remedy for usurpation
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Creation of a constructive trust for the profits derived form the opportunity by the director
Damages also possible is usurpation harmed the corp. |
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Improper Loans of Corporate Funds
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Directors can be liable, BUT
Loans to a director or guarantees of a directors personal liability are acceptable if Approved by shareholders, or if the Bd. Finds it benefits the corporation. (paying for drug habit would not qualify) |
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Improper distributions
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Directors can be liable
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Which directors are liable for any basis of director liability?
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General Rule: A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate record
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Appropriate methods of written dissent from Board Action:
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1) in the minuted
2) IN writing to the secretary at the meeting 3) in registered letter to the secretary promptly after the meeting is adjourned *oral dissent not effective by itself * dissent not effective if the director voted for th resolution at the meeting |
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Exceptions from liability
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1) Missing a meeting where the bad act occurred, where the director registers written dissent within a reasonable time after learning of the action will absolve liability - has to dlever the dissent, or send it by registered mail to the secretary, ensuring it will be filed with the minutes for the missed meeting
2) Where the director acted in good faith reliance on information, opinions, reports or statements by 1) officers or employees of the corporation he believes competent and reliable, 2) lawyers or CPA's whom te director believes are acting within their competence or 3) a committee of which the person is not a member as to matters within its designated authority |
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Officers: Duites owed to corporation:
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Duties of Care and Loyalty
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Can officers bind the corporation to actions they take on its behalf?
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Yes, if they have the authority to do so - they are agents of the corporation
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Inherent authority of the president
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Includes authority to sue, and to bind the corporation to contracts entered into in the ordinary course of business
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Can one person hold multiple offices simultaneously
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Yes
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Who selects and removes officers
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the board, unless the certificate allows shareholders to elect them
* if shareholders can elect them, only shareholders can fire them - however directors can suspend an officers authority to act for cause |
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If board fires president can corp be liable?
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yes, for breach of contract, if applicable
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Who hires and fires directors, generally
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Shareholders
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removal by judical action: how accomplished
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Either the Atty general, or 10% of all shares may sue for a judgment removing an officer for cause. Court can bar reappointment of a person so removed from office
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Who sets officer compensation
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the Bd.
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Reimbursement/Indemnification of directors and officers: when applicable
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Applicable when a director or officer is sued in her capacity as such by or on behalf of the corp.
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When reimbursement/indemnification prohibited
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When officer/director found liable to corp.
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When reimbursement/indemnification mandatory
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When officer director wins a judgment on merits or otherwise
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Can officer or director recover for atty fees and expenses incurred in suing for appropriately owed reimbursement or indemnification
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NO
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When reimbursement/indemnification permissive
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In any case other than when it is prohibtied or mandatory: i.e. in settlement
Officer/director must show 1) acted in good faith 2) reasonably believed her actions were in corporations best interests |
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What may permissive reimbursement include?
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settlement amount, expenses, atty fees
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Who determines eligibility for permissive reimbursement?
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The Bd (with a quorum of non party directors OR if no such quorum
Shareholders or a quorum of disinterested directors Or the board pursuant to a report from independent legal counsel The court may also order it if the court finds she is reasonably entitled to it |
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May corp advance litigation expenses?
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YES, but they must be repaid if it turns out the director/officer not entitled to reimbursement
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Statement in certificates or bylaws concerning indemnification
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May provide for indemnification by resolution of the baord or sharehodlers or by agreement, unless the director/officer acted in bad faith, was deliberate and dishonest in a way material to the case, or wrongfully profitted
* when a director arguably breaches a duty, the certificate may eliminate director liability to the corporation or shareholders for damages for breach EXCEPT when the director acted in bad faith or with wintentional misconduct or received an improper financial benefit or approved an improper distribution or loan. |
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Can shareholders manage corp:
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NO - bd. manages, unless closely held - then they may
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Close Corporation Defined
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Has few shareholders and stock is not publicly traded
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How to allow for shareholder management in Close Corp.
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Provision in certificate restricting or transferring board power to shareholders AND
1) all incorporators or shareholder approve 2) it is conspicuously noted on front and back of all shares 3) all subsequent shareholders have notice shares not listed on an exchange or regularly quoted over the counter |
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Who owes duties of care and loyalty in closely held corp?
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Managing Shareholders
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Additonaly duty of majority shareholders in close corp.
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Duty of Utmost Good Faith - to protect minority shareholders or corporation from oppression, and to give them a remedy for behavior that defects reaonable expectations of investment
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Reasonable Expectations of investment in a close corp
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1) Employment
2) Return on Investment 3) Voice in Managment |
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Professional Service Corporations:
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Corporations formed by members of a licensed profession, such as doctors and lawyers - cannot form a general business corp, but may form a Professional services Corporation.
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What must a professional services corporations name include and what additional certification requirements are there
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P.C., the nature of the services to be performed,names and addresses of original shareholders, D's and O's & must certify that each shareholder D & O is licensed to practice
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Must shareholders, officers and directors of Professional services corporations be licensed professionals?
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Yes, but can hire non professionals as employees
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Malpractice Liability in a PSC
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Liable for your own malpractice, but not that of others
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Are Professionals liable for contracts of PSC
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No - entity liable.
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Effect of death or disqualification of Professional member of PSC
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PSC must buy back the shares of the deceased or disqualified person.
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Are Shareholders liable for what the corporation does?
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General Rule: No - corporation itself is liable for what it does
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When can a shareholder be liable for the acts of a corporation?
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If the court pierces the corporate veil
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Piercing Corporate veil: Availability and Applicability
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1) Must be close corporation
2) The shareholder must have abused the privelege of incorporating 3) Fairness must require holding them liable 4) |
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Fairness requires piercing the corporate veil When
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The shareholder exercises complete dominion and control over the corporation to perpetuate fraud or injustice.
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Test for piercing the corporate veil
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1) General Rule - Shareholder not liable
2) To pierce veil and hold shareholder liable a. the shareholder must have abused privilege of incorporating b. fairness must require holding them liable - the shareholder must exercise complete dominion and control over the corporation to perpetuate fraud or injustice |
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Who may be held liable when the court pierces the corporate veil
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Only the shareholder who was responsible for the misconduct
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Is PCV available to hodl liable another corporation
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Yes - is a parent corporation forms a subsidiary to avoid its obligations and totally dominates the subsidiary, the court might PCV to hold parent liable.
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Is undercapitalization sufficient cause to PCV in NY?
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Not by itself, it seems
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PCV is more commonly used in?
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Tort cases
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The ten largest shareholders in a close corporation are liable for?
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Wages and Benefits of employees under the NY BCL
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Shareholder Derivative Suit: Defined
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When a shareholder sues to enforce the corporations claim, not her own personal claim. Corporation is not pursuing its own claim, so shareholder steps in
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How to determine if a suit is derivative
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Could the corporation have brought the suit?
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These are Always Derivative Suits
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Suits for breach of he Duty of Care, or Duty of Loyalty - duties are owed to the corp.
Suits for waste of corporate assets |
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Effect of shareholder winning derivative suit
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The corporation receives the recovery, the shareholder gets costs, expenses and atty fees.
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May a shareholder receive the damages directly in a derivative suit?
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Only if recovery by the corporation would return money to the bad guys (typically a close corporation issue)
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Consequences of losing derivative suit:
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Shareholder may not recover her costs and expenses
Corporation can probably recover costs from the shareholder Other shareholders are estopped from later raising the same claim |
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Requirements for bringing a shareholder derivative suit.
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1) Stock Ownership when claim Arose
2) Adequate representation of the interests of the corporation and the shareholders 3) May be required to post a bond for defendant's (corporations) costs 4) Must make a demand on directors that the corporation sue, unless it would be futile to do so 5) plea must state with particularity the efforts made to get the board to sue, or why it was futile to do so 6) the corporation must be joined in the litigation as a defendant |
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Shareholder Derivative Suit Requirements: Stock ownership when claim arose
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1) Person bringing suit must have owned stock at the time when the claim arose OR
2)have gotten it by operation of law from someone who owned the stock when the claim arose i.e. by inheritance or divorce 3) Also must own stock when the action is brought and through the entry of judgment |
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Shareholder Derivative Suit Requirements: Posting Bond for defendants Costs
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Can be required, but will be excused if:
1) shareholder owns 5% or more of the stock, OR 2) the stock she owns is worth more than 50,000 |
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Shareholder Derivative Suit Requirements: When a demand may be futile
|
1) If the majority of the board is interested or under the control of interested directors (Most Likely case) - when sitting directors will be defendants in the case
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 |
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Shareholder Derivative Suit Requirements: Effect of Board refusal of a demand to sue
|
S can bring the derivative suit, ONLY if state can show that a majority of the Board is interested or its procedure was incomplete or inadequate.
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Shareholder Derivative Suit: Motions to dismiss
|
Motion to dismiss can be made on a finding by independent directors or a committee of them (called special litigation committee) that the suit is not in teh corporations best interest
|
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When is a suit not in a corporations best interests
|
When it has a low chance of recovery, or that the cost of the suit will exceed the recovery
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Factors the court will consider on a motion to dismiss brought by corporation
|
1) independence of the investigators
2) the sufficiency of the investigation |
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May the parties dismiss or settle a derivative suit
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Only with court approval: Court might require notice to the shareholders to get their feedback
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May a director or officer bring a derivative suit:
|
A D or O can sue another D or O to compel her to account for a violation of duties, or misappropriation of assets.
Does NOT have to meet the derivative suit requirements - suit is in directors name - corporation recovers |
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Shareholder Voting: Who Votes:
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General Rule is that the Record Owner as of Record Date has the right to vote
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Record Owner: Definition
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The person shown as the owner in the corporate records
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Record Date: Definiton
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The voter eligibility cut off - must be set no fewer than 10, and no more than 60 days before the meeting
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Exceptions to Record Owner/Record Date voting rule
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1) Treasury Stock: Corporation cannot vote treasure stock
2) Death of Shareholder: executor of estate may vote shareholders shares if they died after record date 3) Proxies may vote for record owner |
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Proxy: Definition
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A Proxy is
1) a writing 2) signed by the record shareholder or authorized agent 3) directed to secretary of corporation 4) authorizing another to vote the shares |
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may a fax or e-mail suffice to be a proxy?
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yes
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How long does a proxy last
|
11 months, unless it states otherwise
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May a proxy be revoked?
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Yes it may be revoked in writing, or by attending the meeting and voting shares.
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Does death revoke a proxy?
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only when written notice of death is received by corporate secretary
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may a shareholder revoke a proxy which states on its face that it is irrevocable?
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YES - just saying it is irrevocable is insufficient
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What is required for an irrevocable proxy?
|
1)The proxy must say it is irrevocable and
2) the proxy must have some interest in the stock other than voting Called a proxy coupled with interest |
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May shareholders enter into voting trusts?
|
yes
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May shareholders enter into voting agreements
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yes
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Voting Trusts: Requirements
|
1) Written trust agreement controlling how the shares will be voted
2) copy sent to corporation 3) Transfer of legal title of shares to voting trustee and 4) Original shareholders receive voting trust certificates and retain all shareholder rights except for voting. |
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Time limit on voting trusts
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10 years, but may be extended for another ten years within 6 months of expiration
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Voting Agreements: Requirements
|
Must be in writing and signed
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Voting Agreements: Enforcement
|
They are not specifically enforceable
|
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Proxy Statements pursuant to voting agreements
|
Irrevocable if it says so on its face
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Where do Shareholders Vote:
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Anywhere
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How many shareholders make a valid act:
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1) Written consent of the holders of all voting shares OR
2) A meeting |
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Two types of Shareholder meetings
|
1) Annual
2) Special |
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Annual Shareholder Meetings purpose
|
Electing Directors
Highest vote getter for each seat on the board wins, even absent a majority of votes - only a plurality is necessary |
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Remedy for failure to hold annual meeting
|
Court may order one
|
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Special Meeting: Who can call?
|
1) the Board
2) anyone provided for in the certificate or bylaws |
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Notice requirements for shareholder meetings:
|
Must give written notice (email ok) to every shareholder entitled to vote, for every meeting between 10 and 60 days before the meeting (both special and annual)
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Contents of Shareholder meeting notice: Mandatory
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Time and Place
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Contents of Shareholder Meeting Notice: Meeting on Appraisal rights
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Notice must says purpose of meeting implicates appraisal rights, why, and include statute on appraisal rights
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Contents of Shareholder Meeting notice: Special Meeting
|
Must state who called and the purpose,
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What may shareholders do at a special meeting?
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Only the purpose for which the meeting was called
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May shareholders remove an officer at a special meeting?
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NO - special meeting mutt be for a valid shareholder purpose
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Effect of Failure to give notice to all shareholders entitled to vote
|
Any action taken at the meeting is void, unless notice is waived by those not given notice
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Notice Waiver methods
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Express: in writing and signed anytime
Implied if shareholder attends the meeting w/out expression |
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When may shareholders vote:
|
When there is a quorum
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When is there a quorum of shareholders
|
when a majority of SHARES are represented
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may the certificate or bylaws reduce the number required for a shareholder quorum
|
yes, but not to less than 1/4
|
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may the certificate or bylaws reduce the requirement of majority approval for shareholder acts
|
NO
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May a requirement be imposed that a supermajority of the shares entitled to vote be present to constitute a quorum
|
Yes; but only in the certificate, NOT the bylaws
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May a requirement that resolutions at a meeting be approved by a supermajority?
|
Yes, but only in certificate NOT in bylaws
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What is the majority required to bind the corporation
|
If quorum is met, a majority of the shares ACTUALLY Voting in favor or or against the proposal must be reached (abstentions don't count)
|
|
Can a shareholders quorum be lost if people leave the meeting
|
NO - a shareholder quorum is never lost - different from directors
|
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Cumulative Voting
|
available when shareholders are voting to elect directors - device to help small shareholders get representation
|
|
How to caluculate cumulative voting:
|
Multiply number of shares held by number of directors to be elected
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|
When is cumulative voting permitted
|
Only when provided for in certificate of incorporation
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|
Formula to calculate number of shares required to elect one director:
|
One more share than 100/x+1 x= number of directors being elected
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|
Amount of consideration required for transfer of stock by a shareholder
|
NONE - no minimum value required
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Stock transfer restrictions: Defintion
|
Restrictions on the transfer of stock ownership. Commonly used in close corproations where we don;t want outsiders in
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Stock transfer restrictions: Where set
|
Certificate, bylaws, or by agreement
|
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Stock Transfer restrictions: Validity
|
Valid is they are not an undue restraint on alienation
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Stock Transfer restrictions: Right of First Refusal
|
Valid
|
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Stock Transfer restrictions: Corporate approval of sale
|
Probably invalid - coudl be refused for arbitrary reason
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Stock Transfer restrictions: requirement that stock be sold back to the corp upon shareholder death or retirement?
|
Valid - called a buyback or buy/sell agreement
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|
May valid restiritons be invoked against the transferee?
|
ONLY is the restriction is conspicuously noted on the stock certificate OR
the transferss had actual knowledge of the restriction. |
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Requirements for demanding access to Minutes of Shareholder Proceedings or the record of shareholders
|
1)Any Shareholder
2) on 5 days written demand |
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Limitations on Shareholder Access to Shareholder minutes and Record
|
Corporation can require an affidavit stating that
1) the shareholder's purpose is not anything other than his interest in the corporation AND 2) he has not within five years tried to sell ay list of shareholders Can NOT ask for any more detail |
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Effect of refusing to furnish affidavit
|
Corp can refuse access
|
|
Requirements for demanding the ist of current directors and officers
|
1) any shareholder
2) on two days written demand - no affidavit required |
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Requirements for access to Corporations Latest balance sheet
|
Any shareholder can demand by written request, corporation must provide them, can do so by mail
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Requirements for access to Corporations latest profit and loss statement
|
Any shareholder can demand by written request, corporation must provide them, can do so by mail
|
|
Requirements for access to Corporations latest interim statement distributed to shareholders or public
|
Any shareholder can demand by written request, corporation must provide them, can do so by mail
|
|
Common Law Right of Inspection
|
All shareholders have a common law right to inspect records at a reasonable time and proper place. Inspection must be for a proper purpose (something related to role as shareholder)
|
|
Documents covered by common law right of inspection
|
Not specifically delineated - pretty broad - always include
|
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Directors right to inspect corporate books and records
|
Director has unfettered access - she is a manager
|
|
Statutory Right of Shareholder Inspection
|
Shareholders have statutory right to inspect
1) Minutes of Shareholder proceedings 2) Record of Shareholders 3) List of current directors and officers 4) Latest Annual balance sheet 5) Latest profit and loss statement 6) Latest interim statements distributed to shareholders or public |
|
Three Types of Distributions
|
1) Dividend
2) Payment to repurchase shares or 3) Payment to redeem shares |
|
What is a payment to redeem shares
|
A forced sale to corporation at price set in the certificate
|
|
When do shareholders have a right to a distribution
|
No such right - only when Bd. declares one - it is within their discretion
|
|
Willa court ever order a distribution
|
Yes - on a showing of bad faith or dishonest purpose
|
|
What is a stock split
|
An increase in number of shares accompanied by a commensurate decrease in value - 100 at 40 becomes 200 at 20 e.g.
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|
Distribution of dividends: No preferred stock
|
If no preferred - split evenly among common
|
|
Distribution of dividends: with preferred stock
|
If preferred, pay preferred the amount of preference, and then split remainder among common only
|
|
Distribution of dividends: with preferred, participating stock
|
Pay preferred stock amount of preference first, then split remainder among common and preferred evenly
|
|
Distribution of dividends: with preferred, cumulative stock
|
Add up total number of years not paid, including current year and pay preferred stock the amount of preference times number of years
Divide remainder among common |
|
Which funds may be used for distributions?
|
Surplus ONLY, NEVER stated capital
|
|
How is surplus calculated
|
Assets
- Liabilities - Stated Capital = Surplus |
|
How is stated capital calculated: par stock
|
Amount recieved equal to par - stated capital
Amount recieved in excess of par - surplus |
|
How is stated capital calculated: no par
|
within 60 days after issuance the bd can allocate any part (but not all) of sale price to surplus
|
|
When is a corporation forbidden from making distributions?
|
When it is insolvent, or would become so by making the distribution
|
|
Insolvent: Defintion
|
The corporation is unable to pay its debt as they come due in the ordinary course of business
|
|
Are directors personally liable for improper distributions
|
yes
|
|
Are shareholders liable for improper distributions
|
yes, if they knew it was unlawful when they received it
|
|
Who can sue to recover for an imporper distribution
|
the corporation can sue - possible derivative claim
(Creditors?) |
|
Possible defense to imporper distribution claim
|
Good faith reliance
|
|
How are redemption set
|
In certificate, and must be done proportionately within each class of stock
|
|
How are repurchases accomplished
|
through individual negotiation
|
|
May a corporation discriminate in repurchases
|
Yes - but it must have given equal opportunity to all shareholders in a close corporation
|
|
Characteristics of a Fundamental Corporate Change
|
Most require both Board and shareholder approval
The corporation must notify the department of state by delivering a document which the department files Dissenting shareholders may have right of appraisal |
|
Dissenting Shareholders Right of Appraisal: Defined
|
The right to force the corporation to buy your stock for fair value
|
|
What actions trigger the right of appraisal
|
1) Some amendments to the certificate
2) Consolidation 3) your corporation merges into another 4) You corporation transfers substantially all of its assets 5) your corporations shares are acquired in a share exchange |
|
When is there no right of appraisal, despite a fundamental corporate change
|
If the corporation is listed on a national securities exchnge or the nasdaq - b/c there is a public market for the stock
|
|
What type of corporation does the right of appraisal apply to?
|
A close corporation
|
|
What must a shareholder do to perfect the right of appraisal:
|
1) before vote, must file written objection and state intent to demand payment
2) Abstain or vote against the change AND 3) after vote, make a written demand to be bought out |
|
Valuing shares for appraisal purposes:
|
If Corp and shareholder cannot agree on price Corporation can sue and court will set value.
Court MAY not discount minority shares |
|
Amendments to Certificate not qualifying as Fundamental Corporate Change
|
Minor changes, such as those relating to office location and registered agent - can be made by board alone
|
|
Amendements to certificate qualifying as fundamental corporate change: requirements
|
Must be approved by
1) director action and 2) a majority of the shares entitled to vote - not those present |
|
If amendment will change or strike a supermajority quorum or voting requirement for Shareholder voting you need:
|
1) Director action AND
2) a 2/3 vote of the shares entitled to vote. |
|
Amendment of the certificate; rights of appraisal?
|
There is a right of appraisal 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 |
|
Mergers/ Consolidaitions: Requirements
|
1) Each company's Board approves merger/consolidation AND
2) Each company's shareholders approve by a majority of the shares entitled to vote 3) delivery of certificate or merger/consolidation to department of state |
|
Merger; Definition
|
A corp disappears into B corp
|
|
Consolidation, Definition
|
A Corp and B Corp join, disappear, form C corp.
|
|
When is shareholder approval not required
|
When parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into the parent - called a short form merger
|
|
Merger/consolidation: rights of appraisal
|
Yes, but only for the shareholders of the corporation that disappeared
|
|
Do shareholders of the susbsidiary in a short for merger have a right of appraisal
|
yes, despite not voting
|
|
Effect of merger or consolidation
|
Surviving corp succeeeds to all rights and liabilities of disappearing corp. - Called successor liability
|
|
Transfer of all or Substantially All of the Assets Not in the Ordinary Course of Business or Share Exchange: definition
|
One company acquires all the outstanding shares of one or more classes of another corporation: Funadmental Corporate Change for the Selling corporation inly
|
|
Transfer of all or Substantially All of the Assets Not in the Ordinary Course of Business or Share Exchange: Requirements
|
Selling corporations
1) Bd of directors authorizes the deal AND 2) Approval by selling corp's shareholders by majority of shares entitled to vote |
|
Number of shres of buying corporation required to approve purchase?
|
Zero
|
|
Transfer of all or Substantially All of the Assets Not in the Ordinary Course of Business or Share Exchange: Right of Appraisal
|
Selling corp shareholders have right of appraisal
|
|
Transfer of all or Substantially All of the Assets Not in the Ordinary Course of Business or Share Exchange: Filing requirement
|
Required for share exchange, NOT for transfer of assets
|
|
Will company acquiring assets be liable for torts of corporations whose assets it acquired
|
Generally NO Unless
1) the deal provides otherwise 2) the purchasing company is a mere continuation of the seller OR 3) the deal was entered fraudulently to escape such obligations Different than a merger - selling corp still exists, so creditors can still sue it. |
|
Dissolution Two types
|
Voluntary and Involuntary
|
|
Voluntary Dissolution: Requirements
|
Majority of shares entitled to vote in favor - NO BOARD vote necessary
Certificate of dissolution filed with dept of state |
|
Involuntary Dissolution: Definition
|
A judcially ordered dissolution - someone is asking the court for an order of dissolution
|
|
Involuntary Dissolution: Methods & cause
|
*1. Board 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. One-half or more of shares entitled to vote may petition if directors are too divided to manage or shareholders to divided to elect directors Or magnitude of internal dissention makes disollution 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 the voting shares in corporation whose shares are not traded on a securities market may petition on one of two grounds |
|
Grounds for petition of dissloution by twenty percent or more of voting shares in close corp.
|
1) Managements illegal, oppressive, or fraudualent acts toward complaining shareholders
OR 2) Managements wasting, diverting or looting corp. assets Management can be board or anaging shareholders |
|
When can court deny dissolution petition by twenty percent?
|
If there is another way the complaining shareholders can obtain a fair return i.e. by ordering a buy-out
Court will consider whether liquidation is necessary to protect petitioners and is the only way for them to get a fair return on investment |
|
How may the corporation or non complaining shareholders try and avoid dissolution on petition by twenty percent?
|
Within 90 days of the petition, buy the petitioners stock at fair value, in terms approved by the court
|
|
Steps in dissolution/wind up
|
1) Gather all assets
2) Convert Assets to cash 3) Pay creditors (ther were given notice earlier) 4) Distribute remainder to shareholders, pro-rata by share, unless there is a dissolution preference (works the same way as dividend preference - pay first) |
|
May shareholders agree to be paid before creditors
|
NO - creditors must be paid first
|
|
Duties of Shareholders to each other
|
Traditional rule: outside close corporation, shareholders, generally do not owe fiduciary duties to each other or the corporation: may act in their own self interest
|
|
Controlling Shareholder: Duty
|
A sharehodler who also occupies a control position (such as director) or whose ownership is such that she has working control over the corp, owes a fiduciary duty to minority shareholders and sometimes to others (including the corporation)
May NOT use a dominant position for individual advantage at the expense of minority shareholders or the corp. - MOST LIKELY IN CLOSE CORPS |
|
May a controlling shareholder sell her stock for more than its economic value because of the control that comes with it?
|
YES - she can receive a control premium
|
|
Who receives the control premium?
|
The shareholder, generally
|
|
When may the court impose liability on the controlling shareholder for the control premium:
|
When
1) the shareholder sold to looters without making a reasonable investigation (look for facts that woudl put a reasonable person on notice of a problem (agent buying for undisclosed principal) 2) Controlling shareholder de facto sells a corporate asset 3) Controlling shareholder sells a seat on the board |
|
Effect of controlling shareholder sale without reasonable investigation:
|
Disgorgement of the sellers profit, and seller probably liable for any damage done to the corporation
|
|
Remedy for de facto sale of corporate asset
|
All sharehodler share in the control premium
|
|
Remedy for sale of seat on the board
|
Disgorgement of profit
|
|
Freeze outs
|
Mergers aimed solely at cashing out minority shareholders unfairly: usually done by merger with another corporation that majority shareholders own, with purchase of minority shareholders shares for cash, so they have no interest in either corp any more
|
|
How will court evaluate a possible freeze out merger
|
Look at the transaction as a whole: there must be a fair price, and fair dealing
Factors: 1) whether deal is tainted by self dealing or fraud 2) whether minority shareholders are dealt with fairly 3) whether there is a legitimate business reason for the merger |
|
Insider Trading: Types
|
1) Market trading on inside information
2) Non-disclosure of special facts |
|
Market trading on Inside information: Defined
|
when a director or officer engages in market trading of her corporations stock based upon inside information from the corporation. Is a breach of duty to the corp
|
|
Remedy for Market Insider trading
|
Corp can sue to recover insiders profit (can be a derivative suit)
|
|
Non-Disclosure of Special Facts: Defined
|
Directors, officers and (probably) controlling shareholders are forbidden from trading on special facts in a securities transaction with a non-insider. Cannot trade on secrets, must abstain or ensure disclosure so other are on same footing (COMMON LAW INSIDER TRADING)
|
|
Special Facts: DEfined
|
Those a reasonable investor would consider important in making an investment decision.
|
|
Who can sue for violations of special facts doctrine
|
the shareholder with whom the officer or director deals in violation of doctrine
|
|
Measure of Damages for violation of Special Facts Docrine
|
Difference between price paid and value of stock a reasonable time after public disclosure of the special fact - suit belongs to shareholder directly
|