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331 Cards in this Set

  • Front
  • Back
Formation Requirements
People, Paper, Acts
People: Incorporators
Paper: Certificate of Incorporation
Acts: Delivery, Filing and Organizational Meeting
What does an incorporator do
1) Execute Certificate
2) Deliver it to NYS Dep't of State
3) Hold Organizational Meeting
Necessary Number and Requirements of Incorporators
a. one or more
b. Adult Humans ONLY - no corporations
The Certificate of Incorporation: Necessary Information
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)
The Certificate of Incorporation: Optional information
Registered Agent other than secretary of state for service of process
Statement of Duration
Corporate Names: Requirements
Corporate name must include the words, or abrreviation for, Corporation, Incorporated, or Limited
Office of Corporation Address
only COUNTY in which office is established required
Does an office of corporation have to be a place where the corporation actually conducts business?
NO
information for service of process
Designation of Secretary of State
Forwarding Address for service
*optional - name of registered agent for service of process
Statement of Duration
Optional: if not included, default duration is perpetual
Corporate Purpose
Can be to engage in all lawful activity, after first obtaining necessary state agency approval, or be more specific
Ultra Vires Acts: Definition
When a corporation engages in acts outside the scope of the activities provided for in the certificate
Rules regarding Ultra Vires Acts
1) Ultra Vires Acts are valid
2) Shareholders may seek an injunction
3) Responsible managers are liable to the corporation for Ultra Vires losses
Authorized Stock: Definition
the maximum number of shares the corporation can sell
Issued Stock: Definition
The number of shares of stock the corporation actually sells
Outstanding Stock: Definition
stock the corporation has sold and has not reacquired.
Information which MUST be included in the Certificate of incorporation about the corporations stock:
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
Acts required to Incorporate:
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.
Effect of filing certificate of incorporation
Conclusive Evidence of valid corporate formation
De Jure Corporation: Defintion
A corporation formed in full compliance with all statutory requirements
Organizational Meeting: Who holds?
the incorporators
Organizational Meeting: What occurs?
1) Adoption of any bylaws
2) Election of initial directors
What Law governs the internal affairs of a corporation:
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
Powers of corporation as a separate legal person:
Enter contracts
Transfer Property
Buy and Sell Securities
Sue or Be Sued
Make political donations
Make Charitable Donations
Make Loan guarantees
Limtiations on Political Contributions by corporations:
$5,000 per year, per candidate or organization
Limitations on Charitable contributions by corporations:
NONE
Limitations on Loan Guarantees NOT in furtherance of corporate business
Must be approved by 2/3 of shares entitled to vote
Are Directors and Officers liable for corporations debts, breaches, or torts?
NO
Are shareholders liable for corporations debts, breaches or torts
No - limited to liability to the extent of the value of their stock
Who is liable for the corporations acts (generally)
the corporation itself
De facto corporations: Defintion
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
De facto Corporation: Required elements
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
Effect of a Finding of a De Facto Corporation:
treated as a corporation in all cases except in an action by the State
Status of De Facto Corporation Doctrine in NY
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.
Corporation by Estoppel:
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
Are Bylaws necessary for the formation of a corporation:
NO
but almost every corporation has them
Conflict between Bylaws and Certificate
Certificate Controls: it is a contract with the state
Are Bylaws filed with the state:
No
Are outsiders bound by bylaws
No
Who adopts INITIAL bylaws
Incorporators at organizational meeting.
Status of Bylaws adopted by incorporators
Equal to Shareholder bylaws
Power to Amend, repeal, or adopt bylaws
Shareholders
Can Bd. of Directors amend, repeal or adopt new bylaws:
Only if allowed by certificate or shareholder bylaw*
*even then Shareholders can amned or repeal any directeor adopted bylaw
Promoter: Defintion
a person acting on behalf of a corporation not yet formed
Is a corporation liable for pre-incorporation contracts?
Only if it adopts the contract
Methods of Adopting pre-incorporation contracts:
1) Express Adoption
2) Implied Adoption
Express Adoption of Preincorporation contracts: Defined
Express adoption is accomplished by Board action
Implied adoption of preincorporation contracts: Defined
Implied adoption occurs if the corporation knowingly accepts the benefits of the contract
Is the promoter liable for pre-incorporation contracts:
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
Secret Profit Rule
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)
Secret Profit Rule: Property Acquired Before Becoming Promoter - Calculating profit
Profit= price paid by corporation minus FMV at the time of sale
Secret Profit Rule: Property Acquired After becoming promoter - calculating profit
Profit = price paid by corporation minus price paid by promoter.
Foreign Corporations: definition
A corporation incorporated in any other state or nation
Domestic Corporation:
A corporation incorporated in the state
Requirement for Foreign Corporations
To do business in NY they must qualify
Foreign Corporation "Doing Business" defined
Foreign corporation engages in a regular course of intrastate business activity
How to qualify as a foreign corporation:
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
Information required from Foreign corporation to qualify:
1) The info from its certificate of incorporation
2) proof os good standing in its state of incorporation
Effect of foreign corporation doing business in NY without qualifying
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
Issuance of Stock: Defined
Issuance of Stock occurs when a corporation sells its own stock
issuance of Bonds: Defined:
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)
Debenture: Defined
A loan, the repayment of which is not secured by corporate assets
Subscriptions: Defined
A written offer to buy stock from corporation
Revocation of Subscriptions: Pre-incorporation
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
Revocation of Post-incorporation subscriptions:
Revocable until accepted by the corporation
Method of accepting a post incorporation subscritpion
Board acceptance
May the corporation decide to sell to certain subscribers and not others
NO - the coproation must treat all subscribers wihtin each class or series of stock uniformly
Effect of Default by Subscriber after Acceptance: When subscriber has paid Less than hald purchase price
the corporation may keep the money paid and cancel shares. Stock becomes authorized unissued stock, so corporation can sell it
Effect of default by subscriber after acceptance: when a subscriber has paid more than half the purchase price
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
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
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
Permissible Forms of Consideration for Stock
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
Prohibited Forms of Consideration:
Basically NO consideration - would be treated as water
Par Value: Defintion
Minimum Issuance Price: can be sold for more, but not less per share
No Par Stock
No minimum issuance price, can sell for any price
Who sets price for no-par stock
The Bd. UNLESS certificate authorizes shareholders to do so
Treasury Stock: Defined
Stock previously issued and reacquired by the corporation - it may then be resold
- Treasury stock, even if previosuly par stock, has NO PAR VALUE
DEtermination of value of consideration for issuance of stock
Bd has authority to make determination of value of consideration, it is conclusive absent fraud
Result of issuing Par stock for less than minimum price (water)
the corproation (or creditors if corp. insolvent) can sue for missing value (water)
Parties liable for water
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.
Preemptive Rights:
Right of an existing shareholder to maintain percentage of ownership by buying stock whenever there is a NEW issuance of common stock FOR MONEY
If certificate is silent, does "New Issuance" include sale of treasury stock?
NO
If certificate is silent, foes new issuance include sale of shares authorized by the original certificate and sold within two years of formation?
NO - if stock was authorized in original certificate and sold within two years
Do Pre-emptive rights exist if certificate is silent on per-emptive rights?
NO
Do preemptive rights apply to an new issuance of stock made to acquire greenacre?
NO - only to issuances for money
Number of Directors Required
One or more
Method of setting number of directors
1) in the bylaws or
2) by shareholder act or
3) by the board if shareholder bylaw allows
Effect of no specification on number of directors
Only one director
Who elects intial directors
incorporators
After intial directors, who elects?
Shareholders
When are directors elected
At annual shareholders meeting
Must each director position be elected each year?
No - can be divided into 1,2,3 or 4 classses, with one class elected each year
Classified Board: Definition
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
Can shareholders remove a director for cause
yes
Can Board remove a director for cause
Only if permitted by the certificate or a shareholder bylaw.
Can anyone remove a director without cause?
Only shareholders, and ONLY if certificate or bylaws allow
Filling a vacancy on the board
Directors select person to serve the remainder of the term
Who selects person whol will serve remainder of term in case where a director is removed by shareholders without cause
Shareholders
Are individual directors agents of the corporation?
NO
Methods by which Board can act
1) unanimous written consent
2) Meeting
What is the effect of an act not accomplished properly by the baord
it is void unless ratified by valid act
Must Bd. Meetings be held in NY
NO
Notice For Regular Board meetings
Not required, provided the time and place are set in the bylaws or by the board
Notice for Special Meetings of the Board
Required - must state time, place, but need NOT state the purpose
Effect of failure to comply with notice requirement
Actions taken at meeting is void unless director not given notice waives the notice defect
Methods of waiving a board meeting notice defect
1) in writing & signed anytime
2) by attending the meeting without objection
Can a director send a proxy for director voting
NO - a director owes non delegable fiduciary duties
Can Directors enter into voting agreements
NO - non delegable fiduciary duities
Quorum requirement for Board Meetings:
majority of "entire board" (duly constituted board - means number of positions if no vacancies)
passing a resolution with a quorum
requires a majority vote of those present at meeting
Can quorum be less than a majority of directors?
Yes, by certificate or bylaws, but never fewer than 1/3 of the entire bd.
Can corporation decrease requirement that a board resolution must pass by a majority of directors present?
NO
Can a corporation increase a quorum to a number greater than a simple majority of directors
yes, but by certificate ONLY
Can the corporation require a supermajority vote to pass a resolution
yes, but by certificate only
Function of the Bd. or Directors
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
Committees of he Board: Permissible activities
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
Committees of the Board: Impermissible activities
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
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 and in like position.
Breach of Duty of Care: Nonfeasance
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
Breach of Duty of Care: Misfeasance
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
the Business Judgment Rule
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.
Duty of Loyalty: Standard
A director must act in good faith and with the conscientiousness, fairness, morality and honest that the law requires of fiduciaries.
Does the BJR apply to Duty of Loyalty cases
NO - it can never apply when the director has a conflict of interest
Duty of Loyalty: Interested Director transactions:
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.
Interested Director Transactions - How to handle
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
Appropriate means for Approving an interested director transaction
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
Do interested directors count towards a quorum of the board?
YES - can participate, but their vote does not count
Can Bd. set compensation of directors?
YES - but must be reasonable and in good faith. if excessive, it is a waste of corporate assets
When can stock options be issued as an incentive to service
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.
Interested Director Transactions: Competing Ventures
Under Duty of Loyalty, directors can not compete directly with corporation
what If a director competes directly with corporation ?
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
Interested Director transactions: Corporate Opportunity
Under duty of loyalty, director may NOT usurp a corporate opportunity
What qualifies as Usurping?
taking the opportunity without disclosing it to the board and awaiting board rejection of the opportunity
What is a corporate opportunity
Something the corporation needs, has an interest or tangible expectation in, or that is logically related to the business
Inability to afford opportunity
Not a defense to usurpation
remedy for usurpation
Creation of a constructive trust for the profits derived form the opportunity by the director
Damages also possible is usurpation harmed the corp.
Improper Loans of Corporate Funds
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)
Improper distributions
Directors can be liable
Which directors are liable for any basis of director liability?
General Rule: A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate record
Appropriate methods of written dissent from Board Action:
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
Exceptions from liability
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
Officers: Duites owed to corporation:
Duties of Care and Loyalty
Can officers bind the corporation to actions they take on its behalf?
Yes, if they have the authority to do so - they are agents of the corporation
Inherent authority of the president
Includes authority to sue, and to bind the corporation to contracts entered into in the ordinary course of business
Can one person hold multiple offices simultaneously
Yes
Who selects and removes officers
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
If board fires president can corp be liable?
yes, for breach of contract, if applicable
Who hires and fires directors, generally
Shareholders
removal by judical action: how accomplished
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
Who sets officer compensation
the Bd.
Reimbursement/Indemnification of directors and officers: when applicable
Applicable when a director or officer is sued in her capacity as such by or on behalf of the corp.
When reimbursement/indemnification prohibited
When officer/director found liable to corp.
When reimbursement/indemnification mandatory
When officer director wins a judgment on merits or otherwise
Can officer or director recover for atty fees and expenses incurred in suing for appropriately owed reimbursement or indemnification
NO
When reimbursement/indemnification permissive
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
What may permissive reimbursement include?
settlement amount, expenses, atty fees
Who determines eligibility for permissive reimbursement?
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
May corp advance litigation expenses?
YES, but they must be repaid if it turns out the director/officer not entitled to reimbursement
Statement in certificates or bylaws concerning indemnification
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.
Can shareholders manage corp:
NO - bd. manages, unless closely held - then they may
Close Corporation Defined
Has few shareholders and stock is not publicly traded
How to allow for shareholder management in Close Corp.
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
Who owes duties of care and loyalty in closely held corp?
Managing Shareholders
Additonaly duty of majority shareholders in close corp.
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
Reasonable Expectations of investment in a close corp
1) Employment
2) Return on Investment
3) Voice in Managment
Professional Service Corporations:
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.
What must a professional services corporations name include and what additional certification requirements are there
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
Must shareholders, officers and directors of Professional services corporations be licensed professionals?
Yes, but can hire non professionals as employees
Malpractice Liability in a PSC
Liable for your own malpractice, but not that of others
Are Professionals liable for contracts of PSC
No - entity liable.
Effect of death or disqualification of Professional member of PSC
PSC must buy back the shares of the deceased or disqualified person.
Are Shareholders liable for what the corporation does?
General Rule: No - corporation itself is liable for what it does
When can a shareholder be liable for the acts of a corporation?
If the court pierces the corporate veil
Piercing Corporate veil: Availability and Applicability
1) Must be close corporation
2) The shareholder must have abused the privelege of incorporating
3) Fairness must require holding them liable
4)
Fairness requires piercing the corporate veil When
The shareholder exercises complete dominion and control over the corporation to perpetuate fraud or injustice.
Test for piercing the corporate veil
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
Who may be held liable when the court pierces the corporate veil
Only the shareholder who was responsible for the misconduct
Is PCV available to hodl liable another corporation
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.
Is undercapitalization sufficient cause to PCV in NY?
Not by itself, it seems
PCV is more commonly used in?
Tort cases
The ten largest shareholders in a close corporation are liable for?
Wages and Benefits of employees under the NY BCL
Shareholder Derivative Suit: Defined
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
How to determine if a suit is derivative
Could the corporation have brought the suit?
These are Always Derivative Suits
Suits for breach of he Duty of Care, or Duty of Loyalty - duties are owed to the corp.
Suits for waste of corporate assets
Effect of shareholder winning derivative suit
The corporation receives the recovery, the shareholder gets costs, expenses and atty fees.
May a shareholder receive the damages directly in a derivative suit?
Only if recovery by the corporation would return money to the bad guys (typically a close corporation issue)
Consequences of losing derivative suit:
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
Requirements for bringing a shareholder derivative suit.
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
Shareholder Derivative Suit Requirements: Stock ownership when claim arose
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
Shareholder Derivative Suit Requirements: Posting Bond for defendants Costs
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
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
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.
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
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
Factors the court will consider on a motion to dismiss brought by corporation
1) independence of the investigators
2) the sufficiency of the investigation
May the parties dismiss or settle a derivative suit
Only with court approval: Court might require notice to the shareholders to get their feedback
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
Shareholder Voting: Who Votes:
General Rule is that the Record Owner as of Record Date has the right to vote
Record Owner: Definition
The person shown as the owner in the corporate records
Record Date: Definiton
The voter eligibility cut off - must be set no fewer than 10, and no more than 60 days before the meeting
Exceptions to Record Owner/Record Date voting rule
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
Proxy: Definition
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
may a fax or e-mail suffice to be a proxy?
yes
How long does a proxy last
11 months, unless it states otherwise
May a proxy be revoked?
Yes it may be revoked in writing, or by attending the meeting and voting shares.
Does death revoke a proxy?
only when written notice of death is received by corporate secretary
may a shareholder revoke a proxy which states on its face that it is irrevocable?
YES - just saying it is irrevocable is insufficient
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
May shareholders enter into voting trusts?
yes
May shareholders enter into voting agreements
yes
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.
Time limit on voting trusts
10 years, but may be extended for another ten years within 6 months of expiration
Voting Agreements: Requirements
Must be in writing and signed
Voting Agreements: Enforcement
They are not specifically enforceable
Proxy Statements pursuant to voting agreements
Irrevocable if it says so on its face
Where do Shareholders Vote:
Anywhere
How many shareholders make a valid act:
1) Written consent of the holders of all voting shares OR
2) A meeting
Two types of Shareholder meetings
1) Annual
2) Special
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
Remedy for failure to hold annual meeting
Court may order one
Special Meeting: Who can call?
1) the Board
2) anyone provided for in the certificate or bylaws
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)
Contents of Shareholder meeting notice: Mandatory
Time and Place
Contents of Shareholder Meeting Notice: Meeting on Appraisal rights
Notice must says purpose of meeting implicates appraisal rights, why, and include statute on appraisal rights
Contents of Shareholder Meeting notice: Special Meeting
Must state who called and the purpose,
What may shareholders do at a special meeting?
Only the purpose for which the meeting was called
May shareholders remove an officer at a special meeting?
NO - special meeting mutt be for a valid shareholder purpose
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
Notice Waiver methods
Express: in writing and signed anytime
Implied if shareholder attends the meeting w/out expression
When may shareholders vote:
When there is a quorum
When is there a quorum of shareholders
when a majority of SHARES are represented
may the certificate or bylaws reduce the number required for a shareholder quorum
yes, but not to less than 1/4
may the certificate or bylaws reduce the requirement of majority approval for shareholder acts
NO
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
May a requirement that resolutions at a meeting be approved by a supermajority?
Yes, but only in certificate NOT in bylaws
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
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
When is cumulative voting permitted
Only when provided for in certificate of incorporation
Formula to calculate number of shares required to elect one director:
One more share than 100/x+1 x= number of directors being elected
Amount of consideration required for transfer of stock by a shareholder
NONE - no minimum value required
Stock transfer restrictions: Defintion
Restrictions on the transfer of stock ownership. Commonly used in close corproations where we don;t want outsiders in
Stock transfer restrictions: Where set
Certificate, bylaws, or by agreement
Stock Transfer restrictions: Validity
Valid is they are not an undue restraint on alienation
Stock Transfer restrictions: Right of First Refusal
Valid
Stock Transfer restrictions: Corporate approval of sale
Probably invalid - coudl be refused for arbitrary reason
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
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.
Requirements for demanding access to Minutes of Shareholder Proceedings or the record of shareholders
1)Any Shareholder
2) on 5 days written demand
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
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
Requirements for access to Corporations Latest balance sheet
Any shareholder can demand by written request, corporation must provide them, can do so by mail
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
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.
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