Corporations (W/ Ny Quirks) (Final)

Front 1

What does an Incorporator (= a person) do? 2 Things

Back 1

(1) Execute the certificate & deliver it to the Dept of State
(2) Hold the Organization meeting

Front 2

How many incorporators do you need?

Back 2

Just need 1 or more incorporators

Front 3

Who can be an incorporator?

Back 3

In NY adult human beings ONLY (no entities!)

Front 4

What is a certificate of incorporation?

Back 4

= K btw corporation & S
= K btw Corporation & the state

Front 5

What goes in the certificate of incorporation? 4 Things

Back 5

(1) Names & Addresses
(2)Statement of duration (don't have to & then assumed perpetual)
(3) Corporate purpose (required statement).
(4)Capital structure (stock)

Front 6

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

Back 6

- MUST have 1 of these words in Name: Corporation, Incorporated, or Limited (spelled or abbreviated)
- Give county in NY where you have your office or corporation (do not need a street address)(it does not have to be the place you do business out of)

- Designate NY Secretary of State as agent for service of process
- Address for forwarding process to Corp
- You also may (but don’t have to) name a Corp agent for service of process

Front 7

In its statement of purpose, what if certificate indicates that purpose is to sell biscuits & Corp later sells t-shirts as well? CL & the 3 Things You must Know for NY

Back 7

• Selling T-shirts is ultra vires act (beyond scope of certificate) & at CL could be voided

NY =
(1) ultra vires Ks are NOW valid
(2) S can seek an injunction to stop it
(3) Responsible Officer & Dir are liable to the Corp for ultra vires losses

Front 8

What "Theory" do the 3 things you have to know for a Statement of Purpose that doesn't list all of the Company's activities fall under?

Back 8

= FIRST THEORY OF LIABILITY

Front 9

Define Authorized stock.

Back 9

= max # of shares the Corp can sell.

Front 10

Define Issued stock.

Back 10

= # of shares Corp actually sells.

Front 11

Define Outstanding stock.

Back 11

= shares that have been issued and not reacquired by Corp.

Front 12

What must be included under the Capital Structure (stock)in the certificate of Incorporation? 4 Things

Back 12

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

Front 13

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

Back 13

BUT at least one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights.

Front 14

Who signs the certificate of incorporation, how do they sign it, & then what do they do w/ it?

Back 14

• Each incorporator signs certificate & acknowledges it before a notary. They then deliver it to NY Dept of State.

Front 15

What does the NY Dept of State do w/ the Certificate of Incorp.?

Back 15

If it conforms w/ law, & filing fees are paid, the DEPARTMENT FILES the Certificate.

Front 16

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

Back 16

Filing = conclusive E of valid formation (at that moment you are a de jure Corporation in the eyes of the law)

Front 17

What 2 things are done at the incorporation mtg?

Back 17

(1) Adopt any by-laws
(2) Elect the initial BoD (then the BoD takes over management)

Front 18

What is the legal significance of a corporation being formed w/in NY?

Back 18

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

Front 19

How does the law view a Corp & what does that mean in a practical sense? 4 Powers

Back 19

= a separate legal person.

It has broad powers by statute, including the power to:

(1) enter contracts,
(2) transfer property,
(3) buy and sell securities (its own or others’), AND
(4) to sue or be sued.

Front 20

Can a corporation make political contributions?

Back 20

Yes, but no more than $5,000 per yr per candidate OR per org

Front 21

Can a corporation make charitable contributions?

Back 21

Can make charitable contributions & NO statutory ceiling on this

Front 22

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

Back 22

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

Front 23

What is limited liability?

Back 23

Because the corporation is a separate entity, generally, the people who run it (directors and officers) are not liable for its obligations. And the owners (the shareholders) generally enjoy “limited liability,” which means that a shareholder only has to pay for her stock, and not any corporate liability.

Front 24

Who enjoys limited liability?

Back 24

Shareholders, directors, & officers

Front 25

So who is liable for corporate debts and obligations?

Back 25

Corporation = liable (b/c has entity status)

= big advantage over a partnership

Front 26

Why do we have the De Facto Corporations Doctrine & Corporation by Estoppel?

Back 26

B/c they are doctrines by which a business failing to achieve de jure corporate status nonetheless is treated as a corporation (so shareholders will not be personally liable for business debts).

Front 27

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

Back 27

De Facto Corporation: 1)there is a relevant incorporation statute; 2) the parties made a good faith, colorable attempt to comply with it; and 3) some exercise of corporate privileges. If applicable, treated as corporation for all purposes except in an action by the state, so it’s as good as being de jure (except in an action by the state).

Front 28

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

Back 28

Because the Department of State’s filing the certificate is conclusive proof of formation, the doctrine was thought to be abolished.
BUT case law suggests it may be alive, at least in limited circumstances.
For example, say the incorporators put together a proper certificate and deliver it to the Department of State, but the Department failed to file it (without rejecting it). Not de jure, because not filed. Can argue de facto corporation if meet the test.

Front 29

What is corporation by estoppel?

Back 29

= theory is that one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business’s corporate status. So such a person, under this theory, cannot sue the individual proprietors. BUT = ABOLISHED IN NY!

Front 30

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

Back 30

De jure corporation can exist without bylaws; adoption of bylaws is not a condition precedent to formation of a Corp.

But almost every corporation has them.

Front 31

What can by-laws do?

Back 31

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

Front 32

Who is bound by the by-laws?

Back 32

= Outsiders are NOT bound b/c they are an INTERNAL doc

Front 33

Are bylaws filed with the state?

Back 33

By-laws are NOT filed w/ the state

Front 34

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

Back 34

Certificate controls if there is a conflict btw By-laws & certificated b/c certificate = K

Front 35

Who adopts the initial bylaws?

Back 35

Incorporators initially adopt by-laws at 1st org mtg
(Initial ones have status of S by-laws)

Front 36

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

Back 36

Shareholders = can adopt new ones, amend or repeal

Front 37

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

Back 37

- BoD gets to amend/repeal/adopt new ONLY if the certificate or a S by-law allows

(S can amend or repeal any director-adopted bylaw)

Front 38

What is a promoter?

Back 38

A promoter is a person acting on behalf of a corporation not yet formed. For example, she might enter a contract with a third-party on behalf of the corporation-not-yet-formed.

Front 39

When is a Corp liable for preincorporation Ks?

Back 39

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

Front 40

What are the 2 ways for a Corp to adopt a preincorporation K?

Back 40

(1) Express adoption = by Director(s)’ action
(2) ***Implied Adoption = by Corp knowing acceptance of a benefit of the K
(E.g. moved into lease premises, uses leased premises, etc)

Front 41

When is a promoter liable for preincorporation Ks?

Back 41

Generally, unless the contract clearly indicates that the parties do not intend the promotor to be liable, the promoter remains liable on preincorporation contracts until there has been a novation.

Front 42

What is a novation?

Back 42

= an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.

Front 43

What is the Secret Profit Rule w/ regards to promoters?

Back 43

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

Front 44

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

Back 44

(1) Property she had before becoming a promoter... profit = price paid by the Corp MINUS fair mkt value (FMV)
- What the promoter PAID = IRRELEVANT

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

Front 45

What is the rule for foreign corporations?

Back 45

Foreign corporations doing business in NY must qualify.

Front 46

What qualifies as a foreign corp? What about NJ?

Back 46

Foreign = 1 incorporated outside NY
• NJ Corp = foreign
• NY Corp = domestic

Front 47

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

Back 47

Doing business means the regular course of intrastate, not interstate, business activity. Not occasional or sporadic business. Not just having meetings in New York, etc.

Front 48

How can a foreign corp qualify in NY?

Back 48

The foreign corporation can qualify by applying to the N.Y. Department of State and designating the Secretary of State as agent for service of process + paying fees every year.

Front 49

In applying to qualify, what kind of information does the foreign corporation give the N.Y. Department of State? 2 Things

Back 49

(1) Info from its certificate AND
(2) Proof of good standing in its home state

Front 50

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

Back 50

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

Front 51

WHAT IS ISSUANCE OF STOCK?

Back 51

= when a Corp sells its own stock

Front 52

What is the significance of an issuance for the Corp & for the purchaser?

Back 52

Issuance of stock is one way a corporation can raise capital. Investors buy stock and thereby become equity holders -- owners of the corporation. Their equity interest brings with it various rights.

Front 53

How does the isssuance of a bond differ from the issuance of stock? How is it different for a purchaser of a bond (i.e. their title/position vis-a-vis the Corp)?

Back 53

With a bond, the investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the contract. The holder of a bond is a creditor (not an owner) of the corporation.

Front 54

What is a “debenture”?

Back 54

= loan the repayment of which is NOT secured by Corp assets

Front 55

What is a subscription?

Back 55

A subscription is a written, signed offer to buy stock from the corporation.

Front 56

Can a subscription be revoked? If so, why?

Back 56

= a pre-incorporation prescription = irrevocable for 3mths unless it says otherwise OR all subscribers agree.
Rule exists so that people forming the Corp can rely on the $ being there

Front 57

Are post-incorporation subscriptions revocable?

Back 57

• Yes it can be revoked until acceptance

Front 58

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

Back 58

Become obligated when BoD accepts the offer – at that point there is an agreement (there is a deal & can’t walk out)

Front 59

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

Back 59

No MUST be uniform w/in each class or series of stock

Front 60

If the corporation accepts the offer and the subscriber defaults on payment, what happens? What happens to the shares? 2 Alternatives

Back 60

(1) If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. The shares then become authorized and unissued.

(2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash).

Front 61

What happens if no one will pay the remaining balance?

Back 61

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

Front 62

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

Back 62

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

Front 63

What must the Corp receive when it issues stock?

Back 63

Consideration

Front 64

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

Back 64

(1) $ (cash or its equivalent like a check)
(2) Tangible or intangible property
(3) Labor or services already performed for the Corp
(4) A binding obligation to pay in the future in cash of property
(5) A binding obligation to perform future services having an agreed value

Front 65

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

Back 65

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

Front 66

What are prohibited forms of consideration?

Back 66

Anything other than the five permitted forms of consideration.

Front 67

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

Back 67

= unpaid stock & all treated as water

Front 68

What is "par"?

Back 68

Par means “minimum issuance price.”

Front 69

Can you get more than par?

Back 69

Yes.

Front 70

Can you have no par? What does that mean?

Back 70

Yes.
No par = no min issuance price & can be sold for any price

Front 71

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

Back 71

= BoD unless certificate allows shareholders to do so
(if silent, BoD sets)

Front 72

What is treasury stock? what par does it have?

Back 72

Treasury stock is stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock.

ALWAYS treat treasury stock as NO par, even though it was originally par.

Front 73

How does the BoD value the consideration? Can shareholders?

Back 73

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

Front 74

When the BoD determines the value of the consideration for an issuance, is its determination of value conclusive?

Back 74

BoD’s determination = conclusive if it is made in the absence of fraud

Front 75

What is "watered stock"?

Back 75

= par stock issued for less than par value

Front 76

What are the consequences of issuing par stock for less than par value; i.e., "watered stock"?

Back 76

Corp can sue for the missing $/value/worth of the stock

Front 77

Are the directors be liable for the water?

Back 77

YES if they knowingly authorized the issuance

Front 78

Is X (the guy who bought the watered stock) liable?

Back 78

Yes, guy who bought it for less than par (=shareholder) is liable; you are charged w/ notice of the par value

Front 79

What if X buys the watered stock and transfers it to a third-party (TP)?

Back 79

If it is transfered to 3rdP, the 3rdP is NOT liable if she acts in good faith (i.e. she did not know about the water)

Front 80

If X transfers it to a 3rdP, is X still liable?

Back 80

Yes, 3rdP’s status has no effect on liability of X and the directors.

Front 81

***What is a Preemptive RT?

Back 81

= RT of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money (which includes cash or checks).

Front 82

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

Back 82

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

Front 83

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

Back 83

No!!!!!

Front 84

If certificate of incorporation is silent regarding preemptive RTs, do they exist?

Back 84

Answer depends upon date Corp formed
- Before Feb 22, 1998, Yes there are preemptive RTs
- After that date, no they exist only if the certificate says so

Front 85

Suppose the certificate provides for preemptive rights and C Corp. is issuing stock to G to acquire Green Acres from G? Are there preemptive rights?

Back 85

NO b/c this is not an issuance for $! Preemptive RTs ONLY EXIST if there is an issuance FOR MONEY (here it is for property)

Front 86

How many directors must there be in the Corp?

Back 86

One or more adult natural persons.

Front 87

How is the number set? 3 Alternatives

Back 87

(1) In By-laws OR
(2) By S action OR
(3) By BoD if a shareholder adopted by-law allows

Front 88

What if no # of Directors is set?

Back 88

Then there is only 1 director

Front 89

Who elects the initial directors?

Back 89

Incorporators elect initial directors.

Front 90

Do we have to elect all new directors every year?

Back 90

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

Front 91

How many directors must be in a class?

Back 91

At least 3 Directors MUST be in each class

Front 92

When exactly is the intial BoD selected? After that 1st time?

Back 92

Incorporators elect initial BoD but AFTER that S elect them at the annual mtg

Front 93

What is the timing of the Directors selection process if there is 0 class vs. 3 classes?

Back 93

If we had 9 directors, we could elect all 9 each year and they would have one-year terms. OR we could have 3 classes of 3 directors each, and each year we would elect 3 directors; they would serve 3-year terms.

Front 94

Can shareholders remove a director before her term expires for cause?

Back 94

S can do it ANYTIME for cause

Front 95

Can the BoD remove a director for cause before her term expires?

Back 95

BoD can remove for cause only if certificate or by-laws allow for it.

(If cert & by-laws are silent, only S can)

Front 96

Can anyone remove a director without cause?

Back 96

= S only & even then only if cert or by-laws allow it

(if cert is silent = can’t do it)

Front 97

General rule: who selects the person who will serve the remainder of the term after a Director has been removed or has retired/died?

Back 97

Remaining directors select/appoint the person

Front 98

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

Back 98

Shareholders only

Front 99

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

Back 99

(1) Unanimous & written consent to act w/o a mtg OR
(2)A Mtg

Front 100

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

Back 100

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

Front 101

If there is a meeting, must it be held in NY?

Back 101

Anywhere in the world is ok

Front 102

Is a meeting by conference call - where official acts are taken - OK?

Back 102

Yes if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meetings are allowed).

Front 103

Is notice required for regular meetings?

Back 103

Time & place are usually set in the by-laws so no notice required

Front 104

Is notice required for special meetings?

Back 104

YES & method of giving notice can be set in the by-laws
(it's not in the BCLR)

Front 105

What if notice is not given to a director?

Back 105

Action taken at that mtg = void unless Director waives notice defect

Front 106

How can a Director waive lack of notice? 2 Alternatives

Back 106

(1) In writing & signed anytime
(2) By attending the mtg w/o objection

Front 107

Can a director give a proxy for director voting?

Back 107

- NO not such thing as a proxy for director voting
- BUT for S you can have proxy voting

Front 108

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

Back 108

No, void for public policy reasons

Front 109

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

Back 109

To do business, there must be a majority of "entire board" (= quorum).

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

Front 110

What is a resolution?

Back 110

= how the board takes an act at a mtg

Front 111

Suppose there are nine directorship positions on the board, but two of the directors have resigned and no successors have been selected. So there are only seven directors actually serving now. How many must show up at a meeting to constitute a quorum?

Back 111

- Need at least 5
- Not a majority of the positions actually filled
- Need a majority of the entire BoD

Front 112

- Suppose there are nine directorship positions on the board. Five of the directors show up at a properly called meeting, but then one of them leaves the meeting. Can the board continue to do business?

Back 112

BoD cannot do business b/c quorum has been broken

Front 113

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

Back 113

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

Front 114

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

Back 114

NO! The voting requirement can NEVER be decreased

Front 115

Can the corporation increase a quorum to greater than a majority of directors (e.g., two-thirds of the entire board must be present to do business)?

Back 115

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

Front 116

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

Back 116

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

Front 117

What does the BoD do?

Back 117

Generally, board of directors manages business of corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc.

Front 118

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

Back 118

If the certificate or bylaws allow, a majority of the “entire board” can delegate substantial management functions to a committee of ONE or more directors. But, the board cannot delegate all powers and responsibilities to a committee.

Front 119

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

Back 119

***CANNOT
(1) Amend, repeal or adopt by-laws
(2) Submit a fundamental change to S
(3) Fill a Board vacancy
(4) Set Director compensation

Front 120

Can a committee make reccomendations on any of its "forbidden actions/areas" for full board action?

Back 120

Yes, compensation

Front 121

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

Back 121

S derivative suits

Front 122

***What is the standard of care required for a Director?

MUST BE IN YOUR ANSWER!

Back 122

A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position.

Emphasis on ordinarily prudent person under similar circumstances

Front 123

What is nonfeasance?

Back 123

= director does nothing

Front 124

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

Back 124

ONLY IF his breach caused a loss to the Corp!!

• Very tough to show causation (that is caused the loss of $)

Front 125

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

Back 125

(1) Nonfeasance
(2) Misfeasance

Front 126

What is misfeasance?

Back 126

= BoD does something that hurts the Corp - this involves the business judgment rule (BJR).

Front 127

What is the business judgment rule (BJR)?

Back 127

= A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

In other words, only in trouble if it was irrational or grossly negligent

Front 128

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

Back 128

Prudent People Do Appropriate Homework
• Look to see if they deliberated, if they analyzed, if they did what a prudent person would do… if so, then not liable
• If they did NOT investigate at all prior to investment then they may be liable
• You don’t have to be perfect or right, you just have to be prudent!!!

Front 129

***What is the Duty of Loyalty Standard?

Back 129

= a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.

Front 130

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

Back 130

B/c these involve conflicts of interest... BJR goes right out the window for the Director

Front 131

What does a director breach if steals money?

Back 131

Stealing $ = breach of duty of loyalty

Front 132

What is an Interested Director Transaction?

Back 132

= any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest).

Front 133

How would you state the duty of loyalty standard in a problem involving an interested director transaction? Includes 2 things the Interested Director must show & 3 potential approval situations

Back 133

Interested director transactions will be set aside UNLESS the director shows either
(1) the deal was fair and reasonable to the corporation when approved OR (2) the material facts and her interest were disclosed or known and the deal was approved by any of these
(1) S action OR
(2) BoD approval by sufficient vote NOT counting the votes of interested directors OR
(3) Unanimous vote of disinterested directors if disinterested directors are insufficient to constitute an act of the BoD

Front 134

Do interested directors count toward a quorum of the board?

Back 134

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

Front 135

There are nine directors. Five of them are interested in an interested director transaction. All nine attend the meeting to consider approving the deal. After appropriate disclosure, what vote could approve the deal?

Back 135

Majority = interested, so need all 4 disinterested directors to vote yes

Front 136

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

Back 136

Board can set compensation of directors in any capacity, unless certificate or bylaw says they can’t. Compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets & Breach of Duty of Loyalty.

Front 137

Can a Corp give directors & officers stock options?

Back 137

Can give a director or officer stock options as an incentive to service.

Front 138

What if the stock offered as an incentive is listed on a stock exchange?

Back 138

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

Front 139

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

Back 139

If not listed, this use of options must be approved by a S vote

Front 140

What if a director wants to start a Corp. that competes w/ the one she is serving on the BoD for?

Back 140

Director cannot go into competition with her corporation.

Front 141

What happens if a director does go into competition w/ her current Corp.?

Back 141

Original Corp gets a constructive trust on her profits

Front 142

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

Back 142

Director cannot USURP a corporate opportunity.

= Cannot take it until he tells BoD about it & waits for BoD to reject it

Front 143

What qualifies as a corporate opportunity?

Back 143

• Something Corp needs or has an interest or tangible expectancy in OR that is logically related to its business

Front 144

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

Back 144

If there is usurpation, the usual remedy is a constructive trust. So if Director still has it, he must sell it to the corporation at his cost. If Director has sold it at a profit, the corporation gets the profit.

Front 145

What are 4 state law bases for Director Liability?

Back 145

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

Front 146

BoD votes to lend a director $100,000 of corporate funds. = OK?

Back 146

APPROVAL REQUIRED DEPENDS ON WHEN CORPORATION WAS FORMED.

For corporations formed on or before February 22, 1998: shareholder vote (in which a quorum = a majority of disinterested shares), unless the Cert allows BoD to decide that a loan benefits the Corp.

After Feb 22, ONLY need BoD conclusion that the loan benefits the Corp; do not need S approval!

Front 147

*** For these or any other thing a director can be liable for, exactly which directors are liable?

Back 147

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

Front 148

How does the director note their dissent in writing in the Corp records? ONLY 3 ways...

Back 148

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

Front 149

What happens if a Director orally dissents?

Back 149

= NO good; ineffective when it comes to liability

Front 150

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

Back 150

Director cannot dissent if voted for the resolution at the meeting.
= Harsh rule!

Front 151

What are the exceptions to the general rule of holding Directors liable for BoD action? 2 Exceptions

Back 151

(1) Director missed a mtg (e.g. he was sick) = he is not liable if he registers written dissent w/in a reasonable time of learning of the action
(done by deliver/sending it by registered letter to Secretary, & ensuring that it is filed w/ minutes)
(2) Good Faith reliance on any of the stuff by
• Officers or Employees of the Copr who you believe competent
• Lawyers or public accountants whom the Director or officer believes are acting w/in competence
• A Committee of which the person relying is not a member, as to matter w/in its designated authority
(especially likely in a case involving improper distributions!)

Front 152

What are the officers duties to the Corp?

Back 152

• OWE DUTY OF CARE & OF LOYALTY!!!! Exactly the same as Directors

Front 153

What is the status of the Officers of the Corp?

Back 153

= agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so. (Watch for a cross-over with agency.)

Front 154

What are common Officer positions & who selects the people holding them?

Back 154

BoD may select a president, one or more vice-presidents, a secretary, a treasurer, and any others the Board may determine OR for which the bylaws provide.

Front 155

Can one person hold multiple officer positions simultaneously?

Back 155

Yes, can occupy more than one position at one time

Front 156

Who selects and removes the officers?

Back 156

BoD unless cert allows S to do so
(silent = Bod)

(BUT if the S elect them, only the S can fire them. Even then, if for cause, directors can suspend an officer’s authority to act.)

Front 157

Who hires and fires directors?

Back 157

As a general rule, S hire & fire Directors

Front 158

Who hires and fires officers?

Back 158

Directors hire & fire officers

Front 159

Who may sue for a CT judgment removing an officer for cause? 2 Alternatives

Back 159

NY Attorney General or holders of 10% of all shares may sue for a judgment removing an officer for cause. Ct can bar reappointment of a person so removed from office.

Front 160

Who sets compensation of officers?

Back 160

• Directors set compensation of officers.

Front 161

A person is sued in her capacity as officer or director and incurs costs, attorneys’ fees, maybe even fines, a judgment or settlement; she seeks reimbursement from the corporation.

In an action by or on behalf of the corporation, there are three possibilities. Name them.

Back 161

(1) Prohibited
(2) Of RT
(3) Permissive

Front 162

When is reimbursement prohibited?

Back 162

Reimbursement is prohibited if officer or director was held liable to the Corp

Front 163

When is reimbursement a RT?

Back 163

Corp MUST reimburse if she was successful in defending the case on the merits OR otherwise

Front 164

Suppose a director or officer is successful in defending a suit against her, so she qualified for reimbursement of right from Corp. But the Corp refuses to reimburse her. Now she sues the Corp to force it to reimburse her, & wins. Can she recover the attorney’s fees of this suit against the Corp?

Back 164

No! She cannot recover attorneys’ fees of suing Corp

Front 165

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

Back 165

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

Front 166

Reimbursement in the “permissive” category can include what? What can it NOT include?

Back 166

settlement amount, expenses and attorney’s fees.
NOT any judgment!

Front 167

For permissive reimbursement, who determines eligibility? 3 Alternatives

Back 167

(1) The Board (with a quorum of directors being non-parties); OR, if there is no such quorum,
(2) Shareholders or a quorum of those directors who are disinterested; OR
(3) BoD pursuant to report from independent legal counsel

Front 168

Can the court in which the officer or director gets sued order the corporation to reimburse the officer or director for litigation expenses and attorney’s fees?

Back 168

Yes, a CT can order it if it finds that she is reasonably entitled to it BUT CANNOT include a judgment against her

Front 169

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

Back 169

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

Front 170

Can the corporation advance litigation expenses to the director or officer?

Back 170

Yes, can advance litigation expenses

Front 171

***Certificate may provide for elimination of director liability to the Corp or to S for damages for breach of duty EXCEPT in 4 circumstances:

Back 171

(1) When director acted in bad faith OR
(2) W/ intentional misconduct OR
(3) Received an improper financial benefit OR
(4) Approval an unlawful distribution or loan

Front 172

When may a CT pierce the Corporate veil & hold S liable?

Back 172

CT may “pierce the corporate veil” (PCV) & hold S personally liable if they have abused the privilege of incorporating & if fairness demands that the shareholders not have limited liability.

Front 173

Why is PCV extraordinary?

Back 173

= extraordinary b/c Corp is supposed to be liable for what it does (that’s why we incorporated!)

Front 174

Why might NY courts PCV? 3 Reasons

Back 174

(1) To prevent fraud OR
(2) To achieve Equity OR
(3) To prevent the use of the Corp as a cloak for illegality

Front 175

What are the 2 main classifications/rationales behind PCV?

Back 175

(1) Alter ego
(2) Undercapitalization

Front 176

What does it mean for the Corp to be an altar ego & how do you recognize it? What is the standard in NY?

Back 176

= a.k.a. identity interest, excessive domination
- Person(s) commingles personal & corporate funds
- Looking for abuse of privilege of having a Corp
- First thing we do is state the General Rule... in NY we say there is NO PVC if the Corp has any mind, existence, or will of its own (= fairly tough standard)
... never entirely sure if it is met but we argue it

Front 177

If you have a dummy Corp OR a parent Corp completely dominating a subsidiary, then there is a strong possibility of PVC... in that case, who would be liable if CT did PCV?

Back 177

Only go after the active wrongdoer = the person(s) who are carrying out the abuse

Front 178

When is there undercapitalization?

Back 178

B/c S failed to invest enough to cover prospective liabilities

Front 179

Is undercapitalization enough in NY?

Back 179

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

Front 180

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

Back 180

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

Front 181

In a close corporation, the ten largest S are personally liable for what?

Back 181

*** In a close Corp the 10 largest S are liable for the wages & benefits to the Corp’s employees… only in a close Corp though.

Front 182

Who manages the corp & why?

Back 182

Remember that generally BoD (not shareholders) who manage the corp. There is a public policy that BoD must exercise the management
power, and that shareholders should not encroach directly on that power. There
is a trend away from that public policy in some instances.

Front 183

When can S manage the Corp?

Back 183

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

Front 184

What is a close corporation?

Back 184

= has few S AND stock is NOT publicly traded
= mom & pop Corp

Most Corp in this world = close corp (& most Corps on BEX!)

Front 185

Who can manage a close Corp?

Back 185

Either BoD OR S can manage it

Front 186

How is power vested in the S to manage a close corporation?

Back 186

A provision in the certificate can restrict or transfer BoD power to shareholders or others.

Front 187

when is it ok to vest in the shareholders the power to manage a close corp? 4 Requirements

Back 187

OK if:
(1) all incorporators or shareholders (voting and nonvoting) approve it;
(2) all subsequent S have notice;
(3) it is conspicuously noted on front and back of all shares; AND
(4) shares are not listed on an exchange or regularly quoted over-the-counter

Front 188

In a close corporation run by S, who owes the duties of care and loyalty?

Back 188

= managing... CHECK

Front 189

Why might CTs be increasingly willing to protect minority shareholders in a close corp? What duties are imposed on S, especially on controlling S?

Back 189

= willing to protect b/c they have NO WAY OUT of Corp (can’t sell stock b/c not public)

In a close corporation, there is a trend toward imposing fiduciary duties on S in their dealings with each other. Especially, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the Corp or to oppress minority shareholders or the Corp. They owe a duty of utmost good faith.

Front 190

What are professional service corporations?

Back 190

Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation, usually abbreviated "P.C."

Front 191

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

Back 191

Shareholders & Officers & Dirs MUST ALL be licensed professionals...
But employees don’t have to be professionals

Front 192

Are the professionals in a P.C. liable for their own malpractice?

Back 192

YES but NOT for others in the group (may be better than a partnership as a result)

Front 193

Are the professionals liable for Ks entered by the entity and for rent due on leases in the P.C.’s name?

Back 193

NO the entity is liable & the individuals are not

Front 194

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

Back 194

In general, the P.C. is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of "P.C." & must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession.

Front 195

What happens if one of the shareholders dies or is disqualified from the practice?

Back 195

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

Front 196

***What is a derivative suit?

Back 196

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

Front 197

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

Back 197

• ALWAYS ASK – Could the Corp have brought this suit?
If yes, then it’s probably a derivative suit

Front 198

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

Back 198

***YES – duties of care & loyalty are OWED TO THE CORP
A breach of one of those duties hurts the Corp

Front 199

S of Corp. sues X for breaching its K with Corp. Derivative suit?

Back 199

YES, b/c C Corp. could sue X for this breach.

Front 200

S sues BoD of Corp for issuing new stock w/o honoring her preemptive rights. Derivative suit?

Back 200

NO, this is a "direct suit," for S’s personal claim.

Front 201

S sues regarding waste of corporate assets. Derivative suit?

Back 201

Yes, it is derivative (ALWAYS derivative b/c = breach of duty of loyalty)

Front 202

S sues to compel declaration of dividend. Derivative?

Back 202

Probably not. But maybe if it could arguably be based upon a breach of duty to the Corp
- Trying to get $ in her pocket, so probably not
- It might be derivative if it’s part of mismanagement by the Directors

Front 203

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

Back 203

Corp gets the judgment!!!

Front 204

***What does S receive in a successful derivative suit?

Back 204

Costs & attorney’s fees usually from the judgment won for the Corp.

Front 205

We know the damages generally go to the Corp. But can S ever recover the damages directly in a derivative suit?

Back 205

Maybe if recovery by the Corp will return $ to the bad guys

E.g. A close Corp w/ 3 shareholders, each of whom owns 1/3 of the shares & participates in management. One breaches the duty of loyalty by engaging in a competing venture. In a derivative suit, Corp wins a judgment to recover the bad guy’s profits. But giving the recovery to the Corp will return 1/3 of it to the bad guy. CT might let the other S recover directly, although it is a derivative suit.

Front 206

What are the consequences of an unsuccessful S' derivative suit?

Back 206

- S pays her own tab & cannot recover costs & expenses
- S will probably be liable to Corp for their costs (usually winner recovers costs)

Front 207

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

Back 207

NO – res judicata

Front 208

What are the 3 (maybe 4)requirements for bringing a shareholder derivative suit? (Keep in mind, a director or officer can sue another director or officer on behalf of the Corp to compel her to account for violating duties without making these showings.)

Back 208

1. Stock ownership
2. Must adequately represent the interests of Corp & S.
3. Must also make a demand that directors bring suit unless it would be futile.
4. The plaintiff S can be required to post security for costs unless plaintiff owns 5% or more of any class of stock or her stock is worth more than $50,000.

Front 209

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

Back 209

- The person bringing suit must have owned stock or held a voting trust certificate or have gotten it by operation of law from someone who owned the stock WHEN the claim AROSE
(e.g. = Inheritance OR Divorce decree).
- MUST also own stock when the action is brought & through entry of judgment.

Front 210

When might a demand for the directors to bring suit be futile? 3 Circumstances

Back 210

If (1) majority of the board is interested or under the control of interested directors; OR
(2) the board did not inform itself of the transaction to the extent reasonable under the circumstances; OR
(3) the transaction is so egregious on its face that it could not be the result of sound business judgment.

Front 211

What is the special pleading requirement in a derivative suit?

Back 211

= P must plead w/ particularity her efforts to get the BoD to sue OR why demand was excused

Front 212

If demand is made and refused, can S sue?

Back 212

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

Front 213

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

Back 213

It can move to dismiss, based upon the finding by independent directors (or a committee of independent directors, sometimes called a “special litigation committee”) that the suit is not in the corporation’s best interests (e.g., low chance of recovery, or cost of suit will exceed recovery).

Front 214

What does the court look at in deciding whether to dismiss? 2 Things

Back 214

(1) Independence of those making the investigation AND
(2) The sufficiency of the investigation (THAT’S IT!)

Front 215

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

Back 215

• Corp must be joined as a Defendant

Front 216

Can the parties dismiss or settle a derivative suit?

Back 216

• Ps can settle DS (or dismiss) BUT ONLY w/ CT approval
- CT may notify S who will be substantially affected by discontinuance of the action

Front 217

Can an officer or Director bring a derivative suit?

Back 217

- A Dir or Officer can bring an action against another Dir or Officer on behalf of Corp to compel her to account for violating duties
- Does NOT have to make the showing that a S has to do for a DS

Front 218

Who votes?

Back 218

General rule = record owner of stock as of record date has the RT to vote

Front 219

Who is the record owner?

Back 219

= the person shown as the owner in the Corp records.

Front 220

What is the record date?

Back 220

= a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.

Front 221

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

Back 221

(1)*** even if it is the record owner on the record date the Corp does NOT vote treasury stock
(2) Death of a S (his executor can vote the shares)
(3) Voting by proxy

Front 222

What is a proxy?

Back 222

= a 1) writing, 2) signed by record shareholder or authorized agent, 3) directed to secretary of corporation, 4) authorizing another to vote the shares.

Front 223

Is a fax or an email a "writing" for proxy voting purposes?

Back 223

Fax or email = OK for writing requirement

Front 224

Is proxy voting OK for directors? What if a person is both a S & a director?

Back 224

- Proxies OK for S voting but NOT director voting
- If both, then depends on the mtg she’s going to

Front 225

How long does proxy authorization last?

Back 225

generally CANNOT vote at next annual Mtg b/c only good for 11mths unless it says otherwise

Front 226

Is a proxy revocable?

Back 226

yes, S can revoke the person’s proxy

Front 227

Can S revoke a proxy authorization even though it says it is irrevocable?

Back 227

YES!!!

Front 228

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

Back 228

(1) If S sells her shares to another after record date & proxy says it is irrevocable, then can’t revoke it
(2) Proxy + interest = irrevocable
- Does not have to be ownership
- Could be option to buy or a pledge

Front 229

Can shareholders decide to vote together in advance? how?

Back 229

S can decide that they can increase their influence on corporate policy by "block voting" through voting trusts &/or voting agreements

Front 230

What are the 4 requirements of a voting trust?

Back 230

(1) Has to be a WRITTEN trust agreement
(2) Have to give a copy to Corp
(3) Actually transfer shares to voting trustee AND
(4) Original shareholders receive trust certificates & retain all other shareholder RTs except for voting

Front 231

Is there a time limit on voting trusts?

Back 231

= 10yr max (but w/in 6mths of expiration it can be extended for another term of up to 10yrs)

Front 232

What are the 2 requirements for a voting agreement (or “pooling” agreement)?

Back 232

(1) In writing AND
(2) Signed

Front 233

Are voting agreements specifically enforceable?

Back 233

Apparently not specifically enforceable in NY

Front 234

What's special about a proxy given subject to a voting agreement?

Back 234

= it is irrevocable IF IT SAYS SO!!!!

Front 235

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

Back 235

That’s OK, because electing directors is something shareholders do.

Front 236

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

Back 236

= violates rule against voting agreements by Dir’s HOWEVER OK if they are the ONLY 2 S in the Corp
AND IT IS OK to agree to use best efforts to cause the Corp to act in a particular way

Front 237

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

Back 237

(1) Written consent SIGNED by the holders of voting shares to act w/o a Mtg OR
(2) A Mtg

Front 238

What is required before the S can take a valid action w/o a mtg?

Back 238

IF CERT ALLOWS, can take action w/o meeting if there is agreement in writing of the holders of enough shares to pass a resolution if all voting shares were present and voting at a meeting.

Front 239

Where is the annual mtg held? What if it is not held?

Back 239

Annual meeting can be held anywhere.
CT can order one if it is not held.

Front 240

What is so important about the annual meeting?

Back 240

= important b/c this is where the S elect directors

Front 241

Who can call a special meeting of the shareholders? 2 Options

Back 241

1) board OR
2) anyone provided in the certificate

Front 242

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

Back 242

= to elect directors if there is a failure to elect a sufficient number of directors to conduct the business of the Corp. If BoD fails to call such a meeting, the holders of 10% of the voting shares may demand in writing that the Corp hold the meeting.

Front 243

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

Back 243

= must give written notice (e-mail is OK) to EVERY S entitled to vote, for EVERY meeting (annual or special) between 10 and 60 days before the Mtg.

Front 244

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

Back 244

(1) MUST state when & where the Mtg will be
(2) Also must inform if the proposed action would entitle S to appraisal RTs and tell why (and even include the statute about appraisal RTs).
- For a Special Mtg MUST state who called it & the purpose of the Mtg

Front 245

Why is the statement of purpose important in the notice for a special mtg?

Back 245

= important b/ that is the ONLY business that can be transacted at that Mtg

Front 246

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

Back 246

No good b/c S do not remove officers

Front 247

What is the consequence of failure to give proper notice to all shareholders?

Back 247

= action taken at the mtg is void unless those not receiving notice waive the notice defect.

Front 248

How does a S waive it if improper notice is given to him? 2 Ways

Back 248

(1) Express = in writing and signed anytime; OR
(2) Implied = if attend the meeting without objection.

Front 249

What is required for a S vote?

Back 249

There must be a quorum represented at the meeting.

Front 250

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

Back 250

Determination of a quorum focuses on the number of shares represented, not the number of shareholders.

Generally, a quorum requires a majority of outstanding shares.

Front 251

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

Back 251

Need at least 60,001 shares

Front 252

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

Back 252

Cert or bylaws can reduce – BUT it can never be fewer than 1/3 of share entitled to vote

Front 253

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

Back 253

NO - NEVER can reduce the requirement of majority approval

Front 254

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

Back 254

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

Front 255

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

Back 255

YES can increase # of votes required to pass a resolution BUT IN CERT & NOT in the bylaws
= exactly the same as w/ Directors

Front 256

If quorum is met, what is required to bind a Corp?

Back 256

= a majority

Front 257

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

Back 257

Majority means majority of the shares actually voting in favor or against the proposal. (Abstentions don’t count.)

Front 258

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

Back 258

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

Front 259

How and when do shareholders use cumulative voting?

Back 259

= Only available when voting for Directors... Multiply # of shares times # of Directors to be elected

Front 260

Why have cumulataive voting for shareholders?

Back 260

Used to help small sahreholders get rep on BoD

Front 261

You own 1,000 shares of stock in C Corp. C Corp. has nine directorships open for election. You believe that Derek Jeter should be director of C Corp. Under cumulative voting, how many votes can you cast for Derek?

Back 261

9,000 votes

Front 262

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

Back 262

NO!!!!! Only exists if the Cert allows

Front 263

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

Back 263

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

Front 264

So if 9 directors are being elected, what would you need to elect one director under the cumulative voting system?

Back 264

= 100 / (X+1) = 100 / 10 = 10% so need one share more than 10%
• Much tougher w/ classified BoD

Front 265

How transferable is stock?

Back 265

a benefit of stock = the free transferability of the ownership interest

You can give your stock away or, if you can find a buyer, you can sell it.

Front 266

Can a shareholder sell her stock for less than par value?

Back 266

Yes – par is an issuance rule & applies only when Corp selling its own stock

Front 267

Are stock transfer restrictions are permissible?

Back 267

Yes - & they will be upheld if they are reasonable under the circumstances… i.e. it is not an undue restraint on alienation

Front 268

Where are stock transfer restrictions set? 3 options

Back 268

(1) Cert OR
(2) Bylaws OR
(3) Agreement

Front 269

When is it common to have stock transfer restrictions? In what kind of situation?

Back 269

Very common in a close Corp

Front 270

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

Back 270

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

Front 271

Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either 1 of 2 things:

Back 271

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

Front 272

By statute, there is a RT to inspect and copy what 2 things of the Corps? & who exactly can inspect & copy? What do they have to do?

Back 272

(1) minutes of shareholder proceedings AND
(2) the record of shareholders.

- Any S can demand access if 5 days notice & it is a written demand

Front 273

What can the Corp demand of the S who wants to inspect/copy?

Back 273

Corp can demand that the shareholder give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders.

Front 274

Can Corp demand more detail in the affidavit than a statement that his interest is not against the Corp & that he has not tried to sell any S list in last 5yrs?

Back 274

No, NEVER. CANNOT demand more detail in the affidavit

Front 275

What happens if the S refuses to furnish such an affidavit after the Corp demands it?

Back 275

•If S refuses to provide affidavit, then Corp can deny access

Front 276

What can the S make a written request for the Corp to provide to him? 3 Things

Back 276

A shareholder can make a written request for
(1) the corporation’s latest annual balance sheet,
(2) profit and loss statement AND
(3) latest interim statements distributed to shareholders or public.

Corporation must provide the documents; can do so by mail.

Front 277

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

Back 277

Yes, a different statute gives a right to inspect & copy a list of the current directors and officers.

Any S can demand that on 2 day’s written demand.

Front 278

What documents does the CL RT to inspect cover?

Back 278

CL right but must be for a proper purpose (related to your role as S)

= Unclear how broad this is

Front 279

When & how can a director inspect?

Back 279

Director's have unfettered access

Front 280

What are distributions? What 3 types are there?

Back 280

= payments to shareholders
& can be
(1) a dividend OR
(2) a payment to repurchase shares OR
(3) to redeem shares [forced sale to corporation at price set in certificate]

Front 281

When are dividends declared?

Back 281

Distributions are declared in the Board’s discretion.

Front 282

Does a S have a RT to dividends?

Back 282

There is NO S "right" to a distribution until it is declared. Once it's declared, affected shareholders have a RT to it.

Front 283

Will a CT interfere w/ BoD’s discretion & order a distribution?

Back 283

Only on a showing of bad faith or dishonest purpose (very tough to show)

Front 284

Don’t confuse a distribution with a stock split, which gives a shareholder more shares than she now has but reduces the value of each share proportionately. (See e.g. on back)

Back 284

For example, say Sally owns 100 shares of Drew Carey Hairstyle Inc. The shares are selling at $40 per share. If the stock splits 2-for-1, Sally will end up with 200 shares, worth $20 per share. So the economic effect is nothing -- she has $4000 worth of stock either way.

Front 285

BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common stock?

Back 285

$4 per share

Front 286

BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of preferred with $2 dividend preference?

Back 286

Preferred means pay first. So those 20,000 preferred shares must be paid their $2 preference first, before anybody else gets anything. 20,000 shares multiplied by $2 equals a total preference of $40,000. So we skim off $40,000 and pay that to the preferred holders first. That leaves $360,000. Who gets the $360,000? Goes to the common shares – get $3.60 per share

Front 287

BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred that is participating?

Back 287

Participating means pay again. So these 20,000 shares get paid twice -- once as preferred and again because they are participating. Do the preferred exactly as in hypo 2. 20,000 shares multiplied by $2 preference equals $40,000 (just like above). Pay that first, because it’s preferred (just like above). That leaves $360,000 (just like above.) But here, the $360,000 gets divided by 120,000 shares.

Front 288

BoD of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends in the three prior years)?

Back 288

Cumulative means add them up -- for the years in which no dividend was paid, the cumulative holders’ dividend is adding up. So the corporation owes these cumulative holders for the three prior years (because there have been no dividends over those years) PLUS there’s this year, the year the dividend is declared. So the corporation owes the cumulative holders for four years of their $2 preference.

Front 289

***How is surplus computed?

Back 289

• Surplus = assets – liabilities – stated capital OR
• = Net assets – stated capital

Front 290

***Can surplus be used for distributions?

Back 290

Yes but up to BoD if you get a distribution

Front 291

What is stated capital?

Back 291

= par value
& Excess over par goes up into surplus

Front 292

Can stated capital be used for distributions?

Back 292

NO never use for distribution!!!

Front 293

C Corp. has issued 10,000 shares of $2 par stock for $50,000 and 4,000 shares of no par stock for $70,000. $20,000 goes to stated capital and $30,000 goes to surplus. Why?

Back 293

$20, 000 goes to stated capital b/c stated capital = par value & excess over par goes up into surplus (= $30,000)

Front 294

What if no par stock is issued? What part is allocated as stated capital & what part is surplus?

Back 294

W/in 60 days after issuance, BoD can allocate any part, but not all, to surplus. If BoD does not do this, it is all stated capital.

Front 295

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

Back 295

Corp can make distributions even though it lost money last year

Front 296

***When can a Corp NOT make distributions?

Back 296

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

Front 297

What does "insolvent" mean?

Back 297

= unable to pay its debts as they come due in the ordinary course of business

Front 298

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

Back 298

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

Front 299

Who would sue to recover when unlawful distributions were made?

Back 299

Can be a Derivative Suit

Front 300

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

Back 300

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

Front 301

Describe redemptions.

Back 301

= set in certificate, and must be done proportionately within each class of stock.

Front 302

Describe repurchases.

Back 302

= individually negotiated, and can discriminate except in close Corp, where must give equal opportunity to all shareholders.

Front 303

What is the significance & consequences of a fundamental Corp change?

Back 303

= so fundamental that, most of them require both director & shareholder approval.
For most of them, the Corp must notify the Dept of State by delivering a document which the Department then files.

Front 304

****What is the dissenting shareholders’ RT of appraisal?

Back 304

= RT of a S to force the Corp to buy her shares at fair mkt value.

Front 305

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

Back 305

If she disagrees w/ a fundamental change...think RT of appraisal whenever you see:
(1) Some amendments to Cert
(2) Consolidation
(3) Merger into another Corp
(4) That the Corp transfers substantially all of its assets
(5) Your Corp’s shares are acquired in a share exchange

Front 306

Even if there is a trigger, when is there no RT to appraisal & why?

Back 306

No right of appraisal if the company is listed on a national securities exchange or NASDAQ b/c there is a public Mkt for the stock

Front 307

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

Back 307

(1) before S vote, file written objection & intent to demand payment;
(2) abstain or vote against proposed change; AND
(3) After the vote make a written demand to be bought out

Front 308

What happens if the S & the Corp cannot agree on fair value?

Back 308

Corp sues & CT determines the value.

Front 309

In setting the value of the stock, can the court discount the value to reflect the fact that minority shares may be worth less than controlling shares, because they carry no control over corporate affairs?

Back 309

No, no minority discount in NY

Front 310

Who makes minor changes in the Corp?

Back 310

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

Front 311

What happens if the Corp wants to make more substantive changes to the Certificate? What is the 2 step process?

Back 311

Other amendments, such as change of name, purpose or duration, increase or decrease of shares or par, creation of new classes of stock, denial or grant or limitation of preemptive rights, must be approved by
(1) director action AND
(2) a majority of the shares entitled to vote.

Front 312

what if the amendment will change or strike a supermajority quorum or voting requirement for BoD voting or will strike a provision restricting board authority? what is the approval process?

Back 312

If formed ON OR BEFORE before Feb 22, 1998, must get BoD approval AND approval by 2/3 of shares entitled to vote.

If formed AFTER Feb 22, 1998, must get Board approval AND approval by a majority o shares entitled to vote.

Front 313

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

Back 313

= director approval + approval by 2/3 of the shares entitled to vote. Does NOT matter when Corp formed

Front 314

What happens if an amendment is approved?

Back 314

= deliver certificate of amendment to Department of State for its filing.

Front 315

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

Back 315

Yes, if the amendment (1)alters or abolishes a preference, (2) changes redemption rights, (3) alters or abolishes a preemptive right OR (4)limits voting rights.

Front 316

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

Back 316

Need each company’s BoD to adopt plan of consolidation/merger & need S approval from each Corp

Front 317

A Corp. has 6,000 outstanding shares entitled to vote. How many shares must vote for the proposed merger of A Corp. into B, Inc.?

Back 317

DEPENDS ON WHEN FORMED:

• before Feb 22nd 1998, at least 4,000 shares (2/3 entitled to vote)
• After Fed 22nd, at least 3,001 b/c all you need is a majority of shares entitled to vote

Front 318

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

Back 318

No shareholder approval required in "short-form" merger = where a parent corporation owns 90 percent-or-more of each class of stock of a subsidiary that is merged into a parent corporation.

Front 319

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

Back 319

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

Front 320

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

Back 320

yes, RT of Appraisal for the Shareholders of a Corp that DISAPPEARED either in a merger or a consolidation
BUT NOT FOR S of surviving Corp

Front 321

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

Back 321

YES they have RT of appraisal even though they did not get to vote

Front 322

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

Back 322

effect = surviving Corp succeeds to all RTs & liabilities of the constituents (= successor liability)

Front 323

What are 2 fundamental Corp changes that are treated alike?

Back 323

(1) TRANSFER (not just mortgage) OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS NOT IN THE ORDINARY COURSE OF BUSINESS OR
(2)SHARE EXCHANGE

Front 324

What is share exchange?

Back 324

one company acquires all the outstanding shares of one or more classes of another Corp

Front 325

For which company are these fundamental corporate changes - (1) transfer or sale or substantially all of the assets not in course of ordinary business & (2) share exchange?

Back 325

= fundamental corporate changes for the SELLING Corp ONLY - NOT for the BUYING Corp.

Front 326

What is the # of shares of seller Corp that must approve the 2 fundamental change situations?

Back 326

- On or before Feb 22, 1998 need at least 2/3 of the shares entitled to vote
- After then, all you need is a majority

Front 327

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

Back 327

zero - they do not vote b/c not a fund change for the buyer

Front 328

What sort of filing is required for share exchanges & transfers of assets involving a buying & selling Corp?

Back 328

In the share exchange, deliver plan of exchange with the Department of State for filing. In the transfer of assets, no such filing is required.

Front 329

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

Back 329

Yes, for shareholders of the selling corporation only. Not for the shareholders of the buying corporation (because it is not a fundamental corporate change for the buyer).

Front 330

What is the one exception to the S RT of appraisal in selling Corps?

Back 330

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

Front 331

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

Back 331

General rule, the company acquiring assets will not be liable for the torts of the company whose assets it acquired

Front 332

What are the 3 exceptions to the general rule for acquiring tort liability?

Back 332

(1) the deal provides otherwise, OR
(2) the purchasing company is mere continuation of the seller, OR
(3) the deal was entered fraudulently to escape such obligations.

Front 333

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

Back 333

- Yes it is different from the merger
- Here we do not expect successor liability
- Reason = company that sold its assets is still in existence (still there)

Front 334

***What is the ultimate fundamental Corp change?

Back 334

= DISSOLUTION!!!!

Front 335

What are the 3 types of dissolution?

Back 335

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

Front 336

What approval is required for a voluntary dissolution?

Back 336

NO BoD vote necessary at all; only need S approval which =
ON OR BEFORE Feb 22nd = 2/3
& after Feb 22nd = majority of shares entitled to vote.
Either way, certificate of dissolution delivered to the Department of State for its filing.

Front 337

What is involuntary dissolution?

Back 337

= judicial - someone is asking for a CT order of dissolution

Front 338

What are the 4 ways a dissolution can come about?

Back 338

(1) By BoD resolution or resolution of majority of shares entitled to vote, stating that Corp has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders.
(2) 1/2 or more of shares entitled to vote may petition if directors too divided to manage or S too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders.
(3)Any S entitled to vote may petition if shareholders unable to elect directors for 2 annual meetings.
(4) 20%+ of voting shares in Corp whose shares are not traded on a securities market may petition on either of two grounds

Front 339

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

Back 339

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

Front 340

Who is "management" when talking about wasting, diverting or looting assets?

Back 340

= directors or managing S in a closed Corp

Front 341

When will a CT consider denying dissolution & what will a CT look at in making its decision?

Back 341

CT may deny dissolution if there is some other way the complaining S can obtain a fair return on his investment, e.g., by ordering buy out. CT will consider whether liquidation is necessary to protect the petitioners & is the only way for them to get a fair return on their investment.

Front 342

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

Back 342

w/in 90 days of the petition, buy the petitioner’s shares at fair mkt value.
Terms MUST be approved by the CT!!!

Front 343

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

Back 343

1) gather all assets,
2) convert to cash,
3) pay creditors, AND
4) distribute remainder to S, pro-rata by share unless there's a dissolution preference.

Front 344

How does a dissolution preference work?

Back 344

- works like a dividend preference… = pay first
- Must say in Cert if it is a dissolution preference or a distribution preference

Front 345

Can shareholders agree that they will be paid before creditors?

Back 345

S CANNOT agree that they will be paid before creditors

Front 346

What is the CL rule for shareholder's fiduciary duties?

Back 346

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

Front 347

Is there a duty for a controlling S?

Back 347

A shareholder who also occupies a control position (such as a director position) or whose ownership is such that she has working control over the corporation owes a fiduciary duty to minority shareholders and, sometimes, to others (including the corporation). She cannot use a dominant position for individual advantage at the expense of minority shareholders or the corporation.
***Most likely to happen in a Close Corp situation

Front 348

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

Back 348

Yes typically

Front 349

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

Back 349

(1) controlling S sold to looters (who come in & loot the Corp) w/o making a reasonable investigation (reasonable person standard). If happens, disgorge Seller’s profit AND that Seller is probably liable for ALL damage done to that Corp.
(2) Controlling shareholder de facto sells a corporate asset. If she does, all S should share in the premium paid by the buyer.
(3)Controlling shareholder sells a corporate office, e.g., a position on the Board. Fiduciaries cannot sell their position. E.g., controlling shareholder sells controlling interest and agrees that she and "her" directors will resign from the board. It is one thing to have the new controlling shareholder elect new directors. It is another, though, to sell seats on the board. Disgorge the profit.

Front 350

What is the general rule for mergers?

Back 350

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

Front 351

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

Back 351

aimed solely at cashing out minority shareholders unfairly. Usually, majority shareholders cause their corporation to merge with another corporation which they own. The minority shareholders’ shares are purchased for cash, so they have no interest in either corporation. CTs may be increasingly protective of minority.

Front 352

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

Back 352

(1) whether deal = tainted
(2) Whether minority S dealt w/ fairly AND
(3) Whether legit business reason for the merger

Front 353

Suppose a director or an officer engages in market trading based upon inside information from the corporation. She makes a profit by doing so. What is the liability because of & what are the repurcussions?

Back 353

In New York, the director or officer has breached a duty to the corporation by doing this AND Corp can sue to recover her profit

Front 354

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

Back 354

All directors and officers (and probably controlling shareholders) owe an affirmative duty to disclose special facts in a securities transaction with a non-insider. So they cannot trade on secrets; they must disclose or abstain from dealing.

Front 355

What are special facts?

Back 355

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

Front 356

Who can sue for nondisclosure of special facts?

Back 356

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

Front 357

What is the measure of the damage?

Back 357

= difference btw price paid & value of that stock after news goes public & has time to digest

Front 358

***David is a director of X Corp., and has just learned that the company has developed a new machine that will revolutionize the market. The company's stock is now selling at $10 per share. Reports indicate that the stock will go to $50 per share within weeks of the announcement of the new machine. Bobbitt, a shareholder, calls David to complain about the company, and says he wishes he'd never bought stock. David offers to take the stock off Bobbitt's hands for $20 per share. Bobbitt sells. After the announcement, the stock goes up to $50. Can Bobbitt sue David?

Back 358

It is D (= David) who will get in trouble but under CL it was NOT fraud b/c no affirmative misrepresentation. BUT can sue under Special Facts Doctrine b/c CLEARLY a special fact... i.e. reasonable investor would consider it important

Front 359

Bobbitt is a shareholder, who does not know the inside information. David
is a director, who has inside information. David traded on that inside info without disclosing it. He thereby breached a duty to Bobbitt. What damages can Bobbitt recover from David?

Back 359

- Breached a duty b/c traded on insider knowledge
- Damages = difference in price paid & price when goes public (= $30 per share)

Front 360

FINAL PAGE...

Back 360

= ALL THE DATES YOU NEED TO KNOW & WHAT THEY RELATE TO!!!!!!! Make sure to review that page!