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Flashcards in 1. Corporate Organization Deck (17):

What body of law governs NY corporations?

"The controlling statutory law is the New York Business Corporation Law (BCL)"

Note: NY law governs the internal affairs of incorporated businesses EVEN IF the company does NO business in NY


What are the three formation requirements for corporations?

1. People – incorporators (adult humans; NOT entities)
2. Paper – certificate of incorporation ("articles")
3. Acts 
(i) sign notorize certificate of incorporation;
(ii) deliver to NY Dept. of State; AND
(iii) hold an organizational mtg


(who, what, how many)

1. WHO: Incorporators can be any adult human, no entities

2. WHAT: Incorporators:
(a) Execute the certificate,
(b) Deliver it to the NY Dept of State; AND
(c) Hold an organizational meeting

3. HOW MANY: There need be only one or more incorporator


What is the two purposes of the certificate of incorporation ("articles")?

1. It's a contract between the corporation and its shareholders
2. It's a contract between the corporation and the state


What information goes into the certificate of incorporation?

1. MUST include key names and addresses
a. name must include corporation, incorporated,
limited, or any abbreviations of those
b. address is the county in NY of the officer of the corporation (does not have to be the place of primary business)
c. must designate the NY Sec of State as agent for service of process
d. may designate a registered agent for service of process
e. must provide an addy for fwd'ing information to the corporation
f. must include name and address of each incorporator

2. MAY including the duration of the corporate entity
a. if certificate has no statement duration, then the corporation has perpetual existence

3. MUST include the corporate purpose
a. can be as general as "engage in all lawful activity"
b. but if corporation limited its purpose and acts outside of that purpose it would be an ultra vires contract

4. MUST outline its capital structure (stock), including:
a. Authorized stock: maximum number of shares that the corporation can sell
b. Number of shares per class
c. Information on par value, rights, prefrences & limitations for each class
(i) at least ONE class of stock or bonds must have unlimited voting rights; AND
(ii) at least ONE class of stock must have unlimited dividend rights

Relevant Terminology
1. Issued stock = number of shares that the corporation actually sells
2. Outstanding stock = stock that the corporation has sold AND has not reacquired
3. Treasury stock = stock that the corporation has sold and has reacquired


What are the consequences of having an ultra vires act?

Common Law:
(i) the contract could be voided.

(i) ultra vires contracts are valid
(ii) shareholders can seek an injunction
(iii) responsible managers are liable to corporation for ultra vires losses


What acts must incorporators take to establish a corporation?

1. Each incorporator must sign certificate AND have it notarized
2. Must deliver the certificate to the NY Dept of State & pay filing fees (filing creates conclusive evidence of valid formation (de jure corporation))
3. Incorporators must hold an organizational meeting (or they can do it by written consent), where they:
a. adopt bylaws
b. elect initial board of directors, which immediately takes over 


What powers AND liabilities does a corporation have?

A corporation is a separate legal person that has the broad statutory POWER to:
1. enter contracts in its own name
2. be a partner in a partnership
3. transfer property
4. buy and sell securities
5. sue and be sued
6. make political contributions up to $5k/year per candidate/organization
7. make charitable contributions without statutory ceiling
8. guaranty a loan that is NOT in furtherance of corporate business if it is approved by 2/3 of the shares entitled to vote (MC)

A corporations is LIABLE for what the corporation does. So it is incurs a debt, beaches a contract, or commits a tort, liability DOES NOT fall on the:
1. people who run the corporation (board or directors and officers) or the
2. people who own the corporation (shareholders)
a. shareholder are liable only to pay for their stock


What is a de facto corporation?
(NY view)

A corporation whose incorporators fail to form a de jure corporation, but are still be treated as a corporation (limited liability, except in actions by the state) when:
1. there is a relevant incorporation statue;
2. the parties make a good faith, colorable attempt to comply with it; AND
3. the business is being run like a corporation  

NOTE: NY allows de facto corporations ONLY when the incorporators did everything to file for incorporation and the Dept of State failed to file, without rejecting it.

Otherwise it is a partnership and their is liability.


What is corporation by estoppel?
(NY view)

Someone dealing with a business as a corporation, treating it as a corp MAY be estopped from denying the business's corporate status later (i.e. they CANNOT later sue individual proprietors)


Individual properitors ARE liable if they fail to form a de jure corporation


What are bylaws?

Used to set up procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.

1. If bylaws are inconsistent with the certificate, the certificate controls because it is a contract with the state
2. Bylaws are not filed with the state
3. Bylaws are internal and aren't binding on outsiders
4. The incorporators adopt the initial bylaws at the organization meeting. they have the status of shareholder bylaws
5. Shareholders can amend or repeal the bylaws and adopt new ones
6. Board of directors may amend or repeal or adopt bylaws only if
(a) the certificate; OR
(b) the shareholder bylaw allows

NOTE: corporations do not have to have bylaws (the certificate is all that is required)


What is a promoter?

A promoter is a person acting on behalf of a corporation not yet formed and may enter into a contract with a third party on behalf of the corporation-not-yet-formed


Is the corporation liable for pre-incorporation Ks?

The corporation is liable on the contract only if it adopts the contract.


What are two ways a corporation can adopt a pre-incorporation contract?

1. Express adoption: the board of directors can take action to adopt the contract
2. Implied adoption: arrises if the corporation knowingly accepts the benefts of the contract


Is the promoter liable for pre-incorporation contracts?

Unless the contract clearly states otherwise, the promoter is liable until there is an agreement among (i) the promoter; (ii) the corporation; AND (iii) the contracting party that the corporation will replace the promoter (novation)

NOTE: adoption alone by the corporation does not remove the promoter from liability (he would be jointly liable with the corporation)


What is the Secret Profit Rule?

A promoter cannot make a SECRET profit on her dealings with the corporation itself. If she does, she is liable and has to "account for profit" to the corporation (return the profits)

Profit calculations (timing matters)

1. Sale to the corporation of property acquired BEFORE becoming a promoter: PRICE PAID BY CORP – FMV 

2. Sale to the corporation of property acquired AFTER becoming promoter: PRICE PAID BY CORP – PRICE PAID BY PROMOTER


What is the rule for "foreign" corporations doing business in NY?
(plus vocabulary)

Rule: "foreign" corporations "doing business" in NY must "qualify"

"Foreign:" one that is incorporated ANYWHERE outside of NY state. NY corporation = "domestic corporation"

"Doing business:" the regular course of intrastate business activity

  a. applying to the Dept of State and designating the Sec of State as agent (for service of process);
(1) giving information from certificate AND
(2) proof of good standing in home state
b. pay fees for privilege of doing business in NY

NOTE: if a foreign corporation does business in NY without qualifying it cannot sue in NY until it qualifies, pays fees, taxes, and accrued penalties and interest