Corporations Flashcards
CORP. - ORGANIZATION
Bylaws
Bylaws
- Incorporators adopt initial bylaws at the organizational meeting → status of a shareholder bylaw.
- SH can amend, repeal, or adopt new bylaws
- BOD can only amend, etc. when the certificate or the bylaws allow & even then SH can amend or repeal any director-adopted bylaws
If inconsistent w/ certificate, certificate controls b/c certificate was K w/ state
CORP. - LIABILITY
What defenses may shareholders use for a Corp that fails as a de jure Corp?
De Facto Corporation – must show: (1) relevant incorporation statute (there is), (2) parties made a GF, colorable attempt to comply w/ it & (3) the business is being run as a corp.
- o If applies → treated as a corp. in all actions except for action by the state
Corporation by estoppel – NOT available in NY
One dealing w/ a business as a corporation, treating it as a corporation may be estopped from denying the business’s corporate status.
- o i.e. such person could not sue individual proprietors.
PRE-INCORPORATION
Secret Profit Rule
_General Rule: _ Promoter cannot make a secret profit on her dealings w/ the corp. – if she does, liable & has to return it to corp.
Step 1: Was there a profit?
Property acquired BEFORE becoming promoter
- o Profit = price paid by the corp. minus FMV
Property acquired AFTER becoming promoter.
- o Profit = price paid by corp. minus price paid by Promoter
**Step 2: ** Does the corporation know of the profit? if yes, then NOT liable
PRE-INCORPORATION KS
Liability
Promoter liable (unless K clearly says otherwise) until there is a novation
Corp. liable if it adopts K – 2 ways: (1) express adoption – BOD takes an act adopting the K, or (2) *implied adoption – corp.’s knowing acceptance of a benefit of the K (shown by conduct)
Novation – agmt among the Promoter, corp. and the other contracting party that the corporation will replace the promoter under the K.
ISSUANCE OF STOCK
Subscription & Revocability
Subscription: a written, signed, offer to buy stock from the corporation.
Only applies w/ an issuance.
Revocability:
Pre-incorporation subscriptions = irrevocable for 3 months unless it says otherwise or all subscribers agree
Post-incorporation subscriptions = revocable until acceptance by the BOD, at which point Corp & subscriber become obligated under the subscription
Note: Corp cannot decide to sell only to some subscribers & not others - must be uniform w/in each class or series of stock
CORP. - ORGANIZATION
Foreign Corps “doing business” in New York.
General rule: Foreign corps doing business in NY must qualify
“Doing business” = regular course of intra-state business activity
Foreign corp can qualify by:
applying to NY Dept. of State
designating Sec. of State as agent for service of process
pay fees to NY for the privilege of doing business here
Must give info in application: info from its certificate & proof of good standing in its home state
**If corp. does business in NY w/o qualifying → penalty when the corp. does qualify - until if qualifies it cannot sue in NY (but it can be sued)
ISSUANCE OF STOCK
What are the permitted forms of consideration for stock?
cash or check
tangible or intangible property
labor or services already performed for the corporation
binding obligation to pay in the future in cash or check or property
binding obligation to perform future services having an agreed value
NY RULE - Corp can issue stock to somebody for performing services in forming the corporation (labors or services includes this)
ISSUANCE OF STOCK
Corp accepts the offer & subscriber defaults.
If paid less than ½ of the purchase price & then fails to pay the rest w/in 30 days of written demand → Corp can keep the money & cancel the shares – the shares then become authorized and unissued
If paid ½ or more, → Corp must try to sell the stock to someone else for cash (or a binding obligation to pay cash)
No buyer → defaulting subscriber gets nothing
Buyer willing to pay more than balance due → defaulting subscriber recovers any excess over what he agreed to pay minus the Corp’s expenses incurred in selling to the new guy
Ex: A enters subscription agmt to buy $5k worth of stock. A pays $3k & then defaults. The Corp spends $50 to get a new buyer. The new buyer agrees to pay $2500 so the Corp collects $5,500 - $500 more than A agreed to pay. So A gets the $500 - $50 for paying to get new buyer = $450 back.
ISSUANCE OF STOCK
What amount of consideration must Corp get in issuance for par, no par & treasury?
Par = minimum issue price
Ex: If C Corp issues 10,000 share of $3 par stock, it must receive at least $30k.
No par = no minimum issue price – can sell for any price
BOD sets price at which to sell no par stock UNLESS the certificate allows the SH to do it
**Treasury Stock – was previously issued & has been reacquired by the corporation (Corp. can then resell it)
Ex: C Corp is selling $3 par treasury stock – NO minimum. Always treat treasury as no par.
ISSUANCE OF STOCK
Can the Corp acquire property with par value stock?
Acquiring property w/ Par Value Stock
Ex: Can C Corp issue 50,000 shares of $3 par stock to acquire A’s farm?
Form – property so okay
Amount - okay if that farm is worth at least $150,000 (50,000 shares of $3 stock).
ISSUANCE OF STOCK
Consequences of issuing par stock for less than par value?
General Rule: Corp. can sue for the amount of water.
Ex: C Corp issues 10,000 shares of $3 par to X for $22k. Corp (or creditors if Corp is insolvent) can sue for the $8k of “water.”
Directors are liable if they knowingly authorized the issuance.
Buyer of watered stock is liable. No defense.
If Buyer transfers to a 3rd party? 3rd party is not liable if she acts in GF – i.e. she didn’t know about the water. Directors & Buyer still liable.
ISSUANCE OF STOCK
Pre-Emptive Rights
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a NEW ISSUANCE of common stock FOR MONEY
ONLY exists if certificate says so.
Certificate Silent – “new issuance”:
does not include sale of treasury stock.
does not include sale of shares authorized by the original certificate & sold within 2 years of formation.
Ex: Certificate provides for pre-emptive rights. S owns 1,000 shares of C Corp, which has 5,000 shares outstanding (so owns 20%). S has the preemptive rights to buy 20% of the new issuance. C Corp plans add’l 3,000 shares so S can buy 600 shares.
STATUTORY REQS. - DIRECTORS
Election of Directors
Incorporators elect initial directors → after, SH elect the directors at the annual meeting
**Do not need to elect new directors every year** → there can be a “classified board” w/ 2,3 or 4 classes of directors w/ one class elected each year o at least 3 directors must be in a class o total # is set in the certificate or SH bylaws
Ex: If Corp had 9 directors, could elect each one each year. Or, could put them in 3 classes of 3 directors each & each year we would elect 3 directors & they would serve 3 years each.
STATUTORY REQS. - DIRECTORS
Number of Directors
Number of directors – one or more adult natural persons
Number is set:
In the bylaws, or
by SH act, or
By the BOD if a SH bylaw allows
If no # set → then there is one director.
STATUTORY REQS. - DIRECTORS
Filling a vacancy on the BOD.
e.g. director dies or resigns or is removed
General rule: remaining directors select the person who will serve the rest of the term
Special rule: when director removed without cause, then SH select the replacement
STATUTORY REQS. - DIRECTORS
Removal of Directors before expiration of term.
For Cause:
SH → ALWAYS
BOD → ONLY IF allowed in certificate or bylaws
Without Cause:
Only SH → ONLY if the certificate or bylaws allow
DIRECTORS
2 Ways for BOD to Act.
2 Ways for BOD to act:
unanimous written consent to act w/o a meeting
a meeting
Acts not done in one of the ways are VOID unless later ratified
DIRECTORS
Notice requirements for board meetings.
Regular meetings → NO notice
Special meetings → notice required
o No notice → action taken VOID unless D not given notice waives the notice defect:
Waiver:
in writing & signed anytime OR
by attending the meeting w/o objection
DIRECTORS
How do directors pass a resolution at a meeting?
Quorum is necessary to do business.
Majority of # of offices available present?
Majority vote of those making up quorum = valid act.
If 1 D leaves during meeting, quorum may be broken.
Interested parties count toward the quorum.
Cert./Bylaws → can decrease quorum to less than majority but not less than 1/3
Cert. → can increase # for quorum or require supermajority for vote
Can NEVER decrease majority requirement of Ds present.
DIRECTORS
Voting Agmts &
Proxy Agmts
Director can NEVER give a proxy for director voting (for how she will vote).
Directors can NEVER enter voting agmts on how they will vote as directors.
- o Note: SH can vote by proxy or have voting agmts.
TIP – when SH & Director at the same time – if going to director’s meeting – no voting agmt, no proxy but if going to SH meeting to vote as SH then okay
DIRECTORS’ DUTY OF CARE
What is the standard for the Duty of Care?
Duty of Care
Standard: “A director must discharge her duties in good faith and with that degree of diligence, care & skill that an ordinarily prudent person would exercise under similar circumstances in like position.” (*write this on bar*)
DIRECTORS
Sub-Committees of BOD
If certificate or bylaws allow, a majority of the entire BOD can delegate substantial management functions to a committee of one or more Ds.
CANNOT delegate all power & responsibilities to a committee.
Committee Cannot:
fill BOD vacancy
set director compensation
submit a fundamental change to SH
DIRECTORS’ DUTY OF CARE
Misfeasance
Misfeasance (BOD does something that hurts the corporation so causation clear)
Business Judgment Rule – a court will not second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis
- 1st → state duty of care standard
- 2nd → apply BJR - A director is not liable if he meets the Business Judgment Rule. Even if there is a loss because of a decision by the BOD.
- Prudent people do appropriate homework so if director made an appropriate inquiry & deliberate decision then NOT liable.
- Ex: BOD bought property w/o investigating it. It was swamp land, radioactive, etc. Not prudent so NOT protected by BJR.
DIRECTORS’ DUTY OF CARE
Nonfeasance
Nonfeasance (director does NOTHING)
Ex: A, a director of C Corp, fails to attend any of the BOD meetings or to keep abreast of the business in any way. Liable for breach of duty of care?
- 1st → state duty of care standard
- 2nd → apply standard
- 3rd → Causation → only liable only if his breach caused a loss to the corporation.
VERY DIFFICULT TO PROVE CAUSATION
- Ex: person who never went to meetings was an anti-trust expert. BOD approved a stupid anti-trust action; person was guilty of nonfeasance b/c he would have stopped it.
DIRECTORS’ DUTY OF LOYALTY
Standard of Duty of Loyalty
Duty of Loyalty
Standard: “A director must act in good faith & with the conscientiousness, fairness, morality & honesty that the law requires of fiduciaries.”
BJR DOES NOT APPLY – b/c duty of loyalty is about conflicts of interest.
DIRECTORS’ DUTY OF LOYALTY
Interested Director Transactions
Rule: Any deal between the corporation and one of its directors (or a business of which that director is also a director or officer or in which he has a substantial financial interest).
Will be set aside UNLESS the director shows:
- deal was fair & reasonable to the Corp when approved, or
- the material facts & her interest were disclosed/known AND the deal was approved by:
- Shareholders, or
- BOD (interested directors cannot vote but count for quorum), or
- Unanimous vote of disinterested directors if they are insufficient to take an act of the BOD
- _ Ex:_ X Corp has 9 directors – 5 interested. All 9 attend a meeting to consider approving the deal. After appropriate disclosure, ALL FOUR disinterested directors must approve the deals (b/c there are not enough disinterested directors to take an act of the BOD).
DIRECTORS’ DUTY OF LOYALTY
Competing Ventures
Rule: Director cannot go into competition with corporation.
Ex: Sharon is a director of Ozzie’s Music Corp. She can also serve as a director for Home Depot b/c Home Depot does not compete w/ Ozzie’s. BUT, Sharon cannot start her own music corporation b/c it would be in competition w/ her corporation. State duty of loyalty standard.
Remedy: If director goes into competition Corp can get a constructive trust on director’s profits and might recover damages for harm caused by the competition.
DIRECTORS’ DUTY OF LOYALTY
Corporate Opportunity
- Rule: “Director cannot usurp a corporate opportunity.”
- Director cannot take it until he tells the BOD & waits for the BOD to reject it.
- “Corporate opportunity” = “something the corporation needs, has an interest or tangible expectancy in, or that is logically related to its business”
- Remedy: constructive trust (if he still has it, sell it to Corp at his cost or if sold for a profit, give Corp the profit)
DIRECTORS’ DUTY OF LOYALTY
Director Compensation
- BOD can set the compensation of the directors.
- Must be reasonable and in good faith
- If excessive, it is a waste of corporate assets, and Directors liable.
DIRECTORS’ DUTY OF LOYALTY
Stock Options
- Corp can give director, officer or employee stock options as an incentive to service.
- Stock listed on a stock exchange → such use must be authorized under exchange policies.
- Stock not listed on a stock exchange → must be approved by SH.
DIRECTOR LIABILITY
Improper Loans of Corp Funds
- It is okay for BOD to lend a director $100k of corporate funds or to guarantee a director’s personal obligation if the BOD finds it benefits the corporation.
- Ex: Loan to Director to attend business courses at a college. Good use.
- Sarbanes-Oxley Act (federal law) restricts loans to executives in registered (publicly-traded) corporations.
DIRECTORS’ LIABILITY
2 Exceptions to director liability for BOD action.
- Exception – Directors misses meeting: not liable if he registers written dissent w/in a reasonable time after learning of the action: (1) ensuring dissent is filed w/ the minutes for the meeting, or #3.
- Exception - GF reliance on information, opinions, reports, or statements by:
- officers/employees of the Corp, lawyers, accountants, whom Director believes competent & reliable, or
- a committee of which the person relying is not a member, as to matters w/in its designated authority (**most common)
OFFICERS & DIRECTORS
Indemnification
D or O sued by or on behalf of the Corp. seeks reimbursement 3 Possibilities:
- Prohibited – D/O liable (must have been actual holding)
- Of Right - must reimburse D/O if successful in defending the case on the merits or otherwise (i.e. any reason)
- Ex: if Corp won’t reimburse & she has to sue Corp, cannot get attnys fees from suit against Corp.
- Permissive – situation not satisfying 1 or 2 – Corp may reimburse O or D – must show: acted in GF and for a purpose reasonably believed to be in the corporations best interest
**Can include the settlement amount, expenses & attorneys fee but does NOT include a judgment she paid.
