Corporate Organization

Question 1

What body of law governs NY corporations?

Answer 1

The governing statutory law is the NY Business Corporation Law (BCL)

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

Question 2

What are the formation requirements for corporations?

Answer 2

1) People– incorporators (adult humans; NOT entities)
2) Paper– certificate of incorporation (“articles”)

3) Acts–
(i) notorize certificate of incorporation;
(ii) delivery to NY Debt. of State; AND
(iii) hold an organizational meeting

Question 3

What are keyaspects of being an “incorporator”?

Answer 3

1) Responsibilities:
(i) execute the certificate;
(ii) deliver it to the NY Dept of State; AND
(iii) hold an organizational meeting

2) # of incorporators necessary: 1 or more
3) Who can be an incorporator: adult HUMANS only (no entities)

Question 4

What are the purposes of the certificate of incorporation?

Answer 4

1) It’s a contract between the corporation and its shareholders
2) It’s a contract between the corporation and the state

Question 5

What information goes into the certificate of incorporation?

Answer 5

1) MUST include key names and addresses
- Corporate name MUST have “corp.” or “inc” or “ltd”
- Address = county in NY of the “office of the corporation” (doesn’t HAVE to be the place of primary business)
- Must designate the NY Secretary of State as agent for service of process. Additionally, you MAY have a registered agent for service of process
- Provide an address for forwarding service
- Name and address of EACH incorporator

2) MAY including the duration of the corporate entity
- If cert has no provision, then the corp is perpetual

3) MUST include the corporate purpose
- Can be as general as “engage in all lawful actitivty”
- If corporation limits its purpose, then it can not act OUTSIDE that purpose, or it will be ultra vires

4) MUST outline its capital structure, which includes…
- Authorized stocks (MAX # of shares)
- # of shares per class of stock
- Par value, rights, preferences & limits for each class
- Info on any series of preferred stock

NOTE:

(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

• • Issued stock = # of shares that the corp actually sells
• • Outstanding stock = stock that the corporation has sold AND has not reacquired (as part of treasury stock)

Question 6

What are the consequences of having an ultra vires act?

Answer 6

At common law, that would mean the contract could be voided.

• *Today, ulltra vires Ks are VALID (not voided)
• • Shareholders CAN seek an injunction
• • The responsible magangers ARE liable to the corporation for ulta vires losses

Question 7

What acts must incorporators take to establish a corporation?

Answer 7

1) Each incorporator must sign certificate AND have it notarized
2) Must deliver the certificate to the NY Department of State & pay filing fees

Filing = CONCLUSIVE evidence of valid formation (de jure corporation)

3) Incorporators must hold an organizational mtg (or they can do it by written consent), where they…
- adopt bylaws
- elect initial board of directors, which immediately takes over

Question 8

What powers AND liabilities does a corporation have?

Answer 8

A corporation is a separate legal person

1) Powers = broad
- enter contract in its own name
- transfer property
- buy/sell securities
- sue or be sued
- make political contributions UP TO $5k/year per candidate/organization
- make charitable contributions without a limit
- guarantee loans NOT in furtherance of corporation business if it received 2/3rd VOTE of SHARES entitled to vote (not just shareholders)

2) Liability = falls on the CORPORATION itself
* *The ppl who run the corporation (board; officers) are NOT liable for what the corporation does
* * Shareholders (owners) also have limited liability (i.e. they are ONLY obligated to pay the value of their stock

Question 9

What is a de facto corporation?

Answer 9

If incorporators FAIL to form a de jure corporation, they can still be TREATED as a corporation (limited liability, except in actions by the state) IF…

1) there is a relevant incorporation STATUTE (NY = the BCL);
2) the parties made a GOOD FAITH, colorable attempt to comply with it; AND
3) the business is being RUN LIKE a corporation

** NOTE: NY allows de facto corps ONLY when the incorporators did everything to file for incorporation and the Department of State failed to file

Question 10

What is corporation by estoppel?

Answer 10

The theory is that one dealing with a business as a corporation, treating it as a corp MAY be ESTOPPED from denying the business’s corporate status later

IN NY, THIS HAS BEEN ABOLISHED

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

Question 11

What are bylaws?

Answer 11

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

• • If bylaws are inconsistent with the certificate, the CERTIFICATE controls!
• • Bylaws are NOT filed with the state (only the certificate is)
• • Initial bylaws are adopted by the incorporators at the 1st organizational meeting AND have status of shareholder bylaws
• • Power to repeal
• • Shareholders ALWAYS have the power to amend/repeal bylaws (especially board of director bylaws)
• • The board may do so ONLY IF (i) the certificate; OR (ii) SH bylaw allows

** NOTE: corporations DON’T have to have bylaws (the certificate is ALL that is required)

Question 12

What is a promoter?

Answer 12

A promoter is a person acting on behalf of a corporation not yet formed

i.e. the promoter may enter into a contract with a 3rd party on behalf of the corporation-not-yet-formed

Question 13

Is the corporation liable for pre-incorporation contracts?

Answer 13

The corporation is liable on the contract ONLY IF it ADOPTS the contract

Otherwise, NO!

Question 14

How can a corporation adopt a pre-incorporation contract?

Answer 14

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

Question 15

Is the promoter liable for pre-incorporation contracts?

Answer 15

YES! UNLESS the contract clearly states otherwise!

**Promoter is liable UNTIL there is a novation, which is an agreement among (i) the promoter; (ii) the corporation; AND (iii) the contracting party that the corporation will replace the promoter

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

Question 16

What is the Secret Profit Rule?

Answer 16

A promoter CANNOT make a SECRETprofit (i.e. corporation has NO knowledge of the profit) on her dealings with the corporation itself

If she does, she is LIABLE and has to “account for profit” to the corporation (i.e. return the profits)

Profit calculations…

1) Sale to the corporation of property acquired BEFORE becoming a promoter
* * Profit = PRICE PAID BY CORP – FMV

2) Sale to the corporation of property acq’d AFTER becoming promoter
* * Profit = PRICE PAID BY CORP – PRICE PAID BY PROMOTER

Question 17

What is the rule for “foreign” corporations doing business in NY?

Answer 17

Rule: foreign corporations doing business in NY must qualify

Foreign = incorporated outside of NY
Domestic = NY corporation
Doing business = the regular course of INTRAstate business activity

Qualification =
(i) applying to the Department of State and designating the Secretary of State as agent (for service of process);
AND (ii) pay fees to NY for privilege of doing business

Applying = giving information from certificate AND certifying good standing in home state

IF a foreign corporation does business in NY without qualifiying: it CANNOT sue in NY UNTIL it qualifies, pays fees, taxes AND accrued penalties/interest