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Flashcards in Corporations Deck (67)
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Corporations: Formal Definition

A corporation is a legal entity separate and distinct from its owners and managers. The corporation's principal characteristics are:
(1) Limited Liability; (2) Entity Powers; (3) Centralized Management; (4) Perpetual Existence; and (5) Free Transferability of Ownership.


Guarantying or extending loans to directors

IF in furtherance of corp business, OK if approved by majority of directors; if NOT in furtherance of corp business, OK if approved by 2/3 of shares entitled to vote.


Constitutional Rights of Corporations

Corp. is a person entitled to due process of law but not a citizen for purposes of P+I clauses.



A person acting on behalf of a corporation not yet formed. Promoter's may, but need not be, the incorporators of the corporation. Promoters have fiduciary duties of joint venturers until the corporation is organized; after incorporations, promoter-shareholders only have the rights, duties, and obligations of shareholders.


Promoter's Liability on Pre-Incorporation Contracts

Liable UNLESS (1) clear intention of the parties to bind the corporation only; or (2) there is a novation


Forming a Corporation

(1) Execute Certificate through signature of incorporators and acknowledgment by notary public; (2) Deliver to Dept of State; (3) Hold Organizational Meeting. Corporate existence commences upon filing of certificate by the Department of State (unless certificate specifies other date, within 90 days of filing). The filed certificate is conclusive evidence that a corp has been formed.


Certificate of Incorporation

"Nine Purple Cows Can Dance Around Ireland"
Name (Inc., corp., etc)
Purpose (any and all lawful purposes)
County in NY of incorporation
Capital structure (shares, description, par value, if any, details of classes and rights)
Designation of NY Sec of State as agent for service of process
Address for forwarding process to the corporation
name and address of each Incorporator

Other registered agents for service of process (names and addresses)
Duration (perpetual if not otherwise stated)
Limitation on director liability to SHs, if any


Ultra Vires Act by Corporation

The Certificate must contain a statement of corporate purpose; this can be very broad (“all lawful activity . . . .”) At COMMON LAW, an ultra vires act (beyond the scope of corporate purpose) made such acts voidable. In NEW YORK, ultra vires acts are valid, BUT (1) SHs can seek injunction; and (2) Responsible managers are liable to the corporation for ultra vires losses.


Capital Structure

The BCL contains no requirement that any particular minimum amount of capital be paid in before the corporation may commence doing business.

The Certificate must include information about the capital structure of the corporation, including: -- Authorized Stock (maximum # of shares corp. can sell); -- Number of shares per class; -- Par value (if any); -- Information on preferences, rights, and limitations of each class of stock.

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.



Shareholders can amend, repeal, or make new bylaws by shareholder vote.

Directors can also amend, repeal,or make new bylaws, but only if the CERTIFICATE or a shareholder bylaw allows.


Foreign Corp Registration Reqs

With NY Dep't of State:
(1) Fees
(2) Info from Certificate
(3) Proof of good standing in home state
(4) Designate Sec of State as agent for service of process


Revocation of Subscription Offer

Irrevocable for 3 months, if pre-incorporation. Revocable until offer accepted, if post-incorporation.


Non-Payment on Subscription

If no payment within 30 days of written demand:
(1) Paid less than half: keep purchase price; shares become authorized and unissued
(2) Paid more than half: try to resell; if unable, keep purchase price and shares become unauthorized and unissued, but if you can sell for a hire amount, give the difference over the original agreement to the defaulting shareholder, less any costs in securing the new buyer.


Permitted Consideration for Stock Issuance

(1) Money
(2) Debt
(3) Property
(4) Consideration for past services
(5) Consideration for future services


Board's determination of the value of consideration for stock issuance

Determination of value is conclusively valid if made without fraud


Preemptive Rights

Only if provided for in the CERTIFICATE
Only applies to issuances of stock for CASH
and issuances originally authorized in the certificate within 2 years of first formation.
New issue is NOT treasury stock.



(1) Shareholders at any time
(2) Directors only if cert or bylaws allow


Removing a director without cause

Only shareholders and only if cert/bylaws allow


Filling board vacancy

(1) usually directors
(2) if removed without cause, SHs


BoD -- Waiving Notice Defects

By (1) Attending the meeting; or (2) in a writing signed at any time. If required notice for special meeting not given, then any action taken is void unless waived by director to whom notice was not given.


Quorum for Board Action; Default Rule

Majority of the DULY CONSTITUTED board including any vacancies (leaving ends quorum)


Increasing Quorum for Board Action



Decreasing Quorum for Board Action

Must be in CERT OR BYLAWS but no less than 1/3 of duly constituted board


Increasing Voting Requirement for Board Action



Decreasing Voting Requirement for Board Action

Cannot decrease to less than majority vote of those present after establishing quorum.


Non-delegable duties of the BoD

- Set director comp
- Fill a board vacancy
- Submit a fundamental change to SH
- Amend bylaws
- CAN recommend these for full board action


Duty of Care

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


Business Judgment Standard

A court will not second-guess the business decisions of a director if made in good faith, reasonably informed, with a rational basis.


Duty of Loyalty

A D must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries.


Ratifying an interested director transaction

(1) Prove deal was fair and reasonable to the corporation when approved; or (2) material facts and interest were disclosed to corp AND approved by:
- SH action;
- BoD approval sufficient vote w/o interested D;
- Unanimous vote of disinterested directors, if disinterested directors are insufficient to take acton for BoD
(Interested Ds DO count towards quorum and can participate in the meeting).


Stock Options as Compensation to Ds

OK IF: listed on stock exchange (authorized under exchange policies OR, if not listed, approved by SHs.


Corporate Opportunity

Something the corp NEEDS; has an interest/expectancy in; or something logically related to the corp's business.


Constructive Trusts

Placed on D's profits from: competing ventures; usurpation of corporate opportunity; sale of director's office; profits from not-duly-approved interested director transaction


Director's Effective Dissent from Board Action

Presumption of concurrence with board action unless dissent noted in WRITING:
- the minutes
- writing to corporate secretary at meeting;
- registered letter to secretary promptly after adjournment
Cannot dissent if voted at meeting
Good faith reliance defense (if relied on info/opinions/reports/statements made by officers or employees of corp; lawyers/public accounts; and committee, as long as D reasonably believed competence and reliable.


Election of Officers

Appointed by board unless cert provides that SHs can elect them. If SHs elect, only SHs can fire. Otherwise can be removed by board with or without cause (but breach of contract action available).


Removal of Officers For Cause

The attorney general or holders of 10% of all shares may sue for judgment removing officer for cause, which can bar reappointment.


Permissive Reimbursement of Directors for Litigation Expenses: approval

1. BoD with quorum of Ds being non-parties; or, if no such quorum;
2. SHs or quorum of Ds who are disinterested; or
3. BoD pursuant to report from independent legal counsel


Eliminating D liability in cert

Cert may eliminate D liability in cert for damages for breach of duty, EXCEPT:
- D acted in bad faith; or
- with intentional misconduct; or
- received improper financial benefit; or
- approved unlawful distribution or loan


Requirements for Shareholder-Managed Corp

- Unanimous approval by all incorporators or shareholders, voting or non-voting;
- Provision in cert restricting or transferring board power to SH;
- Conspicuous notation on front and back of all shares;
- All subsequent SHs have notice; and
- Shares not listed on an exchange


Close Corps SH Liability

10 largest SHs can be liable personally for wages, benefits of corps employees


Piercing Corporate Veil

(1) SH abused priv of incorporating;
- no corp formalities; inadequate capitalization; commingling of personal/corp assets; corp funds for personal expenses
(2) Fairness requires holding SH liable (when SH exercises such complete dominion over corp to perpetrate a fraud, wrong, or injustice.


Derivative Suit: Requirements

(1) Stock ownership when claim arose (or obtained by operation of law);
(2) Stock ownership when action brought and through entry of judgment
(3) Permissive bond for D's costs, but not required if SH owns 5% or more than $50,000 worth of stock.
(4) Make a demand
(5) Adequately represent interests of SHs
(6) Join Corp as Defendant


Demand Requirements

IF FUTILE -- no demand if:
- Majority of board is interested
- Board did not inform itself of transaction
- Transaction is so Egregious on its face it could not be the result of sound business judgment

- Only can bing suit if shoes a majority of board interested or procedure was complete/inadequate


Board's Motion to Dismiss

Granted if can show an independent and sufficient investigation suggesting that the suit is not in the corp's best interests


Record date

No more than 60 and no fewer than 10 days before meeting



Which Seamstress Does Alterations?

Signed by record SH or authorized agent
Directed to corporate secretary
Authorizing holder to vote shares


Voting Trusts

Written agreement
Copied to the corporation
Transferring legal title of shares to voting trustee.
SHs receive voting trust certs and retain all rights except voting.
Time limit = 10 year max, can be renewed within 6 months of expiration.


Voting Agreement

-In writing
- Signed


Director Elections

By plurality


Special Meeting Notice

- Written notice to every SH entitled to vote, between 10 and 60 days before meeting, stating:
- Time and Place
- Availability of appraisal rights
- Special Meeting: who called it and what purpose


Waiving SH notice

express (in writing); implied by attending without objection


SH Quorum




Cert or bylaws but never fewer than 1/3


Increasing Quorum

In cert only


Majority Approval Requirement changes

cannot reduce to less than majority but can make into supermajority in the cert, not the bylaws.


Rights to Inspect Books and Records

- minutes of SH proceedings and record list of SH: on 5 days written demand; corp can ask for affidavit specifying purpose in interest of corp and no previous attempt to sell SH lists; can refuse if no affidavit but can't ask for more detail.
- List of current D&O: 2 days written notice, no affidavit
- Annual blanace sheet, P&L statement; last statements distributed to SH or public: Any SH can make a written request and the corp must provide the docs; can do so by mail.
- Common Law Right to Inspect: reasonable time, proper place, proper purpose. might be broader than BCL but unclear how much.
- Ds and Os have unfettered access


Surplus and Stated Capital

Assets – liabilities – stated capital = surplus. Distribution can be paid out of surplus.

Stated capital: if holding par stock, # of shares x par value = stated capital (cannot use for distribution). If no par, then within 60 days of any issuance, the BoD can allocate any part, but not all, to surplus.


Actions that trigger appraisal rights

- Amendments to certificate that alters or abolishes a preference; changes redemption rights; alters or abolishes a preemptive right; or limits voting rights.
- Consolidation;
- Merger into another corp;
- Transfer of substantially all assets;
- Corp's shares acquired in share exchange

(appraisal not available if listed on share exchange)


Perfecting Appraisal Rights




If major change, must be done by board approval and approval of majority of shares entitled to vote, but if the amendment will change/strike supermajority quorum or voting requirement for SH voting (not director voting) you need 2/3 shares vote.



Director approval + SH approval for each corp, unless a short-form merger (90% or more from each clas of stock) in which case only dissenting SHs get appraisal rights and no one gets voting rights.


Transfer of All or Substantially All Asseta

Only selling corp gets voting rights and appraisal rights for SH of selling corp only


Liability of buyer corp when buying substantially all assets

Generally a company acquiring assets will not be liable for the torts of company whose assets it acquired unless (1) deal provides otherwise; (2) purchasing company = mere continuation of seller; or (3) deal entered into fraudulently to escape obligations.
Successor liability not automatic in this situation b/c the company selling its assets still exists


Mortgage of substnatially all assets

N?ot a fundamental corp change; director approval only



VOLUNTARY: Majority of shares entitled to vote must approve (no Board action required).

(1) BoD resolution or resolution of majority of shares entitled to vote b/c C has insufficient capital to discharge liabilities, or dissolution beneficial to SHs.
(2) 1/2 or more shares entitled to vote my petition, if directors too divided to manage or SHs too divided to elect directors, or dissolution otherwise beneficial b/c of internal dissension
(3) Any SH entitled to vote may petition if unable to elect D's for two annual meetings;
(4) *** A SH with 20% or more of voting shares in CLOSE CORP may petition on either of two grounds:
- mgmt's illegal, oppressive, or fraudulent acts;
-- mgmt's wasting, diverting, or looting assets
-- court may deny if another way to give SH a fair return on investment, as by ordering buy-out
-- Non-complaining SHs can try to avoid dissolution within 90 days of petition by buying stock at fair value on terms approved by court


Freeze-Out Merger

Mergers must be for a legitimate corporate purpose, even if approved by requisite number of shares. A freeze-out merger, aimed at unfairly cashing out minority shareholders, can be reversed by the court if, looking at the transaction as a whole, the court determines there has not been fair price and fair dealing. Looks at -- whether deal tainted by self-dealing or fraud; whether minority SHs are dealt with fairly; whether there is a legitimate business reason for the merger.


Professional Service Corp

Licensed professionals cannot practice in a general corp but can form a PC.
- SHs, officers, and directors must be licensed professionals.
- Professionals are liable for their own malpractice but not that of other members.
- Professionals are not liable for contracts entered into in the entity's name but the entity is.
- If SH in PC dies or is disqualified form practice, PC must buy back the stock.