Corporations Flashcards

Question

SH RIGHT TO INSPECT | What must a SH do to inspect Corp records?

Answer 1

 Minutes of SH Proceedings & Record of SH – any SH, on 5 days written demand  Corp can demand affidavit – SH purpose is (1) not other than in interest of the Corp and (2) that he has not within 5 yrs. tried to sell any list of SH (can NEVER demand more info) - Corp can deny access if SH refuses  Current list of D and O – any SH on 2 days written demand  Latest (1) annual balance sheet, (2) profit & loss stmt & (3) latest interim stmts distributed to SH or public - any SH can make a written request & Corp must provide docs (usually by mail).  *Common law right to inspect - all SH, to inspect records at a reasonable time & proper place for a proper purpose (related to her role as a SH)

Answer 2

 Only available when SH are electing directors and certificate specifically allows it. Formula: # of shares x # of directors to be elected.  Ex: Own 1,000 shares, 9 on BOD open for election → 9,000 votes to give – can split them any way. Percentage of Share required to elect one director = 100 divided by (# of directors being elected + 1).  Ex: 9 directors being elected – would need 1 share more than 10% to elect one.

Answer 3

 dividend  payment to repurchase shares  payment to redeem shares (forced sale to Corp at price set in certificate).  **Distributions are declared in the BOD’s discretion  NO SH right to a distribution until it is declared.  Court will only interfere only on a showing of BAD FAITH or DISHONEST PURPOSE. Practically impossible.

Answer 4

 General Rule: Must give written (email okay) notice to every SH entitled to vote, for every meeting (annual or special) between 10-60 days before the meeting. Content:  when and where the meeting is  Say if proposed action would entitle SH to appraisal rights & tell why (& include statute about appraisal rights). Special Meeting Content:  who is calling meeting  stmt of purpose → the only business that can be done  Ex: Stated purpose = to remove a particular officer. Not possible b/c SH does not remove officers.

Answer 5

 If no notice is given to shareholders entitled to vote, the action taken is VOID unless those not given notice waive by:  (1) in writing & signed anytime, or  (2) person not given notice, shows up at the meeting without objecting.

Answer 6

 BOD  anyone provided in the certificate or bylaws  Note: Special meeting must be called by BOD if failure to elect enough directors to conduct business of the Corp. If BOD fails to do so, holders of 10% of the voting shares may demand meeting in writing. Corp. Sec. must give notice of the meeting & if does not SH may give it.

Answer 7

 Rule: To take a valid act at a meeting, a quorum must be met.  Quorum = a majority of the outstanding SHARES (NOT SH).  Once quorum met, there is always a quorum, even if SH leaves.  Majority of shares actually voting in favor or against proposal required for valid act.  Certificate/bylaws - reduce quorum but never less than 1/3 of shares entitled to vote.  Majority approval requirement can NEVER be changed.  Certificate – can increase the # nec. for a quorum or # nec. to pass a resolution at the meeting (supermajority)

Answer 8

 Purpose → small SH who want to increase influence on Corp policy can “block vote”  Written Trust Agmt controlling how the shares will be voted  Copy to Corp  Transfer legal title of shares to voting trustee; and  Original SH receive voting trust certificates & retain all SH rights except for voting  Time limit = 10 yr. maximum but w/in 6 months of expiration, can extend for another term of up to 10 years.

Answer 9

2 Ways SH can take a valid act:  Written consent signed by the holders of all voting shares to act w/o a meeting.  Meeting.

Answer 10

General rule: record owner as of record date has the right to vote.  Record owner = whomever Corp records indicate  Record date = voter eligibility cut-off, set no less than 10 & no more than 60 days before the meeting. Exceptions:  Corp reacquires stock (treasury) – NO vote  SH dies after record date – executor can vote  Proxies :(1) writing, (2) signed by record SH or auth. agent, (3) directed to the Sec. of the Corp., (4) authorizing another to vote shares. o good for 11 months, unless says otherwise o revocable (can change mind) even if it says “irrevocable” UNLESS Proxy (saying “irrevocable”) coupled with an interest is irrevocable.

Answer 11

 RULE: SH can enter voting agmt but directors cannot.  Must be (1) in writing and (2) signed.  NOT specifically enforceable.  Proxy (saying “irrevocable”) given subject to a voting agmt = irrevocable.  NOTE: SH can agree to vote to elect each other as directors. CANNOT agree to enter voting agmts when they act as directors. ONLY okay if 2 SH & they are only SH in Corp so no one else harmed.

Answer 12

 SH can bring the suit anyway ONLY IF the SH can show that a majority of the BOD is interested or its procedure was incomplete or inadequate.

Answer 13

 Ex: SH brings derivative suit, Corp moves to dismiss based on a finding by independent directors that the suit is not in the Corp’s best interests (e.g. low chance of recovery, recovery less than costs).  Court looks at the independence of those making the investigation and the sufficiency of their investigation.  If the court finds these 2 factors present – that is it – the case gets dismissed, nothing else needed.  Note: parties may only dismiss or settle w/ court approval & court can seek feedback from SH if necessary.

Answer 14

“Futile”  **majority of the BOD is interested or under control of interested directors  BOD did not inform itself of the transaction to the extent reasonable under the circumstances  transaction so egregious on its face that cannot be sound business judgment

Answer 15

 A director or officer can sue another a director or officer to compel her to account for her violation of duties (also a derivative suit).  P does not have to meet the requirements of a derivative suit.  Director or officer sues in her own name w/o alleging representative capacity.

Answer 16

 General Rule: SH not liable for acts or debts of Corp  Exception - Wages: in a close Corp the 10 largest SH are personally liable for wages & benefits of employees

Answer 17

 Stock ownership when claim arose (or OOL)  Stock ownership when claim is brought  Stock ownership through entry of judgment  Adequately represent interest of the corporation & SH (must demonstrate – mere ownership not enough).  Post a bond UNLESS she owns 5% or more of the stock or stock is worth $50,000.  **SH must make a demand on BOD that the corporation sue UNLESS it would be futile to do so.  Plead w/ particularity her efforts to get the BOD to sue or why the demand was excused.  Corporation must be joined in the litigation as a defendant.

Answer 18

General Rule: SH not liable for acts or debts of Corp Exception – Undercapitalization: Ex: S is a SH of G Corp, a Corp that hauls & disposes of nuclear waste. G Corp does not carry insurance & has an initial capitalization of $1k. V is injured when one of G Corp’s trucks melts down. Can V sue S?  1st – state general rule  2nd – state the PCV standard  3rd – explain PCV  4th – Here the Corp was undercapitalized when formed b/c SH failed to invest enough to cover prospective liabilities.  5th - Undercapitalization is not enough by itself – also need excessive domination or fraud or illegality.  PCV is to be expected more readily in tort cases than contract case.

Answer 19

 Derivative suit can be brought by SH to enforce the Corporation’s claim. SH wins:  Corp gets money.  SH gets attny’s fees  *SH can possibly recover damages in a derivative suit, if recovery by the corporation would return money to the bad guys. (3 person closely held corp.) SH loses:  cannot recover costs & expenses  SH probably liable to the Corp for their costs  res judicata (same D’s – same transaction) for other SH

Answer 20

Certificate must meet general Corp requirements AND:  say P.C. (instead of “corp”)  indicate profession  names & addresses → original SH, directors & officers  certify that each SH, D or O is licensed to practice the profession

Answer 21

General rule: SH not liable for what the corp. does b/c the corp. is liable  Exception → Piercing the Corporate Veil  ONLY can happen in close corporations, not public ones To pierce the corporate veil:  must have abused the privilege of incorporating AND  fairness must require holding them liable  NY Courts might PCV - “to prevent fraud or to achieve equity” (*write this*)

Answer 22

General rule: BOD manages the corp., not SH  Exception – P.C.: members of a licensed profession (e.g. doctors & lawyers) cannot practice the profession through a general business corporation – can form a PC though.  Shareholders, officers & directors in PC must be licensed professionals.  Liable for their own malpractice but not for the malpractice of others  NOT liable for contracts entered by the entity or for rent due on leases in the PC’s name – the entity is liable.  If a SH dies or is disqualified from the practice the entity must purchase his stock.  PC generally governed by rules of the business corporation.

Answer 23

o Alter Ego (identity of interests, agency, excessive domination) o 1st – state general rule (about SH generally not liable for acts or debts of corp) o 2nd – state the PCV standard o 3rd – explain PCV o 4th - “there is no PCV if the corp. has any mind, existence or will of its own.” - this makes it VERY TOUGH TO PIERCE IN NY. o If court does pierce, usually only person liable for the wrongdoing gets in trouble. o Dummy corporation – where SH carry on business in personal capacity for purely personal, not corporate, ends. o SH can be another Corp - parent forms a subsidiary to avoid its obligations, the court PCV through the subsidiary and hold the parent liable (b/c no sep. mind, existence, etc.)

Answer 24

 Court can order Corp to reimburse an officer or director for litigation expenses & attorney’s fees (not including a judgment against him), if the court finds he is reasonably entitled to it.  Corp can advance litigation expenses but must be repaid if it turns out he’s not entitled to reimbursement.  Corp can buy D&O Liability Insurance.  Cert./bylaws can provide for indemnification by resolution of board or SH or by agmt, UNLESS the D or O acted in bad faith, was deliberate & dishonest in a way material to the case or wrongfully profited.

Answer 25

General rule: BOD manages the corp., not SH  Exception: SH can manage the business directly in a close (or “closely held”) corporation  Close Corporation: (1) few shareholders; and (2) no public market for the stock Must have provision in Certificate restricting/transferring BOD power to SH and  ALL incorporators or shareholders (voting & nonvoting) approve it  conspicuously noted on front and back of all shares  all subsequent shareholders have notice AND  shares are not listed on an exchange or regularly quoted over the counter  *Managing shareholders – the ones calling the shots – owe the duties of care and loyalty

Answer 26

 BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum,  SH or a quorum of those directors who are disinterested, or  BOD pursuant to report from independent legal counsel

Answer 27

Certificate may provide for elimination of director liability to the Corp. or to SH for damages for breach of duty EXCEPT when the director:  acted in bad faith, or  w/ intentional misconduct, or  received an improper financial benefit, or  approved an unlawful distribution or loan ➩**ALWAYS put this in an essay when see a director being sued for breach of duty.

Answer 28

 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)

Answer 29

Rule: Directors select & remove the officers UNLESS the certificate allows the SH to elect them.  If SH elect, only SH can fire them. Even then, the BOD can suspend an officer for cause. Judicial Action:  The attorney general or holders of 10% of all shares may sue for a judgment removing an officer for cause.  Court can bar reappointment of a person so removed.

Answer 30

 Same duty of care & loyalty applies  Officers are agents of the Corp can bind the Corp to acts that they take on the corp.’s behalf if they have authority to do so.  Ex: President has apparent authority to sue on behalf of the corp.  BOD sets compensation of officers.  One person can hold multiple offices simultaneously.

Answer 31

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.

Answer 32

 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.

Answer 33

 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.

Answer 34

 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.

Answer 35

 General Rule: a director is presumed to have concurred w/ board action unless her dissent is noted in writing in corporate records (1) minutes; (2) writing to Corp. Sec. at the meeting; (3) deliver or send by registered mail to the Sec. promptly after adjournment.  D cannot dissent if voted in favor at meeting.

Answer 36

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.

Answer 37

 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.

Answer 38

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).

Answer 39

 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)

Answer 40

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*)

Answer 41

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 1. 1st → state duty of care standard 2. 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. 3. 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.

Answer 42

 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

Answer 43

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? o 1st → state duty of care standard o 2nd → apply standard o 3rd → Causation → only liable only if his breach caused a loss to the corporation.  VERY DIFFICULT TO PROVE CAUSATION o 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.

Answer 44

 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

Answer 45

 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.

Answer 46

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

Answer 47

 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

Answer 48

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.

Answer 49

For Cause:  SH → ALWAYS  BOD → ONLY IF allowed in certificate or bylaws Without Cause:  Only SH → ONLY if the certificate or bylaws allow

Answer 50

 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.

Answer 51

 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

Answer 52

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).

Answer 53

 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.

Answer 54

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.

Answer 55

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.

Answer 56

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

Answer 57

 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.

Answer 58

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)

Answer 59

 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)

Answer 60

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

Answer 61

 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.

Answer 62

 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.

Answer 63

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

Corporations Flashcards

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