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Flashcards in Corporations Deck (118):
1

Formal requirements of organization

people (incorporators)
paper (certificate of incorporation)
acts

2

Formal requirements: Incorporators

(1) what do they do? (i) execute the certificate; (ii) deliver it to the department of state; (iii) hold organizational meeting
(2) need 1 incorporator or more (adult humans only)

3

Formal requirements: certificate

(1) names and addresses; (i) corporate name, must have corporation, inc, or limited; (ii) address, county of office of corporation; (iii) must designate corporation's agent for service of process, NY secretary of state; (iv) name and address of each incorporator

(2) Statement of duration (if no duration, perpetual duration)

(3) statement of corporate purpose (can be all lawful activity after first obtaining necessary state and agency approval)

(4) capital structure: (i) authorized stock (maximum number of shares); (ii) number of shares per class; (iii) info on par value, rights, preferences, and limitations on each class; (iv) information on any series (subclass) of preferred stock

4

Ultra vires acts, how are they handled today

(1) valid
(2) shareholders can seek and injunction
(3) responsible managers are liable to the corporation for ultra vires loses

5

Formal requirements: Acts

(1) Each incorporator signs certificate and acknowledges it before a notary; delivered to NY department of state; If conforms with law, and filing fees are paid gets filed; filing is conclusive evidence of valid formation
(2) Hold organizational meeting: (i) adopt by laws; (ii) elect initial directors. At this point the board takes over

6

Effects of formation of corporation

(1) NY law governs internal affairs even if no business is done in NY
(2) Corporation can make political contributions but no more than $5,000 per candiate or organization; can make charitable contributions
(3) Can guarantee a loan not in furtherance of corporate business if approved by 2/3rds of shares entitled to vote
(3) People who run corporation are not liable for what the corporations does; SHs have LL

7

De facto corporation

(1) relevant incorporation statute (BCL)
(2) parties made a good faith, colorable attempt to comply
(3) business is being run as a corporation
(4) only alive in very limited circumstances like when department of state failed to file (without rejecting) a proper certificate delivered to department

8

Corporation by estoppel (abolished in NY)

one dealing with a business as a corporation, treating it as a corporation may be estopped from denying the business's corporate status

9

Bylaws: does a corporation need them?

No, but they almost all have them to set up procedures and responsibilities of people like officers, set forth the type of notice required for meetings etc

10

Bylaws: which controls if bylaws are inconsistent with certificate

Certificate

11

Bylaws: are they filed within state

No

12

Are outsiders bound by bylaws?

No, internal document

13

Bylaws: who adopts initial bylaws

incorporators at organizational meeting have status of shareholder bylaws

14

Bylaws: who can amend or repeal

Shareholders

15

Bylaws: when can BOD ever amend or repeal

if certificate or shareholder bylaw allows

16

Pre-incorporation contracts: is corporation liable on pre-incorporation contracts

Only if the corporation adopts contracts

17

Pre-incorporation contracts: express adoption

board action

18

Pre-incorporation contracts: implied adoption

corporation knowingly accepts a benefit of the contract

19

Pre-incorporation contracts: is promoter liable?

Yes, unless the contract clearly indicates otherwise, until there is a novation (agreement among the three parties that the corporation will replace the promoter)

20

Secret profit rule

Promoter cannot make a secret profit on her dealings with the corporation, if she does she is liable

21

Qualifying foreign corporation

Must provide information (1) certificate information; (2) proof of good standing in home state

22

Foreign corporation: what happens if don't qualify

Cannot sue in NY until qualifies and pays fees, taxes, and penalties & interest

23

Issuance of stock: what is issuance

(1) occurs when corporation sells it's own stock

24

Subscription:

a written signed offer to buy stock from the corporation

25

Subscription: revocation of pre-incorporation subscriptions

Cannot revoke unless the subscription provides otherwise or all subscribers agree to let you revoke

26

Subscription: are post-incorporations revocable

yes until accepted by corporations

27

Subscription: can corporation decide to sell to only some subscribers and not others?

No, must be uniform with each class or series

28

Subscription: what happens if subscriber defaults after acceptance

(1) if paid less than half of the purchase price, and fails to pay the rest within 30 days, corporation can keep money and cancel shares; it becomes authorized unissued
(2) if subscriber has paid half or more and fails to pay the rest, the corporation must try to sell the tock to someone else for cash (same as 1 if no one will pay balance)

29

Consideration: form of consideration

Five permitted forms: (1) money; (2) tangible or intangible property; (3) services already performed for corporation; (4) binding obligation to pay money or property in the future; (5) binding obligation to perform future services having an agreed value

30

Consideration: amount of consideration

(1) par is minimum issuance price
(2) No par means no minimum issuance price
(3) can use stock to gain property for par value

31

Consideration: Treasury stock

(1) stock which was previously issued and has been reacquired by the corporation
(2) no par

32

Consideration: consequences of issuing watered stock (less than par value)

(1) directors are liable for knowingly authorizing issuance
(2) purchaser of stock is liable
(3) third party is not liable if acts in good faith (doesn't know about water)

33

Pre-emptive rights

(1) right to maintain percentage of ownership by buying stock whenever there is a new issuance of common stock for money
(2) does not include sale of treasury stock unless mentioned in certificate
(3) does not include sale of shares authorized by the original certificate and sold within two years of formation
(4) preemptive rights only exist if certificate states

34

Statutory requirements for directors: number

(1) must be at least one; default if not set
(2) set by by laws; shareholder acts; board if shareholder bylaw allows

35

Statutory requirements for directors: who elects?

(1) shareholders at annual meeting
(2) Certificate or bylaw can establish 2, 3, 4 classes of directors with one class elected each day (classified board)

36

Statutory requirements for directors: removal of directors before expiration of their term

(1) Shareholders can remove for cause
(2) board can remove for cause if certificate or shareholder bylaw allows it
(3) can only remove without cause by shareholders and only if allowed in certificate or bylaws

37

Statutory requirements for directors: Filling a vacancy

(1) board selects them
(2) Shareholders select when they are removed by shareholders without cause

38

Statutory requirements for directors: how does board act (board meetings)

(1) unanimous written consent
(2) meeting; need not be in NY
(3) act any other way is void unless ratified by valid act
(4) No notice required for regular meetings if time and place are set in by laws or by the board
(5) notice is required for special meetings (time and place, but not purpose); if not given, any action at meeting is void unless director not given notice waives defects: (i) in writing and signed any time; (ii) by attending meeting w/o objection
(6) no proxies for director voting
(7) no voting agreements

39

Statutory requirements for directors: meetings (quorum requirements)

(1) quorum is majority of entire board (not currently sitting members)
(2) must have majority of present board members to pass
(3) Corporation can decrease quorum by certificate or bylaws but never fewer than 1/3rd
(4) cannot decrease the requirement that a majority of the directors present need to vote in favor of the resolution
(5) Can increase quorum in certificate
(6) can require supermajority in certificate only

40

What can board committees not do (committees are generally used for shareholder derivative suits?

(1) set director compensation
(2) fill board vacancy
(3) submit a fundamental change
(4) amend bylaws

41

Duty of care: nonfeasance

(1) Director does nothing: fails to attend board meetings; keep abreast of business
(2) liable only if breach caused a loss to the corporation

42

Duty of care: misfeasance

(1) board does something that hurts corporation
(2) BJR: made in good faith, was reasonably informed, and had a rational basis

43

Duty of loyalty: general duty

(1) a director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries
(2) BJR does not apply because it cannot apply where conflict of interest exists

44

Duty of loyalty: interested director transactions

(1) deal between corporation and a director
(2) State duty of loyalty standard
(3) transaction will be set aside unless: (i) deal was fair and reasonable to the corporation when approved; or (ii) the material facts and her interest were disclosed or known and the deal was approved by (a) SH action; (b) board approval by sufficient vote not counting votes of interested directors; (c) unanimous vote of disinterested directors if disinterested are insufficient to take a board action (interested directors count towards quorum and may participate in the meeting

45

Duty of loyalty: board setting compensation of directors

(1) may set, but must be reasonable and in good faith (not a waste of corporate assets
(2) Can issue options for stock (must comply with exchange policies); need SH approval for use of options in non-listed corporations

46

Duty of loyalty: competing ventures

(1) state duty of loyalty standard
(2) director cannot compete with her corporation

47

Duty of loyalty: corporate opportunity

(1) state duty of loyalty standard
(2) director cannot usurp a corporate opportunity
(3) must tell board and wait for board to reject
(4) corporate opportunity is anything the corporation needs or has an interest or tangible expectancy in, or that is logically related to its business

48

Improper loans of corporate funds

Can only lend director money or guarantee a director's personal obligation if approved by the shareholders or the board finds it will benefit the corporation

49

Which directors are liable?

(1) A director is presumed to have concurred with board action unless her dissent is noted in writing in the corporate records: (I) in minutes; (ii) in writing to corporate secretary at meeting; (iii) registered letter to secretary promptly after adjournment
(2) exceptions to general rule: Not liable if missed meeting and registered written dissent w/in a reasonable time after hearing on the action
(3) good faith reliance on information (mainly improper distribution), opinions, reports, or statements by officers or employees of the corporation whom the director or officer believes competent and reliable, lawyers accountants acting in their competency, committee as to matters within designated authority

50

Officers duties: what duties

Same duties of care an loyalty as directors

51

Officers: can the bind the corporation

Yes if they have the authority (inherent or otherwise)

52

Who selects and removes officers?

Board of directors unless the certificate allows the shareholder to elect them

53

Reimbursement of legal costs for D&O: when prohibited

Was held liable to the corporation

54

Reimbursement of legal costs for D&O: of right

Won a judgment on the merits

55

Reimbursement of for legal costs of D&O: permissive

Acted in good faith and for a purpose reasonably believed to be in the company's best interest

56

Reimbursement of for legal costs of D&O: can court order corporation to reimburse

Yes if it finds that she is reasonably entitled to them

57

Reimbursement of for legal costs of D&O: can corporation advance litigation expenses to the director or officer

yes, but must be repaid if turns out not to be entitled to reimbursment

58

Reimbursement of for legal costs of D&O: elimination of director liability

(1) certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty except if she acted in bad faith either with intentional misconduct or received an improper financial benefit or approved an unlawful distribution or loan

59

What makes a close corporation?

(1) few shareholders
(2) stock is not publicly traded

60

What do you need to have shareholder management

(1) all incorporators or shareholders approve
(2) it is conspicuously noted on the front and back of all shares
(3) all subsequent shareholders have notice and
(4) shares are not listed on an exchange or regularly quoted over-the-counter
(5) managing shareholder will owe duties of care and loyalty

61

Professional service corporations

(1) shareholders, officers, and directors must be licensed professionals
(2) professionals are liable for their own malpractice but not that of others
(3) entity is liable for contracts
(4) PC must buy stock if shareholder dies or is disqualified from the practice

62

Piercing the veil

(1) shareholders are generally no liable for corporation
(2) Can happen in corporation if: (i) abused the privilege of incorporating; (ii) fairness must require holding them liable
(3) In NY shareholder must exercise complete domination over the entire corporation to perpetuate fraud or injustice against plaintiff

63

Close corporation: shareholder liability

10 largest shareholders are liable for wages & benefits

64

Shareholder derivative suit: can shareholder get attorney's fee

(1) Costs and attorney's fees from judgment won for corporation
(2) cannot recover costs and expenses if lost

65

Shareholder derivative suit: can shareholder ever get damages?

maybe, If recovery by corporation would return money to the bad guys

66

Shareholder derivative suit: requirements for bringing a suit

(1) stock ownership when claim arose (unless gotten through operation of law like inheritance or divorce)
(2) must own stock through entry of judgment
(3) must adequately represent interests of corporation and shareholders
(4) may be required to post a bond for defendant's costs (not if owns 5% or more)
(5) must make demand to directors unless futile
(6) must plead with particularity efforts to get the board to sue or why demand was futile
(7) corporation must be joined in the litigation as a defendant

67

Shareholder derivative suit: when is demand futile?

(1) majority of board is interested or under control of interested directors
(2) the board did not inform itself of the transaction to the extent reasonable under the circumstances
(3) the transaction is so egregious on its face that it could not be the result of sound business judgment

68

Shareholder derivative suit: what if board refuses to have corporation to sue?

Shareholder can only bring suit if she can show that a majority of the board is interested or procedure was incomplete or inadequate

69

Shareholder derivative suit: movement to dismiss by board based on finding of independent directors

(1) showing suit is not in corporation's best interest
(2) Court will look to (i) independence of those making the investigation; (ii) sufficiency of investigation

70

Shareholder derivative suit: can a director or officer bring a derivative suit?

(1) A director or officer can sue another director or officer to compel her to account for violation of duties or misappropriation of corporate assets
(2) Sues in own name (no requirements of derivative), but recovery goes to corporation

71

Shareholder voting: Who votes

(1) record owner as of record date has right to vote. must be set no fewer than 10 and no more than 60 days before the meeting
(2) exceptions to record date voting: (i) no one votes shares if corporation reacquires them as treasury stock; (ii) executor can vote shares of dead man; (iii) proxies are ok

72

Shareholder voting: proxies

(1) in writing (email or fax is ok)
(2) signed by record shareholder or authorized agent
(3) direct to secretary or corporation
(4) authorizing another to vote shares
(5) can revoke in writing or by attending meeting and voting

73

Shareholder voting: irrevocable proxy

(1) says it's irrevocable
(2) proxy-holder has some interest in the stock other than voting

74

Shareholder voting: voting trust

(1) written trust agreement controlling how shares will be voted
(2) copy to corporation
(3) transfer legal title of shares to voting trustee
(4) original shareholders receive voting trust certificates and retain all shareholder rights except for voting
(5) maximum of 10 years under BCL

75

Shareholder voting: voting agreement

(1) in writing
(2) signed
(3) not specifically enforceable
(4) proxy given subject to voting agreement is irrevocable if stated
(5) remember no voting agreements for directors so cannot make voting agreement that conditions how voting will be done as directors in the future

76

Shareholder voting: How can shareholder validly act

(1) written consent of holders of all voting shares
(2) meeting

77

Shareholder voting: annual meetings

(1) need not be in NY
(2) elect directors (highest vote getter for each seat of board wins)
(3) court can order an annual meeting if one does not happen

78

Shareholder voting: special meeting

(1) can be called by board or anyone provided in the certificate or by laws

79

Shareholder voting: notice requirement

(1) must give written notice to every shareholder entitled to vote, for every meeting between 10 and 60 days before the meeting
(2) contents of notice: (i) time and place of meeting; (ii) for special meeting must state who called it and the purpose (can't do anything else at the meeting)
(3) waiver of notice can be express if in writing and signed anytime; or implied if attended meeting without objection

80

Shareholder voting: how does voting work

(1) quorum is majority of outstanding shares; once quorum is established it is not lost if shareholder leave meeting (contrast with board)
(2) certificate or bylaws can reduce a quorum, but not to fewer than 1/3
(3) can increase quorum, but in certificate only
(4) can increase requirement for approval to over a majority in certificate only (cannot reduce below majority approval)

81

Shareholder voting: cumulative voting

(1) voting to elect directors
(2) multiply number of shares times number of directors to be elected
(3) exists only if certificate says so
(4) how to know if have enough to get a member of board: 100/x+1 x is number of directors being elected

82

Transfer of stock: consideration

Par is irrelevant, shareholder can sell for less than par

83

Transfer of stock: stock transfer restrictions

(1) set in certificate, bylaws, or agreement
(2) valid if not undue restraint on alienation
(3) right of first refusal for corporation is ok so long as price offered is reasonable (for example offered to match third party's offer)
(4) buy back provision in case of death or retirement is ok
(5) even if restriction is valid, it cannot be invoked unless: (i) conspicuously noted on stock certificate; (ii) transferee had actual knowledge of the restriction

84

Rights of shareholders to books and records of corporation: minutes of shareholder proceedings and record of shareholders

(1) Any shareholder may demand with 5 days written demand
(2) corporation can demand an affidavit that his purpose is not other than in the interest of the corporation and that he has not within 5 years tried to sell any list of shareholders (cannot ever demand more detail)

85

Rights of shareholders to books and records of corporation: list of current directors and officers

Shareholder can demand on two day's written demand with no affidavit

86

Rights of shareholders to books and records of corporation: annual balance sheet; profit and loss statement; interim statements distributed to shareholders or public

Any shareholder can make written request and corporation must provide documents (mail is ok)

87

Rights of shareholders to books and records of corporation: common law acces

(1) all shareholders have right to inspect records at a reasonable time and proper place
(2) inspection must be for a proper purpose (something related to role as shareholder)

88

Distributions to shareholders: types

(1) dividend
(2) payment to repurchase shares
(3) redeem shares (forced sale to corporation at price set in certificate)

89

Distributions to shareholders: when does shareholder have a right to distribution

(1) when board declares it
(2) court will interfere with board's discretion and order distribution only if there is a showing of bad faith or dishonest purpose

90

Distributions to shareholders: who gets dividents

(1) preferred shares must be paid their preference first (preferred amount)
(2) participating means they share with the common stock after receiving preferred amount
(3) Cumulative means you get back pay for preferred amount that was not paid in previous years

91

Distributions to shareholders: what funds can be used for distribution

(1) surplus (assets - liabilities - stated capital)
(2) this is the only source
(3) stated capital is the par value of issued stock so surplus is only any excess received over this par value (for no par, board can allocate w/in 60 days of issuance any part, but not all to surplus)

92

Distributions to shareholders: when can corporation make distributions

(1) cannot make distributions if insolvent or distribution would render insolvent
(2) unable to pay debts as they come due in ordinary course of business

93

Distributions to shareholders: who is liable for unlawful distributions

(1) directors are personally liable
(2) shareholders are liable who knew the distribution was unlawful when they received it
(3) corporation has a claim (derivative)

94

Distributions to shareholders: can a corporation discriminate in repurchases

yes, except might have to give equal opportunity in close corp

95

Fundamental corporate change: what is it?

Changes that are so fundamental that they require both the board and shareholders approval; additionally must notify the department of state by delivering a document which the department files

96

Fundamental corporate change: right of appraisal

(1) Dissenting shareholder
(2) right to force corporation to buy your stock at fair value only in close corporation
(3) never right of appraisal if corporation is listed on national securities exchange
(4) if no agreed fair value, court determines value

97

Fundamental corporate change: what actions trigger right of appraisal

(1) certain amendments to the certificate
(2) consolidation
(3) corporation merges into another corporation
(4) corporation transfers substantially all of its assets
(5) corporation's shares are acquired in a share exchange

98

Fundamental corporate change: perfecting right of appraisal

(1) before shareholder vote, file written objection and intent to demand payment
(2) abstain or vote against change
(3) after vote make written demand to be bought out

99

Amendment to the certificate of incorporation: minor changes

(1) minor changes such as office location, registered agent, etc
(2) can be made by board alone

100

Amendment to the certificate of incorporation: other amendments

(1) must be approved by director action and a majority of shares entitled to vote

101

Amendment to the certificate of incorporation: change or strike a supermajority quorum or voting requirement for shareholder voting

(1) director approval
(2) approval by 2/3rds of shares entitled to vote

102

Amendment to the certificate of incorporation: what to do after approval of amendment

deliver certificate of amendment to department of state for its filing

103

Amendment to the certificate of incorporation: rights of appraisal

rights are available if amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights

104

Merger: requirements

(1) board of director plan of merger (each company)
(2) shareholder approval from each corporation
(3) no shareholder approval required if parent owns 90% or more of each class of a subsidiary that is merged into a parent corporation (short form merger)
(4) deliver certificate of merger to department of state for filing

105

merger: rights of appraisal

Allowed for shareholder of company that disappeared but not survivor. Also have in short form even though no vote

106

Merger: effect thereof

Surviving company succeeds to all rights and liabilities of disappearing company (successor liability)

107

Transfer of all or substantially all assets not in ordinary course or share exchange

(1) fundamental change for selling corporation only
(2) each corporation's board authorizes and selling shareholders (majority of shares entitled to vote)
(3) rights of appraisal for shareholders of selling corporation only
(4) filing required for share exchange
(5) generally the company acquiring assets is not liable for the torts of the company whose assets are required unless: (i) deal provides otherwise, (ii) purchasing company is a mere continuation of the seller; (iii) or, deal was entered fraudulently to escape such obligations

108

Dissolution: voluntary

Majority of shares entitled to vote

109

Dissolution: involuntary

(1) by board resolution or majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders
(2) one-half of shares entitled to vote may petition of directors too divided to manage or shareholders too divided to elect directors or magnitude of internal dissension makes dissolution beneficial to shareholders
(3) any shareholder entitled to vote may petition if shareholder's unable to elect directors for two annual meetings
(4) twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition on grounds: (i) management's illegal, oppressive or fraudulent acts towards complaining SH; (ii) managements wasting, diverting or looting assets (can also be managing SHs)

110

Dissolution: court denial of involuntary dissolution

Court may deny if there is some other way the complaining shareholder can obtain a fair return on his investment (ex. ordering a buy out)

111

Dissolution: how may corporation or non-complaining shareholders try to avoid dissolution

w/in 90 days of petition, buy petitioners stock at fair value terms approved by the court

112

Dissolution: steps in winding up (liquidating)

(1) gather all assets
(2) convert to cash
(3) pay creditors
(4) distribute remainder to shareholders, pro-rata by share unless there is a dissolution preference

113

Controlling shareholders: traditional rules

Outside the close corporation, shareholders to not owe fiduciary duties to each other or to the corporation

114

Controlling shareholders: when duty is owed

(1) shareholder who occupies control position (director)
(2) ownership is such that working control over corporation
(3) owes fiduciary duty to minority shareholders (also sometimes to corporation)
(4) cannot use dominant position for individual advantage at the expense of the minority shareholders or the corporation

115

Controlling shareholders: sale of controlling shareholder's interest

(1) Generally can keep control premium received for sale of controlling shares
(2) Exceptions: (i) sold to looters without making a reasonable investigation; (ii) de facto sale of corporation; (iii) sells a seat on the board (must disgorge profits)

116

Freezeouts

(1) all mergers must have a legitimate corporate
(2) freeze out is merger aimed at cashing out shareholders unfairly
(3) court will look to transaction at a whole: (i) fair price; (ii) fair price; (iii) legitimate corporate purpose for merger
(4) factors affecting court's view: (i) self-dealing or fraud; (ii) whether minority shareholders were dealth with fairly; (iii) legitimate business purpose for merger

117

Insider trading: market trading on inside information

corporation can sue to recover profit

118

Insider trading: nondisclosure of special facts

(1) all directors and officers must abstain or ensure disclosure so others are on same footing
(2) reasonable investor would consider important in making an investment