Corporations

Question 1

CORP. - ORGANIZATION
Bylaws

Answer 1

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

Question 2

CORP. - LIABILITY
What defenses may shareholders use for a Corp that fails as a de jure Corp?

Answer 2

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.

Question 3

PRE-INCORPORATION
Secret Profit Rule

Answer 3

_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

Question 4

PRE-INCORPORATION KS
Liability

Answer 4

 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.

Question 5

ISSUANCE OF STOCK
Subscription & Revocability

Answer 5

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

Question 6

CORP. - ORGANIZATION
Foreign Corps “doing business” in New York.

Answer 6

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)

Question 7

ISSUANCE OF STOCK
What are the permitted forms of consideration for stock?

Answer 7

 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)

Question 8

ISSUANCE OF STOCK
Corp accepts the offer & subscriber defaults.

Answer 8

 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.

Question 9

ISSUANCE OF STOCK
What amount of consideration must Corp get in issuance for par, no par & treasury?

Answer 9

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.

Question 10

ISSUANCE OF STOCK
Can the Corp acquire property with par value stock?

Answer 10

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).

Question 11

ISSUANCE OF STOCK
Consequences of issuing par stock for less than par value?

Answer 11

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.

Question 12

ISSUANCE OF STOCK
Pre-Emptive Rights

Answer 12

 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.

Question 13

STATUTORY REQS. - DIRECTORS
Election of Directors

Answer 13

 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.

Question 14

STATUTORY REQS. - DIRECTORS
Number of Directors

Answer 14

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.

Question 15

STATUTORY REQS. - DIRECTORS
Filling a vacancy on the BOD.

Answer 15

 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

Question 16

STATUTORY REQS. - DIRECTORS
Removal of Directors before expiration of term.

Answer 16

For Cause:
 SH → ALWAYS
 BOD → ONLY IF allowed in certificate or bylaws

Without Cause:
 Only SH → ONLY if the certificate or bylaws allow

Question 17

DIRECTORS
2 Ways for BOD to Act.

Answer 17

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

Question 18

DIRECTORS
Notice requirements for board meetings.

Answer 18

 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

Question 19

DIRECTORS
How do directors pass a resolution at a meeting?

Answer 19

 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.

Question 20

DIRECTORS
Voting Agmts &
Proxy Agmts

Answer 20

 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

Question 21

DIRECTORS’ DUTY OF CARE
What is the standard for the Duty of Care?

Answer 21

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*)

Question 22

DIRECTORS
Sub-Committees of BOD

Answer 22

 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

Question 23

DIRECTORS’ DUTY OF CARE
Misfeasance

Answer 23

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.
4. Ex: BOD bought property w/o investigating it. It was swamp land, radioactive, etc. Not prudent so NOT protected by BJR.

Question 24

DIRECTORS’ DUTY OF CARE
Nonfeasance

Answer 24

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?

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

Question 25

DIRECTORS’ DUTY OF LOYALTY Standard of Duty of Loyalty

Answer 25

**_Duty of Loyalty_** ## Footnote **_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.

Question 26

DIRECTORS’ DUTY OF LOYALTY Interested Director Transactions

Answer 26

**_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).

Question 27

DIRECTORS’ DUTY OF LOYALTY Competing Ventures

Answer 27

**_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.

Question 28

DIRECTORS’ DUTY OF LOYALTY Corporate Opportunity

Answer 28

* **_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)

Question 29

DIRECTORS’ DUTY OF LOYALTY Director Compensation

Answer 29

* 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.

Question 30

DIRECTORS’ DUTY OF LOYALTY Stock Options

Answer 30

* 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.

Question 31

DIRECTOR LIABILITY Improper Loans of Corp Funds

Answer 31

* 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.

Question 32

DIRECTORS’ LIABILITY 2 Exceptions to director liability for BOD action.

Answer 32

* **_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)

Question 33

OFFICERS & DIRECTORS Indemnification

Answer 33

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.

Question 34

OFFICERS’ LIABILITY Generally

Answer 34

* 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.

Question 35

OFFICERS & DIRECTORS Indemnification Insurance, Advances, & Court Orders, Cert./Bylaws

Answer 35

**Court c**an 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.

Question 36

OFFICERS & DIRECTORS Who determines eligibility for permissive indemnification?

Answer 36

* **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

Question 37

SHAREHOLDERS Shareholder Management

Answer 37

**_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

Question 38

OFFICERS & DIRECTORS What is a way to eliminate director liability?

Answer 38

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.

Question 39

SHAREHOLDERS What goes in a Professional Corporation’s certificate?

Answer 39

**_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

Question 40

SHAREHOLDERS Exception to BOD management: P.C.

Answer 40

**_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 f**or 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.**

Question 41

SHAREHOLDER LIABILITY Are shareholders liable for what the Corp does?

Answer 41

**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\*)

Question 42

SHAREHOLDER LIABILITY What is the standard for Piercing the Corporate Veil?

Answer 42

**_Alter Ego_** (identity of interests, agency, excessive domination) * **1st** – state general rule (about SH generally not liable for acts or debts of corp) * **2nd –** state the PCV standard * **3rd –** explain PCV * **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. **_Result:_** * If court does pierce, usually only person liable for the wrongdoing gets in trouble. * Dummy corporation – where SH carry on business in personal capacity for purely personal, not corporate, ends. * 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.)

Question 43

SHAREHOLDER LIABILITY Wages

Answer 43

* **_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

Question 44

SHAREHOLDER LIABILITY Undercapitalization

Answer 44

**_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.

Question 45

DERIVATIVE SUITS Requirements for bringing a derivative suit.

Answer 45

* 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. * orporation must be joined in the litigation as a defendant.

Question 46

DERIVATIVE SUITS Derivative Suits Generally Winning & Losing

Answer 46

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

Question 47

DERIVATIVE SUITS What happens if the SH makes a demand and the BOD refuses?

Answer 47

* 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._

Question 48

DERIVATIVE SUITS When would it be “futile” to make a demand on the BOD that the Corp sue?

Answer 48

**_“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

Question 49

DERIVATIVE SUITS What does the Court look at when deciding a Motion to Dismiss?

Answer 49

**_ 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.

Question 50

SHAREHOLDER VOTING Which SH get to vote?

Answer 50

**_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. * Good for 11 months, unless says otherwise * revocable (can change mind) even if it says “irrevocable” UNLESS Proxy (saying “irrevocable”) coupled with an interest is irrevocable.

Question 51

SHAREHOLDER VOTING Requirements for a Voting Trust.

Answer 51

**_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.

Question 52

SHAREHOLDER VOTING What are the 2 ways for SH to take a valid act?

Answer 52

**_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.

Question 53

SHAREHOLDER VOTING Requirements for a Voting Agreement (“Pooling Agreement”).

Answer 53

**_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

Question 54

SHAREHOLDER VOTING What is the notice requirement & what does it entail?

Answer 54

**_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.

Question 55

SHAREHOLDER VOTING What happens when there is a failure to give notice to entitled voters?

Answer 55

* **If no notice** is given to **sh**areholders **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.

Question 56

SHAREHOLDER VOTING How do shareholders vote?

Answer 56

**_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)

Question 57

STOCK TRANSFER BY SH Stock Transfer Restrictions

Answer 57

* Can be _set in cert., bylaws, or agmt._ * Will be upheld if “reasonable under the circumstances” (i.e. not an undue restraint on alienation) and * (1) it is conspicuously noted on the stock certificate * **_OR_** * (2) the transferee had actual knowledge of restriction. **_E.g. ROFR_** – if price reasonable okay, but restriction requiring approval for sale, not okay ***_b/c corp could refuse for no reason_***

Question 58

SHAREHOLDER VOTING When is cumulative voting possible & how does it work?

Answer 58

* 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 directo**r = 100 divided by (# of directors being elected + 1). * _Ex:_ 9 directors being elected – would need 1 share more than 10% to elect one.

Question 59

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

Answer 59

* **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)

Question 60

DISTRIBUTIONS What are the 3 ways to make distributions from the Corp & who has a right to them?

Answer 60

* 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.

Question 61

DISTRIBUTIONS What funds may be used for any distribution?

Answer 61

* **Surplus** = Assets – liabilities – stated capital * **NEVER stated capital**

Question 62

DISTRIBUTIONS BOD declares a dividend of 400,000. 100,000 shares common, 20,000 $2 preferred. Preferred participating? Cumulative?

Answer 62

* **100,000 shares of common stock.** → $4/share * **Preferred** → $2 per share. $40k. That leaves $360k, which goes to the common shares so they each get $3.60 per share. * **Participating** (i.e. pay again) → $40k first to preferred SH. $360k remains to split among 120,000 b/c goes to common & preferred participating. $3 per share for the common, ($2 + $3) $5 total per share for preferred. * **Cumulative** - Corp owes them for 4 years (3 prior yrs. of no dividend & this year) of their $2 preference. 4 yrs. x $2 = $8 per share. 20,000 x $8 = $160k - all preferred so pay it first. Leaves us w/ $240k that goes to the common. $2.40 per share for common.

Question 63

DISTRIBUTIONS What is stated capital?

Answer 63

* **Par Stock** → Stated capital = par value of the issuance, excess is surplus * **No-Par stock** → within 60 days after issuance, BOD can allocate any part, but not all, to surplus but if BOD does nothing within 60 days of issuance, it all goes to stated capital.

Question 64

DISTRIBUTION WHEN CAN A CORP MAKE A DISTRIBUTION?

Answer 64

* Whenever, even if it lost money last year BUT cannot if it is insolvent or if the distribution would render it insolvent. * “Insolvent” = Corporation is unable to pay their debts as they come due in the ordinary course of business.

Question 65

DISTRIBUTIONS What are redemptions? Repurchases?

Answer 65

**_Redemptions_** * Forced sale to corporation at a price set in the certificate. * Must be done proportionately within each class of stock. **_Repurchases_** * Corp pays SH to repurchase shares. * Individually negotiated & can discriminate except in a close corporation, where must give equal opportunity to all SH.

Question 66

DISTRIBUTIONS Who is liable for unlawful distributions?

Answer 66

* \*\*Directors are **_personally liable_** for unlawful distributions * SH who knew the distribution was unlawful when they received it. * (Derivative suit) * **Defense:** Director’s GF reliance on what people told him

Question 67

FUNDAMENTAL CORP CHANGES What is the right of appraisal?

Answer 67

* When the corporation wants to make a fundamental corporate change the dissenting shareholder has the right to force the corporation to buy his shares at fair value. * If SH & Corp cannot agree on fair value, the CORPORATION sues to determine the value. Court cannot discount the shares if they are minority shares and not controlling shares.

Question 68

FUNDAMENTAL CORP CHANGES What actions by Corp trigger the right of appraisal?

Answer 68

* Amendments to the certificate: (1) a preference, (2) change of redemption rts., (3) alters or abolishes preemptive rt., (4) limits voting rights. * consolidation * your Corp merges into another corp * your corp transfers substantially all of its assets; * your corporation’s shares are acquired in a share exchange

Question 69

FUNDAMENTAL CORP CHANGES How can a change be made to the certificate?

Answer 69

* **Must be approved by Directors AND majority of the SHARES entitled to vote.** * Then deliver certificate of amendment to Dept. of State for its filing. * **Caveat**: this is majority of all shares – NOT majority of those actually voting at quorum. Ex: Directors approve an amendment & recommend it to the SH. If there are 4,000 outstanding shares entitled to vote, a majority (2,001) must vote for the amendment * **Exception:** If amendment will change or strike a supermajority quorum or voting requirement for shareholder (not director) voting → needs director approval & approval by 2/3 of the shares entitled to vote. Does not matter when Corp was formed

Question 70

FUNDAMENTAL CORP CHANGES What are the requirements for a merger or consolidation & what is its effect?

Answer 70

* **Merger** = A Corp merges into B Corp. → A corp disappears & B survives * **Consolidation =** A Corp. and B Corp. form C Corp. (both disappear) * EACH company’s BOD adopts a plan of merger (or consolidation) AND Shareholder approval needed from BOTH corps * Deliver a certificate of merger (or consolidation) to Dept. of State for filing. * *- Successor Liability** = surviving company succeeds to all rights & liability of the constituents. * *- Rights of Appraisal** – only if SH of Corp that disappeared (i.e. not for SH of surviving company)

Question 71

FUNDAMENTAL CORP CHANGES What is a short-form merger?

Answer 71

* No SH approval if a parent corp. owns 90% or more of each class of stock of the subsidiary that is merged into a parent Corp. * Dissenting SH still have the right of appraisal even though they didn’t get to vote.

Question 72

FUNDAMENTAL CORP CHANGES What is necessary for a share exchange?

Answer 72

* One company acquires all the outstanding shares of one or more class of another corporation. * Deliver plan of exchange to Dept. of State for filing * These are ONLY fundamental changes for the SELLING corporation so only SH of the selling corp. have rights of appraisal. * **_Ex:_** S Corp wants to sell all of its assets to B or B wants to acquire all the shares of S corp. Majority of the shares entitled to vote for the SELLING corp. Number of shares of B that must approve the sale = ZERO b/c they don’t vote b/c it’s not a fundamental change for the buyer.

Question 73

FUNDAMENTAL CORP CHANGES Transfer of all assets not in the ordinary course of business.

Answer 73

**_Transfer of all of the assets NOT in the ordinary course of business:_** * Only a fundamental change for SELLING corporation so only SH of selling corporation have rights of appraisal. * **_No delivery_** to Dept. of State necessary.

Question 74

DISSOLUTION What is necessary for voluntary dissolution?

Answer 74

* NO board vote necessary. * Need votes of majority of **_SHARES ENTITILED to vote._ (NOT those “actually voted”)** * Certificate of dissolution delivered to Dept. of State for filing.

Question 75

FUNDAMENTAL CORP CHANGES Tort liability for share exchange & transfer of assets.

Answer 75

* Company acquiring assets will NOT be liable for the torts of the company whose a**ssets it acquired unless:** * the deal provides otherwise, or * the purchasing company is a mere continuation of the seller, ***_OR_*** * the deal was entered fraudulently to escape such obligations. * Different from merger b/c general rule is **NO SUCCESSOR LIABILITY** b/c the Seller of assets still exists.

Question 76

DISSOLUTION What are the steps to winding up after dissolution?

Answer 76

Steps to winding up (i.e. liquidating): 1. gather all assets 2. convert them to cash 3. pay creditors 4. distribute remainder to SH, pro-rata by share unless there’s a dissolution preference, which means that SH gets paid first 1. Must say **“DISSOLUTION PREFERENCE"** * **SH cannot agree that they can be paid before creditors.** Remember that SH may also be a creditor (e.g. made loan to corp) so he wears two hats & will be paid first as a creditor.

Question 77

DISSOLUTION What is necessary for involuntary dissolution?

Answer 77

**_For involuntary dissolution, tell court:_** * **Resolution** of BOD/majority of shares entitled to vote → Corp has insufficient assets to discharge liability or dissolution would be beneficial to SH * ½ + **of shares entitled to vote** → directors too divided to manage; SH too divided to elect directors; internal dissention makes dissolution beneficial to SH * **Any SH entitled to vote** → SH unable to elect directors for 2 annual meetings * **\*\*\*20% + of voting shares in a close corp** → Mgmt’s illegal, oppressive or fraudulent acts toward the complaining SH or Mgmt’s wasting, diverting or looting of assets * **Mgmt** = directors or managing SH * Ct. can deny if complaining SH can get fair return (e.g. by ordering buyout) but will consider if liquidation is the only way to get a fair return * **\*\*\*Corp. or non-complaining SH can avoid by** → w/in 90 days of the petition, buy the petitioner’s shares at fair value on terms approved by the court.

Question 78

CONTROLLING SHAREHOLDERS Sale of shares, assets, or positions on BOD.

Answer 78

**_Sale of Controlling SH’s Interest:_** * Controlling shareholder can sell his shares at a premium & keep the money unless he sold to looters w/o making a reasonable investigation * **Remedy**: disgorge the Seller’s profit & he is probably liable for all damage to the corporation. _**De facto sells Corp asset**s_ → remedy is that SH get to share in the premium paid by the buyer. **_Position on BOD_** → fiduciaries cannot sell their positions

Question 79

CONTROLLING SHAREHOLDERS Shareholders duties to other shareholders.

Answer 79

**_Rule:_** Outside the close corporation, shareholders generally do not owe fiduciary duties to each other or to the corporation - they can act in their own self-interest. **_Controlling shareholder_** →Owes a duty. SH who has a control position (director position) or has a controlling ownership interest owes a fiduciary duty to minority SH and sometimes to others (including the Corp). She cannot use dominant position for individual advantage at the expense of minority SH or the corp.

Question 80

CONTROLLING SHAREHOLDERS Market trading on inside information.

Answer 80

**_Market Trading of Corp’s Stock_** * Director or an officer engages in market trading of her Corp’s stock based upon inside information from the corporation → breach of a duty to the Corp * **Remedy:** Corp can sue to recover profit.

Question 81

CONTROLLING SHAREHOLDERS Freeze-Out Mergers

Answer 81

* **De facto sells Corp assets** → remedy is that SH get to share in the premium paid by the buyer.

Question 82

CONTROLLING SHAREHOLDERS Non-disclosure of special facts (or circumstances).

Answer 82

**_Rule:_** all directors, officers & probably controlling SH owe an affirmative duty not to trade on “special facts” in a securities transaction w/ a non-insider → must abstain or ensure disclosure. * **Is it a special fact?** reasonable investor would consider important in making a investment decision. * **Who can sue?** has to be a deal w/ a SH * **Measure of damage** – difference between price paid & value of stock a reasonable time after public disclosure

Question 83

CONTROLLING SHAREHOLDERS: Requirement for Valid Merger

Answer 83

**_Rule:_** All mergers must have a legitimate corporate purpose, even if approved by the requisite # of shares. * **E.g.** Majority SH merges Corp w/ another Corp, which they own & minority SH’s interests are purchased. **_Court reviews whole transaction:_** (1) overall course of dealing & (2) fairness of the price. * **_Factors:_** whether (1) deal is tainted by self-dealing or fraud, or (2) minority SH dealt w/ fairly, or (3) legitimate business reason for merger.