Corporations Flashcards
Governing Law
New York Business Corporations Law (“BCL”)
Formation Req’s (3)
- People
- Paper
- Acts
Incorporators - What do they do?
- Execute the certificate
- Deliver it to department of state
- Hold organizational meeting
Incorporators - How Many?
1 or more.
Incorporators - Who can be one?
Adult humans only. No entities.
Certificate of Incorporation - Purposes
- Contract between corporation and shareholders
2. Contract between corporation and state. @@
Certificate of Incorporation - Required Info
- Names and addresses
- Statement of duration
- Corporate purposes
- Capital Structure
Certificate of Incorporation - Names and Addresses
- Corporate Name
- Address
- Corporate agent @@
- Name and address of incorporator
Corporate Name
MUST contain “Corporation,” “Incorporated,” or “Limited”
Corporate Address
COUNTY in New York of office of the cooperation.
Corporate Agent for Service of Process
NY Secretary of State @@
Certificate of Incorporation - Statement of Duration
If silent, Corp will have PERPETUAL existence.
Certificate of Incorporation - Purpose Statement
Corporate statement of purpose is required.
Statement of Purpose - Conduct Outside Scope
Ultra vires act
- Contract/certificate still valid.
- Shareholders can seek an injunction against activity
- Responsible managers are liable to corporation for ultra vires losses.
Authorized Stock
Maximum number of shares the corporation can sell
Issued Stock
The number of shares the corporation has actually sold
Outstanding Stock
Stock the corporation has sold and has not reacquired.
What must be included in certificate re: stock?
- Authorized stock
- Number of shares per class
- Information on par value - rights, preferences, and limitations of each class
- Info on any SERIES of preferred stock
(At least one series with unlimited voting, and one series with unlimited dividend)
Formation - Acts Required
- Incorporator signs certificate before NOTARY
- Incorporator delivers to NYS DoS + pay fee
- DoS files certificate
- Incorporator holds ORGANIZATIONAL MEETING
What is the effect of the DoS filing the certificate?
Conclusive evidence of valid formation - de jure
What happens at ORGANIZATIONAL MEETING?
- Adopt by-laws
2. Elect initial directors
Can a corporation make political contributions?
Yes, but no more than $5,000/year per candidate or organization.
Can a corporation make charitable contributions?
Yes & unlimited
Can a corporation guaranty a loan that is NOT in the furtherance of corporate business?
Yes, if approved by 2/3’s of the shares. @@
Are SH’s liable for the conduct of the corporation?
SH’s have LIMITED LIABILITY
SH Limited Liability
SH’s are liable only to pay for their stock and not generally liable for what the business does.
De Facto Corporation must establish
- there is a relevant incorporation statute (e.g. BCL)
- parties made a good faith, colorable attempt to comply with it; and
- the business is being run as a corporation
De Facto Corporation - Status in NY
Thought to be abolished in NY under the BCL, but it MAY be available in very rare circumstances.
Corporation by Estoppel
One dealing with a business as a corporation, treating is as a corporation may be estopped from denying the business’s corporate status.
Corporation by Estoppel - Status in NY
Abolished in NY.
If bylaws are INCONSISTENT with certificate, which controls?
Certificate (think Constitution preempting statutes)
Are bylaws filed with the state?
No.
Are outsiders bound by bylaws?
No.
Who adopts bylaws?
Incorporators at organizational meeting.
**Status of shareholder bylaw.
Who can amend, repeal, or adopt new bylaws?
Shareholders
When can D’s amend or repeal bylaws?
Only if certificate OR SH bylaw allows it.
Promoter
A person acting on behalf of a corporation NOT YET FORMED.
Are corporations liable for pre-formation contracts?
Only when it ADOPTS the contract.
Pre-formation Contract Adoption (2 Types)
- Express Adoption - board action
2. Implied Adoption - if corporation knowingly accepts a benefit of the contract.
Is the PROMOTER liable for pre-incorporation contracts?
Promoter is liable for pre-incorporation contracts until there is a novation.
Until novation - both company and promoter are liable.
*Still liable even with adoption. Need Novation!
Secret Profit Rule
Promoter can’t make a SECRET profit on her dealings with the corporation.
- If P acquired property BEFORE becoming promoter, PROFIT = Price paid by Corp - FMV
- If P acquired property AFTER becoming promoter, PROFIT = Price paid by Corp - price paid by promoter.
Foreign corporations doing business in NY MUST
qualify
Foreign Corporation - Defined
A corporation incorporated outside New York State.
Domestic Corporation - Defined
Incorporated in New York State
Foreign Corporation - How to qualify?
Applying to NY DoS and designating the Secretary of State
- Info from Certification of Incorporation
- Proof of good standing in its home state.
What happens if a foreign corporation does business in NY without qualifying?
It cannot sue in NY until it qualifies, pays fees, taxes, and accrued penalties and interest.
What is issuance?
Issuance of stock occurs when a corporation sells its own stock.
What is a debenture?
A loan NOT secured by corporate asserts.
What is a subscription?
A written, signed OFFER to buy stock from the corp.
Can a pre-incorporation subscription be revoked?
Irrevocable for 3 months
Are post-incorporation subscriptions revocable?
Yes, but only until it is ACCEPTED by the corporation.
Can the corporation decide to sell only to some subscribers and not others?
Must sell uniformly among the different stock classes
What happens if subscribers paid for less than half and fails to pay within 30 days of written demand?
Corporation can KEEP THE MONEY, cancel the shares, and resell them to someone else.
What happens if subscriber has paid half or more within 30 days of written demand?
Corporation must try to resell for cash, and if it can’t then corp can cancel the shares keep the money.
What are the 5 permitted forms of consideration for an issuance?
- Money
- Property
- Services PREVIOUSLY performed for the corporation.
- Binding obligation to pay money or property in the future.
- A binding obligation to perform future services having an agreed value.
What happens if stock is issued for no consideration?
Considered “unpaid stock” and treated as “water.”
Treasury Stock Defined
Stock that was previously issued and has been reacquired by the corporation.
-No par (i.e. no minimum share price)
מניות רדומות
Consequences for issuing par stock for less than par value
It becomes “watered stock.”
Watered Stock - Director Liability
Liable if they “knowingly authorized issuance” for less than par
Watered Stock - Purchaser Liability
Liable.
“Charged with notice of the par”
Watered Stock - Subsequent Third Party Purchaser Liability
NOT liable if TP acted in good faith.
Is BOD determination of value of consideration for issuance - binding?
Yes if made without fraud.
Pre-emptive Rights
This is 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.
NO DEFAULT PREEMPTIVE RIGHTS for corporations formed after 1998. @@
Do pre-emptive rights attach during the sale of treasury stock?
No, assuming certificate is silent.
Pre-emptive rights with the sale of shares authorized by the original certificate and sold within two years of formation.
Then, if not sold within one-year period, preemptive rights will attach agains.
They don’t exist within 2 years of formation, assuming certificate is silent.
Pre-emptive Rights: Silent Certificate
No rights exist unless they are in the certificate.
Statutory Minimum Number of Directors Required
1 or more adult natural persons.
Number of Directors - Authority
- Bylaws
- Shareholder act
- Board vote if shareholder bylaw allows
(Default - 1)
Who elects directors
- Incorporators initially
2. Shareholders at the annual meeting
Where is staggered board determined
Certificate or SH bylaw
Removal of Director before end of term
- SH’s can remove for cause
2. BD can remove for cause ONLY IF certificate or SH bylaw allows.
Removal of Director without cause?
SH’s only and ONLY IF certificate or bylaws allow
Who chooses a D to fill a vacancy?
The board.
Exception: if SH removes D without cause, then SH appoints.
Are directors agents of the corp?
No. No individual power to bind the corp. to anything
Two ways BD can take a valid act
- Unanimous written consent
- A meeting
Otherwise, void unless ratified by valid act.
Is notice required for a REGULAR MEETING of the bd?
No, if the time and place are set in the bylaws or by the board.
Is notice required for a SPECIAL MEETING of the bd?
Yes, it must state the time and place but NOT the purpose.
Effect of BD meeting notice defect
Voids any act taken by the bd at the meeting
How can a D waive a meeting notice defect?
- In a signed writing ANY TIME
2. By attending the meeting without objection
Can a D give a proxy for a vote?
No, those are void. D’s have non-delegable fiduciary duties.
Can a D enter into a voting agreements on how they will vote?
No.
Quorum of Directors
Must have majority of the ENTIRE board (all positions, even vacant/resigned); then majority vote of those D’s PRESENT
Can the corp decrease a quorum to less than a majority of D’s?
Yes, in the certificate or bylaws but never less than 1/3 of the entire board.
Can the corp decrease the requirement that passing a resolution requires a majority of directors present?
No.
Can the corp increase a quorum to greater than a majority?
Yes, but in the certificate only.
Can the corp require a super majority vote to pass a resolution?
Yes, but in the certificate only.
What can a bd committee NOT DO?
- Set director compensation
- Fill a board vacancy
- Submit a fundamental change to SH’s.
- Amend bylaws
Director Duty of Care - Defined
A fiduciary who must discharge her duties in good faith and with that degree of DILIGENCE, CARE, and SKILL that an ORDINARY PRUDENT person would exercise under similar circumstances in like position.
“Prudent people do appropriate homework.”
Director not guarantor of success.
Directory Duty of Care - 2 Types
- Nonfeasance
2. Misfeasance
Directory Duty of Care - Nonfeasance
D’s can breach their duty of care with omissions, but they are liable ONLY IF breach caused a loss to the corp.
Directory Duty of Care - Misfeasance
BJR - Court will defer to D’s decision if it was made in good faith, was reasonably informed, and had a rational basis.
Director Duty of Loyalty Standard
A director must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries.
Why doesn’t BJR apply in Duty of Loyalty Cases?
Because BJR does NOT apply when there is a conflict of interest.
Interested Director Transaction Defined
Any deal between the Corp. and one of its directors, or a business where the D has a financial interest (self dealing)
Director Self-dealing Rule
Interested director transactions will be set aside UNLESS the D shows either
1. the deal was fair and reasonable to the corp.; OR
2. the material facts and her interest were disclosed or known; AND
the deal was approved by
a. SH vote; or
b. bd approval of disinterested D’s; or
c. unanimous vote of disinterested D’s if they are insufficient to take a bd act.
Remedies for Director Self Dealing
- Constructive trust on D’s profits; and possibly
2. Damages if Corp suffered harm.
Director compensation - set by board?
If reasonable and in good faith.
SH approval needed for options to buy NON-LISTED stock
Competing ventures
Director cannot COMPETE with corporation (first state duty of loyalty standard!).
Constructive trust on director’s profit.
Damages to company if hurt by competition.
Corporate Opportunity Duty of Loyalty Standard
Director cannot USURP a corporate opportunity. (First state duty of loyalty standard)
Corporate Opportunity Defined
Something the corp
- NEEDS, or
- has an INTEREST or TANGIBLE EXPECTANCY in, or
- that is LOGICALLY RELATED to its business
When can D utilize opportunity?
After he notifies the board of the opportunity, and waits for BOD to reject it.
Remedy for Corporate Opportunity Usurption
Constructive trust accounting for profit or object of corp opportunity
When is a corp loan to D allowed?
Board can give D a loan ONLY IF
- Approval by SH’s
- Board finds that it will benefit corp.
Presumption of D concurrence with action
A D is presumed to have concurred in board action UNLESS dissent is noted IN WRITING. How?
1. In minutes
2. In writing to corporate secretary at the meeting
3. Registered letter to corporate secretary promptly after adjournment
(If absent from meeting - within reasonable time after learning of action.)
Good faith reliance defense
If D relied in good faith on info from officers, lawyers, cttees;
who D believes are competent and reliable
then D may be exempt from liability for decision.
Duties of Officers
Same duty of CARE and LOYALTY as directors
Can officers bind the corporation?
Yes, O’s are agents of the corp and can bind the corp if they have the authority to do so.
President’s Power
- Can sue on behalf of the corporation; and
2. Can bind corp. to contracts
Who selects and removes officers?
The board UNLESS the certificate allows SH’s to elect them
Officer - Judicial Action
The attorney general or holders of 10% of all shares may sue for a judgment removing an officer for cause.
Officers - Who sets compensation?
The board
D/O Reimbursement - Prohibited
Prohibited if officer was held liable to the corporation
D/O Reimbursement - Of right
Corporation MUST reimburse if D/O wins a judgment or verdict.
If officer sues co to recover reimbursement - cannot recover attorney fees for this suit.
D/O Reimbursement - Permissive
Any case that is not
1) prohibited or
2) of right, the corporation MAY reimburse the D/O SO LONG AS the D/O acted in GOOD FAITH and for a PURPOSE REASONABLY BELIEVED TO BE IN THE CORP’S BEST INTEREST
[Eligibility determined by: non-party quorum of directors;
if no quorim: SH, or disinterested quorum of BOD’ or BOD acc independent legal counsel report]
Can the court order reimbursement of litigation expenses and attorney’s fees?
Yes, if the court believes the D/O is reasonably entitled to it
Can the corp. advance litigation expenses and attorneys fees?
Yes, but D/O must repay them if D/O is not entitled to reimbursement.
On exam: Say this when D breaches duty:
“Certificate may eliminate D liability to corp of SH for damages of breach of duty, except if:
- acted in bad faith
- intentional misconduct
- improper financial benefit
- approved unlawful distribution or loan.
Can also exculpate except for these.
Can SH’s manage the corp?
Generally, no. Except in close or “closely held” corp.’s when certificate allows this.
What is a close corp?
- Few SH’s
2. Stock is NOT publicly traded
Close Corp - SH Management Requirements
- All incorporators or SH’s approve It
- It is conspicuously noted on front and back of all shares
- All subsequent SH’s have notice; and
- Shares are not listed on an exchange or regularly quoted over-the-counter
Close Corp - Who holds the duty of care and liability?
The controlling SH’s
Close Corp - Controlling SH’s Duties
- Duty of care and loyalty to the corp
2. Duty of UTMOST good faith to other, minority SH’s.
Professional Corp. - Requirements for SH’s, Officer’s, and D’s
All SH’s, O’s and D’s must be licensed professionals
Professional Corp. - Malpractice Liability
Individuals are liable for their own malpractice but not that of others.
Professional Corp. - Contract Liability
The P.C. is liable for contracts, not the individuals
Professional Corp - Deceased or disqualified SH
PC must buy the stock
Are SH’s liable for what the corp does?
Generally, no because the corp is liable for what it does EVEN IF THERE IS ONLY 1 SH
But when can a SH be personally liable for what the corp does?
When the court PIERCES THE CORPORATE VEIL!
In what type of corp can a court PCV?
Who can be liable under PCV?
A close corp.
Shareholders, directors, officers
To PCV and hold SH’s personally liable:
- they must have ABUSED the privilege of incorporating; and
2. fairness MUST require holding them liable to prevent fraud or the use of a corp AS A CLOAK FOR ILLEGALITY
To PCV in NY and hold SH’s personally liable:
- The SH must exercise COMPLETE DOMINATION over the corp; and
- to perpetrate fraud or injustice against the plaintiff.
(Undercapitalization not sufficient by itself)
Is PCV more likely in tort or contract actions?
Tort.
Close Corp - 10 Larges SH’s Liability
10 larges SH’s are personally liable for the wages and benefits of corp’s employees
SH Derivative Suit - Defined
SH sues to enforce the CORPORATION’S claim, not the SH’s own personal claim.
SH Derivative Suit - Test
Could the corp have brought this suit on its own? If so - it’s derivative
What does SH get if he wins a derivative suit?
Costs and attorney’s fees
Corp. gets the judgment
Can the SH ever recover part of the judgment in a derivative suit?
Maybe, but ONLY IF the judgment would result in the Defendants recovering any money (i.e. $$ goes to bad guys).
What happens if SH loses a derivative suit?
- SH has to pay own costs and attorney’s fees
- SH may have to pay Corp.’s costs
- Other SH’s cannot sue again on the same transaction (estoppel)
SH Derivative Suit Requirements (6)
- Stock ownership when the claim arose (standing) or received through operation of law from someone who did AND own the stock all the way through the judgment.
- SH must adequately represent the interests of the corp. and SH’s
- SH may have to pay a bond if she owns less than 5% or $50,000 worth of stock
- S must make a demand on D’s UNLESS it would be futile (eg. most of board is interested)
- SH-P must plead “with particularity” his efforts to get the board to sue OR why the demand was futile
- Corp. must be joined as a defendant
When is a demand futile?
- If a majority of board is interested
- the board did not inform itself of the transaction to the extent reasonable under the circumstances; or
- the transaction is so egregious on its face that it could not be the result of sound business judgment
Can SH still sue if SH makes a demand and board refuses to sue?
Yes but ONLY IF SH can show a majority of the board was interest OR its procedure was incomplete or inadequate
Corp.’s motion to dismiss derivative suit
The motion is based on a finding by independent directors (special litigation committee) that the suit is not in the corp.’s best interests
What factors does a court consider in the Corp’s motion to dismiss a derivative suit?
- The independence of those making the investigation; and
- the sufficiency of the investigation
THAT’S IT! Does not look at merits or likelihood of success
Can the parties dismiss or settle a derivative suit?
Only with court approval.The court MAY require notice to SH’s.
Can a D or O bring a derivative suit?
A D/O can sue another D/O to compel him for violation of duties or misappropriation of corp. assets.
Not bound by requirements! Sues in own name but award goes to corp.
SH Voting - Who Votes?
The record owner as of the record date has the right to vote.
SH Voting - What is the record date?
It’s the voter record cut off date NO FEWER than 10 and NO MORE than 60 days before the meeting.
SH Voting - Treasury Stock
Corporation CANNOT vote treasury stock.
SH Voting - Death of SH
Death of SH after record date, SH Executor can vote.
SH Voting - Proxy Defined
- A writing
- signed by record SH or authorized agent,
- directing to secretary of corp
- authorizing another to vote the shares
SH Voting - How long are proxies valid?
11 months unless it says otherwise.
SH Voting - How can proxies be revoked?
In writing or attending the meeting and voting.
SH Voting - How to create an irrevocable proxy?
Proxy in writing coupled with the proxy holder’s interest in the stock other than voting
.e.g. option to buy stock
Requirement for a Voting Trust
- Written trust agreement controlling how the shares will be voted
- Copy to corp.
- Transfer legal title of shares to voting trustee; and
- Original SH’s receive voting trust certificates and retain all SH rights except for voting
Time Limit on Voting Trust
10 years max, but within 6 months of expiration it can be extended for another 10 years.
Requirements for a voting pooling agreement
- SH’s can participate (no D’s)
2. In writing and signed
Are voting agreements specifically enforceable?
No.
What’s special about a proxy given subject to a voting agreement?
It’s irrevocable if it says so.
What are the only two ways the SH can take a valid act?
- Written consent of ALL voting shares; or
2. a SH meeting
Two types of SH meetings
- Annual
2. Special
Must SH meetings be held in NY?
No
What do we do at the annual meeting?
Elect directors
How are D’s elected by SH
Highest vote-getter for each seat.
Even if no majority of votes. “Plurality” of votes.
Who can call a SH special meeting?
The board or anyone stated in the certificate
SH Notice Requirement
Must give written notice to every SH entitled to vote for every meeting between 10 and 60 days before the meeting containing
- the time
- the place
- details re appraisal rights if relevant to meeting (minority can demand fair value for their shares)
SH Notice of a Special Meeting Must include
- Who is calling the meeting; and
2. the purpose of the meeting
SH Voting - Quorum
A quorum requires a majority of SHARES be represented, not SH’s.
Can certificate or bylaws reduce SH voting quorum?
Yes but NEVER to less than 1/3 of the shares entitled to vote.
Can the certificate or bylaws INCREASE quorum to supermajority of Shares?
Certificate only, not the bylaws (same rule as board voting)
Is it possible to impose a requirement that resolutions be passed by a supermajority?
Yes in certificate only, not bylaws.
Can never reduce majority approval requirement
For SH voting, what is a majority?
It’s a majority of shares ACTUALLY VOTING. Abstensions and absences don’t count.
If a SH quorum is met, what if SH’s leave?
Once a SH quorum is met, it can’t be broken by SH’s leaving
<> BOD in which it can be broken in the middle by D leaving!
Cumulative Voting - When is it used?
for electing D’s only, and only allowed by certificate
Cumulative Voting - How to calculate a SH’s votes?
(#D’s)*(# Shares) = # votes, which a SH can allocate anyway he wants.
Where can restrictions on stock transfer be set?
Certificate, bylaws, or agreement.
Enforceable against transferee only if noted in stock certificate, or transferee has actual knowledge.
What restraint is not allowed on stock transfer?
Unacceptable restraints on alienation.
Co cannot make transfers conditional on its own approval (OPPOSITE IN ISRAELI PRIVATE CO’s)
RoFR OK if price reasonable.
Buyback on death OK
Who can demand access to SH meeting minutes and records of SH’s?
Any SH with 5 days written demand
What can the Corp demand of a SH who demands to see SH meeting minutes or records of SH’s?
An affidavit that his purpose is not other than in the interest of the corp and he has not within 5 years tried to sell any list of SH’s
Who can demand access to a list of current D’s and O’s?
Any SH on 2 days demand w/ no requirement for affidavit.
Who can demand access to 1) annual balance sheet, 2) profit/loss statement, and 3) interim statements distributed to SH’s?
Any SH with a written request, and corp can provide by mail.
Common Law Right to Inspect Documents
Any SH can inspect records at a reasonable time and place for a proper purpose.
Can a D inspect corporate books and records?
Yes, D’s have unrestrained access.
Distributions Definition
Any payment by the corporation to SH’s
Distributions - 3 Types
- dividend
- payment to repurchase shares
- to redeem shares
Distributions - When do they happen?
When the board declares it. (Use BJR)
When will a court interfere with the Board’s discretion and order a distribution?
Only with a showing of bad faith or dishonest purpose.Very hard standard
Which SH’s get dividends?
Preferred stock first, then common stock
What is Preferred stock that is PARTICIPATING or CUMULATIVE?
PARTICIPATING: Preferred stock gets its preferred dividend AND the common stock dividend.
CUMULATIVE: Preference adds up each year that dividend not paid.
Which funds may be used for ANY distribution?
Surplus only
Surplus - How to calculate?
Surplus = assets - liabilities - stated capital
Stated capital - how to calculate?
(# shares issued)*(par value per stock) = stated capital
Stated Capital - No par issuance?
within 60 days the board can make allocation but not all to surplus
Can a corp make a distribution if it lost money?
Yes
When can’t the corp make a distribution?
Corp is insolvent, meaning it can’t pay its debt as THEY COME DUE in the ordinary course of business
D’s liability for unlawful distributions?
Yes. Corporation sues via derivative suit.
Can SH’s be personally liable for receiving an unlawful distribution?
ONLY IF they knew it was unlawful when received.
Fundamental Corp. Change - Who has to Approve?
Board AND SH’s AND file of SoS
What is the dissenting SH’s right of appraisal?
The right to force the corp to buy a SH’s stock at fair market value in a close corp.
What actions trigger a SH’s right of appraisal?
- some certificate amendments
- consolidation
- your corp mergers into another corp
* 4. transfer of substantially all corp assets
* 5. shares are acquired in a share exchange
When can there NEVER be a right of appraisal?
If shares are publicly traded.
What actions are taken by the SH to perfect his right to appraisal?
- Before the vote file a written objection AND intent to demand payment
- Abstain or vote against the change; AND
- after the vote, make a written demand to be bought out
[No “minority discount” in valuation.]
How to make amendment to the certificate?
Approval by
- Board of directors; and
- Majority of shares ** ENTITLED ** TO VOTE (NOT just a majority of those that vote)
Votes for changing SH supermajority requirement?
2/3 of shares ** ENTITLED ** TO VOTE!
Doesn’t apply to BOD supermajority
Mergers - Steps to Complete
- Each corp’s board adopts a plan of merger
- Each corp.’s SH approval of a majority of shares ** ENTITLED ** TO VOTE.
- Deliver certificate of merger to Dept. of State
When is SH approval not required?
If parent corp owns 90% or more of each class of stock of a subsidiary that is merged into a parent corp. "Short-form merger"
Merger - are there dissenting SH’s rights of appraisal?
Yes but only for SH’s of the company that disappeared, not the survivor.
What is the effect of a merger with respect to liability?
The surviving corp takes on all rights and liabilities of the disappearing corp
“Successor Liability”
Asset Sale - Who is it a fundamental change for?
Only the seller. Buyer SH’s don’t need to vote.
Seller: Majority of SH’s ** ENTITLED ** to vote.
Asset Sale - Effect on Liability
No successor liability unless
- deal says otherwise
- purchasing corp is mere continuation of the seller, or
- the deal was entered fraudulently to escape liability.
Voluntary dissolution
Majority of shares ** ENTITLED ** to vote.
Then file certificate of dissolution
Involuntary Dissolution (by court order) - who may petition?
- Board or majority of shares entitled to vote – “insolvency”
- 50% of shares entitled to vote - “directors to divided to manage”
- Any SH - if SH unable to elect Ds for 2 successive annual meetings
- 20% for special grounds (next slide….)
Involuntary Dissolution (by court order) - 20% of voting shares on special grounds?
Twenty percent or more of voting shares in corp. whose shares are not traded on a securities market (close corp) may petition on EITHER of these grounds:
- management’s illegal oppressive or fraudulent acts towards the complaining SH’s; or
- management’s wasting, diverting, or looting assets.
When may a court deny dissolution in a close corp?
If there is another way the complaining SH can obtain a return on investmente.g. corporate buyout
How may the corp try to avoid dissolution
Within 90 days of the petition, buy petitioner’s stock at FMV on terms approved by the court.
[Always mention in essay]
Winding up process
- gather all assets
- convert to cash
- pay creditors
- distribute remainder to SH’s pro rata by shares unless there is a dissolution preference
Controlling Shareholder Duty
A controlling SH with a control position owes a FIDUCIARY DUTY to minority SH’s and the corporation itself.
Controlling SH sale to looters?
If without reasonable investigation
(watch of “undisclosed principal” sending agents)
Or sells seat on the board
–>Can disgorge profit (share premium) + damages to corp
Freeze Out Defined
A merger where one corp merges into another corp owned by the majority SH’s, leaving the minority SH’s with no stock
What factors will a court look at in a freeze out?
Look at merger as a whole - there must be
- fair price
- fair dealing
- and a legitimate corporate purpose
Market Trading on Inside Information by D or O
Insider trading by a D or O is a violation of a duty to the CORPORATION, therefore a SH can sue derivatively
Insider Trading - Special Facts Defined
material information that a reasonable investor would find important in making an investment decision
Insider Trading - Who can sue?
The SH with whom the insider deals
not the public
Insider Trading - Measure of Damages
Difference between price paid and value of stock a reasonable time after public disclosure
