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Corporations Flashcards

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1
Q

Who is a promoter?

A

Someone who acts on behalf of a corporation before the corporation is formed.

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2
Q

Can a promoter be held personally liable for pre-incorporation contracts? Are there any exceptions?

A

Yes. Promoters are personally liable for pre-incorporation contracts, with two exceptions:

(1) if a third party knows that the corporation does not yet exits and agrees to look solely to the corporation
(2) Once the corporation is formed, the promoter may pursue a novation with the corporation and third party.

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3
Q

Is a corporation automatically liable for pre-incorporation contracts?

A

No. Corporation is not automatically liable, but it may adopt them, either expressly or impliedly by accepting the benefits of the contract.

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4
Q

How might a corporation impliedly adopt a pre-incorporation contract?

A

By accepting the benefits of that contract.

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5
Q

What is a novation?

A

A third party steps into the shoes of a person obligated in a contract. Used commonly to relieve a promoter of contract liability and substitute the corporation.

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6
Q

How does a company incorporate?

A

(1) One or more “incorporators” prepare and sign a certificate of incorporation, and
(2) deliver the certificate to the NY Department of State

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7
Q

Who can be an incorporator?

A

Any nature person 18yo or older.

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8
Q

Does an incorporator incur liability by signing a certificate of incorporation?

A

No. An incorporator incurs no liability merely by being the one who signs and delivers the certificate of incorporation to the state. Nor is she responsible for pre-incorporation contracts entered into by a promoter.

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9
Q

What MUST be on a certificate of incorporation?

A

(1) the corporate name
(2) corporate purpose (can be generic)
(3) corporate duration (if there is one)
(4) the county where the office of corporation is OR the residence of a registered agent
(5) share number and classes of stock
(6) must designate the NY Secretary of State as an agent to receive service of process

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10
Q

What CANNOT be on a certificate of incorporation?

A

(1) Cannot include certain words: “state police,” “chamber of commerce,” and “board of trade.”
(2) Cannot include some words (“bank,” “savings,” and “title”) UNLESS get permission from NY Superintendent of Banks or NY Superintendent of Insurance

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11
Q

What MAY be included in a certificate of incorporation?

A

(1) Corporate powers (if blank, powers are implied by BCL)
(2) exculpatory charter provision
(3) any other provision relating to corporation’s business or affairs

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12
Q

What effect does an exculpatory charter provision have?

A

Exculpates corporation’s directors of negligent business decisions but NOT bad faith, illegal or improper purposes.

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13
Q

What is a “de jure” corporation?

A

A corporation that satisfies all the statutory requirements for incorporation. It is properly formed under law. A certificate of incorporation received by the Department of State and filed is conclusive evidence of proper de jure incorporation.

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14
Q

What is a “de facto” corporation?

A

A good faith but unsuccessful effort to incorporate. If owner made good faith effort to comply with statutory provisions, court will treat it as good enough (allowing limited liability).
Requirements:
(1) owner must operate the business as if it were incorporated
(2) the owner must not know that incorporation was defective

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15
Q

What factors will a court consider when piercing the corporate veil?

A

No single test. Common factors:

(1) excessive domination of the corporation by its shareholders (e.g., parent corp uses subsidiary as puppet)
(2) shareholders carry on the business for personal gain, not corporate gain
(3) corporation is being used to hide illegal business or perpetuate a fraud
(4) corporate formalities largely disregarded
(5) corporation is inadequately capitalized

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16
Q

What is an ultra vires action?

A

Action outside the corporation power. Powers are found either in the certificate of incorporation of the BCL’s default powers.
Shareholders or the state can sue to enjoin ultra vires actions OR take action against the director/officer/employee engaging in them.

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17
Q

How can you amend a certificate of incorporation?

A

Certificate of correction = correct minor errors or inaccuracies without getting shareholder approval. (Cannot change corporate name.)

Certificate of amendment = make significant changes with a majority vote of shareholders (if company has shareholders).

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18
Q

How can you amend a company’s bylaws?

A

(1) Shareholders have power to adopt, amend, repeal any bylaw through majority vote
(2) Shareholders can empower the board of directors, but only if the certificate of incorporation allows empowerment. And shareholders get the final word.

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19
Q

What is a “resolution” of the board of directors?

A

A written record of the board’s “resolve” that the company take certain actions. Provides a paper trail.

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20
Q

What is the order of importance for corporate instruments? (I.e., what gets priority in a conflict?)

A

(1) certificate of incorporation
(2) bylaws
(3) board resolutions

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21
Q

Can shareholders take action other than by a vote at a meeting?

A

Yes. Shareholders can take action by “unanimous written consent,” as long as the action could have been taken at an actual shareholder meeting.

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22
Q

What notice must shareholders receive of an upcoming meeting? (timing and content)

A

“60-10 rule” = Written notice is required no more than 60 and no less than 10 days before a meeting.

Content: Notice must include the time, date, and place of the meeting. If it is a special meeting, must specify the purpose of the meeting.

Failure to give notice renders actions taken at the meeting void.

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23
Q

When might a shareholder who doesn’t receive notice of a shareholder meeting waive the requirement?

A

(1) a written waiver

(2) simply attending the meeting

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24
Q

What is a “record date” for share-voting eligibility?

A

The date on which all current shareholders will be recorded and allowed to vote in an upcoming issue. Subsequent trading of shares does not impact voting ability.

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25
Q

When might a person be able to vote shares without actually owning them?

A

(1) Traded after record date
(2) beneficial owner of shares, if stocks held in “street name” by a brokerage account or broker-dealer.
(3) Fiduciary relationship: Shares held by a receiver, administrator, executor, guardian, conservator, or other fiduciary. (Note: Does NOT apply to trustees. Trustees can only vote after shares are transferred into this name.)

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26
Q

What are “treasury shares”?

A

Shares of a corporation previously in the hands of investors that have been repurchased or redeemed by the corporation and are now held in its treasury. These shares cannot be voted by the corporation, and they are not considered “outstanding shares” for voting purposes. They are also not considered assets of the corporation.

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27
Q

What are shareholders entitled to vote on?

A

(1) Election of directors
(2) Amendments to the certificate of incorporation
(3) Sale of substantially all of the corporation’s assets
(4) Mergers and consolidations
(5) Dissolution of the corporation

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28
Q

What is the quorum requirement for a shareholder meeting?

A 
Default = a majority of all outstanding shares is a quorum. If a particular class of shares is entitled to a separate vote, a majority of that class of shares is required. Once established, quorum is not broken if some people leave.
Certificate of incorporation may modify, but can have no less than 1/3rd.
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29
Q

By default, when is a separate class of shareholder entitled to a vote?

A

If proposed amendment to the certificate of incorporation would adversely affect the rights of any class of shares, that class is entitled to a separate vote on the amendment. They may veto the amendment.

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30
Q

How many votes are needed to elect a director according to the default rule?

A

A plurality.

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31
Q

How many votes does a shareholder get in straight/traditional voting?

A

Shareholder gets a number of votes equalling the number of shares he/she owns.

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32
Q

How many votes does a shareholder get in cumulative voting?

A

Each shareholder gets the number of votes equal to the number of shares he/she owns TIMES the number of open board seats. This allows a minority shareholder elect at least one director.

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33
Q

What is a “classified board”?

A

A board that only elects/reelects certain classes of directors at a time. Similar to a staggered board.

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34
Q

How long does authorization for a proxy vote last?

A

When no date is specified, 11 months.

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35
Q

What makes a proxy irrevocable?

A

(1) proxy states on its face that it is irrevocable
(2) “coupled with an interest” = proxy recipient has an interest in the shares (e.g., pledgee, purchaser, creditor, corporate officer, or voting agreement). The proxy will become revocable after the interest “falls away.”

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36
Q

How can a shareholder revoke a proxy vote authorization?

A

(1) in writing
(2) authorizing a new proxy
(3) attending the shareholder meeting in person and voting
NOT revoked by incompetence or death of shareholder

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37
Q

What is a “voting pool”?

A

Shareholders enter into a voting pool by contractually obligating themselves to vote a certain way. Specific enforcement IS available for voting pool breach. No need to file a voting pool agreement with the corporation.

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38
Q

What is a “voting trust”?

A

A separate legal entity to which shareholders transfer stock. Legal ownership is transferred to the trustee but shareholders retain the beneficial interest. Valid up to 10 years and can be extended for up to another 10 years. Trust instrument must be filed with corporation.

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39
Q

What are a shareholder’s inspection rights?

A

May inspect and copy corporate records during normal business hours. Must give 5 days’ prior written notice AND state a “proper purpose” for inspection.

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40
Q

What records may a shareholder inspect under the inspection right?

A

(1) minutes of shareholder meetings
(2) list of shareholders of record
(3) balance sheet and profit-and-loss statement
And at common law: other corporate books and records

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41
Q

What is a “proper purpose” for a shareholder inspection of corporate records?

A

A purpose that relates to the shareholder’s interest in the corporation. Cannot be fore harassment or to conduct illicit discovery in anticipation of a lawsuit against the corporation.

42
Q

Who has standing to bring a derivative suit against a corporation?

A

Any record or beneficial shareholder, or holder of a voting trust certificate. Must have held stock at (1) the time the action is brought AND (2) time of the transaction π complains of.

43
Q

What is the shareholder’s demand requirement?

A

In a derivative lawsuit, must make a written demand upon the board of directors.
Futility exception if shareholder can show: (1) directors were not disinterested and independent AND (2) transaction was not a product of valid business judgment.

44
Q

Can a shareholder freely discontinue or settle a derivative lawsuit?

A

No. Can only discontinue or settle with approval of court.

45
Q

Do controlling shareholders owe a fiduciary duty?

A

Yes, owe duty of good faith to minority shareholders when:

(1) selling controlling share to an outsider
(2) seeking to eliminate other shareholders from corporation
(3) receiving a distribution denied to other shareholders, OR
(4) seeking to dissolve the corporation.

46
Q

How may a director be removed?

A

(1) Shareholders can remove for cause (self-dealing, usurping a corporate opportunity, committing waste, or breaching another fiduciary duty)
(2) Directors can remove fellow directors for cause IF the certificate of incorporation or bylaws allow them.
(3) Shareholders can remove without cause if a provision in the certificate or bylaw allows for it.
Separate class: a director elected by a separate class of stock can only be removed by that class.

47
Q

How can a director count as “present” at a director meeting?

A

Either physical presence or through any technology that allows directors to hear one another during the meeting.

48
Q

Can directors act without holding a meeting?

A

Yes, through unanimous written consent.

49
Q

What are the quorum rules for a board of directors meeting?

A

A majority of the entire board of directors is quorum. These directors must be present at the time the vote is taken. NO proxy voting.

50
Q

May directors enter into voting agreements?

A

No. Directors must exercise independent judgment.

51
Q

Under what circumstances can a corporation lend money to a director?

A

Only if

(1) holders of a majority of shares vote to approve the loan (excluding any shares held by the director in question), OR
(2) board approves the loan after finding that it benefits the corporation.

52
Q

What fiduciary duties to directors owe?

A

(1) Duty of care

(2) Duty of loyalty

53
Q

Whom may a director rely on in order to fulfill the duty of care?

A

(1) Officers and other employees in the corporation
(2) outside attorneys, accountants, or other skilled individuals retained by the corporation
(3) a committee of which the director is a member.

54
Q

What is the business judgment rule?

A

A legal presumption that a director made a business decision in conformity with his fiduciary duties of care. To rebut, opponent must demonstrate (1) an actual conflict of interest or (2) bad faith.
Focus on decision-making process, not actual decision.

55
Q

What is a director’s duty of loyalty?

A

Requires the director to act in a manner the director reasonably believes is the best interest of the corporation. Beached by (1) self-dealing, (2) usurping corporate opportunity, and (3) entrenching in office.

56
Q

How can a director “cleanse” a self-dealing transaction?

A

Safe harbors:
(1) Conflict disclosed to board + board approves transaction through normal voting procedures minus the interested director’s vote
(2) Conflict disclosed to shareholders + shareholders vote to approve transaction
If no safe harbor, court looks to whether transaction was “fair and reasonable.” Plus if corporation received something of comparable value. Burden on director to prove fair and reasonable.

57
Q

Two tests for usurpation of corporate opportunity and their elements

A

(1) Tangible expectancy test
(a) corp has existing interest in the opportunity
(b) corp have expectancy in the opporutnity arising from a right, OR
(c) corp is actively seeking a similar opportunity

(2) Line of business test (broader test)
Opportunity falls within the corporation’s current or prospective line of business

58
Q

When MUST a corporation indemnify a director

A

When the director incurred costs in a successful defense of a proceeding against him in his role as a director.

59
Q

When MAY a corporation indemnify a director

A

When a director unsuccessfully defense a lawsuit (including settling it) against him in his director role AND (1) acted in good faith with a reasonable belief that conduct was in the company’s best interest OR (2) in criminal proceeding, had no reasonable cause to believe the conduct was unlawful.

60
Q

When CANNOT a corporation indemnify a director

A

(1) In a shareholder derivative lawsuit, unless corporation gets court approval.
(2) When director incurred liability by receiving an improper financial benefit.

61
Q

When is a director entitled to inspect corporate books?

A

Director can inspect and copy corporate books, records, etc, for any purpose related to performance of her duty as director.

62
Q

Does the board have power to appoint and remove officers?

A

Yes. By default, all officers are elected or appointed to hold officer until the meeting of the board the next year.

63
Q

Is a corporate officer liable to third parties?

A

As an agent of the corporation, an officer does NOT incur liability to third parties while performing her duties. However, liability is available for personal or tortious behavior.

64
Q

When must a corporation indemnify a corporate officer?

A

To the same extent / same rules as for directors.

65
Q

Does the board need cause to remove an officer?

A

No. Board may remove an officer with or without cause by default. Existence of employment contract does NOT change this, but it may give rise to breach of contract claim.

66
Q

In a merger, does the surviving corp assume the liabilities of the corp that merged out of existence?

A

Yes.

67
Q

What must occur in order to approve a merger?

A

(1) the board of each corp must approve the merger
(2) shareholders of both corps must approve the merger, AND
(3) certificate of merger must be given to NY Department of State

68
Q

What approval margin is needed from shareholders to approve a merger?

A

Depends on when corporation was formed:
Feb 22, 1998 or before = 2/3rds of all outstanding shares
After = majority

69
Q

What is a “short form merger”?

A

A parent corp that owns 90% or more of a subsidiary’s stock can merge without approval of the board or shareholders of the subsidiary.

70
Q

If a corp sells all or substantially all of its assets to a buyer, who gets the debts/liabilities?

A

Generally: Seller retains its debts
Four situations where buyer takes debts:
(1) buyer corp explicitly assumes debts
(2) sale constitutes a de-facto merger of the corporations
(3) buyer is mere continuation of the seller
(4) sale was designed to defraud the seller’s creditors

71
Q

When does a dissenting shareholder get a right of appraisal?

A

(1) Merger or consolidation, as long as shareholder dissents
(2) sale of all or substantially all assets of the corporation, UNLESS sale is all-cash and followed by dissolution of the corporation
(3) Amendment of the certificate of incorporation, if amendment materially and adversely affects rights of the shareholder AND shareholder dissents

72
Q

What is a shareholder’s right of appraisal?

A

Shareholder can have his shares purchased for cash at their “fair value,” as determined by a judge in an appraisal proceeding.

73
Q

What margin of shareholder approval is needed for dissolution of a corporation.

A

Depends on when corporation was formed:
Feb 22, 1998 or before = 2/3rds of all outstanding shares
After = majority
NOTE: Board approval is not required.

74
Q

Is board approval required for dissolution of a merger after approval of dissolution by stockholders?

A

No.

75
Q

Under what circumstances can the state involuntarily dissolve a corporation?

A

(1) Its formation was based on fraud
(2) It engages in illegal or fraudulent courses of conduct
(3) It abuses corporate power or commits ultra vires acts
(4) It fails to pay fees or taxes

76
Q

When may shareholders pursue involuntary dissolution?

A

(1) insufficient assets
(2) dissolution deemed beneficial
(3) director or shareholder deadlock (holders of 50% entitled to petition for dissolution)
(4) Oppressive conduct (shareholders holding at least 20% may petition court for dissolution)

77
Q

What is “oppressive conduct” sufficient to trigger involuntary dissolution?

A

(1) Illegal, fraudulent, or oppressive actions toward minority shareholders, OR
(2) conduct that substantially defeats the “reasonable expectations” held by minority shareholders in committing their capital to the enterprise. Include: Continued employment with corporation, receiving share of earnings, having their voice heard in corporate management

78
Q

What is the “buy-out right” associated with oppressive conduct re: involuntary dissolution?

A

Within 90 days of a petition based on oppressive conduct, controlling shareholders may agree to purchase minority shareholders’ shares at a reasonable price to avoid dissolution.

79
Q

When may directors (by majority vote) involuntarily dissolve a corporation?

A

(1) Insufficient assets

(2) Dissolution deemed beneficial to shareholders

80
Q

What two types of preferences do preferred shareholders commonly hold?

A

(1) dividend preference

(2) liquidation preference

81
Q

What are the three primary types of debt?

A

Bonds (long-term)
Debentures (long-term)
Notes (short-term)

82
Q

What is a stock’s “par value”?

A

The minimum dollar amount for which a share of stock may be legally sold. The aggregate dollar amount of the par value of all shares sold should reflect the “stated capital” that appears on a corporation’s balance sheet.

83
Q

What is a “stock subscription”?

A

Prospective investors may subscribe to purchase tock from a corporation that has yet to be formed. There are only enforceable if (1) in writing and (2) signed by the subscriber. By default, subscriptions are irrevocable for 3 months.

84
Q

What is a shareholder’s “preemptive right”?

A

If corporation issues more shares of stock, shareholder is entitled (but not obligated) to maintain their percentage ownership. Whether shareholders enjoy this right depends on when the corporation was formed:
Before Feb 22, 1998 = shareholders have preemptive right
On or after Feb 22, 1998 = shareholders do not have preemptive right

Exceptions to this right:

(1) stock given as compensation to corporate directors, officers, or employees
(2) exchanged for property
(3) treasury shares

85
Q

When can a corporation authorize a dividend?

A

Dividends and distributions are payable at the discretion of the board of directors and then only out of funds legally available for the payment thereof. (See NY’s Legal Capital Law)

86
Q

Can shareholders sue to force a distribution of a dividend?

A

Usually not, UNLESS the directors abused discretion and refused to declare a distribution in bad faith.

87
Q

How do you calculate a “surplus” for purposes of the Legal Capital Rule and dividend distributions?

A

Surplus = Total assets – total liabilities – stated capital

88
Q

How do you determine “net profits” for purposes of the Legal Capital Rule and dividend distributions?

A

Net profits (or net loss) = Revenues – expenses

89
Q

What is New York’s Legal Capital Law?

A

When issuing dividends, corporations must fulfill the rule.
Legal Capital Rule: (1) Corporation must be solvent and (2) conform to the limits provided by the surplus/net profits determination:
(a) If positive dollar surplus = max is equal to the surplus amount
(b) If zero/negative dollar surplus = max is the corporation’s net profits for the current or previous fiscal year

90
Q

What is a “first option” restriction on sale of securities?

A

Shareholder who desires to sell his shares must first offer them to the corporation or its other shareholders before offering them to third parties. Restriction is valid if considered “reasonable.”

91
Q

What is a “right of first refusal” restriction on sale of securities?

A

Shareholder who wants to sell shares must first offer his shares to the corporation or other shareholders on the same terms that he offers a third party. Restriction is valid if considered “reasonable.”

92
Q

What is a “consent” restriction on sale of securities?

A

Requires shareholder to get consent from all other shareholders OR the corporation before selling. These are UNENFORCEABLE if consent can be withheld in the “sole and absolute” discretion of those holding it. Enforceable if consent cannot be unreasonably withheld.

93
Q

For a closely held corporation, who is liable for debts, wages or salaries if the corporation can’t pay?

A

The 10 largest shareholders are personally liable for all debts, wages, or salaries due to any employees. (But not independent contractors.)

94
Q

What is a “professional corporation” (PC)?

A

A corporation with a purpose that is statutorily limited to rendering a professional service. Shareholders must be members of the applicable profession.
Limits malpractice liability to the one personally responsible.

95
Q

What is an “S Corporation”?

A

A tax designation that allows shareholders to pay the company’s tax directly on their personal income tax returns. Corporation does not pay any corporate tax (so it is not double taxed).

96
Q

What is a “Limited Liability Company” (LLC)?

A

Business entity that combines features of a partnership with the limited liability of a corporation.

97
Q

How is an LLC created?

A

Filing “articles of organization” and adoption an “operating agreement.” NY requires an LLC to publish its articles of organization within 120 days of becoming effective once every week for 6 consecutive weeks in 2 newspapers in the LLC’s county.

98
Q

How are profits and losses allocated by default in an LLC?

A

According to the value of the money/property each member contributed to the LLC.

99
Q

When the certificate of incorporation and bylaws are silent, how must a corporate officer be removed?

A

By a shareholder vote.

100
Q

Does New York follow the “product line” exception for liability for defective products?

A

No.

101
Q

What are the exceptions to corporate preemption rights, even when the company was formed before Feb 28, 1998?

A

shares issued as…

(1) compensation to corporate directors, employees, etc.
(2) in exchange for property
(3) taken from corporate treasury

NYS Bar (24 decks)

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