Corporations

Question 1

Formation of Corporation

Answer 1

Under the BCL, there are two groups of people involved in the formation of a corporation, promoters and subscribers.

Question 2

Promoter

Answer 2

Under the BCL, a promoter will:

1. Prepare pre-incorporation contracts,
2. Become incorporators,
3. Reserve corporate name, AND
4. File the certificate of incorporation

Question 3

Subscriber

Answer 3

Under the BCL, a subscriber will:

1. Sign subscription agreements, and
2. Payment then entitles subscribers to issue corporate stock.

Question 4

Contents of Certificate of Incorporation

Answer 4

Under the BCL, the certificate of incorporation must contain:

1. Name of the corporation,
2. Purpose for which the corporation was formed,
3. Number of shares and par value, if any,
4. Designation of classes of shares, if any,
5. Designations of classes, if any, or preferred shares,
6. Designation of secretary of state as agent of corporation for service of process,
7. Name and address in state of registered agent, if any,
8. Duration, if not perpetual,
9. Provisions limiting liability of directors, if any,
10. Any other provision.

Question 5

Bylaws

Answer 5

Under the BCL bylaws may include provisions for approval of:

1. Shares on stock exchange,
2. Asset sale,
3. Stock purchase,
4. Merger,
5. Consolidation.

Question 6

Corporate Shares

Answer 6

Under the BCL, shares may be sold for:

1. Money
2. Property, tangible or intangible
3. Services actually performed
4. Binding obligation to pay or perform services (shares may be placed in escrow until paid for)

Question 7

Shareholder Liability

Answer 7

Under the BCL, the rights of shareholders include:

1. Elect directors, either:

i. By plurality of votes cast for each vacancy, or
ii. By cumulative voting, if provided in certificate of incorporation

2. Approve decisions taken by the board of directors
3. Preemptive rights, if specifically granted in the certificate of incorporation.

Question 8

Preemptive Rights

Answer 8

A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corporation by being offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase.

Under the New York BCL, for corporations formed after February 22, 1998, shareholders do not enjoy preemptive rights unless such rights are explicitly granted in the corporation’s certificate of incorporation.

Preemptive rights also do not exist when shares are issued for consideration other than cash OR

when the shares issued are authorized shares included in the certificate of incorporation and are sold within two years of incorporation.

Question 9

Board of Directors

Answer 9

Under the BCL, the Board of Directors:

1. Manages the corporation, and
2. Elected by plurality of shareholders at shareholder meetings.

Question 10

Board of Directors Duties

Answer 10

Under the BCL, the duties of a director include loyalty and care.

Question 11

Duty of Care of Directors

Answer 11

Under the BCL, the directors must perform their duties in good faith and with that degree of care that an ordinary prudent person in like position would use under similar circumstances. Courts will normally apply the business judgement rule.

Question 12

Business Judgment Rule

Answer 12

Under the BCL, the court will defer to the judgment of the directors in matters not involving self-dealing or self-interest on the assumption that they acted on an informed basis, in good faith, and in the corporation’s best interest.

The courts use the Business Judgment Rule to abstain from getting involved in business decisions of the corporation.

Question 13

Duty of Loyalty

Answer 13

Under the BCL, the directors owe a duty of loyalty to the corporation. Courts will not apply the business judgment rule to shield the directors when self-dealing occurs.

Question 14

Interested Director Transaction

Answer 14

Under the BCL Interested Director Transaction, no transaction between the corporation and an entity in which a director has an interest shall be voidable where the facts are disclosed and

a) the proposal carries the board of directors with only the non-interested directors voting for it, if that is not possible, where
b) the non-interested directors vote unanimously to approve the proposal, or where
c) the shareholders vote to approve it and
d) if none of these conditions are met, the corporation can avoid the transaction unless the interested director proves that the transaction was fair and reasonable as to the corporation at the time of approval.

Question 15

Standing to Sue and Types of Lawsuits Against a Corporation or Director

Answer 15

Under the BCL, the corporation, an officer, director or shareholder, may bring suit against a director to account for official conduct in the following cases:

1. the failure to perform or violate the duties in the management and disposition of corporate assets committed to his charge,
2. the acquisition by himself, transfer to others, loss or waste of corporate assets due to any failure to perform or other violation of his duties, AND
3. to set aside an unlawful conveyance, assignment, or transfer of corporate assets, where the transferee knew of its unlawfulness.

Question 16

Corporate Opportunity Doctrine

Answer 16

Under the BCL, director owes the corporation a duty of loyalty, which means that the director, in his dealings with the corporation, must act in good faith and with the honesty and fairness that the law imposes on fiduciaries. Under the New York BCL, usurpation of a corporate opportunity is a breach of the duty of loyalty.

A corporate opportunity is any opportunity in which the corporation has an interest/expectancy in OR if it is in the corporation’s line of business.

A corporate opportunity is usurped when a director or officer profits from any transaction that a reasonable director would anticipate is of interest to the corporation, UNLESS:

(1) the director informs the board of the opportunity AND
(2) the board rejects it. If a director is found to have breached her duty of loyalty, she is liable to the corporation for its damages and lost profits caused by the breach.

Question 17

Shareholder’s Derivative Action

Answer 17

Under the BCL, in a derivative suit, a shareholder is suing to enforce the corporation’s claim, not his or her own personal claim. The suit must be one in which the corporation could have brought itself and has harmed the corporation in some way, not merely the plaintiff-shareholder.

Question 18

Piercing the Corporate Veil

Answer 18

Under the BCL, the corporate veil may be pierced when a shareholder has exercised complete dominion over the affairs of a corporation and used that control to commit a fraud or wrong against a third party. The factors a court will evaluate include:

1. treating corporate assets as personal assets, known as commingling of funds,
2. undercapitalization,
3. alter ego, and
4. a failure to maintain corporate formalities.

Under the BCL, courts will pierce the corporate veil to satisfy or compensate for:

1. claims for wages (only after employees win judgment against the corporation),
2. illegal conduct by a shareholder,
3. assets needed to pay sales or income taxes, OR
4. workers’ compensation benefits.

Question 19

Dissolution of a Corporation

Answer 19

Under the BCL, there are two types of dissolution:

1. Statutory and
2. Non-Statutory.

Question 20

Statutory Dissolution

Answer 20

Under the BCL, statutory dissolution occurs either voluntarily or non-voluntarily.

Voluntary Statutory Dissolution occurs when there is a statutory vote of 2/3 of all authorized and outstanding shares. However, if the vote occurs after 2/22/98, only a majority of the votes of outstanding shares is needed.

Alternatively, the certificate of incorporation may provide that any shareholder or holders of specified percentage of shares may require dissolution at will or upon the occurrence of a specified event.

Using either method of voluntary statutory dissolution, a certificate of dissolution must be filed with the Secretary of State.

Question 21

Judicial Dissolution

Answer 21

Under the BCL, Judicial Dissolution may be brought by:

1. Attorney general,
2. Directors, or
3. Shareholders may petition where:

a. 10% or more call a meeting and a majority vote for petition for dissolution,
b. Holders of 1/2 of the voting shares vote, where directors are deadlocked or the shareholders cannot elect,
c. Any shareholder may present petition where shareholders cannot act, OR
d. Holders of 20% or more of shares not listed on an exchange or regularly quoted OTC may petition on grounds of illegal, fraudulent, or oppressive actions towards them, or looting.

Question 22

Non-Statutory Dissolution

Answer 22

Under the BCL, non-statutory dissolution will occur when any number of shareholders bring an action for dissolution where the management of the corporation is reaching its fiduciary.

Question 23

Liability of Corporations for Pre-Incorporation Contracts

Answer 23

A promoter is one who acts on behalf of the corporation to legally form the corporation. Under the New York BCL, a corporation is not liable on pre-incorporation contracts entered into by a promoter unless the corporation expressly or impliedly adopts the contracts post- incorporation. A corporation can expressly adopt a pre-incorporation contract by board action.

Implied adoption occurs when the corporation:

(1) knows or has reason to know of the material terms of the contract AND
(2) accepts the benefit of the contract.

Question 24

Liability of Promoter for Pre-Incorporation Contracts

Answer 24

A promoter is one who acts on behalf of the corporation to legally form the corporation. Under the New York BCL, a promoter can be held liable on a contract until a novation is executed. A novation is a modification to an existing contract where the original parties and a new party agree to release one of the original parties and replace him with the new party. A novation discharges all of the obligations and liability on the contract as to the party released.

Question 25

Requirements for Bringing a Derivative Suit

Answer 25

To bring a derivative suit under the New York BCL, the plaintiff-shareholder must meet the following requirements:

(1) he must own the corporation’s stock at the time the cause of action accrued;
(2) he must own the stock by and through entry of judgment;
(3) he must adequately represent the interests of the corporation;
(4) he must post a bond for the corporation’s reasonable litigation expenses, unless he owns 5% or more of the corporation’s shares or his shares are worth more than $50,000 (the purpose of this requirement being to deter strike suits); AND
(5) he must make a demand upon the board of directors to sue or establish why such demand would be futile.

Question 26

Requirements for Showing that a Demand on the Board of Directors Would Be Futile in a Derivative Action

Answer 26

For a demand upon the board of directors to be deemed futile, it must be the case that:

(a) the board is dominated or composed of interested directors,
(b) the board failed to adequately inform itself of the issue at hand, or
(c) the breach is so egregious that it couldn’t possibly be the result of sound business judgment. The damages awarded in a derivative suit will be paid to the corporation (not the shareholder), but the shareholder can recover the reasonable cost of the litigation. However, in certain instances the court will order the damages to be directly paid to the shareholder(s) if payment to the corporation would benefit the defendants.

Question 27

Judicial Dissolution: 20% or More Minority Shareholder Rights

Answer 27

Under the New York BCL, a minority shareholder owning 20% or more of a corporation’s stock may petition the court to dissolve the corporation if he can show that the controlling shareholders are:

(1) engaging in fraudulent activity,
(2) committing waste, OR
(3) acting in a way that is oppressive to the minority shareholder, such that the minority shareholder is blocked from receiving his anticipated return on investment.

Within 90 days of the petition, however, the controlling shareholders may offer to purchase the minority shareholder’s shares at a reasonable price to avoid dissolution. If the parties cannot agree on a reasonable price, the court may set one. The court could require the company to buy out the complaining shareholder in a close corporation since there is no public market for the shares, and since the shares are not traded on an exchange.

Question 28

Personal Liability of Partners

Answer 28

Under New York Partnership Law, the general partners of a partnership are personally liable for the debts and obligations incurred by the partnership. However, New York Partnership Law places a limitation on the personal liability of incoming partners. An incoming partner is liable only to the extent of his capital contribution for debts incurred by the partnership prior to his entry.

Question 29

Assignment of Partnership Interests

Answer 29

Under New York Partnership Law, a partner may only transfer his interest in the share of the profits of the partnership. All other incidents of partnership ownership, such as the right to access partnership property and the right to participate in management of the partnership belong to the partnership, and CANNOT be transferred. For an assignee of a partnership interest to become a partner in the business all partners must consent, unless a written partnership agreement states otherwise.

Question 30

Definition & Requirements to Form a Partnership

Answer 30

There are no formalities required to create a general partnership. A partnership exists when two or more persons operate a business as co- owners for profit.

Question 31

Personal Liability of Partners

Answer 31

Under New York Partnership Law, the general partners of a partnership are personally liable for the debts and obligations incurred by the partnership. However, New York Partnership Law places a limitation on the personal liability of incoming partners. An incoming partner is liable only to the extent of his capital contribution for debts incurred by the partnership prior to his entry.

Question 32

Assignment of Partnership Interests

Answer 32

Under New York Partnership Law, a partner may only transfer his interest in the share of the profits of the partnership. All other incidents of partnership ownership, such as the right to access partnership property and the right to participate in management of the partnership belong to the partnership, and CANNOT be transferred. For an assignee of a partnership interest to become a partner in the business all partners must consent, unless a written partnership agreement states otherwise.