Corporations Flashcards
Formation of Corporation
Under the BCL, there are two groups of people involved in the formation of a corporation, promoters and subscribers.
Promoter
Under the BCL, a promoter will:
- Prepare pre-incorporation contracts,
- Become incorporators,
- Reserve corporate name, AND
- File the certificate of incorporation
Subscriber
Under the BCL, a subscriber will:
- Sign subscription agreements, and
- Payment then entitles subscribers to issue corporate stock.
Contents of Certificate of Incorporation
Under the BCL, the certificate of incorporation must contain:
- Name of the corporation,
- Purpose for which the corporation was formed,
- Number of shares and par value, if any,
- Designation of classes of shares, if any,
- Designations of classes, if any, or preferred shares,
- Designation of secretary of state as agent of corporation for service of process,
- Name and address in state of registered agent, if any,
- Duration, if not perpetual,
- Provisions limiting liability of directors, if any,
- Any other provision.
Bylaws
Under the BCL bylaws may include provisions for approval of:
- Shares on stock exchange,
- Asset sale,
- Stock purchase,
- Merger,
- Consolidation.
Corporate Shares
Under the BCL, shares may be sold for:
- Money
- Property, tangible or intangible
- Services actually performed
- Binding obligation to pay or perform services (shares may be placed in escrow until paid for)
Shareholder Liability
Under the BCL, the rights of shareholders include:
- Elect directors, either:
i. By plurality of votes cast for each vacancy, or
ii. By cumulative voting, if provided in certificate of incorporation
- Approve decisions taken by the board of directors
- Preemptive rights, if specifically granted in the certificate of incorporation.
Preemptive Rights
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.
Board of Directors
Under the BCL, the Board of Directors:
- Manages the corporation, and
- Elected by plurality of shareholders at shareholder meetings.
Board of Directors Duties
Under the BCL, the duties of a director include loyalty and care.
Duty of Care of Directors
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.
Business Judgment Rule
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.
Duty of Loyalty
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.
Interested Director Transaction
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.
Standing to Sue and Types of Lawsuits Against a Corporation or Director
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:
- the failure to perform or violate the duties in the management and disposition of corporate assets committed to his charge,
- 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
- to set aside an unlawful conveyance, assignment, or transfer of corporate assets, where the transferee knew of its unlawfulness.
Corporate Opportunity Doctrine
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.
Shareholder’s Derivative Action
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.
Piercing the Corporate Veil
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:
- treating corporate assets as personal assets, known as commingling of funds,
- undercapitalization,
- alter ego, and
- a failure to maintain corporate formalities.
Under the BCL, courts will pierce the corporate veil to satisfy or compensate for:
- claims for wages (only after employees win judgment against the corporation),
- illegal conduct by a shareholder,
- assets needed to pay sales or income taxes, OR
- workers’ compensation benefits.
Dissolution of a Corporation
Under the BCL, there are two types of dissolution:
- Statutory and
- Non-Statutory.
Statutory Dissolution
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.
Judicial Dissolution
Under the BCL, Judicial Dissolution may be brought by:
- Attorney general,
- Directors, or
- 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.
Non-Statutory Dissolution
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.
Liability of Corporations for Pre-Incorporation Contracts
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.
Liability of Promoter for Pre-Incorporation Contracts
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.
