Corporations

Question 1

Promoter liability for pre-incorporation K

Answer 1

Personally liable, UNLESS:

1) third party knew corporation did not exist yet but agreed to look solely to corporation (BUT promoter must prove).
2) Post-incorporation novation.

Question 2

Corp liability for pre-incorp Ks

Answer 2

NOT automatically liable, NO duty to adopt.

How to adopt:

1) express: board takes formal action.
2) implied: with full knowledge, corp. accepts benefits of K.

Promoter NOT off hook unless novation.

Question 3

Who can be incorporator?

Answer 3

Any natural person over 18yo.

Incorporator has NO personal liability for CoI or pre-incorp. liabilities.

Question 4

Contents of Certificate

Answer 4

MUST:

1) Name, MUST include “corporation”, “limited’ , “incorporated”, or abbrev.
2) Purpose: usually generic.
3) Duration: limited, other presumed perpetual.
4) Office in NY OR registered agent.
5) Aggregate share and par value, including any class divisions.
6) Sec. of state designated to receive service of process.

CANNOT:

1) use words like “police,” “chamber of commerce.”
2) use “bank” or “insurance” without approval of relevant agencies.

MAY:

1) enumerate specific powers.
2) “exculpatory charter provision” indemnifying directors for negligence.
3) any other provisions validly related to business affairs.

Question 5

Organizational meeting

Answer 5

Incorporator adopts initial bylaws and appoints intial board of directors.

Question 6

“De Jure” corp.

Answer 6

= properly formed under law.

Properly filed CoI = conclusive evidence.

Question 7

Consequences of defective incorporation

Answer 7

If bad faith –> promoter is liable for all obligations.

If good faith attempt to register –> “de facto” corporation status:

1) MUST at least have prepared, signed, and tried to deliver CoI.
2) MUST operate as corporation.
3) MUST NOT be aware that incorp. reqts. have not been met.
- -> still get limited liability.

NY does NOT recognize incorporation by estoppel. 3p not estopped just because he thought he was dealing with corporation.

Question 8

Piercing the corporate veil

Answer 8

done if “necessary to prevent fraud or illegality or to achieve equity.” factors:

1) excessive domination.
2) business is run for shareholder personal gain.
3) corporation is being used to hide illegal business or perpetrate fraud.
4) disregard of corporate formalities: stock certificates, shareholder meetings, failure to elect directors, no board meetings, no documentation of corporate decisions.
5) corporation is inadequately capitalized.

Question 9

Ultra vires actions

Answer 9

• shareholder or state can sue to enjoin corp.

* corp. can sue its employees and directors to stop the action.

Question 10

Certificate of correction

Answer 10

Can change minor errors in CoI, BUT NOT name change.

Question 11

Certificate of amendment

Answer 11

If no shareholders yet, incorporator can file.

If shareholders, then then majority of outstanding shares must first approve.

Question 12

By-laws

Answer 12

• Intially adopted by incorporator, then amended by the Board
• power to amend is shared with shareholders ONLY IF the CoI specifies.
• Shareholders may ALWAYS adopt, amend, or repeal through majority vote.

Question 13

Annual shareholder meeting

Answer 13

MUST hold annual meeting on date specified in bylaws. Primarily to elect directors.

Shareholder can sue to force meeting.

Question 14

Special shareholder meetings

Answer 14

May be called by Board or anyone authorized in CoI or bylaws.

Question 15

Shareholder action by written agreement

Answer 15

In lieu of meeting, shareholders may unanimously agree to do something that they could have done at meeting.
-unanimity reqt. can be modified by CoI.

Question 16

Notice of shareholder meeting

Answer 16

60-10 rule: no more than 60, no less than 10 days before meeting.

• MUST include time, date, place.
• If special, must include purpose.

Shareholder may WAIVE notice in writing or by attending meeting. Otherwise, actions at meeting are void.

Question 17

Right to vote shares

Answer 17

• Shareholder at “record date” of meeting has right to vote.

EXCEPTIONS:

1) Beneficial owner of shares in publicly traded corps (via broker-dealer).
2) Fiduciaries other than trustee: receiver, administrator, guardian, consverator, etc., BUT NOT trustee.
3) Trustee can vote ONLY after shares are transferred to his name.

Question 18

Treasury shares

Answer 18

= repurchased shares held by corp. authorized and issued BUT NOT outstanding.

1) cannot be voted.
2) not deemed “outstanding shares” for purposes of establishing quorum.
3) not considered “assets” of corp.
4) can be resold for capital unless retired and cancelled.
5) retirement and cancellation reduced number of authorized shares.

Question 19

Votes per share

Answer 19

1 vote per share, UNLESS CoI provides otherwise.

Question 20

When are shareholders entitled to vote?

Answer 20

1) election of directors.
2) amendments to CoI.
3) sale of all or substantially all of corp.’s assets.
4) mergers and consolidations.
5) dissolution.

Question 21

Quorum rules

Answer 21

default = majority of outstanding shares entitled to vote. if seperate class vote, then majority of each class.

Specification in CoI: MAY specify less or more than majority, BUT NOT less than 1/3.

Quorum NOT broken if shareholder walks out.

Question 22

Separate class vote

Answer 22

If action would adversely affect a class of shares, that class entitled to class vote, in addition to general vote.

Question 23

Voting for directors

Answer 23

• Plurality of votes.
  1) 1 share = 1 vote, vote all shares for 1 director.
  2) cumulative voting (ONLY if provided by CoI): each shareholder gets her shares x outstanding board seats of votes. can spread votes out amongst multiple directors.
• classified board
• 2,3, or 4 classes.
• number of directors in each class must be nearly equal.

Question 24

Proxy voting

Answer 24

• if not expiration date specified, expire automatically after 11 months.
• shareholder may revoke by:
  1) in writing.
  2) turning in another later-dated proxy.
  3) attending shareholder meeting in person and voting.

NOT revoked by death or incompetence UNLESS, prior to proxy utilization, written notice is sent to proxy holder.

• Irrevocable proxy:
  1) holder has discretionary voting authority.
  2) shareholder can’t revoke.
• How to make proxy irrevocable:
  1) proxy states on its face that it’s irrevocable, AND
  2) “coupled with an interest” in the shares by the holder (proxy becomes revocable when interest is terminated).
• pledgee
• agreed purchasor
• creditor by credit agreement
• corporate officer by employment agrement
• shareholder voting agreement

Question 25

Voting pool

Answer 25

may be enforced by specific enforcement.

NO need to file with corporation.

Question 26

Voting trust

Answer 26

Legal ownership to trustee, who can vote shares. Valid for up to 10 years.

MUST be filed with corporation.

• Beneficial owners may still bring derivative actions and inspect corporate records.

Question 27

Shareholder right to inspection

Answer 27

1) during normal business hours
2) 5 day written notice
3) state “proper purpose.

• records subject to inspection:
  1) minutes of shareholder meetings;
  2) list of shareholders of record.
  3) copies of annual balance sheet and profit and loss statements.
  4) for all other records, must have (i) proper place, (ii) reasonable time, (iii) proper purpose.
• proper purpose = relates to shareholder’s interest in corporation.

Question 28

Shareholder derivative suits

Answer 28

• Shareholder is nominal defendant. Only corporation may recover, BUT plaintiff can get reasonable expenses.
• Who has standing:
  1) any record or beneficial owner, or holder of voting trust certificate, who
  2) was owner at both time of transaction AND when action is brought.
• Demand on board: must set forth with “particularity” how the plaintiff tried to get the board to act.
• futility exception: factors are (i) whether directors and disinterested and independent, (ii) whether business judgment rule applies.
• NO discontinuance or settlement without court approval.

Question 29

Fiduciary duties of controlling shareholders

Answer 29

• Applies when:
  1) selling controlling interest to outsider;
  2) seeking to eliminate other shareholders;
  3) receiving distributions denied to other shareholders;
  4) seeking to dissolve corporation.

Question 30

Board of directors

Answer 30

• Number set in bylaws. May be changed by:
  1) shareholder vote;
  2) in accordance with bylaws;
  3) by the board itself if shareholder’adopted bylaw allows.
• CoI may give one class of shareholders the right to elect a certain seat on the board.
• holdover director: if no election before term ends, then continue in office until successor is elected.
• Removal:
  1) for cause; self-dealing, taking corporate opportunity, waste, breach of duty. directors may remove other directors ONLY IF CoI or shareholder-adopted bylaws provide.
  2) without cause: ONLY IF provided for in CoI or shareholder-adopted bylaws.
  3) if elected through separate class vote, must be removed through same vote.
  4) if elected through cumulative voting, cannot be removed if votes cast against removal are sufficient to elect.
• Replacement: if vacancy due to death or expansion, either Board or shareholders may fill vacancy.

Question 31

Board meetings

Answer 31

• Director is entitled ONLY to notice of special meetings. May waiver in writing or by attendance, unless he objects.
• In lieu of meeting, may act by unanimous written consent.
• Quorum rules
• majority of entire board, without regard to vacancies (unless CoI or bylaws provide otherwise).
• must be present in person or via teleconference. NO proxies.
• level of approval = majority of directors present, UNLESS coi/bylaws provide otherwise.
• voting agreements between directors are NOT enforceable.

Question 32

Board committees

Answer 32

• created by vote of majority of entire board (not just those present at a meeting).
• Committees may NOT:
  1) fix compensation of directors, BUT can make recommendations.
  2) submit actions directly to shareholders for approval.
  3) fill board vacancies.
  4) adopt, amend, or repeal bylaws.
  5) amend or repeal any board resolution, UNLESS expressly allowed.

Question 33

Loans to directors

Answer 33

• may NOT make loans or guarantees for director personal obligations UNLESS:
  1) majority of shareholders approves at meeting (excluding shares held by the interested director); OR
  2) board approves loan after determining that it benefits corporation.

Question 34

Fiduciary duties of Directors

Answer 34

• Duty of care = act with knowledge and skill or an ordinarily prudent person handling his own property. Held responsible for specialist knowledge or skills. Director entitled to rely on:
  1) officers and employees;
  2) outside attorneys, accountants;
  3) board committees.
• Duty of loyalty: must act in manner reasonably believed in best interests of the corporation. Common violations:
  1) self-dealing;
  2) usurpation of corporate opportunity;
  3) entrenchment.

Question 35

Business judgment

Answer 35

Director is presumed to have met fiduciary duty when making a business decision, UNLESS demonstrable conflict of interest or bad faith exists.

Question 36

Self-dealing transactions

Answer 36

• Between corporation and:
  1) director herself;
  2) any person related to director;
  3) another corporation where director has substantial financial interests or sits on the board;
• Interested Director Statute: transaction must be cleansed by safe harbor rules:
  1) disclosure to board, board approval WITHOUT counting interested director.
  2) disclosed to board, unanimous approval by disinterested directors .
  3) disclosure to shareholders, shareholders vote to approve.
• Fairness: even if transaction is not “cleansed” by safe harbor rules, transaction will not be voided if FAIR and REASONABLE to the corporation.
• Burden of proof:
  1) if cleansed, shareholder may NOT challenge.
  2) if not cleansed, interested director must prove fair and reasonable.

Question 37

Usurpation of corporate opportunity

Answer 37

1) taking corporate opportunity without first:
a) giving notice to corporation; AND
b) waiting for corporation to reject.

• “Tangible expectancy test:”
  1) existing interest in the opportunity;
  2) expectancy of opportunity arising from existing right; OR
  3) actively seeking similar opportunity.
• “Line of business” test:
• current OR future line of business.
• key is competition.
• Other factors:
  1) relationship between offeror of opportunity and corporation.
  2) how director learned of opportunity;
  3) whether director is outside or inside director.

Question 38

Indemnification of directors

Answer 38

• Mandatory: required to reimburse expenses in successful defense of claim against director in role as director.
• Permissive: if director unsuccessful, may still indemnify ONLY IF:
  1) director acted in good faith with reasonable belief;
  2) if criminal, director had no cause to think he was committing crime;
  3) disinterested directors or an independent attorney they appoint must approve the indemnification.
• Prohibited indeminfication
• may NOT indemnify for shareholder derivative actions without court approval.
• may NOT indemnify for liability for receiving improper financial benefit.
• corporation may advance litigation expenses to director, BUT director must pay back if not entitled to indemnification.
• Can get insurance, EXCEPT for active and deliberate dishonesty.

Question 39

Director inspection rights

Answer 39

• May inspect and copy corporate records “for purposes related to the performance of her duties as a director.”

Question 40

Inside director

Answer 40

= both officer and director.

Question 41

Officers

Answer 41

• Appointment and removal: by board, unless otherwise specified. May be removed at any with or without cause, even if employment K says otherwise.
• Terms of office: 1 year, unless otherwise specified.
• Powers = as per bylaws OR board resolution.
• Duties: same as directors.
• Liability: only personally liable for purposeful tortious conduct OR conduct outside scope of agency.

Question 42

Procedure for merger

Answer 42

1) boards of each corporation must approve.

2) shareholders of each corporation must approve.
- for corporations formed on or before feb 22, 1998, 2/3 vote required.
- after that date, majority required.
- entitled to class vote if surviving corporation amounts to amendment to certificate that would have created right to class vote.

3) certificate of merger to Dept. of State.
- may also amend the surviving corporation’s certificate of incorporation.

Question 43

Short form merger

Answer 43

If parent owns 90%+ of subsidiary, may merge without approval of board or shareholders of subsidiary.

Question 44

Sale of all of substantially all assets

Answer 44

• Approval
  1) Board authorization;
  2) shareholder vote: 2/3 if before feb 28, 1998, 1/2 if after.
• Liabilities
  1) Seller remains liable for debts, including those associated with assets, UNLESS buyer agrees to assume.
  2) Buyer may be liable in four situations:
  i) explicit assumption;
  ii) de facto merger (same business + continuing identity of ownership);
  iii) mere continuation (same business + continuing identity of ownership);
  iv) designed to defraud creditors.

Question 45

Shareholder right of appraisal

Answer 45

• Available in 3 situations:
  1) Merger or consolidation where shareholder dissents.
  2) sale of all or substantially all assets, UNLESS sale is cash + dissolution.
  3) amendment to certificate materially and adversely affects the rights of shareholder and shareholder votes against it.

Question 46

Voluntary dissolution

Answer 46

• before feb 22, 1998, 2/3 of all outstanding shares.
• after feb 22, 1998, majority of shares.

NO board approval required.

• Must file Certificate of Dissolution, WITH consent of State Dept. of Taxation and Finance.
• dissolution effective on filing.

Question 47

Involuntary dissolution

Answer 47

• Attorney general may dissolve if:
  1) formed by fraud;
  2) illegal or fraudulent courses of business;
  3) abuses corporate power or takes ultra vires actions;
  4) failure to pay fees or taxes or to file required reports.
• Shareholders may sue if:
  1) Assets not sufficient to discharge liabilities;
  2) By resolution deeming dissolution beneficial to shareholders;
  3) holders of at least 50% of shares may petition based on director deadlock OR shareholder deadlock;
  4) for closely held corp., minority shareholder holding 20%+ can dissolve based on “oppressive conduct:”
• BCL = illegal, fraudulent, or oppressive actions toward minority shareholders.
• Courts: “substantially defeats reasonable expectations” of minority shareholder, which may include: (i) continued employment, (ii) receiving share of earnings, (iii) having voice in mgmt. (knowledge: majority shareholders must know or have reason to know of expectations).
• Buy-out right: within 90 days of petition on oppressive conduct, controlling shareholder may offer to buy shares for reasonable price.
• By majority of directors if:
  1) insufficient assets;
  2) dissolution beneficial to shareholders.

Question 48

Proceeds of dissolution

Answer 48

1) employee claims to wages;
2) outside creditors;
3) preferred shareholders;
4) common shareholders.

Question 49

Preferred stock

Answer 49

1) dividend preference: contractual. MUST receive divided before any dividend can be give to common shareholders.
2) Liquidation preference contractual right to payment on liquidation. must be paid in full before any payment is made to common shareholders.

Question 50

Valid consideration for stock

Answer 50

Valid consideration is any combo of:

1) Money
2) tangible or intangible property
3) labor of services actually performed for corporation’s benefit (including by promoters).
4) binding obligations to pay purchase price.

5) binding obligation to perform future
services.

• In absence of fraud, Board’s judgment as to value of goods or services is final.

Question 51

Par value of stock

Answer 51

Par value = minimum sale value.

Aggregate par value of outstanding shares = Stated Capital on the Balance sheet.

Holder of “watered stock” (less than par value) is liable to corporation for difference.

For shares without par value, Board has discretion about how to reflect them on stated capital.

Question 52

Stock subscriptions

Answer 52

= agreement to buy shares from corporation yet to be formed. MUST be in writing AND signed.

• irrevocable, UNLESS agreement states otherwise OR other subscribers consent to revocation.
• if no payment, corporation may sue for collection OR board may declare forfeiture 30 days after written demand for payment.

Question 53

Shareholder preemptive rights

Answer 53

• before feb 22, 1998:
• shareholders have preemptive rights for new offerings of common stock for cash UNLESS certificate expressly denies preemptive rights.
• after feb 22, 1998:
• shareholders do NOT have rights UNLESS certificate specifically grants them.

EXCEPTIONS: shareholders do not have preemptive rights when:

1) shares given as compensation to directors, officers, or employees;
2) exchanged for property rather than cash;
3) treasury shares.

Question 54

Share certificate

Answer 54

MUST be signed by:

1) chairman or vice-chairman of baord, or president or vice president; AND
2) secretary or treasurer.

Question 55

Distributions

Answer 55

• Authorization by board:
• board has discretion.
• shareholders cannot compel dividend UNLESS board abused discretion and acted in bad faith.
• Legal Capital Rule:
  1) insolvency determination: may NOT declare dividend if corp. is insolvent OR would be rendered insolvent.
• insolvent = unable to pay debts as they become due in the regular course of business.
  2) surplus/net profits determination:
• if positive surplus, then board can declare dividend up to surplus amount.
• if negative or no surplus, board can declare dividend up to net profits for fiscal year and/or previous fiscal year.
• Surplus = assets - liabilities - stated capital.

KEY: board discretion + legally payable funds.

• Stock dividends = from treasury stock = NOT subject to legal capital rule.
• Recipients determined by dividend record date.

Question 56

Sale of shares

Answer 56

NY forbids unreasonable restraints on sales of shares. contractual restrictions are valid if deemed reasonable.

1) “first option” = sell back to corp. before selling to 3p = reasonable.
2) “right of first refusal” = can only sell to 3p if first offers to shareholders OR corp. on same terms = reasonable.
3) “consent” = unenforceable UNLESS discretion is limited by phrase “consent cannot be unreasonably withheld.”
* Restrictions may be in certificate, bylaws, or shareholders agreement.

Question 57

Closely held corporation

Answer 57

1) handful of shareholders who are friends and/or family.
2) shareholders are also directors and officers;
3) not publicly traded;
4) transferability of shares restricted via shareholders agreement.

• 10 largest shareholders are personally liable for debts, wages, or salaries owed to employees if corp. can’t pay.

Question 58

Professional Corporation

Answer 58

= limited professional business.

Members personally liable ONLY for own malpractice.

Question 59

S Corporation

Answer 59

For income tax purposes, profits and losses are allocated directly to shareholders.

Question 60

LLC

Answer 60

“incorporated partnership”

Pass-through taxation.

• Creation:
  1) file articles of organization with the state.
  2) adopt an operating agreements, which supercedes statutory default rules.
  3) publication requirement: within 120 days or filing, must public a copy of its articles once a week for 6 consecutive weeks in 2 newspapers located in county of LLC’s offices.
• membership: no new members without majority consent UNLESS operating agreement otherwise specifies.
• management
  1) direct management by members.
  2) centralized management.
• Profits and loss allocated according to paid-in value of each member.
• Transfer only includes financial or economic rights.
• Dissolution
  1) merge with other entity
  2) dissolve as per operating agreement
  3) member suit for dissolution when “no longer practicable to carry on business”.
• Derivative suits permitted