Corporations

Question 1

Corporations Essay Analysis

Answer 1

1) who is acting?
2) how have they acted?
3) did they have authority to act?
4) who is complaining?

Note: the answers to these questions leads you to what rule to apply.

Question 2

4 Remedies to Remember

Answer 2

1) Officers (first line of defense)

2) Derivative Suit

Question 3

Duty of Care

Answer 3

Officers and directors must act with good faith and with that degree of diligence, care, and skill which ordinary prudent persons would exercise under similar circumstances

Question 4

Business Judgment Rule

Answer 4

A ct will not second guess the business decisions of a corp UNLESS there is some evidence of bad faith, conflict of interest, or self-dealing

NO BREACH of duty if relying on corporate documents–Dir or officer not L if she, in good faith, relied on documents, info, or reports prepared specifically for the firm by outside experts, or an in-house expert

Question 5

Shareholder Liabilities

Answer 5

Shareholder Liability–SH not personally L

-SHs of a professional corp not personally L for corp obligations. BUT pro SHs are personally L for their own neg/neg of person under supervision.

Question 6

SH Right to Inspect Books

Answer 6

Any SH has right to inspect the books/records of corp for any PROPER PURPOSE.

• “proper purpose” – any purpose that is reasonably related to a persons interest as a SH
• Stat Right–SH has right under BCL to inspect corp books, which includes minutes of corp meetings, and list of directors and officers. IF crop refuses to provide SH can file an order to SHOW CAUSE requesting a judicial order to compel inspection.
• CL Right–in addition to BLC right there is a CL right to inspect the books upon showing of a proper purpose, proper place, and reasonable time (broader than BCL–covers nearly any corp book). IF corp refuses under CL right SH must bring an Art 78 action.
• Affidavit–a SH may be req to submit an affidavit stating that the person seeking inspection has not, within 5 years sold or offered for sale any list of SHs of any corp and that her purpose is not adverse to the corp.

Question 7

SH Right to Derivative Action

Answer 7

a derivative action brought by SHs for benefit of corp. Corp is named as D and recovery goes to corp after expenses are paid. Action cant be brought by SHs who agreed to the acts complained of or for a wrong done in their individual capacity.

SH has to meet following req:

1) STANDING–SH has standing if she owns stock when the injury occurred and continues to own stock through the suit OR the stock devolved on the by operation of law.
2) DEMAND–a SH must demand action from the board unless such demand would be futile. If board refuses SH can bring action. In complaint SH must outline steps taken to convince board OR why doing so would be futile. Demand is futile when:
(a) interest–the maj of the board is interested or under control of an interested director
(b) uninformed–the board did not inform itself of the transaction to a reasonable extent under the circumstances
(c) egregious transaction–transaction is so egregious on its fact that it could not be the basis of sound business judgment
3) Security–post a security (waived if SH owns at least 5% of corp stock or stock value is over $50k)

NOTE: a SH with over 20% of corp stock may petition ct for dissolution if there has been oppressive or improper conduct (fraud, illegality, waste)

Question 8

SH Right of Voluntary Dissolution

Answer 8

Gen Rule: voluntary dissolution occurs when dissolution is proposed by the board and accepted by SHs.

AUTHORIZATION–after board has passed a resolution on dissolution for a valid legal reason not in contradiction with the certificate of incorporation, then for corps:

(1) in existence on or before 2/22/98: 2/3 of shareholders must approve
(2) in existence after 2/22/98: a maj of SHs can authorize the dissolution. The Cert of Incorp may require a higher number BUT can never be less than statutory %. Cert of Incorp can also have a provision requiring dissolution upon the happening of a specific event–if it is not included you need unanimous SH consent.

Question 9

Judicial Dissolution–AG

Answer 9

The AG may seek dissolution for fraudulent misrep in the corps formation, or for abuse of the powers granted to it by law, or for continuing fraudulent or illegal conduct. Judicial dissolution is ct ordered (non-voluntary).

Question 10

Judicial Dissolution, Insolvency, and Benefit to SHs

Answer 10

10%+ of SHs (or less if in Cert of Incorp), OR the BoD may call a SH meeting to consider dissolution if either finds the corp is INSOLVENT (assets not sufficient to discharge L) or DISSOLUTION BENEFICIAL TO SHs.

-Appropriate maj still req to approve the dissolution

Question 11

Judicial Dissolution–Deadlock

Answer 11

The SH representing at least 50% OF ALL SHARES enitled to vote in an election of directors may present a petition to dissolve the corp on the following grounds:

(1) DIVIDED DIRECTORS–the directors are so divided that the votes req for action by the board cannot be obtained
(2) SH DIVIDED–the SHs are so divided that the votes necessary to elect directors cannot be obtained
(3) DISSENSION–there is internal dissension and two or more factions of SHs are so divided that dissolution would be beneficial to SHs

Question 12

Judicial Dissolution–Special Circumstances: 20% Minority SH Action to Dissolve Corp

Answer 12

• SH representing at least 20% of shares are entitled to vote may petition a ct for dissolution under two different theories:
  (1) SH must allege either (a) illegal, fradulent, or wasteful conduct on the part of the directors, OR (b) oppressive conduct by the directors–oppressive conduct being unreasonable conduct that gets at and harms the central reason for which the oppressed invested in the corp.
  (2) the directors are committing waste, looting, or improper non-corporate diversion of corp assets or property

Question 13

Judicial Dissolution–Special Circumstances: Purchase of Shares

Answer 13

Any SH may, within 90 days of filing the petition under the BCL 1104(a), purchase the petitioners shares at their fair value and upon terms approved by the ct

Question 14

Effects of Dissolution

Answer 14

1) Winding Up–once dissolution granted the corp must begin the process of “winding up” which involves discharging contracts, selling assets, paying off liabilities, and doing any other necessary act.
2) Reimbursement–Once debt holders have been paid off, SHs may be reimbursed if anything remains after paying off debt holders. If all debtholders and SHs are paid off then SHs may receive the remaining assets, but these must be preserved for the potential benefit of creditors.

Question 15

Creditor’s Claims and Survival of Remedies

Answer 15

NOTICE OF DISSOLUTION–once a dissolution order has been issued, the corporation is required to publish notice of the dissolution in a local newspaper for two consecutive weeks.

• The corp may set a date, not earlier than 6 months before publication of notice, after which if a creditor has not provided detailed information of its claims then its claims will be barred.
• contrast this with the interests of directors, officers, and SHs whose claims survive the dissolution.

Question 16

Constructive Trusts

Answer 16

anytime someone ends up with property that does not belong to them we can institute the equitable remedy of constructive trust which essentially says the person holding the property is holding it ins trust for the proper person

Question 17

Who is Acting?–Promoters (pre-incorporation)

Answer 17

General Rule: corp not L for Ks entered into before incorporation. A promoter K in his name or in name of unformed corp is personally L for Ks UNLESS promoter and 3rd party agree to bind the corp under the K. Promoters owe a fid duty to each other and if one breaches may be L to the other

ADOPTION–corp may EXPRESSLY or IMPLIEDLY adopt a promoter’s K (impliedly only if officers had full knowledge). A new K is created on the date that the K is adopted by the corp

RATIFICATION–A corp cannot ratify a promoter’s K

NOVATION–A novation occures when the corp expressly adopts the K and replaces the promoter.

Question 18

Who is Acting?–Corporation (post-incorporation)

De Jure Incorporation

Answer 18

is a corp formed following the procedures set forth in the BCL (corps = creates of statute), and consequently possess all the rights, powers, duties, and liabilities of corp

Question 19

Formation of a Corporation

Answer 19

A corp comes into existence when the Sec of State files the cert of incorp which must include:

(1) Name of Corp–must include “limited” or “corporation” or abbreviation
(2) Its purpose
(3) Its capital structure (# of shares, par or no par value, classes if any, preferred if any, rights associated w each class)
(4) Voting or Quorum req (if above maj req)
(5) Restrictions on stock transfer
(6) SH agreements
(7) Any terms of dissolution

-Once incorporated incorporators hold a org meeting where they name directors and issue initial shares. If corp not properly formed, this it is defective and SH owners may become personally L to creditors

Question 20

Professional Corp

Answer 20

A corp consisting of persons in a regulated profession (MDs/lawyers). Only ppl of the profession listed in the cert of incorp may be directors, SHs, or officers)

-only L for their neg or the neg of ppl directly under their supervision NOT for general corp debts OR the neg of other SHs (professionals)

Question 21

Who is Acting?–Corporation (post-incorporation)

De Facto Incorporation

Answer 21

If all the legal requirements of the BCL are complied with but the Sec of State does not actually file the certificate, the corp may be de facto.

• It will be deemed to posses the same rights, powers, duties, and liabilities of a de jure corp.
• De facto crops are rare in NY

Question 22

Actions of Corporation

Answer 22

A corp can only act though its agents (employees, officers, and directors)

Question 23

Who is Acting?–Shareholders (post-incorporation)

Answer 23

SHs are the OWNERS of the corp and benefit from its limited liability status (not personally L). SH not L to creditors in K or tort.

• HOWEVER the CORP VEIL (limited L) can be PIERCED in certain circumstances
• SH might also be personally L when they are the controlling SHs of a parent corp of a subsidiary or in a close corp and there is a breach of fid duty.

SH POWERS–limited to electing/removing directors and/or officers and approving important transactions for the Corp (sales of assets, mergers, etc). Also possess a default right to call special meetings and revise the Cert of Incorp

Question 24

Who is Acting?–Directors (post-incorporation)

Answer 24

Directors run the corp but day-to-day mgmt is normally left to officers. Directors have limited personal L UNLESS the corp veil is pierced and/or there is a breach of fid duty.

Question 25

Election of Directors

Answer 25

elected by a plurality vote–director with the highest number of votes wins. no absolute maj necessary

CUMULATIVE VOTING–if it is noted in the cert of incorp the directors may be elected by cumulative voting. The number of votes each SH has is determines as follows:

of shares held x # of directorships up for vote

Cert of Incorp may limit voting to one class of SHs

Question 26

Third Parties and Enforceability of Terms

Answer 26

These items need to be in the Cert of Incorp in order to be enforced against 3rd parties:

(1) if the voting of directors is to be cumulative
(2) If SHs rather than directors are to fix consideration for no par value shares
(3) IF voting or quorum req are to be increased above maj vote
(4) Restrictions on shares:
- a res on preemptive rights for corp in existence 2/22/98
- a restriction on selling/transferring stock
- an agreement by SH to vote a particular way
- a provision that calls for dissolution

Question 27

Piercing the Corp Veil

Answer 27

• When you want to ignore the corp form and hold a SH personally L–ie you are not treating the SH and the corp as separate entities.
• NY cts will pierce the corp veil where the corp was set up to defeat creditors OR where the ct needs to achieve equity or prevent fraud or other abuses.
• Bases for disregarding corp veil:
  (1) If corp used for Fraud, Illegality, or Tortious Conduct
  (2) DUMMY CORP if used for personal gain and not benefiting copr
  (3) SH DOMINATION–interference so egregious that the principles of agency have become meaningless (Factors indicating: only one SH, interlocking directorate, SH gives personal advances, insufficient funds to satisfy creditors, lack of capitalization at incorp)
  (4) Subsidiary-Parent–where there is a parent-subsidiary and the subsidiary exists solely to serve the parent
  (5) Ct will pierce to Preserving Creditors Rights

Question 28

Statutory Bases for Piercing Corp Veil

Answer 28

(1) in a closely held corp the ten largest SHs are responsible for unpaid wages, promised benefits, etc
(2) corp officers are strictly crim L when a worker is injured and the officers have failed to obtain workers comp insurance
(3) financial officers are L for unpaid sales and income taxes

Question 29

Controlling SHs Duty of Loyalty to minority SHs

Answer 29

NY CL Rule–SHs dont have a duty of loyalty to other SHs. BUT controlling SHs have fiduciary duties to minority SHs (similar as between partners). Rebuttable presumption duty breached in the following situations:

(1) SQUEEZE OUT–controlling SHs cause the corp to issue more stock but deny purchase rights to minority
(2) FREEZE OUT–a minority SH wants to sell her stock but the Maj agrees to buy them below the mkt rate
(3) SHIFT IN BALANCE OF POWER–maj causes shift in balance of power, usually by causing the corp to issue more shares or repurchase shares in a way that dilutes the minority SHs interest in the corp–> if controlling SH causes a shift in power he must show a COMPELLING BUSINESS PURPOSE for the move and must also demonstrate there was NO OTHER WAY to achieve business objective
(4) Denial of Employment–if a minority SH is fired or denied benefits and/or wages
(5) FRAUD, ILLEGAL CONDUCT, WASTE of corp assets–unreasonable conduct which defeats the SHs purpose for investing in the corp. SH with at least 20% of voting stock may petition ct for dissolution.

Question 30

Duty of Loyalty–Close Corps and SH Agreements

Answer 30

closely held corps may also make use of SH agreements or share transfer restrictions (usually to keep control within family or other group)–ct will enforce as long as they are reasonable.

NOTE: even a SH agreement that is unreasonable b/c it infringes on traditional directorial powers can still be enforced if originally included in the certificate of incorporation or later added by all SHs

Question 31

SH Meetings

Answer 31

SH have a right to meet and vote on corp activities–this right can not be taken away

ANNUAL–SHs meet once a year on a date fixed in the bylaws. Primary purpose: election of directors and approve major corp transactions

SPECIAL–called when SHs are req to approve a board decision or corp action. This meeting can be called by the board, SHs (unless limited in cert of incorp), and anyone else appointed by the Cert of Incorp or the Bylaws

NOTICE: proper notice is req unless the SH attends w/o objection or submits a written waiver before the meeting. Only the business listed in the notice can be discussed. Board acts a VOID if there is no notice or the board acts outside the stated purpose of the meeting.

Question 32

Director Meetings

Answer 32

REGULAR–unless the bylaws require notice, regular meetings can be held w/o notice if the time and place are fixed by the bylaws or the board. most business doe at regular meeting.

SPECIAL–Notice req but a director may waive notice in writing (before or after meeting) or by attending w/o objection (think informal meetings)

Question 33

Director Meetings–Informal Action

Answer 33

Gen rule is that directors acting separately and not collectively at a meeting of the board cannot bind the corp. however, unless specifically limited by the cert of incorp, or bylaws, any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, and w/o a meeting.

Question 34

Director Meetings–Estoppel

Answer 34

Directors can be estopped from challenging a board decision on technical grounds if they were involved in making that decision

Question 35

What is a valid meeting?–Quorum

Answer 35

(1) SHs–a majority of voting shares is needed. Quorum is determined at the beginning of meeting.
- The quorum can be DECREASED as low as 1/3
- quorum can be increased but only if stated in cert of incorp

(2) Directors–a maj of the board (total number of directors which the corp would have if there were no vacancies) shall constitute a quorum for the transaction of business except that the certificate of incorp or the bylaws may fix the quorum at less then a majority of the board but not less then one third.

Question 36

Was there a sufficient number of votes in favor of the meeting?

Answer 36

DIRECTORS–a vote of MAJ or directors PRESENT is necessary

SHs–1 vote is allocated per SH except treasury shares (cant vote). SHs must approve certain board actions. Ex things needing SH approval: Cert of Incorp, loans to director, and the sale or exchange of substantially all of the corp assets.

• MAJ VOTE–is needed for most items of business except voting on amendments to the charter to change supermajority provisions, which requires a 2/3 vote. For Corps formed on or before 2/22/98 a 2/3 vote is required for all items of business.
• RECORD DATE–to vote a SH must be a stockholder by the record date. If the record date is not set in Cert of Incorp the BoD may set (must be between 60 and 10 days before a regular meeting)
• UNANIMOUS WRITTEN CONSENT–if any action may be taken by SHs during a meeting, then the same action can be undertaken and approved by the written consent of all the SHs entitled to vote, or less if the Cert of Incorp states otherwise

Question 37

Did they have authority to Act?

Answer 37

Statutues and CL–control what can be put in the Cert of Incorp and Bylaws

Cert of Incorp–controls the bylaws. The bylaws cannot address issues such a supermajorities, class voting, or quorum requirements, or any provision limiting the board’s authority, which must be in the Cert of Incorp.

Question 38

SH Right to Competition

Answer 38

SHs may compete with their corp, subject to fid duties. The key is that such competition is generally limited to SHs who are not in control of the corp.

Question 39

SH Right of Appraisal

Answer 39

SH can force the corp to buy their stock when they disagree with a fundamental stock right being modified or changed. The corp must pay fair mkt value for the shares.

Under BCL appraisal rights exist in favor of SHs who:

(1) do not agree to proposed merger or consolidaiton
(2) do not agree to sale, lease, exchange of all or substanitally all of the assest or a share exchange of the corp
(3) are adversely affected by amendments to the certificate of incorp which:
- alter or abolish any preferential right of shares having preferences
- create, alter, or abolish any right in respect to the redemption or purchase of shares
- alter or abolish any preemptive of the SH to acquire shares or other securities
- exclude or limit the right of the SH to vote on any matter except as such right may be limited by the voting rights given to new shares then being authorized of any existing or new class

Question 40

Preemptive Rights

Answer 40

If they exist the holders of shares that have been adversely affected by the issuance of addiitonal shares must be given the opportunity to purchase either new shares or securities convertable into shares to maintain their balance of power. For Corps formed:

(1) On or after 2/22/98 there are NO preemptive rights UNLESS provided in Cert of Incorp
(2) Before 2/22/98 there ARE preemptive rights UNLESS they are so denied in the Cert of Incorp

Note: Preemptive rights do not apply to:

• Treasury Shares (the shares of a corp which are previously issued and now re-acquired by the corp)
• Shares to be issued by the board to effect a merger or consolidation. SH get appraisal rights.
• Shares offered or subjected to right or options for consideration other than cash
• Shares issued to satisfy conversion rights or option rights granted by the corp
• Shares issued under a plan or reorg under an act of Congress.

Question 41

SH’s Right to Merge and Consolidate

Answer 41

This requires initial Board approval in the form of a “plan to merger.” If the corp was formed:

(1) ON or before 2/22/98 2/3–SH approval is needed
(2) After 2/22/98–Maj approval is needed

NOTE: a SH of the non-surviving corp who is entitled to vote and does not assent is entitled to payment of the fair value of his share (appraisal rights) as long as shares are not listed on a national securities exchange or NASDAQ

Question 42

SH’s right to declare dividends

Answer 42

Once dividends are declared SHs become creditors of the corp. The right to declare dividends belongs to the board and courts will not interfere unless there is some proof of fraud by the board.

Question 43

SH’s right to sell stock

Answer 43

general right to sell stock UNLESS it is restricted

Question 44

SH’s right to remove directors

Answer 44

Dir can be removed FOR CAUSE or W/O CAUSE

(1) For Cause–includes: self-dealing, usurp corp opportunities, commit waste of crop assets (breach of duty of loyalty).
- SHs can vote to remove Dir for cause, this right may be conferred on the board if in Cert of Incorp or Bylaws

(2) W/o Cause–only permissible if in bylaws or cert of incorp. In a class voting situation a Dir can only be removed by the SHs that elected her.
- The Board can NEVER remove directors w/o cause

NOTE: if an officer (Pres, VP, etc) is appointed by the board, then the board may remove him w/ OR w/o cause.
-IF elected by SHs then ONLY SHs can remove. BUT a board member can SUSPEND officers

Question 45

Replacing Directors

Answer 45

filling vacancies depends on how the officer was removed.

• Replacing Dir removed w/o cause–vacancy can only be filled by SH vote UNLESS Cert of Incorp/Bylaws says otherwise
• Replacing Dir removed w cause–vacancy may be filled by board vote

Question 46

SH Right to Dissolve the corp

Answer 46

• SHs must approve any dissolution proposed by the BoD.

- SHs can force a judicial dissolution of the corp under certain circumstances.

Question 47

Duty of Loyalty

Answer 47

Officers/Dir have a duty to act “in good faith.” Directors and officers have fid obligations and must act wit morality, fairness, and honesty.

NOTE: b/c DoL cases involve conflicts of interest the BJR cannot apply once the P has shown some facts supporting an allegation of conflict of interest. The presence of such a conflict would override and make any business decision taken in the context seem tainted.

NOTE: If the cause of action against a director is based on a specific offense listed in the BCL, then the Dir are jointly and severally L–each Dir is also entitled to compensation or contribution from the other co-D Dir under NY CPLR when he pays more than his share of the judgement.

Question 48

Violations of the Duty of Loyalty by Directors

Answer 48

(1) DIRECT COMPETITION–btw corp and the Dir or an entity she controls;
(2) FRAUD;
(3) SEFL-DEALING–includes interested Dir transactions, which occurs when a Dir/officer contracts with the corp, or occupies managerial or controlling ownership roles in a parent and subsidiary or two partner corporations (such as a joint venture), and induces a transaction (often favorable to one corp), using her managerial role or ownership stake Interested Dir transactions are VOIDABLE.
- Dir who are engaging in interested transactions are required to get APPROVAL from the BoD.
- Must follow approval procedure: a maj of disinterested Dir must approve the transaction IF there are not enough disinterested Dir to approve the deal (quorum req) then: (a) approval must be made by ALL disinterested Dir OR, (b) a maj or SHs approve the transaction.

FAIRNESS TEST–if the Dir did not get approval for the transaction and the SHs or disinterested directors sue, then the interested directors may assert an affirmative defense (fairness test) which states that if the transaction is inherently fair to the corp then they may not be L.

(4) MISAPPROPRIATION OF CORP OPPORTUNITY–officer/Dir cannot usurp an opportunity of the Corp. If they are going to take up a corp opp they need APPROVAL.
- if usurped officer/dir may have to pay profits to the corp

NOTE: even if dir gets approval could still be violating another duty such as duty of loyalty

(5) Unlawful conveyance
(6) Ultra Vires Acts–a corp’s power to act are limited to express/implied powers derived from the crop purpose (in Cert of Incorp). Corp acting outside scope of purpose = ultra vires. UV Ks are enforceable between the corp and other party.
- SH can sue the corp to enjoin a specific ultra vires K. Through a derivative action, SHs and 3rd parties can sue the corp and Dir/officers. the AG may also sue to enjoin the action or dissolve the corp.

Question 49

Violations of the Duty of Loyalty in the BCL

Answer 49

1) Dissolution–upon dissolution, distributing assets to a SH prior to creditors;
2) Improperly declaring a dividend–Board can declare Div if it would make the corp insolvent.
3) Improper loan to a Dir–SHs must approve the loan. If the corp was formed after 2/2/98 then the loan must ALSO benefit the corp.

Question 50

Insider trading

Answer 50

This is covered by fed securities law, in NY = breach of fid duty

Question 51

Indemnification

Answer 51

In a civil case a Dir has a right to indemnification from the corp. In a criminal case, the Dir may be indemnified but only if the Dir had no reasonable cause to believe the action was criminal.

EXCULPATORY CL–a corp may provide for limited L in the Cert of Incorp. The CoA must have accrued while the cl was in existence. Corps must also purchase insurance for their dir/officers