Corporations Flashcards
What does incorporator do?
1) Execute certificate
2) Delivery it to dept of State
3) Hold the organizational meeting
How many incorporators are needed and who can qualify
At least 1 adult human
Certificate/Articles of Incorporation
Contract between corporation and SH and corporation and state
Info needed in certificate (7 things)
1) Name - must contain corporation, incorporated, or limited
2) Address- county in NY of the office of incorporation
3) Designate secretary of state for service of process
4) Name and address of each incorporator
5) Statement of duration (lack of statement means perpetual duration)
6) Corporate purpose- can be general
7) Capital structure
Ultra vires actions by corporation
Going beyond the purpose indicated in certificate. Nowadays they are valid but SH can seek injunction and responsible managers are liable to corp. for ultra vires losses
What must be in the certificate about the corp’s stock?
1) Authorized stock
2) Number of shares per class
3) Info on par value, rights, preferences, and limitations of each class
4) Info on any series of preferred shares
What is effect of Department of State filing certificate?
Conclusive evidence of valid formation
What happens at organizational meeting?
Adopt bylaws and elect initial directors?
What political contributions can a corporation make?
No more than $5000 per year per candidate or organization
Can a corporation guarantee a loan not in furtherance of corporate business?
Yes, if approved by 2/3rds of the shares entitled to vote
Requirements for de facto corporation
1) There is a relevant incorporation statute
2) Parties made a good faith effort to comply with it
3) Business is being run as a corporation
Are bylaws necessary?
Nope
If bylaws are inconsistent with certificate, ______ controls
Certificate
Who can amend or repeal bylaws or adopt new ones?
Shareholders
Can BOD ever amend, repeal or adopt new bylaws?
Only if certificate or SH bylaw allows it
Who is liable on a pre-incorporation contract?
Corporation only if it adopts the contract.
Promoter- unless k clearly says otherwise, he is liable until there is a novation
How can corporation adopt a pre-incorporation contract?
1) Express adoption by board action
2) Implied adoption by knowingly accepting a benefit of the contract
Secret profit rule
Sale to corp. of property acquired before becoming promoter- Profit= price paid minus FMV
Sale to corp. of property acquired after becoming promoter- Profit= price paid by corp minus price paid by promoter
How does a foreign corporation qualify?
Apply to SecState and designate SecState as agent for service of process. Must provide info from certificate and notice of good standing at home
Ramifications for foreign corporation doing business in NY without first qualifying
Cannot sue in NY until it qualifies and pays fees, taxes, penalties, and interest
Issuance of stock occurs where
Corp. sells its own stock
Subscription
Written, signed offer to buy stock from a corp
Revocation of subscriptions
Pre-incorporation- Irrevocable for 3 months absent agreement otherwise or all subscribers let you revoke
Post-incorp- Revocable until accepted by the corp
What happens if corp accepts offer and subscriber defaults on payment?
If paid less than half purchase price and fails to pay rest within 30 days on demand, corp can keep the money and cancel the shares (if paid half or more, corp must try to resell stock)
Forms of consideration for stock issuance
1) Money
2) Tangible or intangible property
3) Services already performed for the corp
4) Binding obligation to pay money or property
5) Binding obligation to perform future services with agreed value
What if corp issued stock for no consideration?
Called unpaid stock and it’s all water
Can a corp issue par value stock to acquire property?
Yes, if the property is worth the par value amount. Board must not commit fraud
Watered stock
Stock sold below par value.
Who is liable for water?
Directors if they knowingly authorized the issuance
Buyer (we presume he knows it was water)
Third party buyer - only liable if knows it’s water
Pre-emptive rights
Right of an existing shareholder to maintain percentage of ownership by buying stock whenever there is a new issuance of common stock for money
Do pre-emptive rights automatically exist?
No. Must be stated in the certificate
Number of directors is set where
In bylaws or by SH act or by the board if SH bylaw allows it
After incorporation, who elects directors?
SH at annual meeting
When can shareholders remove a director
For cause, or without cause if certificate or bylaws permit it
When can the board remove a director?
For cause, only if certificate or shareholder bylaws permit it
Who selects a director to fill a vacancy?
Board unless director was removed by shareholders without cause
Two ways in which the board can take a valid act
1) Unanimous written consent
2) A meeting
Where must meeting be held?
Anywhere
Notice requirements for board meetings
1) Regular meetings- Not required if time/place set in bylaws
2) Special meeting- Notice required. Must state time and place
What if notice not given where required?
Action taken at meeting is void unless director waives the notice defect (a) in signed writing or (b) by attending the meeting without objection
How many directors needed for a meeting?
Quorum to have the meeting, majority vote to pass resolutions
Can a corp. decrease a quorum to less than majority?
Yes, in the certificate or bylaws, but NEVER fewer than 1/3 of the entire board
Can the board decrease the requirement for majority vote at meetings?
No
Can the corp. increase a quorum or require supermajority vote
Yes, in the certificate only
What can a committee not do? (4)
1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to shareholders
4) Amend bylaws
Duty of care standard
Director must discharge vduties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances
Showing breach of DOC through nonfeasance requires
Showing that the breach caused a loss
BJR
Court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis (director is not a guarantor of success)
Duty of loyalty standard
Director must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries
Interested director transactions set aside unless (2)
1) The deal was fair and reasonable when approved OR
2) The material facts and her interest were disclosed/known and the deal was approved by (a) SH action (b) Board approval by sufficient vote excluding interested directors (c) unanimous vote of disinterested directors if majority are intested
Three types of transactions that implicate DOL
1) Interested director transaction
2 Competing ventures
3) Corporate opportunity
If director goes into competition with corp, what happens?
Corp gets a constructive trust for her profits. Corp may get damages if competition hurt it
Corporate opportunity is something that
1) Corp needs
2) Corp has an interest or tangible expectancy in
3) Logically related to business
Directors are liable for acts of the board unless
They dissent in writing
How can a director dissent?
1) In the minutes
2) In writing to the corp. secretary at the meeting
3) Registered letter to corporate secretary promptly after the meeting
When can a director not dissent?
If they voted yes at the meeting
Good faith reliance on information prepared by ________ will protect individual directors
Information, opinions, reports, or statements by
1) officers or employees of the corp whom director or officer believes are competent
2) Lawyers and public accountants
3) Committee of which the person relying is not a member, as to matters within its designated authority
Who selects and removes officers?
Board, unless certificate allows shareholders to elect them
When can D&O be reimbursed from expenses for suit in capacity as officer or director?
1) Prohibited if held liable to the corporation
2) Must reimburse if won a judgment on the merits or otherwise
3) All other cases- permissive
Certificate can eliminate director liability for damages for breach of duty except (4)
1) Acts in bad faith
2) Intentional misconduct
3) Received improper financial benefit
4) Approval of unlawful distribution or loan
What is required for SH management in a close corporation?
1) All incorporators or SH approve it
2) It is conspicuously noted on front and back of all shares
3) All subsequent SH have notice
4) Shares are not listed on an exchange or regularly quoted OTC
In a close corp run by SH, who owes duties of care and loyalty?
Managing SH
What is a close corp?
1) Few shareholders
2) Stock is not publicly traded
Piercing the corporate veil only happens with
Close corporations
To PCV and hold SH personally liable, what must happen? (2)
1) D exercised complete domination over the corp
2) Domination was uded to commit a fraud or wrong against the plaintiff (abused the privilege of the corporate form)
Is undercapitalization enough to PCV?
Not without complete domination and fraud or injustice
What does SH get if they win a derivative suit?
Costs and attorneys fees, and might be able to get damages directly if the bad guys would win
Requirements for derivative suit
1) Claim of the corporation
2) SH had stock ownership when claim arose (or gotten from someone who did) and must own it through judgment
3) Adequately represent interests of corp. and SH
4) Can be required to post bond
5) Demand requirement unless futile
After there has been a demand and the board refuses to sue, can SH bring the suit anyway?
Only if can show that a majority of the board was interest or its procedure was incomplete/inadequate
Special litigation committee
Corp can move to dismiss based on a finding of independent directors that it’s not in their best interests
What does court look at in deciding whether to dismiss upon recommendation from special litigation committee?
1) Independence of those making investigation
2) Sufficiency of investigation
D or O can sue and other D or O for what?
To compel her to account for violation of duties or misappropriation of corporate assets (does not have to meet the requirements for derivative suit that SH does)
Who votes a shareholder’s stock?
Record owner at record date
Can corporation vote treasury stock?
No
What is required for proxy voting?
1) Writing
2) Signed by record shareholder or authorized agent
3) Director to secretary of the corp
4) Authorizing another to vote the sahres
How long is a proxy good for
Good for 11 months unless it says otherwise
When is a proxy irrevocable?
1) States it is irrevocable AND
2) Proxy holder has an interest in the stock (like an option)
OR
3) If it says so and is given subject to a voting agreement
Does death revoke a proxy?
Only when notice is given to corporate secretary
How can shareholders vote in blocks?
1) Voting trusts
2) Voting agreements
Requirements for voting trusts
1) Written trust agreement controlling how the shares will be voted
2) Copy to the corporation
3) Transfer legal title of shares to voting trustee
4) Original SH receive trust certs and retain SH rights other than voting
Requirements and enforceability of voting agreements
Signed writing. Not specifically enforceable
Shareholders can take action in what two ways
1) By shareholder meeting
2) Without meeting if written consent of 100% of SH entitled to vote (unless cert authorizes less)
Where can stock transfer restrictions be set?
Certificate, bylaws, or by agreement
When are stock transfer restrictions valid?
If they are not an undue restraint on alienation
What can a shareholder demand access to?
1) Minutes of SH proceedings and record of SH on 5 days written demand (affidavit if required by corp)
2) List of current D&O (no affidavit required) on 2 days demand
3) Corp’s latest annual balance sheet, profit/loss statement
4) Common law right to inspect records at reasonable time and proper place for proper purpose
When will a court interfere with Board’s decision not to order a distribution?
Only on a showing of bad faith or dishonest purpose
Distribution can only come from
Surplus (assets-liabilities-stated capital)
When can a corp not make distributions?
If it is insolvent or the distribution would render it insolvent
What must a shareholder do to perfect the right of appraisal?
1) Before shareholder vote, file written objection and intent to demand payment
2) Abstain or vote against the change
3) After vote, make written demand to be bought out
Significant changes to certificate require
Director action and majority of shareholders entitled to vote
Approval for merger requires
Each company’s board has to approve it and each corp’s SH must approve (majority of eligible to vote)
Are there dissenting SH right of approval for merger?
For the shareholders of the acquired company but not the acquiring company
What is needed to approve an asset transfer?
Each corp’s board must authorize the deal and approval by selling corp’s shareholders
What is necessary for voluntary dissolution?
Majority of shares entitled to vote, no Board vote needed
What is the special rule for judicial dissolution in a close corp?
Action brought by 20% or more of voting shares in corp not traded on a securities market asserting either
1) Management’s illegal, oppressive, or fraudulent acts toward the SH
Management wasting, diluting, or diverting assets
When will the court deny dissolution for the 20% SH rule?
If there is some other way the complaining shareholder an obtain a fair return on investment
How may the corporation or non-complaining SH try to avoid dissolution in a closely held corp?
Within 90 days of petition, buy petitioner’s stock at fair value at terms approved by court
Order of priority at dissolution
Creditors MUST come before shareholders
Control premium
Sale by controlling shareholder that comes with premium for being able to control the corporation
Does controlling shareholder get to keep the control premium? (rule and exception)
Yes.
Exceptions
1) Controlling shareholder sold to looters without making a reasonable investigation (entitles minority SH to disgorgement and probable liability)
2) Controlling SH de facto sells a corporate asset
3) Controlling shareholder sells seat on the board
In a freeze out merger, court looks at transaction as a whole. Specific factors include (3)
1) Whether there is self-dealing/fraud
2) Whether the minority shareholders are dealt with fairly
3) Whether there is a legitimate business reason for the merger
