Corps

Question 1

What duties do a cntrling SH owe minority SHs?

Answer 1

SH who has a control position (director position)OR has a controlling ownership interest owes a fiduciary duty to minority SH and sometimes to others (including the Corp) She CANNOT use dominant position for individual advantage at the expense of minority SH or the corp. Most likely to be an issue with close corporations

Question 2

When is a cntrling SH who sells his shares subject to liability?

Answer 2

If a CSH sells the stock for more than its economic worth (i.e. “cntrl premium”), she generally gets to keep the excess BUT, cts MAY impose liablity IF such a premium was the product of… 1) Selling to looters w/o making a reasonable investigation; REMEDY: The ct would disgorge the sellers profit AND the seller is probably liable for all damages to the corp 2) De facto selling corporate assets Buyer has no interest in running the corporation, but bought the stock to get access to the corporate assets REMEDY: ALL SHs would share in the premium in addition to the CSH 3) Selling a seat on the board Fiduciaries cannot sell positions REMEDY: Disgorge profits

Question 3

What is the std for CSH “freeze out” mergers?

Answer 3

All mergers must have a legitimate corporate purpose, EVEN IF approved by the requisite # of shares. E.g. Majority SH merges Corp w/ another Corp, which they own & minority SH’s interests are purchased Std = Court reviews whole transaction: (1) overall course of dealing; AND (2) fairness of the price Factors: whether (1) deal is tainted by self-dealing or fraud;(2) minority SH dealt w/ fairly;OR (3) legitimate business reason for merger

Question 4

What is market trading on inside information?

Answer 4

Where director or an officer engages in market trading of her corp’s stock based upon inside information from the corporation → breach of a duty to the Corp Remedy = corp can sue to recover profit (i.e. it could be a derivative suit)

Question 5

What is the special facts doctrine (i.e. common law insider trading)?

Answer 5

Rule: all directors, officers & probably controlling SH owe an affirmative duty NOT to trade on “special facts” in a securities transaction w/ a non-insider → MUST abstain or ensure disclosure A “special fact” means that a reasonable investor would consider it important in making an investment decision A SH with whom the director or officer deals and violates the special facts doctrine can sue DIRECTLY (in her own name; not derivative) Measure of damage = value of stock a reasonable time after public disclosure MINUS price paid by insider

Question 6

What body of law governs NY corporations?

Answer 6

The governing statutory law is the NY Business Corporation Law (BCL) NY law governs the internal affairs of incorporated businesses EVEN IF the company does NO business in NY

Question 7

What are the 3 formation reqs for corporations?

Answer 7

1) People– incorporators (adult humans; NOT entities) 2) Paper– certificate of incorporation (“articles”) 3) Acts– (i) notorize certificate of incorporation; (ii) delivery to NY Debt. of State; AND (iii) hold an organizational mtg

Question 8

What are keyaspects of being an “incorporator”?

Answer 8

1) Responsibilities: (i) execute the certificate; (ii) deliver it to the NY Dept of State; AND (iii) hold an organizational mtg 2) # of incorporators necessary: 1 or more 3) Who can be an incorporator: adult HUMANS only (no entities)

Question 9

What is the 2 purposes of the certificate of incorporation?

Answer 9

1) It’s a K b/t the corporation and its SHs 2) It’s a K b/t the corporation and the state

Question 10

What information goes into the certificate of incorporation?

Answer 10

1) MUST include key names and addresses Corporate name MUST have “corp.” or “inc” or “ltd” Addy = county in NY of the “office of the corporation” (doesn’t HAVE to be the place of primary business) Must designate the NY Sec of State as agent for service of process Additionally, you MAY have a registered agent for serv. of process Must provide an addy for fwd’ing information to the corp Name/addy of EACH incorporator 2) MAY including the duration of the corporate entity If cert has no prvn, then the corp is perpetual 3) MUST include the corporate purpose Can be as general as “engage in all lawful actitivty” If corporation ltd’s its purpose, then it can not act OUTSIDE that purpose, or it will be ultra vires 4) MUST outline its capital structure, which includes… Authorized stk (MAX # of shs that the corp can sell) # of shs per class of stk Information on par value, rights, prefrences & ltds for each class NOTE: (i) at least ONE class of stk or bonds MUST have unltd voting rights; AND (ii) at least ONE class of stk must have unltd dividend rights Info on any series of preferred stk Relevant terminology Issued stk = # of shs that the corp actually sells Outstanding stk = stk that the corporation has sol AND has not reacq’d (as part of Treasury stk)

Question 11

What are the consequences of having an ultra vires act?

Answer 11

At common law, that would mean the K could be voided. Today, ulltra vires Ks are VALID (not voided) SHs CAN seek an injunction The resp. magangers ARE liable to the corporation for ulta vires losses

Question 12

What acts must incorporators take to establish a corporation?

Answer 12

1) Ea. incorporator must sign certificate AND have it notorized 2) Must deliver the certificate to the NY Dept of State & pay filing fees Filing = CONCLUSIVE evidence of valid formation (de jure corporation) 3) Incorporators must hold an organizational mtg (or they can do it by written consent), where they… adopt bylaws elect initial BOD, which immediately takes over

Question 13

What powers AND liabilities does a corporation have?

Answer 13

A corporation is a separate legal person 1) Powers = broad enter K in its own name trnfr property buy/sell securities sue or be sued make political contributions UP TO $5k/yr per candidate/organization make charitable contributions w/o a ltd g’tee loans NOT in furtherance of corp business IFF it received 2/3d VOTE of SHARES entitled to vote (not just SHs) 2) Liability = falls on the CORPORATION itself The ppl who run the corporation (BOD; officers) are NOT liable for what the corporation does SHs (owners) also have ltd liability (i.e. they are ONLY obligated to pay the value of their stk

Question 14

What is a de facto corporation?

Answer 14

If incorporators FAIL to form a de jure corporation, they can still be TREATED as a corporation (ltd liability, EXCEPT in actions by the state) IF… 1) there is a relevant incorporation STATUTE (NY = the BCL); 2) the parties make a GOOD FAITH, colorable attempt to comply with it; AND 3) the business is being RUN LIKE a corporation NOTE: NY allows de facto corps ONLY when the incorporators did everything to file for incorporation and the Dept of State FAILED to file

Question 15

What is corporation by estoppel?

Answer 15

The theory is that one dealing with a business as a corporation, treating it as a corp MAY be ESTOPPED from denying the business’s corp status later i.e. they CANNOT later sue individual proprietors IN NY, THIS HAS BEEN ABOLISHED Individual properitors ARE liable if they fail to form a de jure corporation

Question 16

What are bylaws?

Answer 16

Used to set up procedures and responsibilities of ppl like officers, set forth the type of notice req’d for meetings, etc If bylaws are inconsistent with the certificate, the CERTIFICATE cntrls! Bylaws are NOT filed with the state (only the cert. is) Initial bylaws are adopted by the incorporators at the 1st organizational mtg AND have status of SH bylaws Pwr to repeal SHs ALWAYS have the pwr to amend/repeal bylaws (esp. BOD bylaws) The BOD may do so ONLY IF (i) the certificate; OR (ii) SH bylaw allows NOTE: corporations DON’T have to have bylaws (the certificate is ALL that is req’d)

Question 17

What is a promoter?

Answer 17

A promoter is a person acting on behalf of a corporation not yet formed i.e. the promoter may enter into a K w/ a 3d party on behalf of the corporation-not-yet-formed

Question 18

Is the corporation liable for pre-incorporation Ks?

Answer 18

The corporation is liable on the K ONLY IF it ADOPTS the K Otherwise, NO!

Question 19

Is the corporation liable for pre-incorporation Ks?

Answer 19

The corporation is liable on the K ONLY IF it ADOPTS the K Otherwise, NO!

Question 20

What 2 ways can a corporation adopt a pre-incorporation K?

Answer 20

1) Express adoption: the bd can take action to adopt the K 2) Implied adoption: arrises if the corporation KNOWINGLY accepts the benefts of the K

Question 21

Is the promoter liable for pre-incorporation Ks?

Answer 21

YES! UNLESS the K clearly states otherwise Promoter is liable UNTIL there is a novation, which is an agmt among (i) the promoter; (ii) the corporation; AND (iii) the K-ing party that the corporation will replace the promoter NOTE: adoption ALONE by the corp does NOT remove the promoter from liability (he would be jointly liable with the corp)

Question 22

What is the Secret Profit Rule?

Answer 22

A promoter CANNOT make a SECRETprofit (i.e. corporation has NO knowledge of the profit) on her dealings with the corporation itself If she does, she is LIABLE and has to “account for profit” to the corporation (i.e. return the profits) Profit calculations… 1) Sale to the corporation of property acq’d BEFORE becoming a promoter Profit = PRICE PAID BY CORP – FMV 2) Sale to the corporation of property acq’d AFTER becoming promoter Profit = PRICE PAID BY CORP – PRICE PAID BY PROMOTER

Question 23

What is the rule for “foreign” corporations doing business in NY?

Answer 23

Rule: “foreign” corporations “doing business” in NY must “qualify” “Foreign” = one that is incorporated OUTSIDE of NY (e.g. a NJ corp = foreign) NY corporation = “domestic corporation” “Doing business” = the REGULAR course of INTRAstate business activity “Qualification” =(i) applying to the Dept of State and designating the Sec of State as agent (for service of process); AND (ii) pay fees to NY for privilege of doing business Applying = giving info from certificate AND certifying good standing in home state IF a foreign corp does business in NY w/o qualifiying: it CANNOT sue in NY UNTIL it qualifies, pays fees, taxes AND accrued penalties/interest

Question 24

What is the minimum # of directors that a corporation can have?

Answer 24

1 or more NATURAL (i.e. human) persons Number (greater than 1) can be set in (i) bylaws; (ii) by SH act; OR (iii) by the BOD, if a SH bylaw allows

Question 25

Who elects the initial BOD?

Answer 25

The incorporators elect initial directors at the organizational mtg After that, SHs elect at the annual mtg

Question 26

What is a staggered or “classified” bd?

Answer 26

Where the entire bd is NOT re-elected each year The certificateOR SH bylaw can establish 2, 3, or 4 classes of directors Each class is up for election each year

Question 27

Can a director be removed before the expiration of his term?

Answer 27

“For cause”: by SHs by the BOD, ONLY IF the certificate OR bylaws allow For ANY reason: by SHs, ONLY IF the certificate OR bylaws allow

Question 28

How is a board seat filled on event of resignation, death or removal?

Answer 28

General rule: the BOD selects the person who will serve the remainder of the term If director was removed by SHs, WITHOUT “cause”, then SHs fill the vacancy

Question 29

What are the ONLY 2 ways a BOD can take a valid act?

Answer 29

1) UNANIMOUS written consent; OR 2) Via a board meeting NOTE: INDIVIDUAL bd members are NOT agents of the corporation (they have no pwr to bind in their individual capacity); they MUST act as a group If a bd purports to “act” in some OTHER WAY than listed above, the action is VOID, UNLESS the action was ratified by the BOD via a valid act (e.g. a conversation among a few directors is NOT a mtg)

Question 30

What are the 4 requirements for a valid board meeting?

Answer 30

1) Notice: is NOT req’d for REGULAR meetings if the time/place is set in bylaws Notice IS req’d for SPECIAL meetings, AND must state the time/place of the mtg (need NOT state the purpose) If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection 2) Unrestrained voting: bd CANNOT vote by PROXY or enter VOTING AGMTS to vote in a certain way Voting is a non-delegable fiduciary duty NOTE: SHs CAN vote by proxy and enter voting agmts 3) Quorum: to meet quorum, there must be a MAJORITY of the “entire board” present “Entire board” = duly constituted board = the # of positions WITHOUT vacancies E.g. if there are 9 director positions w/o vacancies, then you’d need at least 5 present Quorum CAN be “broken” (i.e. if it’s met and sufficient directors leave, then it can fall below req’d amt) 4) Majority voting: once quorum is met, passing a resolution reqs a MAJORITY of those directors present E.g. of the 5 directors present, you’d need 3 to pass a resolution NOTE: The board mtg does NOT have to be in NY A meeting CAN be via conference call

Question 31

What is necessay to raise OR lower the quorum requirement?

Answer 31

Lower The quorum req CAN be less than a majority ONLY IF stated in the certificateOR bylaws NEVER can be fewer than 1/3d of the bd Increase The quorum req CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 32

What is necessay to raise OR lower the board resolution voting requirement?

Answer 32

Lower: the corporation can NEVER decrease the resolution voting requirement below a majority Increase: The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 33

When can a BOD delegate responsibility to a committee of directors?

Answer 33

A BOD can delegate certain functions IF (i) the certificate OR bylaws allow; AND (ii) a majority of the “entired board” (without vacancies) votes to delegate Committee must be made of AT LEAST one director A BOD CANNOT delegate all of its powers to a committee

Question 34

What is a board committee PROHIBITED from doing?

Answer 34

1) Set director compensation 2) Fill a board vacancy 3) Submit a fundamental change to SHs 4) Amend bylaws NOTE: A committee CAN recommend ANY of the above for FULL board action Committees are used in conjunction with SH derivative suits

Question 35

What is the standard for the duty of care?

Answer 35

Std = “A director must discharge her duties in GOOD FAITH and with that degree of DILIGENCE, CARE AND SKILL that an ORDINARY PRUDENT PERSON would exercise under similar circumstances in like position” Nonfeasance (i.e. BOD does NOTHING) will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove) Misfeasance (i.e. BOD does something that hurts corp) Implicates the Business Judgment Rule (BJR): a ct will not second guess a business decn IF it was made in GOOD FAITH, was REASONABLY INFORMED and RATIONAL

Question 36

What is the standard for duty of loyalty?

Answer 36

Std = “A director must act in GOOD FAITH and with the CONSCIENTIOUSNESS, FAIRNESS, MORALITY and HONESTY that the law requires of fiduciaries” BJR does NOT apply b/c the bd cannot take proper action if there is a conflict of interest

Question 37

What 3 types of transactions can breach the duty of loyalty?

Answer 37

1) Interested director (self-dealing) trxns: occurs when there is any deal b/t the corporation and one of its directors (or business of which the director is also a director or has subtl fin. interest) Can be “cleansed” IF: (1) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND (2) the deal was approved by (i) SH action; (ii) BOD approval by disinterested directors; OR (iii) UNANIMOUS approval of disinterested directors if they are insuffiicent in number to take bd action NOTE: interested directors DO count for quorum purposes; they just CANNOT vote The entire board CAN set director compensation, BUT it must be reasonable and in good faith (otherwise, it’s a waste of corp assets) To give directors or officers options for PRIVATE stock, they must be approved by SHs 2) Competing ventures: directors cannot compete with their with their own corporation If director DOES compete, a ct would establish a CONSTRUCTIVE TRUST for the profit made from the competing venture (corp could also get damages, if it were hurt) 3) Corporate opportunity: a director cannot “USURP a corporate opportunity” A director CAN take an opportunity ONLY IF: (1) he tells the BOD abt the opportunity; AND (2) the director waits for the disinterested BOD to REJECT it Corporate opportunity = someting the corporation NEEDS, have an EXPECTANCY INTEREST IN, OR is logically RELATED TO its business “The corporation couldn’t afford it” is NOT a valid excuse Remedy = constructive trust established, which accounts for any profits made

Question 38

Is a loan to a director using corporate funds OK?

Answer 38

ONLY IF (i) it’s approved by SHs; OR (ii) if the board finds that it will benefit the corporation

Question 39

How can a director dissent from a board decision?

Answer 39

General rule = a director is PRESUMED to have concurred w/ board action UNLESS her dissent is noted in WRITING in corporate records Procedure = (i) dissent in the board minutes; (ii) in writing to the corp. secretary at the meeting; OR (iii) via registered letter to the corp. secretary PROMPLTY after adjournment ORAL dissent is NEVER effective by itself EXCEPTIONS: A MISSING director is not liable for meeting actions IF he dissents in WRITING to the corp secretaryw/in a reasonable time AFTER learning of the action

Question 40

When can directors rely on opinions of others?

Answer 40

ONLY when the reliance is done in GOOD FAITH Applies to information, opinions, reports or stmts by… officers or employees lawyers or accountants a committee’s recommendation… PROVIDED the director believes the person is competent and is working w/in scope of designated authority

Question 41

What duties do officers of a corporation have?

Answer 41

As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty

Question 42

Who may elect/remove officers?

Answer 42

The BODunless the certificate allows SHs to elect them (rare) One person CAN hold more than one office BOD can suspend an officer’s authority to act “for cause”

Question 43

Can an officer be removed via judicial action?

Answer 43

The atty general OR holders of 10% of all SHARES may sue for a judgment removing an officer “for cause” Ct can bar reappointment of a person so removed from office

Question 44

When can a director or officer be reimbursed by the corporation for personal liability?

Answer 44

4 categories… 1) Prohibited reimbursement: if officer was held liable to the corporation (a judicial holding, not accusal) 2) Of right: the corp MUST reimburse the director/officer IF she won a judgment on the merits or otherwise NOTE: if she files ANOTHER action to collect reimbursement, the corporation is not req’d to pay THOSE atty fees 3) Permissive: if not part of the categories above, the corp MAY reimburse, IF (i) she acted in good faith; AND (ii) for a purpose reasonably believed to be in the company’s best interest Can include reimbursement for settlement 4) Cout orderd: n/w/s the above, a ct can order the corp to reimburse a director/officer for litigation expenses/atty fees NOTE: A corp can ADVANCE litigation expenses to a director/officer, BUT they MUST be repaid if it turns out that she’s NOT entitled to reimbursement A corp. can buy insurance to cover director/officer liability Exculpation: The certificate may eliminate director liability to the corporation/SHs for breach of a duty, EXCEPT if she (i) acted in bad faith; (ii) acted with intentional misconduct; (iii) received an improper fin. benefit; OR (iv) approved an unlawful distribution or loan

Question 45

Who determines eligibility for permissive indemnification of directors OR officers?

Answer 45

1) BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum… 2) SH or a quorum of those directors who are disinterested; or… 3) BOD pursuant to report from independent legal counsel

Question 46

What are SH appraisal rights?

Answer 46

When the corporation wants to make a fundamental corporate change the dissenting shareholder has the right to force the corporation to buy his shares at “fair value” If SH & corp cannot agree on fair value, the CORPORATION sues to determine the value→ct cannot discount the shares if they are minority shares and not controlling shares

Question 47

Which 5 fundamental changes trigger SH appraisal rights?

Answer 47

1) SOME amendments to the certificate; like those… altering or abolishing a preference changing redemption rights altering or abolishing a preemptive right limiting voting rights 2) Consolidation 3) YOUR corporation merges into another corporation 4) YOUR corporation trnfrs substantially all of its assets 5) YOUR corporation’s shares are acq’d in a share exchange NOTE: BUT EVEN IF a corp is doing one of these fund. changes, if the stock is listed on a PUBLIC exchange→ NO appraisal rights (i.e. applies to CLOSE corps only)

Question 48

What 3 things must a SH do to “perfect” his appraisal rights?

Answer 48

1) Before the SH vote, file written objection & your intent to demand payment with the corporation; 2) Abstain or vote against the change;AND 3) After the vote, make written demand to be bought out

Question 49

How can changes be made the the certificate of incorporation?

Answer 49

STEP 1: Minor changes: can be made by the BOD ALONE e.g. changing office location, registered agent, etc Non-minor changes: must be approved by (i) the BOD; AND (ii) a MAJORITY of the shares entitled to vote (NOT just those ACTUALLY voting) NOTE: If amendment will change or strike a supermajority quorumor voting requirement for shareholder voting (NOT directors) → needs approval of (i) the BOD; AND (ii) 2/3d of the shares entitled to vote STEP 2: If an amendment is approved, certificate of amendment must be delivered to the Dept. of State for filing

Question 50

What is the difference b/t a merger and a consolidation?

Answer 50

1) Merger = Corp A merges into Corp B → Corp Adisappears & Corp B survives 2) Consolidation = Corp A and Corp B form Corp C (both A & B disappear)

Question 51

What 3 steps are req’d to effect a merger (or consolidation)?

Answer 51

1) EACH company’s BOD adopts a plan of merger (or consolidation); 2) SH approval is needed from BOTH corps; AND NOTE: NO SH approval is necessaryIF the parent (acq’ing) corp owns 90 PERCENT or more (i.e. a short form merger) 3 Deliver a certificate of merger (or consolidation) to Dept. of State for filing NOTE: Successor Liability = the surviving company succeeds to all rights & liability of the constituents Rights of Appraisal→ ONLY IF SH of Corp that disappeared (i.e. not for SH of surviving company)

Question 52

What are the steps toeffect of a transfer of substantially all of the assets of a corp?

Answer 52

STEP 1: each corp’s BOD authorizes the deal; AND STEP 2: approval by SELLING corp’s SHs (ONLY) Majority of shares ENTITLED to vote NOTE: These assets areNOT in the ordinary course of business ACQ’ING company normally takes assets free of successor liability Only SH of selling corporation have rights of appraisal No delivery to Dept. of State necessary

Question 53

What is 2 steps are necessary to effect a share exchange?

Answer 53

STEP 1: one company acquires all the outstanding shares of one or more class of another corporation STEP 2: deliver plan of exchange to Dept. of State for filing NOTE: These are ONLY fundamental changes for the SELLING corporation so only SH of the selling corp. have rights of appraisal

Question 54

What 2 things areneeded for VOLUNTARY dissolution?

Answer 54

1) Votes of majority of SHARES entitled to vote(NOT those “actually voted”) NO BODvote necessary 2) Certificate of dissolution delivered to Dept. of State for filing

Question 55

What are the 4 ways to petition the ct for INVOLUNTARY dissolution?

Answer 55

1) Resolution by BOD OR majority of shares entitled to vote, IF the corp has insufficient assets to discharge liability or dissolution would be beneficial to SH 2) ½+ of shares entitled to vote, IF(i) directors too divided to manage; (ii) SH too divided to elect directors; OR (iii) internal dissention makes dissolution beneficial to SH 3) ANY SH entitled to vote, IF SHs are unable to elect directors for 2 annual meetings 4) 20%+ of voting shares in a CLOSE CORP, IF there is evidence of… mgmt’s (i.e. directors or managing SHs)illegal, oppressive or fraudulent acts toward the complaining SH; OR mgmt’s wasting, diverting or looting of assets NOTE: ct can deny if complaining SH can get fair return (e.g. by ordering buyout); will consider if liquidation is the ONLY way to get a fair return Corp. or non-complaining SH can AVOID dissolution IF w/in 90 days of the petition, they buy the petitioner’s shares at fair value on terms approved by the court (i.e. a buyout)

Question 56

What are the steps to liquidating a business after it has been dissolved?

Answer 56

Dissolution does NOT end the corporation’s existence.Further steps must be taken. Steps to winding up (i.e. liquidating): 1) gather all assets 2) convert them to cash 3) pay creditors 4) distribute remainder to SH, pro-rata by share unless there’s a dissolution preference Must say “dissolution preference” (which means paid first) SHs CANNOT agree that they will be paid before creditors

Question 57

Can SHs manage a corporation?

Answer 57

Generally, NO! (the BOD manages the corporation) EXCEPTION: SHs CAN manage the business directly in a “close corporation”

Question 58

What is a “close corporation”?

Answer 58

A corporation w/ “FEW” SHs The stk is NOT publicly traded

Question 59

Do you NEED to have SH management in a close corporation?

Answer 59

NO! You do not HAVE to have SH mgmt; you CAN have a BOD BUT, if you want to have SH mgmt, you need 4 things… 1) a prvn in the certificate restricting or transferring bd pwr to SHs (or others); 2) ALL incorporators or SHs (voting AND nonvoting) must approve the certificate; 3) ALL subsequent SHs have notice of the special certificate; AND 4) share are NOT listed on an exchange or regularly quoted OTC dealer

Question 60

In a close corporation run by SHs, who owes the duties of care AND loyalty?

Answer 60

The managing SHs owe the duties of CARE and LOYALTY to the corporation

Question 61

In a close corporation, what duties are owed to the minority SHs?

Answer 61

Fid duties are imposed on SHs dealing w/ EA. OTHER: cntrling SHs cannot use their pwr… for PERSONAL GAIN at the expense of the minority SHs or the corporation; OR to OPPRESS minority SHs or the corporation They owe a duty of UTMOST good faith Policy: cts want to give minority SHs a remedy for behavior that “defeats reasonable expectations for investing”

Question 62

What is a professional service corporation?

Answer 62

Members of a LICENSED profession (doctors or lawyers) CANNOT practice the prof’n thru a general business corp→they form a professional service corporation Abbreviated “P.C.” Certificate MUST meet the general corporation reqs of the BCL: must also indicate the profession to be practiced AND the names/addys of original SHs, directors or officers SHs, officers AND directors MUST be licensed, but can hire non-profs as employees (certification of status MUST BE in the certificate) If a SH dies or is disqualified→ the P.C. MUST buy the stock Each profn’l is resp for his OWN malpractice, BUT not that of the others (thus, better than a partnership) Profn’ls are NOT resp for Ks entered into by the entity in its OWN name

Question 63

What 2 ways can SHs “pierce the corporate veil”?

Answer 63

REMEMBER: general rule is that SHs are NOT liable for what the corp does; BUT in a CLOSE corporation, SHs can be PERSONALLY liable if (i) they abuse the privilege of incorporation; AND (ii) fairness reqs holding them liable (to prevent fraud) [ALWAYS STATE THE ABOVE RULE FIRST] Two fact patterns… 1) Alter ego: the SHs exercises COMPLETE domination over the company “to perpetrate fraud or injustice” to the πs Commingling personal and corporate funds Use of corp assets for personal use NOTE: the “SH” can be another corp entity 2) Undercapitalization: SH failed to INVEST ENOUGH to cover prospective liabilities NOTE: undercapitalization ALONE is NOT enough to PCV in NY→ you’d ALSO need complete domination ORfraud/injsutice NOTE: PCV is more likely to be in TORT vs. K

Question 64

In a close corporation, what are the Top 10 SHs personally liable for?

Answer 64

TOP 10 SHs are personal liable for wages AND benefits of the company’s emps

Question 65

What is a SH derivative suit?

Answer 65

When a SH is suing to enforce the CORPORATION’S claim (NOT her own personal claim) Always ask: “could the CORPORATION have brought this suit?”; If YES→ it’s a derivative suit Normally for breaches of fid. duties owed to the corp (care/loyalty)

Question 66

What is a “direct suit”?

Answer 66

When a SH is suing for a PERSONAL claim (NOT one on behalf of the corporation, derviative)

Question 67

What happens if a SH wins OR loses a derivative suit?

Answer 67

SH wins: 1) Corp gets money If recovery by the corporation would return the money to the violators, then maybe SH gets award (e.g. in a close corporation) 2) Suing SH gets atty’s fees SH loses: 1) SH cannot recover costs & expenses 2) SH probably liable to the Corp for its costs 3) SHs CANNOT sue the same ∆s on the same trxn (i.e. res judicata)

Question 68

What are the 6 reqs for a proper SH derivative suit?

Answer 68

1) Stock ownership when claim AROSE until JUDGMENT (or gotten it by operation of law from someone who did, like inheritance or divorce decree) 2) SH must adequately rep the interests of the corp AND the SHs 3) SH can be req’d to post a BOND for ∆’s costs NOT req’d if she owns ≥5% of the stock OR her stock is worth more than $50k 4) SH must make a DEMAND on directors that the corporation sue NOT req’d if doing so would be FUTILE… Maj of BOD is interested (or under cntrl of interested dirs) The BOD violated duty of care The trxn was SO egregious on its face that it COULDN’T have been based on sound jdmt If bd REFUSES after demand, SH could sue ONLY IF… Maj of BOD is interested; OR The PROCEDURE was incomplete/inadequate (e.g. didn’t use a special litigation committee, SLC) 5) SH must plead w/ “PARTICULARITY her effors to get the BOD to sue or why it was FUTILE to do so” 6) The CORPORATION must be joined in the litigation AS A ∆(!!!)

Question 69

What 2 factors do a ct consider when deciding to dismiss a derivative suit (based on SLC motion)?

Answer 69

1) The INDEPENDENCEof the those making the investigation 2) Sufficiency of the INVESTIGATION If these two things are OK, the ct WILL dismiss

Question 70

Can parties DISMISS or SETTLE a derivative suit?

Answer 70

Yes, but ONLY with ct approval

Question 71

Can a director OR officer ever bring a derivative suit?

Answer 71

A director or officer CAN sue another director or officer to compel her to ACCOUNT for violation of dutiesOR MISSAPPROPRIATION fo corp assets The suing director or officer does NOT have to meet the reqs for bringing a SH derivative suit The director or officer sues in OWN name, but recovery goes to the CORP

Question 72

Which SHs get to vote their shares?

Answer 72

General rule: record owner as of record date has the right to vote Record owner = whomever Corp records indicate Record date = voter eligibility cut-off [set b/t 10-60 days before the meeting] EXCEPTIONS: 1) Corp reacquires stock→NO vote for treasury stk 2) SH dies after record date→executor can vote 3) Proxies: OK for SH voting Proxies is a (1) writing;(2) signed by record SH or auth. agent; (3) directed to the corp. secretary;(4) authorizing another to vote shares Proxies are ONLY good for 11 months, unless says otherwise Proxies can be revoked(even if “irrevocable”) by: (1) a writing; OR (2) the SH attending the meeting NOTE: you CAN have an “irrevocable proxy”IF (i) it says “irrevocable”; AND (ii) the proxy-holder has SOME interest in the stock other than voting (e.g. an option to buy the stock); this is called “proxy coupled w/ an interest” NOTE: SH death ONLY revokes proxy WHEN written notice of death is received by the corp secretary

Question 73

What are the 2 ways for SHs to “block vote”?

Answer 73

Pockets of SH can pool their votes via.. 1) Voting trust 2) Voting (“pooling”) agreement NOTE:When giving advice, MUST state BOTH

Question 74

What are the 4 reqs of a voting trust?

Answer 74

1) Written trust agmt cntrling how the share will be voted; 2) Copy of agmt to the corporation; 3) Transfer of legal title of shs to voting trustee; AND 4) Original SHs receive voting trust certificates and retain ALL rights except for voting NOTE: the MAXIMUM time ltd on voting trusts in 10 YEARS

Question 75

What are the 2 reqs for a voting (“pooling”) agmt?

Answer 75

1) Entered into by SHs (NOT directors) 2) Agmt must be written AND signed NOTE: Two SHs CAN agree to vote their shs to elect each other, BUT they CANNOT agree abt what actions they’d take once in office (NO voting agmt for director voting) Voting agmts are NOT specifically enforceable A proxy given SUBJECT TO a voting agreement is IRREVOCABLE, IF it states so

Question 76

What are 2 ways for SHs to validly vote?

Answer 76

1) Voting by written consent of the holders of ALL vals shares 2) Voting at an annual OR special meeting

Question 77

What are 2 types of SH meetings and their key aspects?

Answer 77

1) Annual meeting: where directors are elected Just need a PLURALITY (not a majority of votes) for election of directors (majority for everything else) If annual mtg is not held, one can be COMPELLED by a ct order 2) Special meeting Called by: (i) the BOD; OR (ii) anyone provided in the certificate or bylaws NOTE: Either meeting can be held ANYWHERE (no NY req)

Question 78

What is the notice req for a SH meeting?

Answer 78

For annual AND special mtgs: corp must give WRITTEN notice (e-mail OK) to every SH entitled to vote b/t 10-60 days BEFORE the meeting Notice must ALWAYS state the time/place If the meeting is abt something that COULD req APPRAISAL RIGHTS, the notice must say so and tell why Special meetings: must ALSO state who called it AND the purpose of the meeting Must be abt something SHs can ACTUALLY vote on (i.e. it cannot be a mtg to remove an OFFICER) NOTE: the mtg will be LTD to ONLY that purpose) IF NO notice is given, the action at the meeting is VOID BUT, the action could be upheld IF those NOT given notice WAIVE the defect by: (i) doing so in a signed writing; OR (ii) attend the meeting w/o objection

Question 79

What are the quorum reqs for a SH meeting?

Answer 79

NOTE: The focus is on the # OF SHARES, NOT the # of SHs Generally, quorum = majority of outstanding shares The certificate or bylaws CAN lower the majority quorum req; provided it’s not lowered BELOW 1/3d A SUPERMAJORITY quorum req can be imposed ONLY IF it’s in the certificate (NOT bylaws) NOTE: once a quorum is ESTABLISHED it CANNOT be lost due to voter attrition (Cf. director voting quorum reqs) NOTE: we can NEVER reduce the req of majority approval Majority means of those ACTUALLY VOTING (abstentions don’t count) A SUPERMAJORITY vote req can be imposed ONLY IF it’s in the certificate (NOT bylaws)

Question 80

What are key apsects of cumulative voting?

Answer 80

A voting device that can help minority SHs get representation on the BOD Cumulative voting is ONLY available WHEN a prvn is in the CERTIFICATE; AND SHs are voting in DIRECTOR elections # VOTES received = # of shares X # of directors to be elected Votes can be distributed in any way (i.e. can be put behind one candidate) % of shares req’d to elect ONE director = 100 / (X + 1) X = # of directors being directed Must get ONE more share than the calc’d %

Question 81

What is the right of SHs to inspect AND copy corporate books/records?

Answer 81

ANY SH on 5 days written demand can demand to REVIEW: (i) minutes of SH proceedings; AND (2) record of SHs The corporation can demand the SH give an affidavit (under oath) that his purpose is NOT other than the interest of the corp AND he has not tried to sell SH list w/in 5 yrs ANY SH on 2 days written demand can REVIEW list of current directors and officers No affidavit can be req’d ANY SH on written demand can REQUEST/REVIEW the corp’s latest (i) annual B/S; (ii) I/S; AND (iii) interim stmts

Question 82

What is an issuance?

Answer 82

Issuance occurs when a corporation sells its own stock NOTE: an issuance is NOT when stock is sold in the SECONDARY mkt

Question 83

What is a subscription?

Answer 83

A subscription is a written, signed offer to buy stk from a corporation

Question 84

When is a subscription revocable?

Answer 84

Pre-incorporation subscriptions: are irrevocable by PURCHASERS for 3 MONTHS unless the subscription provides otherwise OR all subscribers agree to let you revoke Post-incorporation subscriptions: are revocable up UNTIL the corp accepts the subscription offer (when the BOD accepts the offer)

Question 85

Can a corporation decide to sell only to some subscribers and NOT others?

Answer 85

NO! It must be uniform w/in each class or series of stock

Question 86

What happens if a purchaser/subscriber defaults on pmt?

Answer 86

IF… 1) He pays LESS than 1/2 and fails to pay the rest w/in 30 DAYS of demand, the corp can KEEP the money AND cancel the shares (they become a part of treasury stk) 2) He pays 1/2 or MORE and fails to pay rest w/in 30 DAYS of demand, the corp must TRY to sell the stk to someone else for cash (or binding obligation to pay cash) If no one buys, the corp can KEEP the money AND cancel the shares into treasury stk If new subscriber pays MORE than the remaining balance, the defaulting subscriber recovers the EXCESS (less expenses to resell)

Question 87

What are the 5 permitted forms of consideration for stock issuance?

Answer 87

1) Cash & cash equiv. 2) Tangible or intangible property 3) Services ALREADY performed for the corp 4) A binding obligation to pay money or property in the future (i.e. a promissory note) 5) A binding obligation to perform FUTURE services having an agreed value

Question 88

What is unpaid stock?

Answer 88

It’s when stock is issued for NO consideration It is treated as “watered stock”

Question 89

What is the minimum issuance price for a series of stock?

Answer 89

The PAR value EXCEPTION: If the stock is “No par”, then there is no minimum Price is determined by the BOD, unless the certificate lets SHs do it (unlikely) TREASURY STOCK can be treated as having “no par” ON RESALE (i.e. can sell treasury shs for ANY price)

Question 90

Can a corporation acquire property by issuing par stock?

Answer 90

Yes; PROVIDED the form is worth at least the par value of the stock issued Based on a BOD’s good faith determination

Question 91

What is “watered stock” AND the consequences for a corporation issuing such stock?

Answer 91

“Watered stock” = stock that is issued for LESS than the par value Consequences: The corporation can sue for the “water” amt The directors ARE liable IF they “knowingly authorized” the issuance The direct purchaserIS liable (w/o a defese) A 3d party purchaser from a direct purchaser is NOT liable if she acted in good faith (i.e. BFP that does not know abt the water)

Question 92

What are pre-emptive rights?

Answer 92

The right of an EXISTING SH to MAINTAIN her % of ownership by buying stock (PRO RATA) whenever there is a NEW ISSUANCE for MONEY (cash/cash equiv) Exist ONLY IF such rights are listed in the CERTIFICATE “New issuance” does NOT include the sale of shs authorized by the orig. cert AND sold w/in 2 YRS of incorporation Does NOT include the sale of treasury stk UNLESS the certificate says it does If new stk is sold for PROPERTY, then there are NO preemptive rights (issuance must be for money)

Question 93

Is there a restriction on the amount of consideration req’d for a secondary sale of stock?

Answer 93

NO! That concept ONLY matters for NEW stock issuance

Question 94

When are stock transfer restrictions valid?

Answer 94

When they are “NOT an undue restraint on alienation” OK: req’ing a sale of one’s stock to the corp once a SH dies NOT OK: req’ing approval of the corp to sell stk Any restriction MUST be in CERTIFICATE, BYLAWS or by AGMT To be enforced against transferee, MUST (i) be conspicuously noted on the stock cert.;OR (ii) transferee has knowledge of restriction

Question 95

When do SHs have a right to a stock distribution?

Answer 95

When the BOD declares it in its DISCRETION Stock distribution = (i) dividend; (ii) pmt for repurchases; OR (iii) pmt for redemption A ct will interfere w/ a BOD’s discretion ONLY IF there is a showing of bad faith or dishonest purpose (high hurdle to cross) The BOD can’t declare if the company is insolvent (or the distribution would render the company insolvent)

Question 96

In what order are stock dividends paid?

Answer 96

FIRST: Preferred SHs→get dividends before common “Participating”: means the preferred SHs get paid 2X: once as preferred SHs and second as part of common pool “Cumulative”: means if there are arrears, the past due amts will be paid in FULL before common get pmt (relevant when BOD doesn’t declare a dividend) SECOND: Common SHs→get paid after preferred shs

Question 97

Which funds may be used for distributions to SHs?

Answer 97

From “surplus” ONLY: APIC + Retained Earnings Surplus = Assets – liabilities – stated capital (par value of stock) NEVER from stated capital (par value of stock) If there is no-par issuance, the BOD can allocate any part (BUT not all) to surplus w/in 60 days of issuance

Question 98

Who can sue to recover from unlawful corporate distrbutions?

Answer 98

Negl. directors and SHs w/ knoweldge are PERSONALLY liable for unlawful distributions The corporation can sue (or SHs derivatively) REMEMBER: directors CAN rely on 3d party experts

Question 99

Can corporations discriminate among SHs in repurchases?

Answer 99

Yes EXCEPT, it might have to give equal opportunity to all SHs in a CLOSE CORPORATION NOTE: redemption prices are set in the certificate and must be done PROPORTIONALLY w/in each class of stock

Question 100

What is the minimum # of directors that a corporation can have?

Answer 100

1 or more NATURAL (i.e. human) persons Number (greater than 1) can be set in (i) bylaws; (ii) by SH act; OR (iii) by the BOD, if a SH bylaw allows

Question 101

Who elects the initial BOD?

Answer 101

The incorporators elect initial directors at the organizational mtg After that, SHs elect at the annual mtg

Question 102

What is a staggered or “classified” bd?

Answer 102

Where the entire bd is NOT re-elected each year The certificateOR SH bylaw can establish 2, 3, or 4 classes of directors Each class is up for election each year

Question 103

Can a director be removed before the expiration of his term?

Answer 103

“For cause”: by SHs by the BOD, ONLY IF the certificate OR bylaws allow For ANY reason: by SHs, ONLY IF the certificate OR bylaws allow

Question 104

How is a board seat filled on event of resignation, death or removal?

Answer 104

General rule: the BOD selects the person who will serve the remainder of the term If director was removed by SHs, WITHOUT “cause”, then SHs fill the vacancy

Question 105

What are the ONLY 2 ways a BOD can take a valid act?

Answer 105

1) UNANIMOUS written consent; OR 2) Via a board meeting NOTE: INDIVIDUAL bd members are NOT agents of the corporation (they have no pwr to bind in their individual capacity); they MUST act as a group If a bd purports to “act” in some OTHER WAY than listed above, the action is VOID, UNLESS the action was ratified by the BOD via a valid act (e.g. a conversation among a few directors is NOT a mtg)

Question 106

What are the 4 requirements for a valid board meeting?

Answer 106

1) Notice: is NOT req’d for REGULAR meetings if the time/place is set in bylaws Notice IS req’d for SPECIAL meetings, AND must state the time/place of the mtg (need NOT state the purpose) If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection 2) Unrestrained voting: bd CANNOT vote by PROXY or enter VOTING AGMTS to vote in a certain way Voting is a non-delegable fiduciary duty NOTE: SHs CAN vote by proxy and enter voting agmts 3) Quorum: to meet quorum, there must be a MAJORITY of the “entire board” present “Entire board” = duly constituted board = the # of positions WITHOUT vacancies E.g. if there are 9 director positions w/o vacancies, then you’d need at least 5 present Quorum CAN be “broken” (i.e. if it’s met and sufficient directors leave, then it can fall below req’d amt) 4) Majority voting: once quorum is met, passing a resolution reqs a MAJORITY of those directors present E.g. of the 5 directors present, you’d need 3 to pass a resolution NOTE: The board mtg does NOT have to be in NY A meeting CAN be via conference call

Question 107

What is necessay to raise OR lower the quorum requirement?

Answer 107

Lower The quorum req CAN be less than a majority ONLY IF stated in the certificateOR bylaws NEVER can be fewer than 1/3d of the bd Increase The quorum req CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 108

What is necessay to raise OR lower the board resolution voting requirement?

Answer 108

Lower: the corporation can NEVER decrease the resolution voting requirement below a majority Increase: The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 109

When can a BOD delegate responsibility to a committee of directors?

Answer 109

A BOD can delegate certain functions IF (i) the certificate OR bylaws allow; AND (ii) a majority of the “entired board” (without vacancies) votes to delegate Committee must be made of AT LEAST one director A BOD CANNOT delegate all of its powers to a committee

Question 110

What is a board committee PROHIBITED from doing?

Answer 110

1) Set director compensation 2) Fill a board vacancy 3) Submit a fundamental change to SHs 4) Amend bylaws NOTE: A committee CAN recommend ANY of the above for FULL board action Committees are used in conjunction with SH derivative suits

Question 111

What is the standard for the duty of care?

Answer 111

Std = “A director must discharge her duties in GOOD FAITH and with that degree of DILIGENCE, CARE AND SKILL that an ORDINARY PRUDENT PERSON would exercise under similar circumstances in like position” Nonfeasance (i.e. BOD does NOTHING) will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove) Misfeasance (i.e. BOD does something that hurts corp) Implicates the Business Judgment Rule (BJR): a ct will not second guess a business decn IF it was made in GOOD FAITH, was REASONABLY INFORMED and RATIONAL

Question 112

What is the standard for duty of loyalty?

Answer 112

Std = “A director must act in GOOD FAITH and with the CONSCIENTIOUSNESS, FAIRNESS, MORALITY and HONESTY that the law requires of fiduciaries” BJR does NOT apply b/c the bd cannot take proper action if there is a conflict of interest

Question 113

What 3 types of transactions can breach the duty of loyalty?

Answer 113

1) Interested director (self-dealing) trxns: occurs when there is any deal b/t the corporation and one of its directors (or business of which the director is also a director or has subtl fin. interest) Can be “cleansed” IF: (1) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND (2) the deal was approved by (i) SH action; (ii) BOD approval by disinterested directors; OR (iii) UNANIMOUS approval of disinterested directors if they are insuffiicent in number to take bd action NOTE: interested directors DO count for quorum purposes; they just CANNOT vote The entire board CAN set director compensation, BUT it must be reasonable and in good faith (otherwise, it’s a waste of corp assets) To give directors or officers options for PRIVATE stock, they must be approved by SHs 2) Competing ventures: directors cannot compete with their with their own corporation If director DOES compete, a ct would establish a CONSTRUCTIVE TRUST for the profit made from the competing venture (corp could also get damages, if it were hurt) 3) Corporate opportunity: a director cannot “USURP a corporate opportunity” A director CAN take an opportunity ONLY IF: (1) he tells the BOD abt the opportunity; AND (2) the director waits for the disinterested BOD to REJECT it Corporate opportunity = someting the corporation NEEDS, have an EXPECTANCY INTEREST IN, OR is logically RELATED TO its business “The corporation couldn’t afford it” is NOT a valid excuse Remedy = constructive trust established, which accounts for any profits made

Question 114

Is a loan to a director using corporate funds OK?

Answer 114

ONLY IF (i) it’s approved by SHs; OR (ii) if the board finds that it will benefit the corporation

Question 115

How can a director dissent from a board decision?

Answer 115

General rule = a director is PRESUMED to have concurred w/ board action UNLESS her dissent is noted in WRITING in corporate records Procedure = (i) dissent in the board minutes; (ii) in writing to the corp. secretary at the meeting; OR (iii) via registered letter to the corp. secretary PROMPLTY after adjournment ORAL dissent is NEVER effective by itself EXCEPTIONS: A MISSING director is not liable for meeting actions IF he dissents in WRITING to the corp secretaryw/in a reasonable time AFTER learning of the action

Question 116

When can directors rely on opinions of others?

Answer 116

ONLY when the reliance is done in GOOD FAITH Applies to information, opinions, reports or stmts by… officers or employees lawyers or accountants a committee’s recommendation… PROVIDED the director believes the person is competent and is working w/in scope of designated authority

Question 117

What duties do officers of a corporation have?

Answer 117

As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty

Question 118

Who may elect/remove officers?

Answer 118

The BODunless the certificate allows SHs to elect them (rare) One person CAN hold more than one office BOD can suspend an officer’s authority to act “for cause”

Question 119

Can an officer be removed via judicial action?

Answer 119

The atty general OR holders of 10% of all SHARES may sue for a judgment removing an officer “for cause” Ct can bar reappointment of a person so removed from office

Question 120

When can a director or officer be reimbursed by the corporation for personal liability?

Answer 120

4 categories… 1) Prohibited reimbursement: if officer was held liable to the corporation (a judicial holding, not accusal) 2) Of right: the corp MUST reimburse the director/officer IF she won a judgment on the merits or otherwise NOTE: if she files ANOTHER action to collect reimbursement, the corporation is not req’d to pay THOSE atty fees 3) Permissive: if not part of the categories above, the corp MAY reimburse, IF (i) she acted in good faith; AND (ii) for a purpose reasonably believed to be in the company’s best interest Can include reimbursement for settlement 4) Cout orderd: n/w/s the above, a ct can order the corp to reimburse a director/officer for litigation expenses/atty fees NOTE: A corp can ADVANCE litigation expenses to a director/officer, BUT they MUST be repaid if it turns out that she’s NOT entitled to reimbursement A corp. can buy insurance to cover director/officer liability Exculpation: The certificate may eliminate director liability to the corporation/SHs for breach of a duty, EXCEPT if she (i) acted in bad faith; (ii) acted with intentional misconduct; (iii) received an improper fin. benefit; OR (iv) approved an unlawful distribution or loan

Question 121

Who determines eligibility for permissive indemnification of directors OR officers?

Answer 121

1) BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum… 2) SH or a quorum of those directors who are disinterested; or… 3) BOD pursuant to report from independent legal counsel