Formation and Issuance

Question 1

A. Formation Requirements (PPA)

Answer 1

People (incorporators), Paper (cert of inc), Acts

Question 2

People req’d to do what to incorporate?

Answer 2

Need one or more adult natural persons to:
o (1) Execute certificate and deliver it to the Dept. of State.
o (2) Hold an organizational meeting.

Question 3

2. Certificate of Incorporation (Paper) = K b/t corp and SHs and b/t corp and State. What info goes in cert of inc?

Answer 3

o name—must have “corporation,” “incorporated,” or “limited” in the corporate name.
o (2) Address—County
agent—MUST designate NY Secretary of State as the corporation’s agent for service of process
o 4) Name and Address of Each Incorporator
o 5) Corp purpose (e.g., all lawful)
o 6. Capital structure (authorized stock, issued stock, oustanding stock, par value and info re class rights.

Question 4

Statement of duration required in cert of inc?

Answer 4

No

Question 5

o	At least one class of stock/bonds must have unlimited \_\_\_\_\_\_\_\_\_\_\_\_ rights,
o	At least one class of stock/bonds must have unlimited \_\_\_\_\_\_\_\_\_ rights.

Answer 5

o	At least one class of stock/bonds must have unlimited voting rights,
o	At least one class of stock/bonds must have unlimited dividend rights.

Question 6

Cert of inc must be signed by all incorporators before notary and deliver to NY SOS. Then you have de jure corp. To get meat on the bones, the incorporators hold org meeting to do 3 things:

Answer 6

o (1) Adopt any bylaws.
o (2) Elect the initial directors.
o (3) Then BoD takes over management.

Question 7

• Internal Affairs Doctrine (def)

Answer 7

Internal affairs of a NY corporation are governed by NY law.

Question 8

o Can guaranty a loan that is not in furtherance of corporate business if?

Answer 8

SUPERMAJORITY VOTE Can guaranty a loan that is not in furtherance of corporate business if it is approved by 2/3 of the shares entitled to vote. [Exam Tip: May be on MC]

Question 9

• Following defenses may get the business treated as a de facto corporation (2 examples w/ defs, but 1 abolished in NY)

Answer 9

1. De Facto Corporation
   • Must show
   o (1) There is a relevant incorporation statute (the BCL);
   o (2) The parties made a good faith, colorable attempt to comply with it; and
   o (3) Business is being run as a corporation.
   • If applicable, it is treated as a corporation for all purposes except in an action by the state.
   • Mostly abolished, but may be used:
   o Incorporators deliver a proper certificate and Dept of State fails to file it without rejecting it.
2. Corporation by Estoppel (Abolished in NY)
   • One dealing with and treating a business as a corporation may be estopped from denying the business’s corporate status.

Question 10

Can you have a corp w/o bylaws?

Answer 10

Yes

Question 11

Incorporators adopt initial bylaws. Who amends or repeals them and adopts new ones generally? Exception where cert of inc says….

Answer 11

SHs generally, but if cert of inc says so, BoD may amend or repeal or adopt, and even then, SHs can overrule.

Question 12

If bylaws conflict with cert of inc?

Answer 12

Cert of inc controls

Question 13

Are bylaws filed with state?

Answer 13

No

Question 14

Pre-incorporation contracts: Corp is liable only if

Answer 14

• Corporation is liable on the pre-incorporation contract ONLY IF it adopts that contract. Two ways:
o (1) Express adoption—board action
o (2) Implied adoption—Arises if the corporation knowingly accepts a benefit of the contract.

Question 15

If a corporations’ promoter makes pre-incorporation K, who’s liable when? Does adoption by corp relieve promoter of liability?

Answer 15

• Promoter is liable on pre-incorporation contracts until there is a novation—an agreement among the promoter, corp and other contracting party that the corp will replace the promoter under the contract.
o Adoption by corporation does not relieve promoter of liability. Both would be liable until novation relieves P. EXAM TIP: Bar exam favorite.

Question 16

F. Secret Profit Rule

Answer 16

• Promoter cannot make a secret profit on her dealings with the corporation. If she does, she is liable and has to account for the profit – damages go to corp in amount paid minus fair market value (for property acquired before becoming promoter).

Question 17

• Foreign corporations doing business in NY must qualify. What does it take to qualify?

Answer 17

o Qualify = applying to the N.Y. Dept. of State and designating the Secretary of State as an agent for service of process. Has to pay fees to NY for the privilege of doing business in NY.
• Info given to Dept. of State—
• (1) Info from its certificate;
• (2) Proof of good standing in its home state.

Question 18

Define Debenture

Answer 18

a corporate loan, the repayment of which is NOT secured by corporate assets

Question 19

• Subscription =

Answer 19

written, signed offer to buy stock from the corporation

Question 20

Revocation of Pre-Incorporation Subscriptions (1) Are pre-incorporation subscriptions revokable immediately/at will? (2) what about post-incorporation subscriptions?

Answer 20

(1) No, only after 3 months (unless subscription provides otherwise). (2) post-incorporation subscriptions are revocable until corp accepts them, which is WHEN BOD ACCEPTS THE OFFER.

Question 21

• Subscriber Default – what happens when subscriber won’t pay If they’ve paid under vs over 50% of what they owe?

Answer 21

o (1) If subscriber has paid < 50% of the purchase price and fails to pay the rest within 30 days of written demand, the corp can keep the money and cancel the shares. The stock becomes authorized and unissued.
o (2)(a) If subscriber has paid ≥ 50% and fails to pay the rest within 30 days of written demand, the corp must try to sell the stock to someone else for cash (or a binding obligation to pay cash).
• If no one will pay the remaining balance, corp can keep the money paid and cancel the shares. Stock becomes authorized and unissued.
o (2)(b) If someone will pay more than the remaining balance due—defaulting subscriber recovers any excess over what he agreed to pay minus the corporation’s expenses in selling to the new guy.

Question 22

5 permitted forms of consideration that can be paid for issuance of stock?

Answer 22

1. $
2. property (tangible or intangible)
3. services already performed for corp
4. binding obligation to pay $ or property in future
5. binding obligation to perform future services w/ agreed-upon value

Question 23

If corp issues 10,000 shares of $3 par stock, how much is MINIMUM it must receive if paid in cash?

Answer 23

$30,000. Par value is minimum, but can sell for more.

Question 24

For an issuance of NO PAR stock, what is the default price? who sets price?

Answer 24

NO PAR = no minimum required. BOD sets price unless cert reserves right to SHs.

Question 25

Corp selling 10,000 shares of $3 par TREASURY stock. Minimum it must receive?

Answer 25

Any amount. Treasury stock = stock reacquired by corp. Treated as no par for issuance purposes.

Question 26

When BOD determines value of non-$ consideration for issuance, when is value determinative and when not? E.g., I accept your farm for 10,000 shares.

Answer 26

Determinative absent fraud, e.g., can’t pay director’s son $1M in stock for a week of sweeping floors

Question 27

if you issue shares for less than par, what happens? e.g., 10,000 shares of $3 par sold for $22K, what then?

Answer 27

the remaining $8K are WATER –> directors and buyers can be sued for the $8K

Question 28

**define preemptive rights and when they apply

Answer 28

right of existing SH to maintain her % of ownership by buying whenever there is a NEW ISSUANCE of common sold for CASH or check

Question 29

Do preemptive rights apply to sale of treas stock? Apply to sale for non-$ consideration?

Answer 29

No. Only to new issuance for $ does preemptive right apply.

Question 30

For preemptive rights, where cert is silent, is it a NEW ISSUANCE when corp sells shares authorized in original cert and sold w/in 2 years of formation?

Answer 30

No. That’s not a new issuance if authorized in original cert and sold w/in 2 years of formation

Question 31

If cert is silent WRT preemptive rights, do they exist?

Answer 31

No