New York Corporations

Question 1

Initial Requirements for Incorporation

Answer 1

An incorporator must: (1) Execute the Certificate of Incorporation; (2) Deliver the Certificate to the NY Dep’t of State; and (3) Hold the Organizational Meeting Only adult humans (1 or more) may incorporate an entity.

Question 2

Certificate of Incorporation

Answer 2

The Certificate is a CONTRACT between the corporation and (1) the shareholders; (2) the state. It MUST contain: (1) Corporate Name (incl. inc., corp., ltd., etc.) (2) Statement of Corporate Purpose (see other card) (3) The county in NY of incorporation, not necessarily where business is done (4) Designation of the NY Secretary of State as the designated agent for service of process (5) Address for forwarding service of process to corp. (6) Name and address of each incorporator (7) Information about capital structure (see other card) It MAY contain: Duration (perpetual if not specified); other registered agent for service of process.

Question 3

Corporate Purpose and Ultra Vires

Answer 3

The Certificate must contain a statement of corporate purpose; this can be very broad (“all lawful activity . . . .”) At COMMON LAW, an ultra vires act (beyond the scope of corporate purpose) made such acts voidable. In NEW YORK, ultra vires acts are valid, BUT (1) SHs can seek injunction; and (2) responsible managers are liable to the corporation for ultra vires losses. Note on AGENCY: Officers, as agents, have the power to bind the corporation in ordinary business but NOT extraordinary/unusual (ultra vires) business. Directors are not agents of the corporation.

Question 4

Capital Structure (Cert. Requirements)

Answer 4

Certificate must contain: info. about capital structure, including authorized stock, number of shares per class, information on par value (if any), the rights, preferences, and limitations of each class, and information on any series (sub-class) of preferred shares. At minimum, it will contain 1 class of bonds/stock with UNLIMITED voting rights and 1 class of stock with UNLIMITED dividend rights. Definitions: AUTHORIZED STOCK = max. # of shares the corp. can sell ISSUED STOCK = # of shares actually sold OUTSTANDING STOCK = stock corp. sold & not reacquired

Question 5

Steps for Valid Formation

Answer 5

(1) Once the incorporator signs the certificate and acknowledges it before a notary, she will deliver it to the department of state; and (2) The department of state must verify that the certificate conforms with the law and filing fees were paid, then it files the certificate. –> we have a de jure corporation Note that there is no minimum capital requirement before corp. commences doing business.

Question 6

Organizational Meeting

Answer 6

Can be done by written consent. 1. Adopt initial bylaws 2. Elect initial directors

Question 7

Corporate Personhood: Contributions and Guaranty Power

Answer 7

A corporation is a separate legal person with broad statutory powers to enter contracts, transfer property, buy and sell securities, and sue/be sued. Campaign contributions: No more than $5,000 per candidate per cycle Charitable contributions: Yes, no limitation Guaranties or loans NOT in furtherance of corporate business: Permissible, IF approved by 2/3 of the shares entitled to vote.

Question 8

Liability for Corporate Acts

Answer 8

Unless there is a breach of fiduciary duty… Directors and officers are not personally liable for the acts of the corporation; Shareholders are only liable to the extent of their invested shares (liable to pay only for their stock); Only the corporation is liable for its actions.

Question 9

De Facto Corporation

Answer 9

Very rare in NY, arising under the very limited circumstance that the certificate was properly filed with the state and the state dep’t failed to file but did not reject the certificate. At common law, a DFC is formed when: (1) There is a relevant incorporation statute (e.g., the BCL) (2) Parties made a good faith, colorable effort to comply; & (3) The business is being run as a corporation. –> Treated as a corporation for all purposes (except in action by state).

Question 10

Corporation by Estoppel

Answer 10

THIS IS ABOLISHED IN NEW YORK. The theory is that one dealing with a business as a corporation, treating it as a corporation, may be estopped from later denying the business’s corporate statutes and so cannot sue the individual proprietors.

Question 11

Bylaws

Answer 11

• Bylaws are NOT necessary for corporate formation, but almost every corp. has them.
• The bylaws set up procedures and responsibilities of officers, notice required for meetings, etc.
• Bylaws cannot be inconsistent with the certificate.
• Bylaws are NOT filed with the state (outsiders not bound).
• The bylaws initially adopted by the incorporators have the status of shareholder bylaws. Afterh t,e shareholders can amend/repeal/adopt new bylaws.
• **The Board may only adopt bylaws if the CERTIFICATE or BYLAWS allow. **
• **Shareholders can amend/repeal any director-adopted bylaws. **

Question 12

Pre-Incorporation Contracts

Answer 12

• A “PROMOTOR” acts on behalf of a corporation not yet formed.
• The corporation is only liable on pre-inc contracts if it ADOPTS the contract, either
  
  • expressly by board action; or
  • impliedly by knowingly accepting a benefit of the contract
• The PROMOTOR REMAINS LIABLE on the contract, notwithstanding adoption by the corp., until there is a **novation. **

Question 13

Secret Profit Rule

Answer 13

A promotor may not make a **secret profit **on her dealings with the corp.

If she does, she is liable to the corp. and must disgorge profit, account for profit.

Secret Profits:

• Transaction was secret; and
• Promotor made a profit, measured by:
  
  • Sale of property acquired BEFORE becoming promotor: PROFIT = price paid by corp. – FMV of property.
  • **Sale of property acquired AFTER becoming promotor: **PROFIT = price paid by corp. – price paid by promotor.

Question 14

Foreign Corporation

Answer 14

A foreign corp. is one incorporated OUTSIDE of New York (other state or country).

A New York corp. is a “domestic” corp.

Foreign corps. must quality for doing business in New York. Doing business = regular course of business activity.

To quality, the corp. must apply to the NY Dep’t of State, designate the NY Sec. of State as agent for service of process, and pay fees. Application must include info. from certificate and proof of good standing in home state.

If a foreign corp. does not file with the state, it cannot assert a legal claim in New York.

Question 15

Issuance of Stock

Answer 15

Issuance of stock occurs when a corporation sells its own stock.

This is distinguishable from bond issuance (debenture = loan, repayment of which is not secured by corporate assets).

Question 16

Subscription

(Revocability and Uniformity)

Answer 16

A subscription is a written, signed offer to buy stock from the corporation.

Revocability:

1. Pre-incorporation subscriptions are irrevocable for three months, unless the subscription provides otherwise or with the consent of all subscribers.
2. Post-incorporation subscriptions are irrevocable unless the corporation accepts the offer by action of the board.

Uniformity:

1. The corporation must sell to all subscribers uniformly within each class or series of stock subscribed.

Question 17

Subscription

(Defaulting on)

Answer 17

If the corporation **accepts **a subscription offer, and subscriber defaults on payment, the corporation’s responsibilities depend on how much the subscriber has already paid for the stock.

1. **S paid < 1/2 the purchase price: **If S fails to pay the balance within 30 days of written demand, the corporation can keep the money and cancel the shares; they become authorized/unissued.
2. **S paid > 1/2 the purchase price: **If S fails to pay the balance within 30 days of written demand, the corporation must try to sell the shares for cash/bond; if unable to, the corporation can keep the money and cancel the shares; they become authorized/unissued.

• **If someone is willing to pay more than the remaining balance due, the defaulter acquires the excess over what she agreed to pay less expenses for finding another subscriber. **
  
  • ​Ex. I agree to buy $5,000 worth of stock in subscription agreement. I pay $3,000 and then efault. The corporation spends $50 to find a new buyer. Another buyer agrees to pay $2,500. The corporation collects in total $5,500 for the stock. This is $500 more than I agreed to pay, so I collect $450 ($500 – expenses to find a new buyer).

Question 18

Consideration

(Permissible Forms)

Answer 18

1. Money
2. Tangible/intangible property
3. Service already performed for the corporation
4. Binding obligation to pay money/property in the future (debt)
5. Binding obligation to perform future services having an agreed-upon value

NO UNPAID STOCK.

Question 19

Consideration

(Amount Paid)

Answer 19

Par or Non-Par OKAY in New York

Par means minimum issuance price (e.g., if par value is $3 an corp. issues 10,000 shares, it must receive at least $30,000 for those shares).

No par means there is no minimum issuance price.

The board must determine the value of consideration in good faith without fraud; if it does so, the decision is conclusive as to value.

Question 20

Treasury Stock

Answer 20

Stock previously issued, then reacquired, by the corporation.

Treasury stock is treated as NO PAR.

Question 21

Watered Stock

Answer 21

Stock issued for less than par value

• Directors are liable for the “water” (deficiency), if they knowingly authorized the issuance.
• Purchasers are liable because they are charged with notice of par value.
• Third party purchasers are not liable as long as they did not know about the water (this has no effect on the liability of the directors and first purchasers).

Question 22

Preemptive Rights

Answer 22

Available only if provided for in certificate.

If so provided, preemptive rights consist of the right of existing shareholders to maintain their existing percentage ownership, by buying stock whenever there is a new issuance of common stock for money.

• Does not include sale of treasury stock (unless the certificate says so);
• Does not include issuance of shares authorized by the original certificate sold within two years of formation.
• Does not include sales of stock in exchange for consideration other than money.

Question 23

Directors: Initial Appointment and Numbers

Answer 23

Initial directors are elected by incorporators; and after that, shareholders elect directors. This happens each year, unless the certificate provides for a classified board.

• Number of directors must be 1 or more adult persons.
• The number is set in the bylaws, by shareholder act, or by the board if a shareholder bylaw allows.
• Default rule is **one director **if none is specified.

Question 24

Removal of Directors

Answer 24

1. **FOR CAUSE: **​

• Shareholders can always remove a director (before expiration of term) for cause.
• Directors can only remove a director for cause if the certificate or bylaws allow.

1. **WITHOUT CAUSE: **
   * Shareholders ONLY, and **only if **the certificate or bylaws allow.

Question 25

Filling Board Vacancies

Answer 25

If a director dies, resigns, or is removed, the general rule is that the Board selects the person who will serve the remainder of the term.

**EXCEPTION: **If the director is moved without cause, by shareholder vote if allowed in cert/bylaws, then the director can be replaced by the shareholders through election.

Question 26

Board Action

Answer 26

Individual directors **are not **agents of the corporation, and so they do not have the power to unilaterally bind the corporation. Such action will be void unless ratified.

The board acts by:

1. Unanimous, written consent, or
2. A meeting

Meetings:

• Need not be in NY
• Can be called by conference call if quorum of directors present at the same time/can hear
• Notice is not required for regular meetings, if they are set forth in the bylaws
• For special meetings, notice to directors must be given, including time and place (not purpose).
  
  • If no notice is given, any action taken by the board is not valid unless a director not given notice WAIVES by a writing (signed anytime) or by attending the meeting without objection.

Question 27

Removal of Officers

Answer 27

May be done at any time, with or without cause, by a majority of the board, unless the certificate provides that officers are elected by shareholder vote.

Question 28

Director Voting

Answer 28

**PROXIES are void. **Directors owes non-delegable fiduciary duties (same with voting agreements).

Board action requires a quorum** and a board vote consisting of a **majority of the quorum.

• Quorum = a majority of the duly-constituted board (including vacant positions)
  
  • Unless the certificate or bylaws allow for a smaller quorum, but in no event can the quorum be less than 1/3 of directors.
  • Greater quorum can only be required by certificate.
• Board vote must be majority of quorum, unless the certificate allows for a supermajority vote.
  
  • In no event can the certificate/bylaws allow director action by less than a majority of the quorum.
  • If the question indicates there was a “shareholder agreement” for supermajority board action, this is invalid unless it expressly states that the certificate was amended to include supermajority board voting.

Question 29

Director Committees

Answer 29

The entire board, by majority vote, can delegate substantial management functions to a committee of one or more directors, but cannot delegate (but can make recommendations about):

• Setting director compensation;
• Filling a board vacancy
• Submtting a fundamental change to shareholders; or
• Amend bylaws

Committees are commonly used to handle shareholder derivative suits (SLCs).

Committees have all the powers of the board except as limited by the certificate/bylaws or the BCL.

Question 30

Duty of Care

Answer 30

**“A director must discharge her duties in good faith and with that degree of care, diligence, and skill that an ordinarily prudent person would exercise under similar circumstances in like position.” **

Question 31

Director Non-Feasance

Answer 31

E.g., no meeting attendance, no attention at all to the corporation.

The **duty of care **applies, but for liability to attach, a complainant must show that the non-feasance caused a loss to the corporation (very difficult to prove).

Ex. only director with special expertise in an area, such as anti-trust, and liability for problem in that area.

Question 32

Director Misfeasance

Answer 32

**Duty of care standard (but BJR applies). **

“Prudent people do appropriate homework” (duty to deliberate, analyze decisions.

A director is not a guarantor of success, so a court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

Question 33

Duty of Loyalty

Answer 33

**“A director must act in good faith, and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries.” **

Question 34

Business Judgment Rule and Conflict of Interest Transactions

Answer 34

BJR does not apply in duty of loyalty cases where there is a conflict of interest.

Question 35

Interested Director Transactions

Answer 35

Any deal between the corporation and one of its directors, or business of which its director is also a director, or where director has substantial financial interest, is an interested transaction.

Under duty of loyalty standard, the transaction will be set aside, unless either:

1. Director shows the transaction was fair and reasonable; or
2. The deal was approved by either:

• Shareholders;
• Unanimous vote of disinterested directors;
• Board approval by sufficient vote not counting interested directors.

(Interested directors do count towards a quorum).

Question 36

Board Compensation

Answer 36

The board can set the compensaton of directors, as long as reasonable and in good faith. If excessive, it is a waste of corporate assets.

Stock options can be used as incentive to service (if approved by shareholders or, if listed on stock exchange, without shareholder approval).

Question 37

Competing Ventures

Answer 37

Duty of Loyalty Standard.

A director who competes with her corporation –> corp. gets a constructive trust in the profits (accounting must be made).

Corporation may also get damages, if the competition hurt it.

Question 38

Usurpation of Corporate Opportunity

Answer 38

When a director usurps a corporate opportunity, this is judged under the duty of loyalty standard.

A director may not take an opportunity the corporation needs, has an interest/expectancy in, or is tangibly related to the business, until or unless he tells the board about the opportunity and waits for the board to reject it.

“Corporation couldn’t afford it” is not an excuse.

Usurpration results in constructive trust, accounting for profits, damages if harmed.

Question 39

Loans of Corporate Funds/ Guarantees to Directors

Answer 39

Loans not benefitting the corporation** require approval by a **majority of SHs entitled to vote. Directors who approve unlawful loans violate their duties to the corporation and are jointly and severally liable for resulting losses. A director who is present is deemed to concur unless he dissents (see other card).

If the Board finds that it benefits the corporation, the board may act to approve the loan without shareholder vote.

However, Sarbanes-Oxley restricts loans to executives in publicly-traded corps. Board of such large companies must establish an audit committee and oversee work of registered accounting firm; CEO & financial officers must certify to accurancy and completeness of financial reports.

Question 40

Basis for Director Liability

Answer 40

A director is presumed to have concurred with board action, unless her dissent is noted in writing **in the corporate records: **

1. In the minutes;
2. In writing to the secretary at the meeting;
3. Registered letter to the secretary promptly after adjournment.

Oral dissent not by itself effective; director cannot dissent if s/he voted for the corporate act.

Question 41

Exceptions to Presumption of Director Concurrence

Answer 41

• A director who missed the meeting is not liable if she registered written dissent within reasonable time of learning about the action.
  
  • Delivering the dissent;
  • Sending by registered mail to corp. secretary, ensuring that dissent is filed.
• Good faith reliance on information, opinions, reports, or statements by (1) officers or employees of the corp. who director believes is competent/reliable, (2) lawyer/public accountings acting on their competence; or (3) committee of board of directos.

Question 42

Officers

(Duties to Corporation, etc.)

Answer 42

Officers owe same duty as directors.

But, they are agents and can bind the corporation if they have that authority.

• Officers are bound by ordinary agency rules. A principal (the corp) can only be bound if the agent acted with authority; where articles limit corporate activities to a certain type and there is no vote of SHs or directors to give officers authority beyond those activities, there is no actual authority to make extraordinary/unusual contracts. An officer who makes an extraordinary/unusual contract without authority cannot bind the corporation.

A person can hold multiple officers simultaneously.

The Board appoints and removes officers unless the certificate allows shareholders to elect them.

Question 43

Reimbursement of Directors and Officers

Answer 43

• PROHIBITED if director was held liable to the corporation, or in a criminal case, if director had no reason to believe his actions were lawful.
• MANDATORY if director was held not liable on the merits. **OR **in a non-derivative suit brought against officer/director, if the officer defends the action on the merits or otherwise.
• PERMISSIBLE if other case, such as where the director in good faith and for a purpose reasonably believed in corporation’s best interested as determined by:
  
  • Board action (quorum being non-parties); and if there is no such quorum, then by:
    
    • Shareholders or quorum of disinterested directors; or
    • Board, pursuant to report from independent legal counsel.

A court may order reimbursement of litigation expenses and attorney’s fees.

The corporation may advance litigation fees, but must be repaid if the director was not entitled to reimbursement.

D&O insurance held by corporation is okay.

Indemnification permissible by board resolution or shareholder agreement unless in bad faith, deliberate dishonesty, in a way material to the case.

• But attorney’s fees are only recoverable to the extent they are incurred in connection with defense of derivative action; those fees incurred in a proceeding to force the corp to indemnify the office (so-called fees on fees) are not incurred in defense of a derivative action and so are not recoverable.

Question 44

Elimination of Director Liability in the Certificate of Incorporation

Answer 44

The certificate may eliminate director liability to the corporation or to its shareholders for damages for breach of duty, except when the director acted in bad faith, or with intentional misconduct, or received improper financial benefit, or appoved an unlawful distribution or loan.

Question 45

Shareholder Management

Answer 45

Generally, shareholders cannot manage the corporation, except for close corporations (few shareholders; not publicly traded).

Close corps can choose to be controlled by shareholders by including in the certificate a provision restricting/transferring control and board power to shareholders, and:

1. Unanimous approval of shareholders (voting/non-voting) / incorporators;
2. It is conspicuously noted on front and back of all shares;
3. All subsequent shareholders have notice; and
4. Shares are not listed on an exchange or regularly quoted over-the-counter.

Question 46

Fiduciary Duties in SH-run Close Corps

Answer 46

In close corps., managing SHs owe duties of care and loyalty to the shareholders.

There is a trend towards imposing fiduciary duties on shareholders in their dealing with one another, and imposing a duty of utmost good faith, in order to give minority shareholders a remedy for behavior that defeats their reasonable expectations for investing.

Question 47

Close Corporations (Investing)

Answer 47

Reasonable expectations of most eople who invest in corporations:

1. Employment
2. Return on investment
3. Voice in management

When frozen out of close corp., breach of duty of good faith.

Question 48

Professional Corporations

Answer 48

Members of professions such as doctors/lawyers cannot practice profession in a corporation, can can form a “PC” (professional corp).

• Shareholders, officers, and directors must be licensed professionals.
• Professionals liable for their own malpractice, but not that of others.
• Professionals are not liable for contracts entered into by entity or for rent due on leases in the P.C.’s name
• If member dies/is disqualified, the PC must buy the shares back.

Question 49

Shareholder Liability

Answer 49

General rule: shareholders are NOT liable for acts of the corporation.

But, a shareholder might be personally liable if the court “pierces the corporate veil.”

Question 50

Piercing the Corporate Veil

Answer 50

Can only happen in close corporations.

1. Shareholder must have abused the privilege of incorporating; and
2. Fairness requires holding them liable, because the SH exercised **complete dominion and control **over the corp to perpetrate a fraud or injustice.

Alter-Ego Theory: identity of interest/agency/domination

Under-capitalization is not by itself sufficient to PCV but compelling factor.

This is more readily available in TORT than in CONTRACT.

Question 51

Shareholder Liability for Wages/Benefits

Answer 51

In a close corporation, the ten largest shareholders are personally liable for wages/benefits of the company’s employees.

Question 52

Shareholder Derivative Suit

Answer 52

SH sues to enforce the corporation’s claim, not her own. E.g., breach of duty of care/loyalty are owed to the corporation and thus are the corporation’s claims.

Suits to honor preemptive rights, declare dividends, not usually derivative (unless breach of duty).

Suit for waste of corporate assets = derivative.

If successful, the corporation gets recovery, and SH gets costs/fees, unless the court determines recovery would return $ to the “bad guys” in which case the SH might recover directly.

If unsuccessful, no costs/expenses to SH, and the SH may be liable to the defendants for costs, and there is claim preemption for future SHs.

Question 53

Bringing a Shareholder Derivative Suit

Answer 53

1. Stock ownership when claim arose

(or receipt by operation of law (inheritance, divorce) from someone who owned when claim arose.

2. Stock ownership when suit was brought and through recovery;
3. Permissive order to post bond for defendant’s costs, unless 5% owner or owns > $50,000 worth of stock;
4. Demand, unless futile (see other card)
5. Joinder of corp. as defendant

Question 54

The Demand Requirement

Answer 54

**Demand must be brought, unless futile. **

**Futile IF: **

• Majority of board is interested/in control of interested directors;
• Board did not reasonably inform itself; or
• The transaction is egregious on its face, not sound business judgment.

Must be plead with particularity.

**If demand is made and denied: **

• May only sue if SH can show the board is interested or the procedure was incomplete/inadequate.

Question 55

Special Litigation Committees / Motions to Dismiss

Answer 55

Corporation being sued in a derivative action can move to dismiss, based on a finding by an independent committee or directors (or just independent directors) that the suit is not in the corporation’s best interest (e.g., low chance of recovery / costs exceed recovery).

Court considers:

1. Independence of recommendations, and
2. Sufficiency of investigation

If satisfied, usually dismissed.

Question 56

Dismissal by Parties / Settlement of Derivative Suit

Answer 56

Only with court approval

Court might require notice to shareholders for their feedback.

Question 57

Suits by Directors and Officers

Answer 57

A director or officer can sue another D or O to comepl her to account for violation of duties or misappropriation of assets, and need not meet the requirements of a shareholder derivative suit because she sues in her own name.

Question 58

Shareholder Voting

(Who is entitled to vote)

Answer 58

Record owner as of record date has the right to vote. Record date must be no fewer than 10 and no more than 60 days before the meeting.

EXCEPTIONS:

• Corporations cannot vote treasury stock;
• Dead SH’s executor can vote SH’s stock if dead SH was holder as of record date; and
• Proxies are permitted for SH voting.

Question 59

Shareholder Voting

(Proxies)

Answer 59

A proxy is:

1. A writing (fax/email okay);
2. Signed by the record shareholder;
3. Directed to the corporate secretary;
4. Authorizing holder of proxy to vote shares.

Proxy is valid for 11 months, unless otherwise specified.

Proies are revocable unless the proxy SAYS otherwise, and the proxy-holder has some interest in the stock other than voting (proxy coupled with an interest) e.g., option / voting agreement.

Question 60

Voting Trust

Answer 60

1. Written trust agreement controlling how shares will be voted;
2. Copied to the coporation;
3. Transfer of title to shares to voting trustee;
4. Original shareholders receive voting trust certificates and retain all other SH rights except voting.

Voting trusts can last up to ten years, with an option to renew for another term of up to ten years, if agreed to within 6 months of expiration.

Question 61

Voting / Pooling Agreement

Answer 61

Voting agreements must be signed and in writing. It is not clear that they are specifically enforceable.

Proies given subject to a voting agreement are irrevocable if the proxy says so.

Shareholder may not make an agreement about actions they will take if elected as directors.

Question 62

Shareholder Action

(Consent, Meetings, Notice)

Answer 62

Shareholders may act by unanimous, written consent, or by a meeting.

• Meetings need not be held in New York
• Notice given by writing (email okay), between 10–60 days before the meeting, stating the time and place, and:
  
  • If the action to be taken triggers appraisal rights, notification of such rights with a copy of the statute; and
  • Purpose of the meeting, if it is a special meeting.
• Notice must be given to all SHs entitled to vote; failure to give notice will void board action unless (1) express, signed, written waiver or (2) SH attendance w/o objection.
• Special meeting may only be conducted for the specific purpose indicated in the notice.
• If the board fails to hold an annual meeting to hold an annual meeting, the court may order.

Question 63

Valid Shareholder Voting

Answer 63

QUORUM. Not lost if people leave meeting (contrast with directors).

• Default Rule: Majority of outstanding shares.
• Amendment:
  
  • Reduction of quorum can be provided for in certificate or bylaws (no less than 1/3).
  • Supermajority** can be provided for **in certificate only.

VOTE.** **

• Default Rule: Majority of shares present, actually voting (not including abstainers).
• Amendment:
  
  • **Supermajority **can be provided for in certificate only.
  • Cannot reduce to less than majority approval.
  • Cumulative voting** if provided for in **certificate only.
    
    • ​100 / (x+1) + 1 share = percentage ownership necessary to ensure one director elected.

Question 64

Transfer of Shareholder Stock

Answer 64

• Amount of consideration: Par value N/A; SH can sell for any price.
• Transferability restrictions: if set in cert/bylaws, or by agreement, restrictions are valid if they are not an undue restraint on alienation.
  
  • Right of first refusal by corp. okay if price offered is reasonable;
  • Usually not okay to require consent by corp. to sell, because arbitrary/undue restraint.
  • Requiring to sell back to corp. in event of death/retirement is okay.
• For a restriction to be valid against a transferee, the restriction must be conspicuously noted on the stock certificate, or the transfereee had ACTUAL knowledge.

Question 65

Shareholder Right to Inspect/Copy Books and Records

Answer 65

• **Minutes of shareholder proceedings and record of shareholders. **Any SH, within 5 days of written demand, may have access.
  
  • Corporation may demand an affidavit only to the extent asking for assurance that the purpose is not in something other than the interest of the corp and that the SH has not, within 5 years, tried to sell any list of SHs.
  • Corp. may deny access if SH refuses to furnish such affidavit.
• **List of current directors and officers. **Any SH, within **2 days **of written demand, may demand access. No affidavit required.
• **Request for annual balance sheet, profit and loss statement, and interim statements to SHs/public. **Corporation must timely comply with request, can send by mail.
• **Common Law Right to Inspect. **In addition to statutory rights, SH also has common law right to inspect records at a reasonable time and place and for proper purpose related to role as SH. Unclear how broad this right is.

Question 66

Distributions and Dividends

Answer 66

Distributions are payments by the corporation to shareholders, including dividends, share repurchases, and redeeming shares (forced sale to corp). These are declared at the board’s discretion; a court will only interfere upon showing of bad faith/dishonest purpose.

Shareholders receiving dividends:

• Preferred shares are paid first, according to their preference; the rest distributed pro rata among common stock.
• Preferred participating shares are paid first according to their preference, and then paid again when remainder is distributed pro rata among common and preferred SHs.
• Cumulative preferred shares get paid first, according to the amount of their preference, for each year the dividend went unpaid, then distributed pro rata among common SHs.

Question 67

Surplus

Stated Capital

Answer 67

Surplus = assets – liabilities – stated capital.

Stated capital = par value of all shares issued, or if there is no par, the board can allocate any part (but not all) of the consideration received for the issuance within 60 days of issuance.

• Stated capital **may not **be distributed.
• Distributions must be made out of the surplus.

Question 68

Unlawful Distributions

Answer 68

Distributions may not be made out of stated capital or while the company is insolvent, or if the distribution would render the corporation insolvent. The corporation can make a distribution if it lost money last year.

Directors are personally liable for unlawful distributions, as are shareholders who knew the distribution was unlawful when they received it.

• Knowingly unlawful distribution can be derivative b/c corporation’s claim.
• Possible good faith reliance defense for director.

Question 69

Redemptions and Repurchases

Answer 69

Redemptions: Forced sale of shares to the corporation. Must be set forth in the certificate and proportional to all shares within the class.

Repurchases: Corp. buys shares back from shareholders (voluntary). These are individually negotiated deals; corporation usually may discriminate in repurchases but it might have to give equal opportunity in close corporations to all shareholders.

Question 70

Fundamental Corporate Changes

Answer 70

• Require both board and shareholder approval and notification w/ dep’t of state.
• Dissenting shareholders, for certain actions, get appraisal rights, meaning the right to force the corp. to buy your stock at fair value.
• No appraisal rights for publicly-traded corps.
• Triggering events:
  
  • Some certificate amendments
  • Consolidation
  • Merger
  • Transfer of substantially all assets
  • Share exchange acquisition

Question 71

Perfecting Appraisal Rights

Answer 71

1. Before vote, file written objection and intent to demand payment.
2. Abstain or vote against the change.
3. After vote, make a written demand to be bought out.

If SH and corp. cannot agree on fair value, the corp. sues and the court determines fair value. The court may not discount value of stock to reflect a minority position.

Question 72

Amending the Certificate

Answer 72

• Minor changes by board (officer location, registered agent, etc.) do not require shareholder approval.
• Other changes require (1) board approval and (2) approval by the majority of shares entitled to vote.
  
  • EXCEPT: If the amendment would change or strike a supermajority voting requirement for shareholder (not director) voting, you need director approval plus 2/3 shares entitled to vote.
• Appraisal available if the amendment alters/abolishes an existing right/preference/redemption/voting right.
• Changes must be delivered to state for filing.

Question 73

Mergers and Consolidation

Answer 73

1. Board adopts merger plan.
2. SH approval by each corporation (majority of outanding shares entitled to vote). –> exception: where parent owns >90% of sub, short form merger does not require shareholder vote for either corporation.
3. Deliver certificate of merger to Dep’t of State

**Appraisal rights: disappearing corp’s dissenters have appraisal rights even if merger is short-form. **

**Successor liablity attaches. **

Question 74

Transfer of Substantially All Assets or Share Exchange

Answer 74

• This is a fundamental corporate change for the seller only, not for the buying corp.
• Selling corp. needs boad approval + shareholder vote (majority of shares entitled to vote); appraisal available.
• Share exchange: file with dep’t of state
• Asset sale: no filing
• Usually no successor liability, unless (1) deal provides otherwise; or (2) purchasing co = mere continuation of seller; or (3) deal entered into fraudulently to escape obligations.

Question 75

Mortgage of Substantially All Assets

Answer 75

**NOT A FUNDAMENTAL CORPORATION CHANGE. ONLY REQUIRES PROPER BOARD ACTION. **

Question 76

Dissolution

(Standards)

Answer 76

Voluntary: No board vote necessaey. Just majority vote of shares entitled to vote; then certificate of dissolution filed with state.

Involuntary (court-ordered):

• By board resolution or majority of shares entitled to vote, that corp. has insufficient assets or dissolution is beneficial to shareholders;
• 1/2 or more of shares entitled to vote may petition if directors are too divided to manage or shareholders too divided to elect directors or magnitude of dissention makes dissolution beneficial;
• Any SH may petition if SHs unable to elect directors for 2 annual meetings; and
• Close corp only: Holder of 20% or more can petition on grounds that management is illegal/oppressive/fraudulent to SH or management is wasting/divesting corporate assets.

Question 77

Dissolution

(Procedure)

Answer 77

1. Gather assets
2. Convert to cash
3. Pay creditors
4. Distribute remainder to SHs, pro rata, unless dissolution preference.

Shareholders cannot agree they will be paid before creditors.

Question 78

Controlling Shareholder Duty

Answer 78

• A controlling SH or a SH who also occupies a management/control position owes a fiduciary duty to minority SHs. She cannot use her dominant position for individual advantage at the expense of minority SHs or the corporation.
• A controlling SH may sell shares at a premium, but if she does so without making reasonable investigation and in fact sells control to a looter, courts may impose liability. The controller-seller then must disgorge profits and is probably liable for the corporation’s damage.
• If the seller has no interest in running the company, it de facto is selling a corporate asset (the control premium) and all shareholders share in the premium.

Question 79

Selling Seat on Board

Answer 79

Fiduciaries cannot sell positions. Must disgorge profit.

Question 80

Freeze-Out

Answer 80

All mergers must have a legitimate corporate purpose, even though approved by required number of shares. “Freeze-out” mergers aimed solely at cashing out minority shareholders unfairly might prompt courts to protect minority SHs, looking at transaction as a whole, to make sure there was fair price and fair dealing.

• Whether deal was tainted by self-dealing/fraud
• Whether minority SH was dealth with fairly
• Whether legitimate business reason for merger

Question 81

Insider Trading

Answer 81

1. Market Trading on Inside Information. Breach of duty to corp.; corp can sue for profit / derivative suit.
2. Non-Disclosure of Special Facts to SH. Directors, officers, and controlling SHs owe a duty not to trade on “special facts” in securities transaction with a non-insider. Special facts = those that a reasonable investor would consider important in making an investment decision. The SH with whom the violator deals can sue (breach of duty owed to SH) as a direct suit.