NY Corporations

Question 1

Key subjects:

Answer 1

• Judicial Dissolution – 20% or More Minority Shareholder Rights
• Preemptive Rights
• Derivative Suits
• Improper Loans of Corporate Funds
• Duty of Care
• Duty of Loyalty – Interested Director Transactions
• Duty of Loyalty – Corporate Opportunity Doctrine
• Piercing the Corporate Veil
• Liability of Corporation for Pre- Incorporation Contracts
• Liability of Promoter for Pre- Incorporation Contracts

Question 2

Promoters and Pre-incorpation Ks

• -

Answer 2

Promoters are liable for pre-incorporation contracts, with TWO exceptions:

(1) If the third party to the contract knows that the corporation does not yet exist but nonetheless agrees to look solely to the corporation once formed, for performance, then the promoter is off the hook. The promoter has the BURDEN of proof with respect to this exception.
(2) novation after corporation formed.

nb - promoter owes fiduciary duty

Question 3

Corp Liab Pre-incorpation Ks

Answer 3

General rule is no liability, except when it ADOPTS the contract. Adoption can be either express or implied.

• Express adoption requires a RESOLUTION by BOD
• Implied adoption happens when Corp with full knowledge of K’s existence ACCEPTS benefits (eg cashing check)

Adoption does not relieve promoter of liability

Question 4

Incorporation

Answer 4

File certificate
Incorporator holds organizational meeting
First annual meeting

Question 5

Name of Business statute

Answer 5

BCL

Question 6

Incorporation: Certificate

Answer 6

CERTIFICATE: MUSTS: name, corporate purpose, duration, office of corporation, registered agent, authorized shares (par value), designate SOS as agent for service.

CANNOTS: certain phrases in name (“state police,” “chamber of commerce” and “board of trade.”) or (bank,” “savings,” “insurance,” and “title”)

MAYS: corporate powers, exculpatory charter provision absolving BOD (but not for bad faith), ANY OTHER PROVISION SO LONG AS legal and relates to Corp’s purpose

CERTIFICATE received by SOS and filed is CONCLUSIVE evidence of incorporation.

Question 7

Incorporation: org meeting

Answer 7

3. Organizational Meeting: once certificate filed, incorporator hold organization meeting

. o At this meeting, the incorporator will adopt the corporation’s initial BYLAWS and appoint the initial DIRECTORS to the board who will hold office until the first annual meeting of shareholders.

Question 8

1. Effect of Proper Incorporation—”De Jure” Corporation

Answer 8

Once all statutory reqs met, a de jure corp has been formed. Certificate filed by Dept of State is CONCLUSIVE evidence.

Benefit limited liabiltiy.

Question 9

2. Defective Incorporation

de facto corporation doctrien

Answer 9

a. Lack of good faith effort to incorporate
If you conduct your business as if it were a corporation without first making a GOOD FAITH attempt to comply with the statutory incorporation requirements, then you are considered to be a promoter and, as such, are PERSONALLY for any obligations incurred in the name of the nonexistent corporation.

b. Good faith effort to incorporate–”de facto” corporation.
THREE requirements must be met to achieve “de facto” corporate status:

Question 10

NY recognizes corporation by estoppel doctrine?

Answer 10

NO: Thus, a person who deals with a business thinking it is a corporation will not be estopped for that reason alone from suing the business owner personally if de jure or de facto status has not been achieved.

Question 11

PIERCING THE CORPORATE VEIL

IMPORTANT!

Answer 11

In NY limited liability protecting corporate owners will be disregard if it is (1) NECESSARY TO PREVENT FRAUD OR TO ACHIEVE EQUITY or (2) necessary to prevetn illegality.

Often found under the following circumstances:

• excessive domination by SHs
• SHs carrying on for personal gain
• Corp being to hide illegality
• DISREGARDING OF CORPORATE FORMALITIES
• —stock certicates
• —meetings
• —elect board,e t

Question 12

Ultra vires

Answer 12

SH or NYS can sue to enjoin

corporation can sue D or O

Powers in Certificate

Question 13

Governance Instruments

Answer 13

Certificate (also can file Certificate of Correction, or Amendment of Certificate)

BYLAWS:

• if provided in certificate, BOD can adopt bylaws BUT SH are entitled to amend
• intitial bylaw adopted by incorporators

RESOLUTOINS:
By board

Question 14

SH MEETINGS:

annual
special

Answer 14

There are two primary types of shareholder meetings—annual and special. In addition, if
necessary a special meeting specifically for the election of directors may be held.

a. Annual Meeting
- date in bylaws
- elect directors
- SH may seek ct order compelling Corp to hold meeting

b. Special Meeting

Question 15

SH MEETINGS

written consent in lieu?

Answer 15

Permissible
d. Action by Written Consent
Instead of holding a shareholder meeting (and thus avoiding the expense and delay associated with such a meeting), shareholders may take any action by unanimous WRITTEN CONSENT, so long as the action they consent to could have been taken at an actual shareholder meeting.

Can be lower ratio if specified in CERTIFICATE

Question 16

SH MEETINGS

-

Answer 16

Point, deficient notice can render actions at meeting void. Look for wiaver.

“60-10 rule”. Written notice of a meeting must be given to shareholders no more than 60, nor less than 10 days before the meeting date.
o The notice must include the time, date, and place of the meeting. If the meeting is a special meeting, the notice must state the identity of the person calling the meeting and the purpose of the special meeting, and only that business may be conducted during the special meeting.
o SH can WAIVE notice in writing or by simply showing up to meeting. Otherwise, failure to give notice renders actions taken at the meeting, including elections, VOID.

Question 17

SH MEETINGS

a. Voting Eligibility/Record Date
b. Number of Votes
c. Shareholder Voting

Answer 17

Because shares of stock in a corporation (particularly a publicly-traded corporation) change hands, a board will select a RECORD DATE for an upcoming shareholder meeting. Only shareholders of record at the close of business on the record date will be entitled to ATTEND and VOTE at an upcoming shareholder meeting.

• beneficial owners direct broker
• treasury shares CANNOT be voted

NUMBER OF VOTES, usually one per share. But other provisions can be specified in CERTIFICATE.

SHAREHOLDER voting: major stuff

Question 18

SH MEETINGS

d. Quorum Requirements

Answer 18

In order to take legally binding action at a shareholder meeting, the holders of a critical mass of shares must be represented at the meeting, either in person or by proxy. This is the concept of “quorum.” Unless a quorum is achieved, shareholder action at a meeting is VOID

Question 19

SH MEETINGS

e. Separate Class Voting

Answer 19

If a proposed amendment to the certificate of incorporation would ADVERSELY AFFECT the rights of any class or series of shares, then holders of shares of that class or series, voting as a separate class, are entitled to vote on the proposed amendment. This is in addition to holders of those shares voting collectively with all other shareholders on the proposed amendment.

Providing holders of those shares with a separate class vote gives them VETO power over the proposed amendment.

The certificate of incorporation may contain provisions granting the holders of a particular class or series of shares with a separate class vote on other matters.

Question 20

SH MEETINGS

f. Special Voting for Directors

Answer 20

Directors are elected by a PLURALITY of the votes cast at a shareholder meeting. This means that those director nominees receiving the most votes win.

TRADITIONAL vs. CUMULATIVE - better for minority SHs

CLASSIFIED BOARD

Question 21

SH MEETINGS

g. Proxy Voting by Shareholders

Answer 21

1) Expiration of proxy - Proxies normally specify an expiration date. When no date is specified, a proxy is valid for 11 MONTHS, thus ensuring the proxy can only be used at one annual meeting and not two.

2) Revocation of proxy - Except in the case of the irrevocable proxy, every proxy is REVOCABLE at the pleasure of the shareholder executing it. She may do so by:
- request in writing
- turning in later dated proxy
- attend meeting in person

3) Irrevocable proxy - Under the right conditions, a proxy may become irrevocable. TWO CONDITIONS
(a) state ON ITS FACE its irrevocable, and (b) person must have SOME interest in the share (the concept of “coupled with an interest”).

Question 22

SH MEETINGS

h. Voting Together with other Shareholders

Answer 22

1) Voting pool—retention of legal ownership

Question 23

SH INSPECTION OF CORPORATE RECORDS

Answer 23

• SH has right to inspect records.
• Need to give 5 days written notice
• Notice must state “proper purpose” for inspection
  a. Records Subject to Inspection

Question 24

3. SUITS BY SHAREHOLDERS

Answer 24

a. Who May Bring Suit

Question 25

SH fidcuiary duties

Answer 25

o General rule is SHs owe no duties

o CONTROLLING SHs do owe a fiduciary duty of GOOD FAITH to minority SHs when:

Question 26

Removal of a Director

Answer 26

FOR CAUSE

Question 27

Director Voting

Answer 27

a. Quorum Rules
In order for the board to take legal action, a quorum of directors must be present at the meeting.

1) Number of directors
A majority of the entire board of directors (without regard to any vacancies) constitutes a quorum. However, the certificate of incorporation or a shareholder adopted by-law may set a higher or lower number.

2) Presence of directors
Directors must be present—either in person or telephonically—at the time a vote is taken in order to be counted for quorum purposes.

b. Vote - vote must be majority, no lower
c. Voting agreements uneforceable!

Question 28

Can a director vote by proxy?

Answer 28

No

Question 29

Board Committee’s Powers

Answer 29

Generally, anything granted by full board. EXCEPTIONS (5):

Question 30

Loans to Directors

Answer 30

A corporation may not lend money to or guarantee the obligation of a director unless [SH cleanse or BOD cleanse]:

Holders of a MAJORITY OF SHARES entitled to vote at a meeting at which a quorum is present vote to approve such loan or guarantee. Importantly, shares held by the director in question may not be voted nor are they considered for quorum purposes; or

The board approves the loan or guarantee after determining that it BENEFITS the corporation. Because the loan or guarantee constitutes a self-interested transaction, board approval in this regard must comply with New York’s interested director statute.

Question 31

Directors’ Fidcuary Duties

Answer 31

The basis for a director’s fiduciary duties is found in the BCL. It states that a director must perform his duties as a director, including his duties as a committee member, in GOOD FAITH and with that degree of CARE that an ordinarily prudent person in a like position would use under similar circumstances.

Question 32

Directors’ Fidcuary Duties: DOC

-

-

-

Answer 32

Duty of Care

Question 33

BJR

Answer 33

The business judgment rule is a legal presumption that a director, when making a business decision, has satisfied his fiduciary duties to the corporation. Therefore, unless a demonstrable CONFLICT OF INTEREST or BAD FAITH exists, New York courts will not second guess the business judgment of the directors.

Question 34

Directors’ Fidcuary Duties: DOL

generally
three situations

Answer 34

The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interest of the corporation. Typically, a director breaches this duty by placing his own interests before those of the corporation. Duty of loyalty issues arise in the following THREE situations:

SELF-DEALING transactions;

USURPATION of a corporate opportunity

actions that lead to directors being ENTRENCHED in office.

Question 35

Directors’ Fidcuary Duties: DOL

1. Self-Dealing

arises (3)

cleansing

Answer 35

1) Self-dealing arises when a transaction occurs between the corporation in question and (i) the director, (ii) some related to the director, OR (iii) another corporation for which the director is a director (interlocking directorates)
2) Unless the transaction is CLEANSED through New York’s interested director statute (a safe harbor rule), or is otherwise fair to the corporation, a court may ENJOIN OR VOID it and subject the director to liability for damages.

Question 36

Directors’ Fidcuary Duties: DOL

1. Self-Dealing

CLEANSING (3)

or

FAIR

Answer 36

SAFE HARBOR CLEANSING- Approval of transactions - An interested director transaction is cleansed (i.e., not voidable) if one of the three cleansing processes occurs:

i) The conflict is disclosed to the board and the board then approves the transaction in a manner that satisfies the normal board approval requirement but without counting the votes of INTERESTED directors;
* NB* both interested and disinterested directors are counted for quorum purposes

ii) The conflict is disclosed to the board and the disinterested directors approve the transaction UNANIMOUSLY; or
iii) The conflict is disclosed to the shareholders and the SHs vote to approve the transaction.

5) Fairness of transaction
a) If the transaction in question hasn’t been cleansed through a disinterested director or shareholder vote, courts will still not void it if the transaction was FAIR AND REASONABLE to the corporation when approved.
b) In deciding this, a court will look to see if the corporation received something of comparable value in exchange for what it gave to the director.
* *BURDEN ON INTERESTED DIRECTOR!

Question 37

Directors’ Fidcuary Duties: DOL

2. Usurping Corp Opportunity

What is a coprorate opp? (2)

Answer 37

What is a “corporate opportunity?” In making this determination, courts have applied the “tangible expectancy” test or the “line of business” test.

TANGIBLE EXPECTANCY = exiting interest, right to purchase, or ACTIVELY seeking similar opportunity.

LINE OF BUSINESS TEST: is the biz within the corp’s current or prospective line of biz?
-If director will end up in competition, then normally a CO

FACTORS:

• inside or outside director?
• how director acquired knowledge about opportunity?

REMEDY: Constructive trust

Question 38

Types of indemnification (3)

Answer 38

a. Mandatory indemnification
b. Permissive indemnification
c. Prohibited indemnification
- No indemnification for derivative suit, absent court approval

Question 39

Officer Duties

Officer removal

Answer 39

DOL (CO & S-D)
DOC

Remove at any time for any reason
K will simply lead to breach of K

Question 40

MERGERS AND ACQUISITIONS

Procedure for Merger

Answer 40

THREE STEPS
(1) The BODs of each corporation must approve the merger;

(2) SHs of each corporation must approve the merger; and
- before 2/22/1998 2/3 vote
- after 2/22/1998 (or where ceriticate states) majority
* *If eliminating class, then class must have separate vote

(3) certificate of MERGER must be delivered to the New York Department of State.

Question 41

MERGERS AND ACQUISITIONS

Short-form merger

Question 42

MERGERS AND ACQUISITIONS

Asset sales

Liabilities
*
*

Answer 42

Shareholders must approve the sale or other transfer of all or substantially all of a corporation’s assets.

1) Bd approval
2) Approval of SHs same rules re 2/22/1998

GENERAL RULE: seller retains liabilities, but an EXCEPTION in 4 circumstances:

• buyer explicitly assumes
• when assets sale is a DE FACTO MERGER
• mere continuation (“identity of ownership”)
• designed to defraud the seller

Question 43

DISSENTING SHAREHOLDER’S RIGHT OF APPRAISAL

3

Answer 43

A shareholder may be entitled to have his shares bought for cash at a price equal to their fair value as determined by a judge in an APPRAISAL proceeding. Appraisal rights can be brought in THREE situations:

Question 44

Dissolution

voluntary

involuntary

Answer 44

Voluntary

• SH vote (2/22/1998)
• file certificate of dissolution (need tax approval)

Involuntary can be brought by State or SH

By State: The state, acting through the attorney general, may dissolve a corporation involuntarily if:

Question 45

Dissolution

involuntary, by SHs (4)

KNOW THIS

Answer 45

Four grounds (no $, better,

Question 46

Judicial dissolution of minority SH (IMPORTANT!)

*

-

*

Question 47

voluntary dissolution by BOD

Answer 47

A majority of the board of directors may pursue the involuntary dissolution of a corporation under the following circumstances:

Question 48

Effect of dissolution

Answer 48

wind up, pay creditors, distribute

Question 49

Two preferred stock preferences over common stock

Answer 49

Dividend preference

Liquidation preference

Question 50

What can contsittue consideration for stock?

Answer 50

Lots: property, labor, obligation, etc.

AND: In the absence of fraud, the BOARD’s judgment as to the value of any non-cash consideration is conclusive

Question 51

Enforceability of stock subsciriptions

Answer 51

Prospective investors may subscirbe to purchase stock from a corporation that has yet to be formed. However, in order to be enforceable, the subscription must be in WRITING and SIGNED by the subscriber.

Presumed irrevocable for 3 months

Question 52

SH’s preemptive rights (KNOW IT)

what

when

exception

Answer 52

Under the common law, shareholders were entitled (but not obligated) to maintain their percentage ownership in a corporation whenever the corporation sold additional shares of common stock for cash. They could do so by purchasing their pro rata share of the new shares being sold. This entitlement is referred to as “preemptive rights”.

BEFORE 2/22/98 SHs HAVE preemptive rights
AFTER 2/22/98 SHs do NOT have preemptive rights

EXCEPTION: even if SHs have preemptive rights, SHs generally not entitled to exercise their rights when the new shares of stock are:

Question 53

Limits on Distributions

generally

reqs 2

Answer 53

Point: protect creditors. The rule has two parts: an insolvency determination; and a surplus/net profits determination. Both parts must be satisfied for a corporation to make a legal distribution.

1) Insolvency determination

Question 54

Dividend record date

Answer 54

Only record owners on said date get paid

Question 55

Sale of securities

restrcitions 3

• *

-

Answer 55

Stock shares are alienable, but reasonable restrictions can be placed on alienability. Transfer restrictions may be set forth in the certificate of incorporation, by-laws, or a separate agreement (most notably a “shareholders’ agreement”). TYPES:

a. “First Option” Restrictions - Restrictions requiring any shareholder who desires to sell his shares to first offer his shares to the corporation or its other shareholders before offering them to third parties are valid if considered “reasonable”. Normally, a “first option” provision contains a price at which the selling shareholder must sell or a pricing formula that can be used to determine that price.
* A mere disparity between the contract price and the “fair market” or “intrinsic” value of the shares does not invalidate the price or formula, so long as the parties agreed to that price or formula when entering into their agreement.

b. “Right of First Refusal” Restrictions - Sell on same terms to Corp or other SHs
c. “Consent” Restrictions - requires a shareholder to obtain the consent of all the other shareholders or that of the corporation before selling to others. Consent restraints are generally UNENFORCEABLE if consent can be withheld in the SOLE discretion of those holding it. However, a consent restraint where “consent cannot be unreasonably withheld” is generally enforceable.

Question 56

CLOSELY-HELD AND CLOSE CORPORATIONS

what

RULE
*

Answer 56

“mom and pop”-type corporation

The 10 largest SHs of a closely-held corporation are personally liable for all debts, wages, or salaries due and owing to any of its EMPLOYEES (but not independent contractors) if the corporation can’t pay.
*EEs not IC!

Question 57

LLC

what

mandatory publication requirement

membership

default

derivative suits

Answer 57

A limited liability company (“LLC”) is a business entity that combines features of a corporation with those of a partnership. In fact, LLCs are often called “incorporated partnerships”.

Within 120 days after effectiveness of its articles of formation, the LLC must publish a copy of its articles or a notice containing the substance of its articles. Specifically, the notice must be published:

Question 58

Model answer, SH right to inspect

Answer 58

A shareholder has a right to inspect and copy corporate records, books, papers, etc., upon five days written notice stating a proper purpose. A proper purpose is one that relates to the shareholder’s interest in the corporation.

Question 59

Model answer re compeling a dividend

Answer 59

The power to authorize the payment of dividends rests with the board of directors. In general, a shareholder cannot compel the board to authorize a dividend. It is only upon an affirmative showing of fraud or bad faith on the part of the board of directors, which would permit a court to intervene and compel distribution of such payment.

Here, Omega’s board of directors has been retaining Omega’s earnings for the purpose of expanding business, a legitimate decision by the board. The facts suggest that Omega has been successful in expanding its business in recent years. There is nothing to suggest any bad faith by the board of directors and therefore Smith is unlikely to be successful in filing suit.

Question 60

Model answer re DOL, corporate opp

Answer 60

Every director of a corporation is subject to a duty of loyalty which requires the director to act in a manner that the director reasonably believes is in the best interest of the corporation. Typically, a director breaches that duty when he places his own interest ahead of that of the corporation. It is a breach of the duty of loyalty when a director usurps a corporate opportunity by taking advantage of an opportunity the director knows or should know would be of interest to the corporation without first offering that opportunity to the corporation. Directors must first offer an opportunity to the corporation when a corporation has a “tangible expectancy” in an opportunity or when the opportunity is within the corporation’s current or prospective “line of business.” The remedy for usurping a corporate opportunity is for the director to turn over the opportunity and disgorge profits earned.