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NY Bar Exam Review - Corporations Law


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What are the six possible corporation fact patterns on the bar?
1) Organization of corporations;
2) Issuance of stock;
3) Directors and officers;
4) Shareholders;
5) Fundamental corporate changes;
6) Controlling shareholders (and related topics)
What is required for formation of a NY corporation?
1) Incorporators (people);
2) Certificate of incorporation (paper); and
3) Signature of certificate by each incorporator and acknowledgement before notary, then delivery to NY Department of State, who files it (acts)
What does an incorporator do?
1) Execute the certificate and deliver it to the Department of State;
2) Hold the organizational meeting.
How many incorporators do you need?
One or more.
Who can be an incorporator?
Adult humans ONLY - no entities.
*Note: this is unusual b/c in most states an entity could be an incorporator, but not in NY.
What are the purposes of the certificate of incorporation?
1) It's a contract b/t corporation and s/h's;
2) It's also a K between corporation and state.
What information goes into the certificate?
1) Names and address;
2) MAY make a statement of duration;
3) MUST make statement of corporate purpose;
4) Capital structure (stock)
What names and addresses go into the certificate?
1) Corporate name;
2) The county in NY of the "office of corporation";
3) MUST Designate NY Secretary of State as corporation's agent for service of process;
4) MUST give address for forwarding process;
5) MAY (but don't have to) name a registered agent for service of process;
6) Name and addresses of each incorporator.
What restrictions apply to the choice of corporation's name?
Must have one of these words, or an abbreviation thereof: corporatoin, incorporated, or limited.
Does the office of corporation have to be a place where the corporation actually does business?
What if the statement contains no statement of duration?
We presume perpetual existence.
What are the possibilities for the corporate statement of purpose?
1) Could be a general statement of purpose (such as, "to engage in all lawful activity, after first obtaining necessary state agency approval");
2) Could be a specific statement of purpose.
What is the result if a corporation includes in its certificate a specific statement of purpose, and then does something outside that purpose?
The later act is an "ultra vires act" - beyond the scope of the certificate. At common law, that would mean that the contract could be voided as beyond the capacity of the corporation.
How do we handle ultra vires today?
1) Ultra vires Ks are VALID;
2) S/h's can seek an INJUNCTION;
3) Responsible OFFICERS AND DIRECTORS are LIABLE to the corporation for ultra vires losses.
When should you be on the lookout for ultra vires issues?
Whenever a question gives you a specific statement of purposes.
What is authorized stock?
The maximum number of shars the corporation CAN SELL.
What is issued stock?
The number of shares the corporation ACTUALLY SELLS.
What is outstanding stock?
Shares that have been ISSUED AND NOT REACQUIRED by the corporation.
What must be included in the certificate with respect to capital structure?
1) Authorized stock;
2) Number of shares per class;
3) Information on par value, rights, preferences, and limitations of eac class;
4) Information on series of preferred shares
What is a series?
A subclass of stock.
What is required of the classes of stocks?
At least one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights.
What is the effect of the filing of the certificate by the NY Department of State?
The Department's filing is CONCLUSIVE EVIDENCE of VALID FORMATION. At that moment, you have a de jure corporation.
What is required after the certificate is filed?
The incorporators hold an organizational meeting (or they can do it by written consent).
What do they do at the organizational meeting?
1) Adopt any bylaws;
2) Elect the initial directors.
At that point, the board of directors will take over management.
What is the legal significance of formation of a corporation?
1) Internal affairs (duties, relationship among directors, officers, shareholders, etc.) of a NY corporation are governed by NY law (regardless of where corporation is doing business);
2) A corporation is a separate legal person. It has broad powers by statute, including the power to enter contracts, transfer property, buy and sell securitie (its own ow others') and to sue or be sued;
3) Because the corporation is a separate entity, generally, the people who run it (directors and officers) are not liable for its obligations. And the owners (the shareholders) generally enjoy "limited liability" which means that a shareholder only has to pay for her stock, and not any corporate liability.
Can the corporation guarantee a loan not in the furtherance of corporate business?
Yes, but only with the approval of 2/3 of the shares entitled to vote.
Can a corporation make political contributions?
Yes, but no more than $5000 per year per candidate or organization (under election law, not BCL).
Can a corporation make charitable contributions?
Yes. There's no statutory ceiling here.
Who is liable for corporate debts and obligations?
The corporation. It has entity status, so that if our corporation breaches a contract, commits a tort, or defaults on a debt, IT is liable and not the s/hs.
What are the de facto corporation/ corporation by estoppel doctrines?
Doctrines by which a business failing to achieve de jure corporate status nonetheless is treated as a corporation (so s/hs will not be personally liable for business debts).
When will the de facto corporation doctrine be applied and what is the result where it is?
1) There is a relevant incorporation statute;
2) The parties made a good faith, colorable attempt to comply with it; and
3) Some exercise of corporate privileges.
If applicable, treated as corporation for all purposes except in an action by the state.
What is the status of the de facto corporation doctrine in NY?
B/c the Department of State's filing the certificate is conclusive proof of formation, the doctrine was thought to be abolished. BUT, case law suggests that it may be alive, at leaset in limited circumstances, such as where the incorporators put together a proper certificate and delivered it to the Department of State, but the Department failed to file it (without rejecting it)
What is corporation by estoppel?
Theory is that one dealing with a business as a corporation, treating it as a corporation, may be estopped from denying the business's corporate status. So, such a person, under this theory, cannot sue the individual proprietors.
What is the status of the corporation by esstoppel doctrine in NY?
Exists in a lot of states, but abolished in NY.
Can a de jure corporation exist without bylaws?
Yes. Adoption of bylaws is NOT a condition precedent to formation of a corporation. But, almost every corporation has them b/c they can establish internal procedures and responsibilities of people like officers, set forth the type of notice required for meetings, etc.
If the bylaws are inconsistent with the certificate, which document controls?
The certificate, because the certificate is a contract with the state; it is a more important document.
Are bylaws filed with the state?
Are outsiders bound by bylaws?
No. They are an internal document.
Who adopts the initial bylaws?
The incorporators, at the organizational meeting.
What is the status of the intial bylaws?
They have the statuts of a s/h bylaw.
Who can amend or repeal the bylaws or adopt new ones?
The shareholders.
When does the board of directors ever get to amend or repeal bylaws or adopt new ones?
Only if the certificate or a shareholder bylaw allows.
Who can amend or repeal director-adopted bylaws?
What is a promoter?
A person acting on behalf of a corporation not yet formed.
What is the corporation's liability on preincorporation contracts?
A corporation is NOT liable on preincorporation contracts until it ADOPTS the contract.
How can adoption happen?
1) Express adoption;
2) Implied adoption
What is express adoption?
Director's action
What is implied adoption?
Comes from the corporation's knowing acceptance of a benefit of the contract
What is the liability of the promotor with respect to preincorporation contracts?
Generally, unless the K clearly indicates that the parties do not intend the promotor to be liable, the promotor remains liable on preincorporation contracts until there has been a novation (agreement of the promoter, the corporation, and the other contracting party taht the corporation will replace the promoter under the contract).
Will the promotor be liable on the lease if the corporation is formed and adopts the contract?
Yes. The promotor is liable until novation and here, we have no novation. But, the adoption makes the corporation liable as well, so here both the promotor and the corporation would be liable.
What is the rule with respect to a promoter dealing with the corporation itself?
Secret profit rule - promoter cannot make a secret profit on her dealings with the corporation.
How is profit measured where the sale to corporation by promoter is of property acquired before becoming a promotor?
Profit equals the price paid by the corporation minus fair market value (FMV). What promoter paid is irrelevant.
How is profit measured where the sale to corporation by promoter is of property acquired after becoming promoter?
Profit equals price paid by corporation minus price paid by promoter.
When is the promoter liable to the corporation for the profit?
Only if it was secret. NOT if board consents or ratifies the profit.
What is a foreign corporation?
One incorporated outside NY.
What is a NY corporation called?
A domestic corporation.
What must foreign corporations doing business in NY do?
Foreign corporations doing business in NY must qualify.
What does "doing business" mean?
The regular course of INTRAstate, not interstate, business activity. Not occasional or sporadic business. Not just having meetings in NY, etc.
How can a foreign corporation qualify?
By applying to the NY Department of State and designating the Secretary of State as agent for service of process.
In applying to qualify, what kind of information does the foreign corporation give the NY Department of State?
1) Information from its certificate;
2) Proof of good standing in its home state.
What happens if a foreign corporation does business in NY without qualifying?
1) There's a penalty when the corporation DOES qualify;
2) Until it qualifies, the foreign corporation cannot sue in NY, but it CAN be sued.
What is an issuance of stock?
Occurs when a corporation sells or trades its OWN stock.
What is the difference between the issuance of stock and the issuance of bonds?
In an issuance of stock, investors buy stock and thereby become equity holders - owners of the corporation. Their equity interest brings with it various rights.

With a bond, the investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the K. The holder of a bond is a creditor (not an owner) of the corporation.
What is a debenture?
It is a lona, the repayment of which is not secured by corporate assets.
When do the rules under this fact pattern apply?
ONLY when the corporation is selling its own stock - not when we buy stock on market, etc.
What is the rule with respect to revocation of preincorporation subscriptions?
A preincorporation subscription is irrevocable for three months unless it says otherwise or all subscribers agree.
What is the purpose of that rule?
So that the people forming the corporation can rely on the money being there.
Are post-incorporation subscriptions revocable?
Yes, until acceptance.
When do the corporation and the subscribers become obligated under a subscription?
When the board accepts the offer. At that point, there is an agreement to sell to this subscriber.
Can the corporation decide to sell only to some subscribers and not others?
Corporation must be uniform within each class or series of stock.
If the corporation accepts the offer and te subscriber defaults on payment, what happens?
1) If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. The shares then become authorized and unissued.
2) If subscriber has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash).
What happens in the latter scenario if no one will pay the remaining balance?
Defaulting subscriber forefeits what he has paid and the shares are canceled.
What happens if someone will pay more than the remaining balance due?
The defaulting subscriber recovers any excess over what he agreed to pay, but we deduct from that the corporation's expenses in selling.
What type of consideration must the corporation reeceive when it issues stock?
Five permitted forms of consideration for an issuance:
1) Money (includes cash or equivalent, such as check);
2) Tangible or intangible property;
3) Labor or services ALREADY PERFORMED for the corporation;
4) A binding obligation to pay in the future in cash or property;
5) A binding obligation to perform future services having an agreed value.
Can the corporation issue stsock to somebody for performing services in forming the corporation?
Yes. This is OK.
What are PROHIBITED forms of consideration?
Anything other than the five permitted forms of consideration.
What happens if somebody "pays" for an issuance with an improper form?
It is unpaid stock, which means it is all treated as "water"
What does par mean?
Minimum issuance price.
What does no par mean?
There is no minimum issuange price - can sell for any price.
Who sets the price at which to sell no par stock?
The board, unless the certificate reserves the right to shareholders.
What is treasury stock?
Stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock.
What is the par value of treasury stock?
There is no minimm. You always treat treasury stock as no par. The par of the stock when originally issued is irrelevant.
What is the rule where a corpoartion issues par value stock in exchange for property other than cash?
The property must be worth at least the combined par value of the shares issued for it.
Who values the consideration in a par issuance?
The board.
Who values consideration in a no-par issuance?
The board, unless certificate allows shareholders to do so.
When the board determines the value of the consideration for an issuance, is its determination of value conclusive?
Yes, if it is made without fraud.
What happesn when the board determines the value of services rendered in exchange for stock and they grossly over value those services?
It will likely be considered fraud. And the directors will be liable for wasting corporate assets.
What are the consequences of issuing par stock for less than par value, i.e. watered stock?
The corporation can sue for the difference b/t the par value of the stock and the price receieved - the "water."
Are the directors liable for the water?
Yes, if they knowingly authorized the issuance.
Is the s/h who bought the watered stock liable?
Yes. You're charged with notice of the par value.
What if the buyer buys the watered stock and transfers it to a third-party?
The TP is not liable if she acted in good faith, meaning that she didn't know about the water.
Does the third party have to pay value for the shares transfered to her?
No. Doesn't have to be a BFO; she could have gotten it as a gift.
Does third party's status have any effect on liability of the original purchaser of the watered stock and the directors?
What are preemptive rights?
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money (which includes cash or checks).
Does the new issuance include sale of treasury stock?
No, unless the certificate says otherwise.
Does the new issuance include sale of shares authorized by the original certificate and sold within two years of formation?
No, unless the certificate says otherwise.
If the certificate of incorporation is silent regarding preemptive rights, do they exist?
The answer depends upon when the corporation was formed.

For corporations formed BEFORE Feb 22, 1998, yes, we would have preemptive rights.

For corporations formed ON OR AFTER February 22, 1998, no, we do not have preemptive rights.
Do preemptive rights apply where corp is issuing stock to acquire Green Acres?
No. Only in new issuance for money.
What is the statutory requirement with respect to number and identity of directores?
One or more adult natural persons.
How is hte actual number of directors set?
1) In the bylaws;
2) By shareholder action;
3) By the board, if a shareholder bylaw allows;
What if no number of directors is set in any such way?
Then there is one director.
Who elects initial directors?
After that, who elects directors?
The shareholders at the annual meeting.
Do you have to elect all new directors every year?
No. There can be a "classified board" (staggered board) with 2, 3, or 4 classes of directors, with one class elected each year.
How many directors must be in a class?
At least three.
Can shareholders remove a director for cause?
Can the board remove a director for caue?
No, UNLESS it is permitted in the certificate or the bylaw.
Can anyone remove a director without cause?
Shareholderrs only and ONLY IF the certificate or bylaws allow. So, on bar exam, most often, the answer will be no.
When can a director not be removed?
If cumulative voting is in effect and the number of votes cast against removal would have elected her.
What is the general rule with respect to filling a vacancy on the board (e.g. where a director dies or resigns or is removed)?
The general rule is that the remaining directors select the person who will serve the remainder of the term.
What is the special rule with resepct to filling a vacancy on the board?
When a director is removed by shareholders without cause, shareholders select the person who will serve the remainder of the term. *BUT, remember that this will be extremely rare b/c they can only remove without cause if the certificate or bylaws allow, and they usually will not.
How does teh board of directors act?
There are only two ways in which the board can take a valid act:
1) Unanimous, written consent to act without a meeting; or
2) Have a meeting
*Note, if all board members talk to one another one at a time and all agree, it won't be valid act.
What is the result if an act is purportedly taken but neither of the above methods is followed?
The act taken is void unless later ratified by a valid act.
If there is a meeting, must it be held in NY?
No. It can be held anywhere in the world.
Is a meeting by conference call OK?
Yes, if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meeintgs are allowed).
Is notice required for regular meetings?
No. Usually, the time and place of regular meetings is in the bylaws.
Is notice required for special meetings?
Yes. You must give notice of a special meeting. The method for giving notice is set in the bylaws.
What happens if required notice for a special meeting is not given to a director?
Any action taken at the meeting is void unless the director not given notice waives the notice defect.
How can she waive the notice defect?
1) In writing and signed, any time at all;
2) By attending the meeting without objection.
Can a director give a proxy for director voting?
No. This is void as agaisnt public policy. We do not allow directors to give proxies for director voting.
Can directors enter voting agreements on how they will vote as directors?
No. This is also void as violating public policy. The whole point is that we want directlr's independent judgment.
What is the quorum required for a meeting?
To do business, we must have a majority of "entire board" (duly constituted board).
What is a duly constituted board?
The number of positions if no vacancies. (So, it's a majority of the directorship postions on the board that must be present for a quorum.)
Once we have a quorum, what is required to pass a resolution?
Majority vote of THOSE PRESENT.
What happens if there is a quorum at a meeting, but then one director leaves the meeting? Can the
The board cannot continue to do busines. The quorum has been broken, and we cannot do business.
What if there are unfilled vacancies on the board?
Still need a majority of the total directorship positions to constitute a quorum.
Can the corporation decrease a quorum to less than a majority of directors?
Yes, by certificate or bylaw. But, it can never be fewer than 1/3 of the directors.
Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?
No. We can never reduce that.
Can the corporation increase a quorum to greater than a majority of directors (e.g., two-thirds of the entire board must be present to do business)?
Yes, in the certificate only, not in bylaws.
Can the corporation require a supermajority to pass a resolution (e.g., 2/3 of the directors present must approve the resolution)?
Yes, but in the certificate only, and not in the bylaws.
What does the board of directors do?
Generally, teh board of directors manages business of corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, recommends fundamental corporate changes, etc.
What is the rule with respect to delegation of management function by the board?
If the certificate or bylaws allow, a majority of the entire board can delegate substantial managment functions to a committee of ONE or more directors. But, the board cannot delegate ALL powers and responsibilities to a committee.
What can a committee NOT do?
1) Amend, adopt, or repeal bylaws;
2) Fill a board vacancy;
3) Set director compensation;
4) Submit a fundamental corporate change shareholders
Can a committee recommend any of these things for full board action?
What is a particularly important area in which committees are used?
Shareholder derivative suits.
What sentence must be in your answer whenever there is a duty of care fact pattern?
The duty of care standard: "A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position.
What are the ways to raise the duty of care?
1) Nonfeasance (director does nothing);
2) Misfeasance (board does something that hurts the corporation)
What is the rule with respect to nonfeasance?
First, state teh duty of care standard. Then state whether or not the director breached the duty of care and why. Then state: BUT, he is liable only if his breach caused a loss to the corporation (difficult to do).
What is the rule for misfeasance?
State the duty of care standard. Then state that a director is not liable if she meets the business judgment rule (BJR).
What is the business judgment rule?
A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.
When can you be in trouble even under the BJR?
Only if it was irrational or grossly negligent (e.g. buying a property without having ANY inspection of the property at all).
What sentence must be in your answer if there's a duty of loyalty fact pattern?
Duty of Loyalty Standard: A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.
Why does the BJR not apply in duty of loyalty cases?
Because these cases always involve conflicts of interest.
What are the classic fact patterns in duty of loyalty cases?
1) Interested director transaction;
2) Competing ventures;
3) Corporate opportunity.
What is the interested director transaction?
Any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest).
What is the rule in interested director transactions?
First, state the duty of loyalty standard. Then state that interested director transactions will be set aside UNLESS the director shows either 1) the deal was fair and reasonable to the corporation when approved OR 2) the material facts and her interest were disclosed or known AND the deal was approved by any of these: a) Sharehholder action; b) Board approval by sufficient vote NOT counting the vote of interested directors; or c) Unanimous vote of disinterested directors if disinterested directors are insufficient to take an act of the board.
Do interested directors count toward a quorum of the board?
Who sets directors' compensation?
Board can set compensation of directors in any capacity, unless certificate or bylaw says they can't. Compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets, and that is breach of the duty of loyalty.
What is the rule with respect to the corporation giving a director or officer stock options as an incentive to service?
If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. But, if the stock is not listed on a stock exchange, than the use of options must be approved by shareholder vote.
What is the rule where a director wants to start a venture in the same area as the corporation?
First, state the duty of loyalty standard. Then state that director cannot go into competition with his corporation.
What happens if a director does go into competition with his corporation?
The corporation gets a constructive trust on her profits.
What is the rule with respect to corporate opportunities?
First, state the duty of loyalty standard. Then state that director cannot USURP a corporate opportunity, meaning he cannot take it until: 1) he tells the board; and 2) waits for the board to reject it.
What qualifies as a corporate opportunity?
Something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its business.
What is the remedy where there is usurpation?
The usual remedy is a constructive trust.
What are the other state law bases of director liability?
1) Ultra vires acts;
2) Watered stock;
3) Improper loans;
4) Improper distributions;
What is the rule with respect to loans to directors?
The approval required depends on when the corporation was formed:
1) For corporations formed on or before February 22, 1998, you must have a shareholder vote (in which a quorum is a majority of disinterested shares), unless the certificate allows board to decide that a loan benefits the corporation;
2) For corporations formed after February 22, 1998, instead of shareholder vote, all we need is board conclusion that the loan benefits the corporation.
For things a director can be liable for, exactly which directors are liable?
The general rule is that a director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records.
How does the director have her dissent noted in writing in corporate records?
Three ways:
1) In the minutes;
2) In writing, to the corporate secretary, at the meeting; or
3) Registered letter to the corporation promptly after adjournment.

*An oral dissent is NOT enough.
Can a director dissent if he voted for the resolution at the meeting?
What are the exceptions to the general rule?
1) Director is not liable IF she registers written dissent within a reasonable time after learning of the action.
2) Good faith reliance on information, opinions, reports, or statements by: a) officers or employees of the corporation whom the director or officer believes competent and reliable; b) lawyers or public accountants whom the director or officer believes are acting within their competence; or c) a committee of which the person relying is not a member, as to matters within its designated authority.
When might the second exception be especially likely?
In a case involving improper distributions.
How can a director register written dissent?
By deivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes for the meeting.
What duties do officers owe the corporation?
Officers owe the same duties of care and loyalty as the directors. So, all of the duty of care and loyalty fact patterns can also come up in the contexts of officers.
What are offiers' status?
Officers are agents of the corporation, so they can bind the corporation to deals if they have agency authority to do so.
What officers may the board select?
A president, one or more vice-presidents, a secretary, a treasurer, and any others the Board may determine or for which the bylaws provide.
Can one person hold multiple offices simultaneously?
Who selects and removes the officers?
The directors, unless the certificate allows the shareholdrs to elect them. If hte shareholders elect them, only the shareholders can fire them. Even then, for cause, directors can suspend an officer's authority to act.
What are the consequences if the directors appoint a president and later fire him?
The presidente will be gone, but the corporation may be liable for brach of contract damages. Damages is all the fired president can get - can't get his job back.
So, as a general rule, who hires and fires directors?
The shareholders.
Who hires and fires officers?
The directors
Do shareholders, as a general rule, hire and fire officers?
How else may an officer be removed?
By judicial action. The attorney general or holders of 10% of all the shares may sue for a judgment removing an officer for cause. The court can bar reappointment of a peerson so removed from office.
Who sets officers' compensation?
The directors. The directors monitor the officers - hire, fire, set compensation.
What is the indemnification situation?
A person is sued in her capacity as officer or director and incurs costs, attorney's fees, maybe even fines, a judgment or settlement; she seeks reimbursement from the corporation.
What are the three possibilities as to permissibility of such reimbursement?
1) Prohibited: reimbursement is prohibited if the officer or director was held liable to the corporation;
2) Of right: the corporation must reimburse the director or officer if: she was successful in defending the action on the merits or otherwise;
3) Permissive: Situation not satisfying (a) or (b), the corporation may reimburse the officer or director.
Where a director or officer qualifies for reimbursement of right from corporation, but corporation refuses to reimburse her, and she sues the corporation to force it to reimburse her and wins, can she recover the attorney's fees of this suit against the
No. Even though the corporation is treating her wrong here.
Where permissive reimbursement applies, what must the officer or director show in order to be reimbursed?
That she acted in good faith and for a purpose reasonably believed to be in the corporation's best interest.
What can reimbursement in the "permissive" category include?
Settlement amount, expenses and attorney's fees (but not any judgment)
For permissive, who determines eligibility?
1) The Board;
2) Shareholders or a quorum of those directors who are disinterested; or
3) The Board pursuant to report from independent legal counsel.
In an action by or for someone other than the corporation, when is reimbursement permitted?
If the director or officer shows she acted in good faith and for a purpose reasoanbly beileved to be in the best interest of the corporation. In a criminal case, must also show that she had no reason to believe her conduct was unlawful.
What can reimbursement include in that case?
Judgment, settlement, expenses, and attorney's fees.
Can the court in which the officer or director gets sued order the corporation to reimburse the officer or director for litigation expenses and attorney's fees?
Yes, if it finds she is reasonably entitled to it.
Note: It could not include a judgment agianst her.
How else may indemnification be provided for?
Certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the direector or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited.
Can the corporation advance litigation expenses to the director or officer?
Yes, but she must repay them if it turns out she's not entitled to reimbursement.
May corporation buy insurance to cover D and O liability?
May the certificate provide for elimination of director liability to the corporation or shareholders for damages for breach of duty?
Yes, EXCEPT, where a judgment adverse to the director established that he: 1) acted in bad faith; 2) or with intentional misconduct;
3) or received an improper financial benefit; or
4)approved an unlawful distribution or loan
When may a court pierce the corporate veil (PCV) and hold shareholders personally liable?
If they have abused the privilege of incorporating and if fairness demands that the shareholdres not have limited liability.
Why might NY courts PCV?
1) To prevent fraud or to achieve equity; or
2) To prevent the use of the corporation as a cloak for illegality.
What is an alter ego?
Where there is identity of interests, agency, and excessive domination.
What facts indicate that a corporation is being used as an alter ego?
1) S/h commingles personal and corporate funds;
2) Uses the corporate car as her own; and
3) Uses the corporate credit card for personal purchases.
If you get a PCV question, how to answer?
First, state the general rule (about shareholders generally not liable for debts or acts of corporation); and state the PCV standard and explain PCV. Then, conclude that there is no PCV if the corporation has any MIND, EXISTENCE, or WILL of its own. In NY, this is a VERY tough standard to meet - usually veil will not be pierced.
In what types of situations might a NY court PCV?
1) A dummy corporation, where sharehodlers carry on business in personal capacity or for purely personal, not corporate ends.
2) A parent corporation that so controls the daily operations of a subsidiary as to act as true prime movers behind the subsidiary's action.
3) Where a group of separate corporations are operatred as one, so they are so dominated by one that they have no mind, existence, or will of their own.
If a court does PCV, agaisnt whom would they do so?
Only agaisnt the shareholder who is treating the corporation as his alter ego - not others.
What answer where the question involves an undercapitalization fact pattern?
First, state the general rule and PCV standard and explain PCV. Then note whether the corporation was undercapitalized when formed (meaning that shareholders failed to invest enough to cover prosepctive liabilities).
Is undercapitalization enough for PCV in NY?
Apparently not by itself. Also need excessive domination or fraud or illegality.
What else should you always say in a PCV case?
As a general rule, we expect PCV more readily in tort cases than K cases.
In a close corporation, the ten largest shareholders are personally liable for what?
Wages and benefits to the corporation's employees.
What is the general rule with respect to shareholder managment of the corporation?
Generally, the board of directors and not the shareholders manage the corporation and there is a public policy that the board must exercise the management power, and that shareholders should not encroach directly on that power. There is a trend away from that public policy in some instances.
When can shareholders manage the business directly?
In a close or closely held corporation.
What is a close corporation?
It has few shareholders and there's no public market for the stock. Most corporatoins in the world are close corporations.
How is power vested in the shareholders to manage a close corporation?
A provision in the certificate can restrict or transfer board power to shareholders or others. This is OK if:
1) All incorporators or shareholders (voting and nonvoting) approve it;
2) All subsequent shareholders have notice;
3) It is conspicuously noted on the front and back of all shares; and
4) Shares are not listed on an exchange or regularly quoted over the counter.
In a close corporation run by shareholders, who owes the duties of care and loyalty?
The managing shareholders (those who actually run the corporation)
What is the trend in close corporations?
Toward imposing fiduciary duties on shareholders in their dealings with each other. Especially, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the corporation or to oppress minority shareholders or the corporation. They owe a duty of utmost good faith.
Why might courts be increasingly willing to protect minority shareholders in a close corporation?
Because they have no way out. There is no public market for the stock.
What is a processional service corporation?
Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation, but they can form a professional service corporation, usually abbreviated, "PC."
Must shareholders in a PC be licensed professionals?
Yes. And so must hte offiers and directors.
Are the professionals liable for their own malpractice?
Are the professionals liable for contracts entered by the entity and for rent due on leases in the PC's name?
No. The entity is liable.
By what rules is the PC governed?
In general, the PC is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of PC and must indicate teh profession to be practiced and include the names annd addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession.
What happens if one of the shareholders dies or is disqualified from the practice?
The PC must purchase his stock.
Who is suing in a derivative claim and why?
In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute the claim.
What must you ask to determine if a suit is a derivative suit?
Always ask: could the corporation bring this suit? If yes, probably a derivative suit.
What types of suits are always derivative?
Where s/h sues regarding waste of corporate assets.
What are the consequences of a successful derivative suit?
Generally, the recovery in any successful derivative suit goes to the corporation. S/h receives costs and attorney's fees, usually from the judgment won for the corporation.
Can s/h ever recover the damages directly in a derivative suit?
Maybe if recovery by the corporation would return money to the bad guys - the people who are breaching duties. *All you have to do is make the argumetn here - it's not clear what the court would actually do.
What are the consequences of an unsuccessful shareholders' derivative suit?
S/h cannot recover costs and expenses and is probably liable to Ds for costs b/c winner usually recovers costs from loser. But, s/h would probably NOT be liable to Ds for attorney's fees b/c the statute is silent. But, in a lot of states, we can have judgment include attorney's fees if s/ sued without reasonable cause.
Can other shareholders later sue the same defendants on the same transaction?
No. This is res judicata.
What are the requirements for bringing a shareholder deriviatve suit?
1) Stock ownership;
2) Must adequately represent the interests of corporation and sharheolders;
3) Must also make a demand that directors bring suit unless it would be futile;
4) The P shareholder can be required to pose security for costs unless P owns 5% or more of any class of stock or her stock is worth more than $50,000;
5) If demand is made and refused, in order for s/h to show, she must show a majority of the board is interested or its procedure was incomplete or inadequate.
When is it not necssary to make the showings required for a derivative shareholder suit?
A director or officer can sue another director or officer on behalf of the corporation to compel her to account for violating duties without making these showings.
What is the stock ownership requirement?
The person bringing suit must have owned stock (or held a voting trust certificate) at the time the claim arose OR have gotten it by operation of law from someone who owned the stock when the claim arose. In addition, she must own stock when the action is brought and through entry of judgment.
What are examples of "operation of law"?
Inheritance and divorce decree.
When might a demand be futile?
1) Majority of the board is interested or under the control of interested directors; or
2) The board did not inform itself of the transaction to the extent reasonable under the circumstances; or
3) The transaction is so egregious on its face that it could not be the result of sound business judgment. E.g., board continued to give financial support to defendant director even after he admitted guilt.
What is the special pleading requirement?
P must plead with particularity her efforts to get the board to sue or why demand is excused.
What if s/h brings a derivative suit, and the corporation wants it dismissed?
It can move to dismiss, based upon the finding by independent directors (or a committee of independent directors, someimes called a "special litigation committee") that the suit is not in the corporation's best interests (e.g., low chance of recovery, or cost of suit will exceed recovery).
What does the court look at in deciding whether to dismiss?
1) Independence of those making the investigation; and
2) The sufficiency of the investigation.
In a derivative suit, what role does the corporation have?
The corporation must be joined as a party as a defendent, b/c it did not sue.
Can the parties dismiss or settle a derivative suit?
Only with court approval. The court may notify shareholders whose interest will be substantially affected.
What is the general rule with respect to voting?
The general rule is that the record owner as of record date has the right to vote
Who is the record owner?
The person shown as the owner in the corporate records.
What is the record date?
The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.
What are the exceptions to the general rule that the record owner on record date votes?
1) Even if it is the record owner on the record date, corporation does not vote treasury stock;
2) Death of a shareholder - the executor of the s/h's estate can vote the shares;
3) Proxies.
What is a proxy?
1) A writing;
2) Signed by record shareholder or authorized agent;
3) Directed to secretary of corporation;
4) Authorizing another to vote the shares.
Is a fax a writing for proxy purposes?
Yes, and so is email.
Can you have proxies in director meetings?
How long is a proxy good?
For 11 months, unless it says otherwise.
Can proxies be revoked?
Can a proxy be revoked even though it states that it is irrevocable?
When can a proxy not be revoked?
1) It says it is irreovocable; and
2) The proxy-holder has some interest in the shares other than voting.
What is this called?
It is called a proxy coupled with an interest.
What are the requirements for a voting trust?
1) Written trust agreement controlling how the shares will be voted;
2) Copy to corporation;
3) Transfer legal title of shares to voting trustee;
4) Original shareholders receive voting trust certificates and retain all shaeholder rights except for voting.
Is there a time limit on voting trusts?
Yes. 10 year maximum, but within 6 months of expiration, can extend for another term of up to 10 years.
What are the requirements for a voting agreement (or "pooling" agreement)?
Agreement must be in writing and signed.
Are shareholder voting agreements permissible?
Are voting agreements specifically enforceable?
Apparently not.
What's special about a proxy given subject to a voting agreement?
It is irrevocable if it says so.
May 2 shareholders agree to vote to elect each other as directors?
Yes, because electing directors is something shareholders do.
May 2 shareholders agree about what actions they will take once they are directors?
1) This may violate the rule against voting agreements by directors;
2) It would be OK if these are the only two shareholders;
3) It is OK to agree to use best efforts to cause the corporation to act in a particular way.
What are the only two ways the shareholders can take a valid act?
1) Unanimous written consent signed by the holders of all voting shares; or
2) A meeting;
3) If the certificate allows, can take action without a meeting if there is agreement in writing of the holders of enough shares to pass a resolution if all voting shares were present and voting at a meeting.
What is the rule with respect to the annual meeting and what happens there?
1) Can be held anywhere;
2) Court can order one if not held;
3) What is so important about the annual meeting.

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