Organization : Formation Requirements	Steps: (1) Execute the certificate of incorporation (2) Deliver the certificate to the Department of State; and (3) Hold the organizational meeting ii. Required members: 1+ (adult humans only) Note: most other states allow other corporations to be an incorporator.
Organization: Certificate of Incorporation	Purpose: (i) It’s a contract between corporation and shareholders (ii) It’s also a contract between corporation and state Info Req'd: (1) Name and Address (mandatory); (2) State of duration (optional); (3) Corporate purpose (mandatory); (4) Capital Structure
Organization: Certificate of Incorporation: Information Required Re: Name & Address	Corporate Name: Must include (either fully spelled out or in abbreviated form corporation, incorporated, limited Address as Corporation: just need to list the county in NY in which the “office of corporation” is located Note: the “office of corporation” does not have to be the place where the corporation actually does business. Corporation’s Agent: the NY Secretary of State must be designated as the corporation’s agent for service of process. Registered Agent: in addition to the Secretary of State, you may (but do not have to) name a registered agent for service of process. Address for Service of Process: there must be an address included in the certificate, indicating an address to which service of process can be forwarded to the corporation.
Organization: Certificate of Incorporation: Durational Statement	Durational statement is optional, not req'd—default rule is perpetual continuity
Organization: Certificate of Incorporation: Corporate Purpose, Ultra Vires Acts	Purpose: Most corporations make their statement of corporate purpose very broad. (E.g., “The corporation’s purpose is to engage in all lawful activity, after first obtaining necessary state agency approval.”) Ultra Vires Acts: those acts by a corporation that are beyond the scope of the statement of corporate purpose as provided in the certificate. CL: voidable BCL: valid, but SHs can seek injunction; responsible managers are liable to corporation for ultra vires acts
Organization: Capital Structre: Authorized, Issued, Outstanding Stock	Authorized Stock: maximum number of shares the corporation can sell. Issued Stock: the number of shares the corporation actually sells (this includes treasury stock) Outstanding Stock: stock that the corporation has sold and has not reacquired.
Organization: Capital Structure: Info Req'd in Certificate	Authorized Stock # of shares per class Info on par value, rights, preferences, and limitations of each class. Info on any series of preferred shares * 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.
Organization: Acts: Process & Effect of Filing	Filing Process: (1) Each incorporator signs the certificate and acknowledges it before a notary. (2) Incorporators deliver the certificate to the NY Department of State (3) If the certificate conforms with the law, and filing fees are paid, the Department files the certificate. Effect: (1) it is conclusive evidence of valid formation (2) a de jure corporation (a legal corporation) is formed
Organization: Acts: Organizational Meeting	After paperwork, incorporators (1) Adopt any bylaws, and (2) Elect the initial directors (3) Board then takes over management of corporation. Note: Bylaws can be adopted and initial directors can be elected by written consent, instead of at an organizational meeting.
Organization: Effects of Incorporating, Loans	Liability: The corporation, not the directors or shareholders, is liable. Choice of Law: NY law governs even if business is transacted outside of NY Contributions: (1) Political: allowable but no more than $5k/year; (2) Charitable: allowable w/o limit Guarantying a loan not in furtherance of corporate business: OK IF approved by 2/3rd of shares entitled to vote Loans may be granted: if to benefit the corporation, majority of directors if not to benefit the corporation, requires SH approval as well
Organization: Defenses In Case of Failure to Form De Jure Corporation: De Facto Corporation Doctrine, Corporation by Estoppel	DFC: (1) good faith attempt to comply (2) with relevant incorporation statute and (3) business is being run as a corporation—treated as a corporation (except in an action by the state) but likely abolished in NY Corporation by Estoppel: abolished in NY; prevents parties who treat a business as a corporation from claiming that it's not
Organization: Bylaws	Bylaws are permissive: you can have a corporation WITHOUT bylaws. However, almost every corporation have set them up for procedures/responsibilities of officers, etc. Bylaws inconsistent w/ certificate: certificate always controls Bylaws are not filed by the state, and outsiders are not bound by the bylaws
Organization: Bylaws, Adoption, Amendment, Repeal	Initial bylaws are adopted by incorporators—given status of SH bylaws Shareholders can amend or repeal any bylaws or adopt new ones. The board of directors only can amend or repeal bylaws or adopt new ones if the certificate or a shareholder bylaw expressly provides for it.
Organization: Pre–Incorporation Contracts: Promoters, Corporation Liability	A promoter is a person acting on behalf of a corporation not yet formed. Corporations are liable on pre–incorporation contracts if the corporation adopts the contract. However, the corporation will not (is never) automatically bound/liable. Express adoption: we need board action for express adoption Implied adoption: this arises if a corporation knowingly accepts a benefit of the contract
Organization: Pre–Incorporation Contracts: Promoter Liability	Unless the contract clearly indicates otherwise, the promoter is liable on pre–incorporation contracts until there is novation—an agreement among the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract—even if corporation is never formed and even if corporation adopts contract but no novation occurs
Organization: Pre–Incorporation Contracts: Promoter Liability, Secret Profit Rule	Promoters cannot make a secret profit on her dealings with the corporation—otherwise has has to account for the profit and return it to the corporation—depends on corporation's knowledge of profit Secret profit calculation: Sale to a corporation of property acquired BEFORE becoming a promotet; Profit = Price Paid by the Corporation – FMV Sale to a corporation of property acquired AFTER becoming promoter; Profit = Price paid by Corporation – Price Paid by Promoter
Organization: Foreign Corporations	Foreign corporations can qualify by applying to the New York Department of State and designating the Secretary of State as an agent for service of process. It also has to pay fees to New York for the privilege of doing business here. Required Info: Foreign corporation has to give the N.Y Department of State information from its (1) certification of incorporation and (2) proof of good standing in the state in which it was formed.
Organization: Foreign Corporations: Doing Business Without Qualifying	If a foreign corporation does business in NY without qualifying, it cannot sue in New York until it qualifies, pays all fees, taxes, penalties, and interest due.
Issuance of Stock: Generally	An issuance of stock occurs when a corporation (not a SH) sells its own stock, as a method to raise capital—holders/purchasers are of equity securities Contrast bonds (debts) and debentures (loan, the repayment of which is not secured by corporate assets)—holders are creditors of debt securities
Issuance of Stock: Subscriptions	A subscription is a written, signed offer to buy stock from the corporation. The corporation cannot decide to sell only to some subscribers and not to others—must be uniform within each class or series of stock. Revocation: Pre–incorporation subscriptions are irrevocable for 3 months UNLESS (1) the subscription provides otherwise or (2) all subscribers agree to let you revoke—allows those forming the corporation to rely on the money being there when the corporation is formed. Post–incorporation subscriptions are revocable until accepted by the corporation.
Issuance of Stock: Subscriptions, Default on Payment, Less than Half Payment	If the subscriber has paid less than half of the purchase price, and fails to pay the rest w/in 30 days of written demand, the corporation can keep the money paid and cancel the shares. Stock: the stock then becomes authorized and unissued stock, which means stock can be sold by the corporation.
Issuance of Stock: Subscriptions, Default on Payment, More than Half Payment	If the subscriber has paid half or more of the purchase price, and fails to pay the rest w/in 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). If no one will pay the remaining balance, the corporation may treat the stock as authorized and unissued stock. If someone offers to pay more than the remaining balance due, then the defaulting subscriber recovers any excess over what she agreed to pay (but deduct from that the corporation’s expenses in selling to the new guy).
Issuance of Stock: Consideration	5 permitted forms of consideration: Money—cash or check Tangible or intangible property Services already performed for the corporation (must be for an entity!) Binding obligation to pay money or property in the future (e.g., promissory note) Binding obligation to perform future services having an agreed value. Note: a corporation can issue stock to somebody for performing services in forming the corporation—counts as services performed Sale of stock for anything but permitted consideration—unpaid stock and treated as "water"
Issuance of Stock: Consideration, Par Value	Par: par means the minimum issuance price. Corporations can issue stock for more than par value, but not for less. No Par: no par means that there is no minimum issuance price. The stock can be sold for any price (determined by board, unless certificate lets SHs do it)
Issuance of Stock: Consideration, Treasury Stock	Stock that was previously issued and has been reacquired by the corporation. The corporation may then sell the treasury stock. No minimum par value on treasury stock
Issuance of Stock: Consideration, Exchange for Property, Board's Determination of Value of Consideration	Corporation can sell par value stock in exchange for property as long as the property’s value is equal to the par value of the stock for which it is exchanged. Board's determination of value of consideration of issuance is conclusive unless made with obvious fraud
Issuance of Stock: Consideration, Consequences of Issuing Watered Stock	If the directors knowingly authorized the issuance, then they will be liable for the water. The person who bought the stock will also be liable for the water—charged with notice of the par value of the stock If a TP buys the watered stock from the original buyer, the TP will not be liable for the water if she did not know about the water.
Issuance of Stock: Pre–emptive 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)—excludes other forms of consideration—must be stated IN the certificate New issuance does not include (1) the sale of treasury stock or (2) sale of shares authorized by the original certificate and sold within two years.
Directors and Officers: Statutory Requirements	The number of directors (1+ adult natural persons; default: 1) is set (1) in the bylaws (2) by shareholders act, or (3) by the board, if a shareholder bylaw allows Incorporators select initial directors; then determined by SHs at annual meeting; certificate can specify number of directors per class (classified board)
Directors and Officers: Removal Before Expiration of Term	Shareholders can remove a director (1) for cause and (2) without cause only if the certificate or SH bylaws provide. The Board can only remove a director for cause if the certificate or SH bylaw allows for it. Usually both documents will be silent—and the shareholders will hold the exclusive power to remove a director for cause.
Directors and Officers: Filling Vacancies	The board selects the person who will serve the remainder of the term. But the SHs selects the person who will serve the remainder of the term in the rare case when a director is removed by shareholders without cause.
Directors and Officers: Board Action	Only two ways the board may act: (1) unanimous written consent or (2) meeting; Individual directors are NOT agents of the corporation, so they have no power to bind the corporation to anything. If the directors act in some other way, the act is void UNLESS ratified by a valid act Meetings need not be held in New York—can be by conference call (assuming everyone can hear all other participants).
Directors and Officers: Notice Requirements for Meetings	Notice is NOT required for regular meetings of the board if the time and the place of the regular meetings are set in the bylaws or by the Board. Notice IS required for special meetings and must state the time and place, but need not state the purpose. Action taken at special meetings is void unless director not given notice waives notice defect—through (1) writing and signed at any time or (2) by attending the meeting without objection.
Directors and Officers: Director Proxy / Voting Agreement	A director cannot use a proxy to vote. Such a vote would be void because directors have non–delegable fiduciary duties. Directors cannot enter into voting agreements on how they will vote. Such an agreement is prohibited and would render any vote void.
Directors & Officers: Quorom for a Meeting	Quorum: To do business, there must be a majority of “entire board” (the number of available positions). After quorum is established, passing a resolution (board action): Requires majority vote of those present—quorum must not be "broken" by having a necessary director leave. Quorum can be reduced but no fewer than 1/3rd of entire board through certificate or bylaws; requirements for passing resolution cannot be reduced. Quorum and requirements for passing a resolution (e.g., supermajority) can be increased to require more than a majority but only by certificate.
Directors and Officers: Board's Purpose	Board of directors manages business of corporation: sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corporation will issue stock, recommends fundamental corporate changes, etc.
Directors and Officers: Delegation of Power	If the certificate or bylaws allow, a majority of the “entire board” can delegate substantial management functions to a committee of 1+ directors. But, the board cannot delegate all powers and responsibilities to a committee.
Directors and Officers: Delegation of Power, Restrictions	Committee cannot: Set director compensation Fill a board vacancy Submit a fundamental change to shareholders Amend the bylaws However: a committee CAN recommend any of these things for a full board action.
Directors and Officers: Duty of Care	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.
Directors and Officers: Duty of Care, Nonfeasance	Directors failure to take action can cause him to be liable but only if plaintiff establishes that breach caused a loss to the corporation (causation)—very difficult
Directors and Officers: Duty of Care, Misfeasance	Board's act that hurts the corporation (misfeasance) subject to business judgment rule—a Court will not second–guess a business decision of the board of directors if it was made in good faith, was reasonably informed, and had a rational basis. Look for: did directors deliberate? analyze? Note: director is not a guarantor of success!
Directors and Officers: Duty of Loyalty	A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.
Directors and Officers: Duty of Loyalty, Business Judgment Rule?	BJR does NOT apply in duty of loyalty cases because the BJR does not apply when there is a conflict of interest and duty of loyalty cases ALWAYS are conflict of interests.
Directors and Officers: Duty of Loyalty, Interested Director Transactions	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). Interested directors transactions void UNLESS the director show 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: (i) SH action, (ii) board approval by a sufficient vote, not including votes of interested directors, or (iii) unanimous vote of disinterested directors if disinterested directors are insufficient to take a board action—interested directors count toward quorum and can vote, but votes don't count
Directors and Officers: Duty of Loyalty, Director Compensation	Board can set the compensation of directors. BUT compensation must be reasonable and in good faith. If it is excessive, it is waste of corporate assets. Stock incentives (options) must be approved by the SHs if stock is not listed on an exchange or authorized under exchange policies if not listed on an exchange.
Directors and Officers: Duty of Loyalty, Competing Ventures	Directors cannot compete with his corporation. If a director goes into competition with the corporation, (1) (i) she gets a constructive trust placed on her profit and (ii) she must account for her profit, OR (2) corporation may get damages if competition hurt the corporation.
Directors and Officers: Duty of Loyalty, Corporate Opportunity	A direct cannot usurp a corporate opportunity—director cannot take a corporate opportunity until he tells the board about the opportunity and waits for the board to reject it, even if corporation cannot afford the opportunity. Corporate opportunities: something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its business (common sense determination) Remedy: constructive trust
Directors and Officers: Other Bases of Director Liability	A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records (minutes, writing to secretary, or registered letter to secretary promptly after adjournment)—cannot dissent if voted for resolution at the meeting. Sources of liability: Improper loans of corporate funds unless it has been approved by shareholders or if the board finds it will benefit the corporation. Imroper distributions are also a source of liability. SOX
Directors and Officers: Exceptions to Director Liability	If a director mises a meeting she will be liable for resolutions passed at that meeting unless she registers written dissent w/in a reasonable time after learning about the act. OR Good faith reliance on information, opinions, reports, or statements byofficers or employees of the corporation whom the director or officer believes competent and reliable, lawyers or public accountants whom the director or officer believes are acting w/in their competences, OR a committee of which the person relying is not a member, as to matters within its designated authority.
Directors and Officers: Officers, Duties and Binding Power, Compensation	Officers owe the same duties as the directors owe to the corporation. Officers can bind the corporation if they have the authority to do so—actual authority comes from articles, bylaws, or director vote; apparent authority only exists to make usual/ordinary decisions Compensation is set by the board.
Directors and Officers: Officers, Selection and Removal	The board selects and removes the officers UNLESS the certificate allows SHs to elect them. If SHs elect them, only the SHs can remove them. Directors can still suspend an officer’s authority to act with cause. The attorney general or holders of 10% of all shares may sue for judgment removing an officer for cause. Court can bar reappointment of a person so removed from office.
Directors and Officers: Reimbursement	Three categories for reimbursement: Prohibited: reimbursement is prohibited if she was held liable to the corporation. Of Right: the corporation must reimburse the director or officer if she won a judgment on the merits or otherwise—but responsible for attorney fees if she has to sue corporation for reimbursement (failure to repay) Permissive: otherwise, the corporation may reimburse the officer or director—director must show she (i) acted in good faith and (ii) for a purpose reasonably believed in the company's best interest
Directors and Officers: Reimbursement, Permissive Reimbursements	Permissive reimbursements include settlement amounts, expenses, and attorney's fees (not judgments). Eligibility determined by board with quorum of non–party directors or if no such quorum exists, SHs/quorum of disinterested directors or board through report from independent legal counsel. The court (in which the O/D was sued) can order the corporation to reimburse her for litigation expenses and attorneys’ fees if it finds she is reasonably entitled to it.
Directors and Officers: Advancing Litigation Expenses	A corporation can advance litigation expenses to a director of officer, but if it turns out that she is not entitled to reimbursement, she must repay the corporation for the entire amount of the advance.
Directors and Officers: Insurance, Indemnification	A corporation can buy insurance to cover director and officer liability. The certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited.
Exam Tip: Any time you see a director breaching a duty, what should you say?	Anytime you see a director arguably breaching a duty, say this: The certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty EXCEPT: 1. For acts in bad faith 2. Internal misconduct 3. Receipt of improper financial benefit 4. Approval of unlawful distribution or loan.
Shareholders: Management of Corporation	Shareholders cannot directly manage corporation except for Closely Held Corporations SHs can manage the business directly in a close (or “closely held”) corporation Reqs: (1) has few SHs and (2) the stock is NOT publicly traded. Note: almost all corporations on the bar exam are close corporations.
Shareholders: Requirements for SH Management	SH management not required for close corporation; it can have a board of directors. But to have shareholder management, there must be a provision in the certificate restricting or transferring board power to shareholders (or others). Additional requirements: All incorporators or shareholders (voting or nonvoting) approve it It is conspicuously noted on front and back of all shares All subsequent shareholders have notice; AND Shares are not listed on an exchange or regularly quoted over–the–counter.
Shareholders: SH Duties in Close Corporation	In a close corporation run by shareholders, the managing shareholders owe the duties of care and loyalty because they are functionally equivalent to acting directors. There is a trend toward imposing fiduciary duties on shareholders in their dealings with each other. Controlling SHs owe a duty of utmost good faith.
Shareholders: Professional Service Corporations	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
Shareohlders: Rules Governing Professional Service Corporations	Shareholders, O&D in a P.C. must be licensed professionals, but they can hire non–professionals as employees to perform non–professional activities. Professionals will be liable for their own malpractice, but not for others' and not liable for contracts entered into by P.C. or for rent due on leases in the P.C.’s name. The P.C. is governed by the rules of the business corporation. Certificate must meet the general corporation requirements except for the use of “P.C.” and must indicate the profession to be practiced and include the names and 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. If a shareholder in a PC dies or is disqualified from the practice—the PC must buy back his/her shares.
Shareholders: Liability, Piercing the Corporate Veil	Shareholders are generally not liable for the corporation does, the corporation will be held liable for what it does. A shareholder might be personally liable for what the corporation does if the court “pierces the corporate veil” (close corporations only): A shareholder must have abused the privilege of incorporating, and Fairness requires holding them liable (NY: SH must exercise complete domination and control to perpetuate fraud or injustice) Two common fact patterns: 1. Alter ego (identity of interests, agency, excessive domination, commingles funds) 2. Undercapitalization (failure to invest sufficient founds to cover prospective liabilities) Only the SH who abused the privilege, etc. would be liable.
Shareholders: Purpose to Pierce the Corporate Veil	To impose liability on a shareholder. That shareholder might be another corporation. So if a parent corporation forms a subsidiary to avoid its obligations, and totally dominates the subsidiary, the court might PCV to hold the parents liable.
Shareholders: Wages	In a close corporation, the ten largest shareholders are personally liable for wages and benefits of the corporation’s employees.
Shareholders: Derivative Suits	In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim (direct suit). Requires that the corporation could have brought the suit (e.g., against a director for breach of duty of loyalty/care, waste of corporate assets)
Shareholders: Derivative Suits, Recovery	The corporation gets the recovery in a successful shareholder derivative suit. Shareholder can recover costs and attorneys’ fees, usually from the judgment won for the corporation.
Shareholders: Derivative Suits, Direct SH Recovery	SH can recover the damages from a shareholder derivative suit directly if the recovery by the corporation would return money to the wrongdoers (e.g., close corporation w/ breach of duty by 1 director; would not want the recovery to go back to the breaching director)
Shareholders: Derivative Suits, Unsuccessful Suits / Res Judicata	SH cannot recover costs and expenses from pursuing the derivative suit; also likely that the SH will be liable to the defendants for their costs because the winner party usually recover costs and expenses from the losing party. Res Judicata: other SHs also will NOT be able to sue the same defendants on the same transaction later. The initial suit will extinguish the other shareholders’ claim.
Shareholders: Derivative Suits, Requirements	Stock ownership requirement: owned stock when claim arose Requisite interest Bond requirement Demand on directors Corporation must be joined as the defendant
Shareholders: Derivative Suits, Requirements, Stock Ownership	SH must own stock when the claim arises anc must own stock through entry of judgment SH may have acquired stock by operation of law from someone who owned the stock when the claim arose (e.g., inheritence, divorce decree)
Shareholders: Derivative Suits, Requirements, Requisite Interest	The shareholder must adequately represent the interest of the corporation and shareholders.
Shareholders: Derivative Suits, Requirements, Bond Requirement	SH may be required to post a bond to cover the defendant’s costs. Exception: She does not have to post a bond, though, if she owns 5% or more of the stock of the corporation or if her stock is worth more than $50,000.
Shareholders: Derivative Suits, Requirements, Demand Requirement	SH must make a demand on the directors to initiate a suit on behalf of the corporation before initiating a shareholder derivative suit. Exception: S does not need to make this demand if doing so would be futile, if a majority of the board is interested or under the control of interested directors; the board did not inform itself of the transaction to the extent reasonable under the circumstances; or the transaction is so egregious on its face that it could not be the result of sound business judgment. Special pleading requirement: SH must plead with particularity her efforts to get the board to sue or why a demand is or would be futile.
Shareholders: Derivative Suits, Requirements, Joining Corporation Requirement	The corporation must be joined in the litigation—as a defendant (counterintuitive)
Shareholders: Derivative Suits, Corporation's MTD	The corporation can move to dismiss a derivative suit. The motion is based on a finding by independent directors (SLC) that the suit is not in the corporation’s best interest; court considers: Independence of those making the investigation Sufficiency of the investigation Note: court does NOT look at the strengths of the merits of the case.
Shareholders: Derivative Suits, Parties' Settlement / Dismissal	The parties can only dismiss or settle a derivative suit with court approval, and then the court may require notice to all of the shareholders to get their feedback.
Shareholders: Derivative Suits, D/O Suits	A director or officer can sue another director or officer to compel him/her to account for a violation of duties or misappropriation of corporate assets. Standing Requirements: the D/Os bringing a suit against another D/O does NOT have to meet the standing requirements for a shareholder derivative suit. The D/O can sue in her own name, but the recovery will be by the corporation.
Shareholders: Voting Rights	The record owner as of the record date has the right to vote. Record owner: is the person shown as the owner in the corporate records. Record date: a voter eligibility cut–off, set no fewer than 10 and no more than 60 days before the meeting.
Shareholders: Voting Rights, Exceptions	Treasury Stock: corporation may not vote because not oustanding stock Death of a shareholders: executor may vote Proxies: OK for SH voting; (1) written, (2) signed by record SH / authorized agent, (3) directed to corporation secretary, and (4) authorizes another to vote the shares
Shareohlders: Voting Rights, Exceptions, Proxies	Writing: includes fax/email Time limit: only good for 11 months unless otherwise stated Revocation: must be in writing or by attending meeting and voting Death: revokes proxy to grantee once grantee receives written notice of grantor's death by secretary Irrevocable Proxies: allowed if (1) says it's irrevocable, (2) the proxy–holder has some interest in the stock other than voting (e.g., option to buy stock)––otherwise still revocable
Shareholders: Voting Trusts	Requirements: Written trust agreement controlling how the shares will be voted; Copy to corporation; Transfer legal title of shares to voting trustee; and Original shareholders receive voting trust certificates and retain all shareholder rights except for voting. Time Limit: There is a 10 year maximum on voting trusts (but w/in 6 months of expiration, can extend for another term of up to 10 years).
Shareholders: Voting Agreements / Pool	Shareholders can enter into a voting agreement (1) in writing and (2) must be signed by the shareholders Voting agreements are NOT specifically enforceable. NY Courts will not enforce voting agreements! Note: remember, voting agreements for directors (for action) are VOID, even if made as SHs
Shareholders: SH Action	Two methods for valid SH action: Written consent of the holders of all voting shares A meeting
Shareholders: Meetings	Place: can be anywhere Annual Meeting: shareholders elect directors at the annual meetings––plurality (highest vote) is needed to elect seats on board Annual Meeting Required: a court can order one because annual meetings are required. Special Meeting: a board or anyone provided in the certificate or bylaws can call a special meeting
Shareholders: Meetings, Requirements	General Meetings: must given written notice (e–mail is OK) to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting––must ALWAYS state the time & place of the meeting. If action proposed at the meeting is something on which shareholders would have appraisal rights, the notice must say so and explain (and even include the statute about the appraisal rights). (Usually only relevant to close corporations.) Special Meetings: notice of special meetings must state who called it and the purpose of the meeting. The statement of purpose for a special meeting is important because the attendees cannot do anything outside stated purpose at the meeting.
Shareholders: Meetings, Notice Defects & Waivers	Notice Defects: if the corporation does not give notice to everyone entitled to vote, any actions taken at the meeting will be void without waiver. Waiver: Those not given notice may waive the notice defect, either: Expressly: in writing and signed anytime; OR Impliedly: by attending the meeting w/o objection.
Shareholders: Voting, Quorum & Resolution Adoption	There must be a quorum represented at the meeting. Determination of a quorum focuses on the number of shares represented, not the number of shareholders. Generally, a quorum requires a majority of outstanding shares. Quorum may be decreased in the certificate or bylaws but no less than 1/3rd of shares entitled to vote; may be increased in the certificate––quorum cannot be lost once it's obtained (e.g., SHs leave meeting) Resolution adoption requirement may be increased beyond majority in the certificate but may never be reduced below majority.
Shareholders: Requirements for SH Action	If quorum is met, a majority may act to bind the corporation. Majority means majority of the shares actually voting in favor or against the proposal. Abstentions don’t count.
Shareholders: Cumulative Voting	Cumulative voting: only available when SHs are voting to elect directors––must be specified in the certificate Formula: number of shares times number of directors to be elected.
Shareholders: Director Voting Formula (Not important)	To calculate the percentage of shares required to elect one director if cumulative voting is in place, you use this formula 100 [divided] (X + 1) and then add one additional share. (X is the number of directors being elected).
Shareholders: Transferability of Shares	Transfer restrictions on transferability valid through the certificate, bylaws or by agreement but MAY NOT be an undue restraint on alienation SHs are not bound by par value when selling shares––par rule only applies to issuance by corporation.
Shareholders: Types of Restrictions	Right of First Refusal––valid as long as price offered is reasonable Corporate approval––questionable whether this would be a valid restriction because corporation could unreasonably refuse Death/retirement & Buy–back agreement––common in close corporations
Shareholders: Enforceability of Restrictions	Restrictions cannot be invoked against transferee unless: It is conspicuously noted on the stock certificate, OR The transferee had actual knowledge of the restriction
Shareholders: Right of Inspection, BCL	Minutes of SH proceedings and the record SHs: Any SH can demand access to these two items on 5 days written demand. The corporation can demand that the SH give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders (cannot demand a more detailed affidavit)––corporation can deny the SH access if demand requirement not complied with. List of Current D&O: any shareholder can demand the list of current directors and officers on two day’s written demand. No affidavit required. Financials: regarding the corporation’s latest (1) annual balance sheet, (2) profit and loss statement and (3) interim statements distributed to shareholders or public, any SH can make a written request, and the corporation must provide the documents. It can do so by mail.
Shareholders: Right of Inspection, CL	All SHs also have a common law right to inspect records at a reasonable time and proper place. Inspection must be for a proper purpose, which means something related to his role as a shareholder. Unclear what documents are covered––perhaps broader than BCL.
Shareholders: Distributions	Distributions are payments by the corporation to shareholders: Dividend Payment to repurchase shares To redeem shares [forced sale to corporation at price set in certificate] Distributions are declared in the board’s discretion. A court will only interfere with the board’s discretion and order a distribution on a showing of bad faith or dishonest purpose.
Shareholders: Stock Splits	A stock split gives a shareholder more shares than she now has but reduces the value of each share proportionately.
Shareholders: Distribution Rights	Preferred shares: receive dividend first Participating: preferred that share pro rata with CS after receiving preferred amount Cumulative: dividend add up over years
Shareholders: Funds for Distributions:	Distributions may come from surplus but NEVER stated capital. Surplus = assets – liabilities – stated capital Stated capital = par value for shares' issuance; anything above par value = surplus No–par issuance: w/in 60 days of issuance, board can allocate ANY but not ALL part of consideration to surplus
Shareholders: Restrictions on Distributions	Corporations can make distributions even though it lost money last year. However, a corporation cannot make distributions if it is insolvent or if the distribution would render it insolvent (unable to pay its debt as they come due in the ordinary course of business)
Shareholders: Liability for Improper Distributions	Directors are personally liable for unlawful distributions. Shareholders who knew the distribution was unlawful when they received it are also liable. Because this is a corporate claim, it could be the basis of a shareholder derivative suit. Defense: however, remember that a director could claim good faith reliance (see above).
Shareholders: Redemptions	Redemptions are set in certificate, and must be done proportionately within each class of stock. Repurchases are individually negotiated. Corporation may discriminate in repurchases––but it may have to give an equal opportunity in a close corporation (to prevent freeze–outs)
Fundamental Corporate Changes:	Changes so fundamental that most of them require both that the board approves and that the shareholders approve. In addition, in most, the corporation must notify the Department of State by delivery a document which the Department files.
Fundamental Corporate Changes: Right of Appraisal	The right of appraisal is a right to force the corporation to buy your stock at a fair value. This right only exists in a close corporation.
Fundamental Corporate Changes: Appraisal Triggering Events	Actions in the corporation that trigger the shareholder’s right of appraisal Some amendments to the certificate; Consolidation; Your corporation merges into another corporation; Your corporation transfers substantially all of its assets; or Your corporation’s shares are acquired in a share exchange But there is no right of appraisal if the corporation is listed on a national exchange or NASDAQ
Fundamental Corporate Changes: Right of Appraisal Perfection	To perfect the right of appraisal, SH must: Before the SH vote, file written objection and intention to demand payment During vote, abstain or vote against the changes, AND After the vote, make written demand to be bought out
Fundamental Corporate Changes: Valuing Shares on Appraisal	If the shareholder and the corporation cannot agree on fair value, the corporation sues and the court determines the value. No Minority Discount: in setting the value of the stock, the court cannot discount the value to reflect that minority shares may be worth less than controlling shares, because they carry no control over corporate affairs.
Fundamental Corporate Changes: Amendment to the Certificate	Minor changes can be made by the board alone (e.g., relating to office location, registered agent, etc.) Other amendments: must be approved by (1) director action and (2) a majority of the shares entitled to vote. If the amendment will change or strike a supermajority quorum or voting requirement for SH (not director) voting, you need director approval PLUS a 2/3 vote approving the amendment by all shares entitled to vote.
Fundamental Corporate Changes: Approved Amendment Requirement, SH Dissent	If an amendment is approved, deliver certificate of amendment to the Department of State for its filing. Dissenting SHs will have a right of appraisal.
Fundamental Corporate Changes: Requirements for Merger (A–>B) or Consolidation (A+B=C)	The board of directors of each company must adopt the plan of merger (or consolidation), The shareholders of each corporation must approve the plan of merger (or consolidation), AND Deliver the certificate of merger (or consolidation) to the Department of State for filing.
Fundamental Corporate Changes: Effect of Merger or Consolidation	Successor Liability: The surviving corporation succeeds to all rights and liabilities of the constituents (i.e., the disappearing corporation(s)).
Fundamental Corporate Changes: Short Form Mergers	No shareholder approval is required for merger if the parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into a parent corporation—only requires board of buyer to approve.
Fundamental Corporate Changes: Appraisal Rights in Merger	Generally, only dissenting SHs of a disappearing corporation BUT NOT the surviving corporation have appraisal rights. Dissenting SHs in a short–form merger have the right of appraisal, regardless of voting.
Fundamental Corporate Changes: Transfer of All or Substantially All of the Assets Not in the Ordinary Course of Business	Fundamental corporate changes for the selling corporation only, not for the buying corporation; requirements: Each corporation’s board of directors authorizes the deal, AND SHs of the selling corporation must approve by majority of shares entitled to vote No filing required for the transfer of assets; Share Exchange Plans must be delivered to Dept. of State for filing.
Fundamental Corporate Changes: Transfer of All or Substantially All of the Assets, Appraisal Rights	There are rights of appraisal for dissenting shareholders of the selling company, only.
Fundamental Corporate Changes: Transfer of All or Substantially All of the Assets, Tort Liability	Generally: the company acquiring assets will not be liable for the torts of the company whose assets it acquired unless the deal provides otherwise, the purchasing company is mere continuation of the seller, or the deal was entered fraudulently to escape such obligations. Note: this is different than a merger. Here, there is NO successor liability because the selling corporation still exists and can be sued by creditors
Fundamental Corporate Changes: Dissolution	No board vote is necessary, but it requires a majority vote of shares entitled to vote. Then a certificate of dissolution is delivered to the Department of State for filing.
Fundamental Corporate Changes: Involuntary Judicial Dissolution	By board resolution or resolution of majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders. One–half 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 internal dissention makes dissolution beneficial to shareholders. Any shareholder entitled to vote may petition if shareholders unable to elect directors for two annual meetings. Twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds: (i) Management’s (board or managing SHs) illegal, oppressive, OR fraudulent acts towards complaining shareholders; OR (ii) Management’s wasting, diverting or looting of corporate assets
Fundamental Corporate Changes: Court Involvement for Close Corporation Involuntary Dissolution	The court may deny dissolution if there is some other way the complaining shareholder can obtain a fair return on his investment, e.g., by ordering buy out. Court will consider whether liquidation is necessary to protect the petitioners and is the only way for them to get a fair return on their investment.
Fundamental Corporate Changes: Court Involvement for Close Corporation Involuntary Dissolution, Avoiding Dissolution	The corporation or noncomplaining SHs may try to avoid dissolution by, w/in 90 days of petition, buy the petitioner’s stock at fair value on terms approved by the court. It is up to the court to figure out fair terms. This is a forced sale.
Fundamental Corporate Changes: Dissolution, Winding Up	Dissolution does not end the corporation’s existence. The corporation stays in existence to wind up: Gather all assets, Convert to cash, Pay creditors (they had been given notice earlier), and Distribute remainder to shareholders (who are last in line), pro–rata by share unless there is a dissolution preference. Dissolution preference—works like a dividend preference; it means “pay first.”
Controlling Shareholders and Related Topics: SHs' Fiduciary Duties	Outside the close corporation, shareholders generally do not owe fiduciary duties to each other or to the corporation. They can act in their own self–interest.
Controlling Shareholders and Related Topics: Controlling SH Duty	A shareholder who also occupies a control position (such as a director position) or whose ownership is such that she has working control over the corporation owes a fiduciary duty to minority shareholders and, sometimes, to others (including the corporation). She cannot use a dominant position for individual advantage at the expense of minority shareholders or the corporation.
Controlling Shareholders and Related Topics: Sale of Controlling SH's Interest	Generally, controlling SHs can sell their shares at a premium because of their ability to control (the control premium). A court may impose liability IF Controlling SH sold to looters w/o making a reasonable investigation (e.g., facts that would put a reasonable person on notice); remedy: disgorge seller's profits AND seller is peronally liable for all damages to the corporation Controlling SH de facto sells a corporate asset; remedy: all SHs share in control premium Controlling SH sells a seat on the board––fidiuciaries cannot sell positions; remedy: disgorge the profits
Controlling Shareholders and Related Topics: Freeze–Outs	All mergers must have a legitimate corporate purpose, even though approved by the requisite number of shares. “Freeze–out” merger aimed solely at cashing out minority shareholders unfairly. Usually, majority shareholders cause their corporation to merge with another corporation which they own. The minority shareholders’ shares are purchased for cash, so they have no interest in either corporation. Courts might protect the minority shareholders. Factors to consider: Whether the deal is tainted by self–dealing or fraud; Whether the minority shareholders are dealt with fairly Whether there is a legitimate business reason for the merger.
Controlling Shareholders and Related Topics: Insider Trading, Market Trading on Inside Information	In New York, the director or officer has breaches a duty to the corporation by market trading and profiting on inside information. The corporation can sue to recover D/O profit. This claim could be the basis for a shareholder derivative suit!
Controlling Shareholders and Related Topics: Insider Trading, Nondisclosure of "Special Facts" (CL)	All directors and officers (and probably controlling SHs) owe a duty not to trade on “special facts" in a securities transaction with a non–insider––they cannot trade on secrets: Special facts: facts that a reasonable investor would consider important when making an investment decision. Right to sue: a shareholder with whom the D/O deals and violates the special facts doctrine. This is a breach of duty owed to the SH. Damages: the difference between price paid and value of stock at a reasonable time after public disclosure. Recovery: the SH will recover these damages. This is NOT a derivative suit.

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