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CORPORATIONS
Corps.
118
Law
Graduate
07/12/2012

Additional Law Flashcards

 


 

Cards

Term
Incorporators
Definition

execute certificate, deliver to dept. of state, and hold organizational meeting

 

ONLY NEED 1 OR MORE

(adult humans only)

Term

Things included in Certificate of Incorporation

 

(K between corp and SHs, corp and state)

Definition

1. Names/Addresses

-corporate name

-address = county in NY of office of incorporation

-corp's agent = NY SOS (and address for forwarding process)

-names and addresses of each incorporator

2. May make statement of duration

3. Corporate Purpose statement is required

(Note: ultra vires (purposes outside corp. purpose) are valid but SHs can seek injunction/responsible managers are liable to corp for ultra vires losses)

4. Capital Structure (stock)

-authorized stock

-# of shares per class

-info on par value

-rights preferences and limitations of each class

-info on an series of preferred shares

 

Term
Acts incorporators need to do
Definition

-sign certificate and acknowledge it before a notary

-deliver to the NY Dept. of State

-Pay fililng fees

(when DOS files, conclusive evidence of valid formation --> de jure corporation)

-hold organizational meeting to adopt any by-laws, elect initial directors

Term
Consequences of Forming a Corporation
Definition

-NY law governs internal affairs (even if corp does no business in NY)

-separate legal entity (can enter contracts, transfer prop, buy and sell securities and sue or be sued)

*limited to $5000 in political contributions but no limit for charity

 

*Corp can guaranty a loan that is NOT in furtherance of corp. business if approved by 2/3 of SHs entitled to vote

 

NOTE: only corp ITSELF liable for what corp. does

Term
De Facto Corporation/Corporation by Estoppel
Definition

When proprietors fail to form de jure corp, de facto corporation can be shown if

 

1. there is a relevant incorporation statute (BCL!)

2. parties made a good faith, colorable attempt to comply with it, and

3.  business is being run as a corporation

 

BCL probably abolished this concept in NY (but may be allowed under very limited circumstances)

 

Corporation by estoppel abolished in NY

Term
BYLAWS
Definition

-can have corp. without bylaws

-certificate controls if contradicts bylaws

-not filed with state

-initially filed by incorporators at the organizational meeting

-can be amended or added to by SHs

-board can only amend or repeal bylaws if certificate or SH bylaw allows

Term
Promoter
Definition

person acting on behalf of a corporation not yet formed

-enters into contracts with thid parties on behalf of corporations not yet formed

Term

Pre-Incorporation Contracts

 

Is corp. liable?

Definition

Yes, only if it adopts the contract (NOT AUTOMATIC)

 

Adoption

express: board actoin

implied: if corp. knowlingly accepts a benefit of the K

Term

Pre-Incorporation Contracts

 

Is PROMOTER liable?

Definition

Unless contract indicates otherwise, promoter liable until novation (agreement among promoter, corporation, and other contracting party that the corporation will replace the promotor under the contract)

 

 

Term
SECRET PROFIT RULE
Definition

Promotor cannot make a secret profit on her dealings with corp.

 

sale to corp. of prop. acquired BEFORE becoming promoter --> profit equals price paid by corp. MINUS FMV (what she paid before is irrelevant)

 

sale to corp. of prop. acquired after becomign promoter --> profit equals price paid by corp. MINUS price paid by promoter

 

Only liable if secret

Term

Foreign Corporations

 

(incorporated outside NY)

Definition

doing business in NY = regular course of intra state business activity

 

MUST QUALIFY

-by applying to NY DOS and designating SOS as agent for service of process (must also pay fees to NY)

-give info from certificate & proof of good standing in home state to DOS

 

If it does not qualify, it cannot sue in NY until qualifies, pays fees, taxes, penalties, and interest

Term
what is an ISSUANCE?
Definition

when corporation sells its own stock

 

(distinguish from issuance fof bonds -- where investor loan to the corp to be re paid)

 

bond holer has debt security

stock holder has equity security

 

Debenture = loan not secured by corporate assets

Term
Subscriptions
Definition

-written, signed offer to buy stock from the corporation

 

PRE-CORP IRREVOCABLE FOR 3 MONTHS unless subscription provides otherwise or all subscribers agree to let you revoke

 

post-corporation subscriptions revocable until accepted by corp. (when board accepts offer)

 

Corp. cannot decide to sell to only some subscribers and not others (must be uniform within each class/series of stock)

Term
If corporation accepts an offer from a subscription and subscriber defaults on payment, what happens?
Definition

IF has paid less than half of purchase price and fails to pay rest within 30 days of written demand --> corp. can keep money paid and cancel the shares

(stock becomes authorized and unissued)

 

IF has paid half or more, and fails to pay the rest within 30 days of written demnad, corp. must try to sell stock to someone else for cash

(if no one will pay remaining, treat same as above)

 

If someone will pay more than the remaining balance due, defaulting subscriber recovers any excess over what she agreed to pay (but deduct corp.'s costs in selling to new guy)

Term
5 permitted forms of consideration for an issuance
Definition

1. money (cash or check)

2. tangible or intangible property

3. services already performed FOR CORPORATION

4. binding obligation to pay money or property in the future

5. binding obligation to perform future services with agreed upon price

(can even issue stock to somebody for performing services in forming corp.)

 

unpaid stock treated as water

Term
What is par value?
Definition

minimum issuance price

 

If no par value, board sets the price at which to sell (unless SHs specify otherwise)

Term
 What is TREASURY stock?
Definition

stock that was previously issued and has been reacquired by the corporation

(no minimum --> no par value for treasury)

Term
Consequences of issuing par stock for less than par value (watered stock)
Definition

-directors are liable if they knowingly authorized issuance

 

-whoever bought watered stock is liable if charged with notice of par value

 

-third party who buys from original buyer not liable if she did not know about water

Term
PRE-EMPTIVE RIGHTS!!
Definition

Right of an existing SH to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money

 

if certificate is silent, new issuance does not include sale of treasury stock  NOR does it include sale of shares authorized by the original certificate and sold within 2 years of formation

 

if certificate is silent re: pre-emptive rights they do not exist

Term
How is the number of directors set?
Definition

1. by-laws

2. SH act

3. by board if SH by-laws allow

 

if no number set --> 1

 

WHO ELECTS DIRECTORS? SHs! at annual meeting

(can have staggered board)

Term
Can shareholders remove a director for cause?
Definition
YES!
Term
Can board remove a director for cause?
Definition
only if certificate or SH by-law allows it
Term
Can anyone remove a director WITHOUT cause?
Definition
SHs only and only if certificate allows
Term
Who selects the person who will serve the remainder of the term when there is a vacancy on the board?
Definition
THE BOARD
Term

Special rule!

Who selects person who will serve the remainder of the term in the rare case when a director is removed by SHs without cause?

Definition
SHs
Term

What are the two ways in which the baord can take a valid act?

 

Note: directors are NOT agents so they have to act as a group

Definition

1. unanimous written consent

2. meeting

 

*if a director acts in some other way (like individual action) --> void unless ratified by valid act

Term
Notice Requirements for board meetings
Definition

No notice required for regular meetings if time and place is in by-laws or set by the board

 

Notice required for special meetings: must state time and place (but not purpose)

 

If notice for special meeting not given to a director then the meeting is VOID unless the director waives (can waive in signed writing OR by attending the meeting w/o objection)

 

NO PROXIES FOR DIRECTOR VOTING and no voting agreements for how they will vote as directors

Term
Quorum for Director Meeting
Definition

must be a majority of the "entire board"

(duly constituted board - number of positions if no vacancies)

 -Passing resolutions requires majority of those PRESENT

 

if there is quorum at the beginning and one director leaves it breaks the quorum


to decrease quorum - in certificate or bylaws (BUT NEVER FEWER THAN 1/3)


to increase quorum to greater than majority - YES in certificate only


CANNOT DECREASE MAJORITY NEEDED TO PASS A RESOLUTION, BUT can require SUPERMAJORITY VOTE TO PASS RESOLUTION (only in cert!!)

Term

If certificate or by-laws allow, majority of entire board can delegate substantial management functions to a committee of ONE or more directors.

 

What can a committee NOT DO?

Definition

1. set director compensation

2. full board vacancy

3. submit fundamental change to SHs

4. amend by-laws

 

*although the committee can recommend this for board action

 

Usually boards are used for SH derivative suits

Term
DUTY OF CARE!
Definition

A director must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinary prudent person would exercise under similar cirumctances in like position

 

*will be held liable for breaches that cause loss to corporation if causation shown (for nonfeasance)

Term

Misfeasance --> board does something that hurts corp.

 

apply BJR

Definition
a court will not second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis
Term
DUTY OF LOYALTY!
Definition
A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries
Term
Interested Director Transactions
Definition

any deal between the corporation and one of its directors (or bsuiness of which its director is also a director or officer or in which he has a substantial financial interest)

 

Interested director transactions will be set aside UNLESS director shows either:

1. deal was fair and reasonable to the corp when approved

2. material facts and her interest were dislcosed or known and the deal was approved by SH action, BD approval by sufficient vote (excluding interested director), or unanimous vote of disinterested directors IF insufficient to take board action

 

*note: interested directors count as quorum of the board but not for the vote

Term
Can the board set the compensation of directors?
Definition

Yes,  BUT compensation must be reasonable and in good faith. If excessive, it is a waste of corporate assets

 

*if corp wants to give a director or officer stock options, must be authorized under exchange policies if listed on stock exchange, IF ITS NOT YOU NEED SH approval

Term
Competing Ventures
Definition

Director cannot compete with her own corp.

 

If so, first corp. gets constructive trust on profits

(must account for profits)

Term

Corporate Opportunity

 

(something the corporation needs, or has an interest or tangible expectancy in, OR that is logically related to its business)

Definition

Directors cannot USURP a corporate opportunity. Cannot take unless he tells board about it and waits for board to reject it

 

remedy = constructive trust

 

 

Term
Improper loans of corporate funds
Definition
must get approved by SHs or if BD finds that it will benefit corporation
Term
Which directors are liable for these types of breaches?
Definition

director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records!

-in minutes

-in writing to corp. secretary at meeting, or

3. registered letter to corporate secretary promplty after adjournment

*cannot dissent if voted for resolution at meeting

-if director is sick/misses meeting not liable if he registers written dissent within reasonable time after act

Term
Good faith reliance for corporate action
Definition

can rely on info, opinions, reports, or statements by

1. officers or employees of the corporation whom the director/officer believes competent and reliable

2. lawyers or puhblic accountants whom the director or offcier believes are acting within their competence, or

3. a committee of which the person relaying is not a member

*usually used in improper distributions

Term
What duties do officers owe to corporation?
Definition
same as directors (care + Loyalty)
Term
Can officers bind corporation to acts that they take in the corporations behalf?
Definition

Yes, if they have authority to do so

 

Term
Officer positions
Definition

board may select president, VP, secretary, treasurer, and other others

 

person can hold more than one office

Term
Who selects and removes officers?
Definition

board unless certificate allows SH to elect them

(if SH elects, only SH can fire)

 

-if board fires oficers, may be liable for breach of K damages

 

NOTE: board also sets compensation of officers

Term
judicial action to remove officer
Definition
attorney general OR holders of 10 percent of all shares may sue for a judgment removing officer for cause + can bar reappointment of a pesron so removed
Term
Reimbursement of Directors/Officers sued in their capacity as D/O by on on behalf of Corp.
Definition

1. Prohibited if she was held liable to corp.

 

2. Of right if she won a judgment on the merits

(if she has to sue to get this reimbursement she must pay her own attorney's fees)

 

 

Term
When is reimbursement to a D/O permissive
Definition

When any of the above categories are not satisfied AND: D/O acted in good faith + for purpose reasonably believed in company's best interest

(can include settlement amount, attys fees, etc.)

 

Who determines eligibility?

board, SH, quorum of disinterested directors, or board pursuant to report from indep. legal counsel

 

*notwithstanding above - court can order the corp. to reimburse if it finds she is resaonably entitled to it

Term
Can corporation advance litigation expenses to a D/O?
Definition

yes, but must be re-paid if it turns out she is not entitled to reimbursement

 

Term
The certificate may eliminate director liability (or allow for indemnification by resolution by board or SHs) to the corporation or shareholders for damages for breach of duty EXCEPT:
Definition

1. for acts in bad faith

2. intentional misconduct

3. receipt of improper financial benefit

4. approval of unlawful distribution or loan

Term
What is a close corporation?
Definition

1. few SHs

2. stock not publicly traded

 

-do not have to have SH management, you can have a board

Term
SH management in close corporations
Definition

-you have a provision in the certificate restricting or transferring board power to SHs, also need:

1. all incorporators or SHs (voting and nonvoting) to approve it

2. it is conspicuously noted on front and back of all shares

3. all subsequent SHs have notice, and

4. shares are not listed on an exchange or regularly quoted over-the-counter

 

In a CC run by SHs, who owes duties of care and loyalty?

MANAGING SHs

Term
SHs fiduciary duties in relation to each other (CCs)
Definition

trend toward imposing fid. duties on SHs in dealing with each other.

 

Controlling SHs cannot use their power for personal gain at the expense of minority SHs or the corp. or to oppress minority SHs or the corp.

THEY OWE DUTY OF UTMOST GOOD FAITH

 

-gives remedy for behavior that defeats minority SHs reasonable expectations for investing

Term
Professional Service Corporations
Definition

Members of licensed profession, like doctors and lawyers cannot practice profession through general business corp. so they form professional service corp.

 

-SHs, officers, and directors must be licensed professionalss BUT you can hire non-professionals as employees

 

-liable for their own malpractice but not those of otheres, not liable for Ks entered by the entity or for rent due on leases

 

-generally governed by rules of business corporation (same certificate requirements)

 

if P.C. SH dies or is disqualified --> PC must buy back shares

Term
Piercing the Corporate Veil (AKA where a SH is personally liable for what the corporation did) is only available in what kind of corporation?
Definition

CLOSE CORPORATION

(non-publicly traded)

Term
to pierce the corporate veil:
Definition

1. SH must have abused the privilege of incorporating, and

2. fairness must require holding them liable

(to prevent fraud or the use of a corporation as a cloak for illegality)

 

Some examples: treating corporate assets as her own, undercapitalization

NY: These things not enough on their own --> SH must exercise complete domination over corporation to perpetrate fraud or injustice on the plaintiff

 

Creditors not being paid would usually be unfair BUT NY is a high bar (we need complete domination)

Term
In a close corporation, the 10 largest shareholders are personally liable for WHAT?
Definition
wages and benefits to corporations employees
Term
SH Derivative Suits
Definition

SH sues to enforce the corporation's claim

(breach of fiduciary duty)

-usually for mismanagement, things like wasting corporate assets

 

CORPORATION recovers, not individual SH (but SH can receive costs and attys fees - unless recovery to CORP would be returning money to the bad guys)

 

If SH loses, may have to pay costs to Ds, and other SHs will be barred from suing Ds on same transaction

Term
Requirements for bringing derivative suit
Definition

1. stock ownership when claim arose

-must have owned stock at time claim arose and through entry of judgment or received it by operation of law (inheritance, divorce, etc.)

2. must adequately represent the interests of the corporation and SHs

3. S can be required to post a bond for Ds costs (doesn't have to if owns 5% ore more and its worth more than $50K)

4. S must make demand on directors that corp. sue (unless demand would be futile aka majority of board is interested or under control of interested directors; the board did not inform itself of the transaction to extent reasonable under the circumstances; or the transaction is so egregious on its face that it oculd not be the result of sound business judgment)

5. Special pleading requirement (must plead with particularity)

6. corp. must be joined in the litigation as a defendant

Term
If SH makes demand and board refuses to have corporation sue, can SH bring derivative suit anyway?
Definition
only if SH can show that the majority of the board is interested or its procedure was incomplete or inadequate
Term

Corp. can move to dismiss derivative suit if based on a finding by independent directors (or a committee of independent directors, sometimes called a "special litigation committee") that the suit is not in the corporation's best interests.

 

What does court look at in deciding whether or not to dismiss?

Definition

1. independence of those making investigation

2. sufficiency of investigation

 

examples: case has a low chance of recovery or that the cost of suit will exceed recovery

Term
Can parties dismiss or settle a derivative suit?
Definition
only with court approval
Term
Can a D/O bring a derivative suit?
Definition

D or O can sue another D or O to compel her to account for violation of duties or misappropriation of corporate assets

 

-does not need to meet the requirements for a derivative suit (but recovery is to corp.)

Term

SHAREHOLDER VOTING

 

Record owner as of record date has right to vote.

 

What is record owner?

Definition

person shown as the owner in the corporate records (record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting)

 

NOTE: corp. does not vote treasury stock

 

-if SH is record owner at record date + dies his executor votes

Term
What is a Proxy?
Definition

1. writing

2. signed by record SH or authorized agent

3. directed to a secretary of corporation

4 authorizing another to vote the shares

(can be fax or email)

 

*GOOD FOR 11 MONTHS (unless says otherwise)

-can revoke by writing or by attending meeting and voting (even if says irrevocable)

if SH dies only revoked when written notice of death received by secretary


ONLY IRREVOCABLE if it says irrevocable and the proxy-holder has some interest in the stock other than voting (proxy coupled with interest)

Term
Requirements for voting TRUST
Definition

1. written trust agreement controlling how shares will be voted

2. copy to corporation

3. transfer legal title of shares to voting trustee; and

4. original shareholders receive voting trust certificates and retain all shareholder rights except for voting

10 year max!!!

Term
Requirements for voting AGREEMENT
Definition

agreement in writing & signed

-apparently not enforceable

**a PROXY given subject to a voting agreement is irrevocable if it says so!!**

Term
What are the only two ways SHs can take a valid act?
Definition

1. written consent of holders of ALL voting shares, or

2. meeting

Term
2 types of shareholder meetings
Definition

annual (elect directors) and special (called by board or anyone provided in certificate or bylaws)

 

*dont need to be held in NY!

 

if annual meeting not held, court can order one

Term
how SH voting for directors works
Definition

highest vote-getting for each seat on the board wins, even if she did not get a majority of the votes

 

(only needs plurality, not majority)

Term
notice requirement for SH meetings
Definition

-must give written notice (email OK) to every SH entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting

-must always state time and place

-if action proposed at meeting is something on which SHs would have appraisal rights, notice must say so and tell why

-notice of special meeting must state who called it and the purpose of meeting (meeting must be something SHs can vote on)

WITHOUT NOTICE, action taken at meeting is void (unless they waive)

 

Term
SH quorums
Definition

Quorum: majority of outstanding shares (not SHs)

 

can decrease quorum (never fewer than 1/3 cert. or bylaws) in the cert or bylaws

can't reduce requirement of majority approval

can impose SUPERMAJORITY and increase quorum in cert!


if quorum is met-- majority may bind corp (majority of shares ACTUALLY voting in favor or against the proposal)


Quorum not lost if people leave the meeting

Term
How/When do SHs use cumulative voting?
Definition

When SHs are voting to elect directors

(helps small SHs get representation on the board)

 

-multiply number of shares times numner of directors to be elected

(so if you have 1000 shares and there are 9 spots, you have 9000 votes)

 

One big at large election! Top # of spots wins (not seat by seat)


ONLY EXISTS IF CERTIFICATE SAYS SO

Term
Can SHs sell their stock for less than par value?
Definition

YES.

 

PAR = issuance rule (only applies when corp. is selling its own stock)

Term
Stock transfer restrictions
Definition

restrictions on transfer (usually in close corporations to keep outsiders out)


-usually set in cert., bylaws, or by agreement

-valid if NOT an undue restraint on alienation

(right of first refusal is acceptable so long as the price offered is reasonable like if corp. offered to match third party offer)

-can have a restriction requiring sale of one's stock to the corp. when SH dies or retires from working for co. (they often set price too)

-even if restriction is valid, cannot be invoked against transferee unless either conspicuously noted on stock cert. OR transferee had actual knowledge of the restriction

Term

Who can demand access to

1. minutes of SH proceedings, and

2. Record of SHs?

Definition

Any SH on 5 days written demand

(corp. can demand that SH give affidavit that his purpose is not other than that in the interest of the corp. and he has not within 5 years tried to sell any list of SHs)

 

Term
Who can demand to see a list of current D/Os?
Definition
any SH on 2 days written demand
Term

Who can request corporations latest

1. annual balance sheet

2. profit and loss statemtn

3. interim statements distributed to SHs or public

Definition

Any SH can make written request, and corp. must provide docs (can do so by mail)

 

NOTE: under common law, all SHs have a right to inspect records and reasonable time and proper place (for proper purpose, related to role as SH)

 

ALSO NOTE: Director has unfettered access to corporate books and records

Term
Three types of distributions
Definition

1. dividend

2. payment to repurchase shares, or

3. to redeem shares (forced sale to corporation at prices set in certificate)

Term
When do SHs have a right to a distribution?
Definition

When board declares it

(court will only interfere with board's discretion upon a showing of bad faith or dishonest purpose)

Term
Stock Split
Definition
gives a SH more shares than she now has but reduces the value of each share
Term
Who gets paid dividends first?
Definition
preferred stock
Term
What does participating stock mean?
Definition
participating means pay again, so pay them TWICE before moving on to common stock
Term
what does cumulative stock mean?
Definition
add them up - for the years in which there were no dividends, cumulative holder's dividend is adding up (must pay off before you pay others)
Term
What funds may be used for distribution?
Definition

surplus (assets-liabilities-stated capital)

 

Term
Stated Capital
Definition

can NEVER be used for distribution

 

TOTAL PAR VALUE (par value of each stock x # of shares)

Par value of entire issuance

(10,000 shares x $2)=$20,000

(if you issue this for $50K then $30K is surplus)

 

Max value of dividends

 

Term
If there was no par-issuance, how is consideration allocated?
Definition
Within 60 days after issuance, board can allocate any part but not ALL to surplus
Term
What does insolvent mean?
Definition

corp. unable to pay its debts as they come due in ordinary course of business

(cannot make distributions if it is insolvent or if the distribution would render it insolvent)

 

 

Term
Who is liable for an unlawful distribution?
Definition

directors PERSONALLY liable AND SHs who knew the distribution was unlawful when they received it

 

(could be derivative suit)

 

but directors can have good faith reliance defense

Term
How are redemptions set up?
Definition

in certificate

 

must be done proportionately within each class of stock

Term
how are repurchases done?
Definition

individually negotiated

 

corporation can repurchase some SHs stock and not others BUT it might have to give equal opportunities to all SHs in a close corporation

Term
FUNDAMENTAL CORPORATE CHANGE
Definition

so fundamental that most require board AND SH approval

-in addition, corp. must notify DOS by delivering a document which the Dept. files

Term
What are appraisal rights?
Definition
Right to force corporation to buy your stock at fair value
Term
What actions by the corporation trigger the SHs rights of appraisal?
Definition

-some amendments to the certificate

-consolidation

-your corp. merges into another corporation

-your corporation transfers substantially all of its assets

-your corporation's shares are acquired in a share exchange

 

*NO RIGHT OF APPRAISAL IF CORP. IS LISTED ON NATIONAL SECURITY EXCHANGE OR NASDAQ

Term
What actions are taken by SH to perfect the right of appraisal?
Definition

1. before SH vote, file written objection and intent to demand payment

2. abstain or vote against change, AND

3. after vote make written demand to be bought out

Term
What happens if SH and corp. cannot agree on fair value?
Definition

Corporation sues and the court determines the value

(IN NY, can't discount the value to refelct that minority shares may be worth less than controlling shares. Fair value of shares)

Term
How to amend certificate of incorporation?
Definition

Minor changes (registered agent, office location, etc.) --> can be board alone

 

Other amendments --> approved by director action and majority of shares ENTITLED to vote

 

 

Term
If an amendment will change or strike a supermajority quorum or voting requirement for SHAREHOLDER voting, you need director approval AND WHAT SH VOTE?
Definition

2/3 of shares entitled to vote!!

 

NOTE: if amendment approved, deliver cert. of amendment to DOS for filing

Term
Are there rights of appraisal for amendments to certificate?
Definition
Yes, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights
Term

MERGERS (A merges into B), OR

CONSOLIDATIONS (A + B = C)

 

needs:

 

Definition

-each company's board of directors adopts a plan of merger or consolidation AND

 

-each coporation's SHs approve

 

-deliver certificate of merger to DOS for filing

 

*NOTE: rights of appraisal for SH of corp. that disappears

Term
When is SH approval not needed for a merger or consolidation?
Definition

if parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into a parent corp.

 

SHORT FORM MERGER

*appraisal rights even though they didn't vote

Term
What is the effect of a merger/consolidation?
Definition

surviving corporation succeeds to all rights and liabilities of the constituents

 

-successor liability

Term

How to transfer all or substantially all of the assets not in the ordinary course of business

OR

share exchange (one company acquires all of the outstanding shares of one or more classes of another corporation)

Definition

fundamental change for SELLING CORP ONLY (not buying)

 

-each board authorizes deal AND approval by SELLING corporations SHs

(majority of shares entitled to vote)

 

*rights of appraisal for SHs of selling company

-dont need to file with state if transferring assets but you DO in the share exchange

Term
Is a company who acquires the assets of another company liable for the torts of the company whose assets it acquired?
Definition

GENERALLY, NO. UNLESS:

 

1. the deal provides otherwise, or

2. the purchasing company is mere continuation of the sellor, or

3. the deal was entered into fraudulently to escape such obligations

 

(not like successor liability for mergers)

Term
DISSOLUTION
Definition

Voluntary --> no board vote necessary but need majority of SHs who are entitled to vote

 

Then certificate of dissolution delivered to DOS for filing

Term
Involuntary Dissolution
Definition

-Board or majority of SHs can ask for involuntary dissolution by the court, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to SHs

 

-1/2 or more of shares entitled to vote may petition if directors too divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to SHs


-ANy SH entitled to vote may petition is SHs unable to elect directors for 2 annual meetings


Term

PETITIONING FOR INVOLUTNARY DISSOLUTION IN A CLOSE CORPORATION

 

Definition

20 PERCENT OR MORE OF VOTING SHARES MAY PETITION ON EITHER OF THESE GROUNDS:

 

1. managements illegal/oppressive fradulent acts toward complaining SHs

OR

2. management's wasting/diverting OR dissolution of corporate assets

 

Management = board or managing SHs

Term
Court may deny dissolution IF:
Definition

there is some other way the complaining SH can obtain a fair return on his investment

(ordering buy out)

-will consider whether liquidation is necessary to protect petitioners and is the only way for them to get a fair return on investment

Term
How may corporation or non-complaining SHs try to avoid dissolution here?
Definition
Within 90 days of petition, buy petitioner's stock at fair value on terms approved by the court
Term
STEPS IN WINDING UP (liquidating)
Definition

1. gather all assets

2. convert to cash

3. pay creditors(MUST BE PAID b4 SHs), and

4. distribute remainder to SHs, pro-rata by share unless there is a dissolution preference

(works like divident preference)

Term
Controlling SHs duties
Definition

SH who occupies a control position or whose ownership is such that she has working control over the corporation owes a fiduciary duty to minority SHs and, sometimes to others (including corp.)

 

-cannot use dominant position for individual advantage at the expense of minority SHs

Term

Sale of Controlling SHs Interest

 

SH gets control premium UNLESS:

Definition

-controlling SH sold to looters without making reasonable investigation

(then she must disgorge profits and is liable for all damage to corporation)

-controlling SH de facto sells corporate assets (i.e. SH sells to someone who bought just to get access to assets --> all SH should share in the premium)

-controlling SH sells a seat on the board

(fiduciaries cannot sell positions) i.e. sells and agrees that she and her directors will resign from board (disgorge profit)

Term

FREEZE-OUT MERGER

 

(aimed solely at cashing out minority SHs unfairly)

-usualy maj. SHs cause their corp. to merge with another corp. which they own and they buy minority's shares for cash

 

Courts will protect minority SHs. THey look at:

Definition

transaction as a whole

-fair price

-fair course of dealing

-legit corporate purpose for the merger

Term
Questions to ask in freeze-out merger:
Definition

1. whether deal is tained by self-dealing or fraud

2. whether minority SHs are dealt with fairly

3. whether there is legitimate business reason for the merger

Term
What happens with D/O engages in market trading of her corporations stock based on inside info?
Definition

NY: (breached duty to CORPORATION!)

 

corporation can sue to recover her profit

Term

Duty to abstain or disclose "special facts" in securities transactions with non-insider

 

What are special facts?

Definition
Those a reasonable investor would consider important in making an investment decision
Term
Who can sue?
Definition

a SH with whom the director or officer deals and violates the special facts doctrine breaches a duty owed to the SH

 

measure of damage: difference between price paid and value of stock a reasonable time after public disclosure (recovered by SH)

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