1. Execute certificate

2. Deliver certificate to Dep't of State

3. Hold organizational meeting

1. Corporate name, address (county), agent for service, and names and addresses of incorporators

2. Statement of duration (optional)

3. Statement of purpose

4. Capital structure

1. Authorized stock (max # of shares a corporation can issue)

2. Number of shares per class

3. Par value, preferences, limitations, and rights for each class

3. Info on any series of preferred shares

1. Shareholders

2. Board of directors, but only if COI or shareholder-created bylaw allows for it.

Only if the corporation ADOPTS the contract after being formed

1. Express adoption - action by BoD

2. Implied adoption - corporation knowingly accepting a benefit of the contract

YES - only released from liability if there has been a novation b/w corporation and contracting party

Corp adopting K does NOT release promoter from liability until there has been a novation

Promoter can't make any secret profit in dealing w/ corp - if she does, she has to account for the profit.

Def'n of profit depends on whether property was acquired before or after becoming a promoter:

Before: profit = price paid by corp - FMV

After: profit = price paid by corp - price at which promoter acquired property

Pre-incorporation subscriptions: irrevocable for 3 months UNLESS (1) subscription says it's revocable or (2) all other subscribers approve revocation

Post-incorporation subscriptions revocable until corporation ACCEPTS.

If subscriber has paid less than 50% of purchase price: corp can keep stock and sell it to someone else while retaining the $$ paid thus far

If subscriber has paid more than 50% of purchase price & has failed to pay w/in 30 days of written demand: corp gets to keep/sell stock, but must pay subscriber any excess from subsequent sale

(Subsequent sale price - deficiency - costs incurred in subsequent sale = amount to be repaid)

Directors IF they knowingly authorized the issuance

Buyer is liable no matter what - charged w/ notice of par value; has no defense.

3rd party purchaser is NOT liable if she didn't know about the water.

^{The rights of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money}

Must be expressly provided for in the COI

Sale of stock in exchange for property or other non-currency is NOT an issuance

Stock authorized by COI and sold w/in 2 years of formation is NOT an issuance

1. Shareholders, for cause

2. BoD, for cause, but only if COI or bylaws allow them to.

3. Shareholders, w/o cause, but only if COI or bylaws allow them to.

Generally, by BoD selection.

Special rule for when vacancy occurs b/c of shareholder removal w/o cause: shareholders elect director to fill vacancy.

1. Meeting - need not be in NY, and can be by conference, assuming everyone can hear each other.

2. Unanimous written consent.

Regular meetings: no notice required, if time and place are set in bylaws or COI.

Special meetings: notice must state time and place (not purpose) (no requirement of timing)

1. By showing up and failing to make an objection at the meeting.

2. By signing a written waiver of notice.

It is the number of directors required to be present for the board to be able to take action at a meeting - default is that a majority of the ENTIRE board must be present.

COI or bylaws can reduce the quorum, but never to less than 1/3 of the directors

Similarly, COI (and only COI - NOT bylaws) can increase the quorum to require that a supermajority of directors be present to constitute the quorum.

*Entire board = # of directors if there are no vacancies

A majority of directors present, once quorum has been reached.

COI and bylaws cannot decrease the requirement that a majority of directors present must approve an action.

However, COI can increase it so that a supermajority is required for the board to take action.

* Delegation permitted only if provided for in COI or bylaws.

BoD may delegate management functions to committee, but not:

1. Setting director compensation

2. Filling a vacancy

3. Submitting a fundamental change to shareholders

4. Amending bylaws

However, a committee can always reccommend such action to the BoD.

The duty to discharge duties in good faith and with the degree of diligence, care, and skill that an ordinarily prudent person would exercise under the circumstances.

Failing to attend meetings or stay abreast of business

Liable only if the failure caused some LOSS to the corporation - π must show causation - very difficult - must show corporation would not have lost money if D/O had not committed nonfeasance.

A court will not second-guess a D/O's business judgment and hold her liable for coporate loss if she exercised:

1. Good faith

2. Reasonable prudence (appropriate hw)

3. Rational basis for action

Directors are not guarantors of their company's success.

1. The deal was fair and reasonable to the corporation when entered into

2. The director's interest and material facts were disclosed AND the deal was approved by:

(a) the shareholders

(b) BoD by sufficient vote not counting votes of interested directors

(c) unanimous vote of disinterested directors if all of them combined aren't sufficient to take board action.

1. Approved by shareholders

2. If the stock is listed on an exchange, the incentive must be authorized by the exchange's policies.

1. Corporation gets a constructive trust on her profits - director must "account for" her profits

2. Corporation may also get damages if it was injured by the competition.

D/O must inform BoD of the opportunity and wait for them to reject it before taking advantage herself - cannot usurp the opportunity.

If director usurps, corporation gets a constructive trust - director must account for her profits.

General rule: all directors are presumed to have concurred with board action unless their dissent is noted in writing in the corporate records.

Ways to dissent: in the minutes, writing to corporate secretary at the meeting, or registered mail to corporate secretary promptly after adjournment.

When director missed the meeting, so long as she registers written dissent within a reasonable time after the wrongful act.

When she relies in good faith on information, reports, statements, or opinions of: (1) officers or employees who are known to be competent and reliable, (2) lawyers and public accountants whom director believes to be acting w/in their competence, (3) committee on which director is not a member, as to matters w/in committee's authority

1. BoD

2. Shareholders, if COI allows shareholders to elect officers.

3. AG or 10% shareholders by bringing a judicial action to remove an officer for cause.

When the D/O has won a judgment on the merits or otherwise.

If corp refuses to reimburse her, she can sue for the reimbursement, but can't recover attorneys' fees.

When D/O was neither held liable to the company nor won a judgment on the merits or otherwise.

E.g., settlement - can include the settlement amount, attorneys' fees, expenses

1. BoD w/ quorum of directors who are non-parties, or if there is no such quorum,

2. Shareholders or quorum of disinterested directors (?)

3. BoD pursuant to report from independent legal counsel

1. Court in which D/O was sued can order reimbursement if it finds she is reasonable entitled to it

2. COI or bylaws can provide for corp indemnification of D/O, so long as D/O didn't act in bad faith, act in a materially deliberate and dishonest way, or profit wrongfully.

COI restricts or transfers board power to shareholders, and 4 requirements:

1. All incorporators (voting & nonvoting) approve

2. Provision is conspicuously noted on front and back of shares

3. All subsequent shareholders have notice

4. Shares are not listed on any exchange or regularly quoted OTC

2 characteristics:

1. Few shareholders

2. Stock not publicly traded

Fiduciary duties (modern trend)

Controlling shareholders can't use their power for personal gain at the expense of minority shareholders, or to oppress minority shareholders.

Owe one another duty of utmost good faith (like p/s)

1. When shareholders have abused the privilege of incorporating

Abuse = complete domination of a corporation to perpetuate a fraud or injustice

2. When fairness requires holding them liable

1. She cannot recover her costs and attorneys' fees

2. May be liable to ∆ for their costs

3. Corporation and other shareholders are barred from suing the ∆s for the same transaction - res judicata

1. Stock ownership when the claim arose and throughout entry of judgment

2. Must be able to adequately represent the interests of the shareholders and the corporation

3. May be required to post a bond for ∆'s costs - but not if she owns 5%+ or $50k+ of stock

4. Must make a demand on the board unless demand would be futile

5. Special pleading requirements

6. Corporation must be joined as a ∆.

1. Majority of board is interested or under control of interested directors

2. BoD did not inform itself of the transaction to the extent reasonable under the circumstances

3. Transaction is so egregious on its face that it cannot be the result of sound business judgment

π is barred from bringing suit, UNLESS she can show that:

1. Majority of BoD was interested, or

2. BoD's procedure was incomplete or inadequate

1. Independence of those making the investigation and decision to move to dismiss

2. Sufficiency of the investigation

1. Proxy says its irrevocable AND

2. Either (a) proxy holder has some interest in the stock beyond voting, or (b) proxy is given subject to a shareholder voting agreement.

1. Shareholder can revoke by writing to corporate secretary

2. Death of shareholder, when corporate secretary receives notice of the death

3. Expiration of proxy at stated date or end of 11 months of no stated date 

Note - a proxy is not irrevocable just b/c it says so!

Real trust under trust law - requires

1. Written trust agreement setting out how shares will be voted - copy must be provided to corp

2. Legal title of shares transferred to trustee

3. Original shareholders have voting trust certificates; retain all shareholder rights except voting

4. 10-year lifetime - but can renew for another 10 years w/in 6 months of expiration

1. Written consent of all shareholders

2. Meeting

1. Written notice of when and where the meeting is given b/w 10 and 60 days before the meeting

2. If shareholder appraisal rights are available, state it and give statutory provision

3. If it's a special meeting, must state purpose - no other purpose can be conducted at the meeting.

1. Express: signed writing given at any time

2. Implied: shareholder attends meeting w/o objection

Majority of outstanding shares - number of shareholders present is irrelevant.

COI or bylaws can increase quorum requirement to supermajority or decrease, but never to less than 1/3.

Majority of shares must approve the action.

COI or bylaws can increase to supermajority, but cannot decrease to less than a majority.

Note - absentee votes, though counted toward the quorum, are NOT vounted toward whether a majority has been reached.

They are allowed if not an undue restraint on alienation.

Right of first refusal: allowed if price offered is reasonable

Requirement of corporate approval before sale: not allowed if corporation can withhold approval for no reason

General rule: restriction CAN'T be enforced against the transferee, unless:

1. Restriction was conspicuously noted on stock certificate

2. Transferee had actual knowledge of the restriction

Written demand on 5 days notice.

However, corporation can demand that shareholder provide an affidavit that the demand is for a proper purpose and that shareholder has not tried to sell the shareholder list in the last 5 years.

Written demand on 2 days notice.

Corporation cannot require an affidavit prior to providing the list.

Written demand.

Corporation CAN demand an affidavit here, but seeking this info for the purpose of researching a takeover is NOT an improper purpose for which corporation can deny access.

Right to inspect records at a reasonable time and place so long as inspection is for a proper purpose.

Scope of this right is unclear.

The surplus - assets less liabilities less stated capital.

Stated capital = par value of the issuance.

Par value of issuance.

If no par value, corporation has 60 days from date of issuance to allocate SOME PART of the money into the surplus - but cannot allocate all of it.

When the corporation is insolvent or when making a distribution would cause the corporation to become insolvent.

Insolvent: corporation is unable to pay its debts as they come due in the ordinary course of business.

Directors are PERSONALLY LIABLE (but can assert defense if they relied in good faith on the report of another)

Shareholders who knew that the distribution was unlawful at the time of receiving it are also liable.

Forced sale to corporation of stock at price set out in COI.

Must be done proportionately with each class of stock.

Corporation's individual negotiation of repurchase of stock from a shareholder.

Corporation is free to discriminate - i.e., purchase one stockholder's stock and not another's.

In a close corporation, however, all shareholders must have equal opportunity to sell back.

Right to force the corporation to buy back your shares at fair market value.

Triggered by certain fundamental changes to the corporation.

1. Important amendments to the COI

2. Consolidation

3. Merger where corporation is subsumed

4. Corporation transfers substantially all of its assets

5. Corporation's shares are acquired in a share exchange

1. Before shareholder vote on the fundamental change, file written objection and intent to demand payment

2. Abstain or vote against the change

3. After the vote, make a written demand to be bought out

1. Approval by (a) BoD and (b) majority of shares ENTITLED to vote (as opposed to majority of shares actually voting, as for regular shareholder action)

2. If amendment will change or strike a supermajority requirement, a supermajority of shares is required to approve it.

1. Amendment alters or abolishes a preemptive right

2. Amendment limits a voting right

Approval of a majority of shares entitled to vote.

Exception: short-form merger - where surviving company owns 90% of more of disappearing company

Minority shareholders in short-form merger get right of appraisal, but not right to vote on the merger.

One company acquires all the stock of one or more classes of another company.

Share plan must be filed w/ Department of State

Fundamental change ONLY for the seller - only seller shareholders get right of appraisal

Shareholders in seller get right of appraisal

No filing requirement

No successor liability unless (1) the deal provides for it, (2) purchasing company is a mere continuation of the seller, (3) deal was fraudulent to escape such obligations

1. Insufficient assets / dissolution would be beneficial to shareholders: BoD or majority of shares entitled to vote

2. Directors too divided to manage / shareholders too divided to elect: 1/2 or more of shares entitled to vote

3. Shareholders unable to elect directors for 2 or more meetings: any shareholder

4. 20% or more of shares in a close corp under certain circumstances

Must be 20% or more shareholder

1. Management is committing illegal, oppressive, or fraudulent acts toward complaining shareholder

Oppression = conduct by majority shareholders that substantially defeats minority shareholder's reasonable expectations

2. Management is wasting, diverting, or looting resources

When there is some other way that the complaining shareholder can obtain a return on investment - e.g., for ordering a buyout

Considerations:

1. Whether liquidation is necessary to protect shareholder

2. Whether it is the only way for them to get a fair return on investment

By buying the complaining shareholders' stock w/in 90 days of petition on terms approved by the court.

In approving buy-back, court is not bound by earlier agreements regarding buy-backs.

CREDITORS - shareholders put provision in bylaws that they will get paid before creditors.

However, shareholders CAN agree that certain among them will get paid before other shareholders.

Bylaws = agreement among shareholders; can be enforced among shareholders but not outsiders.

1. Gather assets

2. Convert to cash

3. Pay off creditors

4. Distribute remainder to shareholders pro rata (unless there is a distribution preference)

1. She sells to looters w/o reasonable investigation

2. She de facto sells a corporate asset (shareholders have no power to do this)

3. She sells a seat on the board (sale of stock + causing her directors to resign)

Majority shareholder causes the corporation to merge w/ another corporation she owns.

Minority shareholders shares are purchased for cash so they no longer have an interest in the corporation.

Generally: looking for fair price, fair dealing, and legitimate corporate purpose for merger

1. Whether deal is tainted by self-dealing or fraud

2. Whether minority shareholders were dealt w/ fairly

3. Whether there is a legitimate business purpose for the merger.

D/O who trades her stock based on inside info on the corporation has breached duty to the corporation

Corporation can sue to recover her profit

D/O and controlling shareholders breach duty when they trade on inside info w/ non-insider - must either abstain from trading or disclose info so that non-insider is on equal ground.

Non-insider can recover difference b/w price paid and market price a reasonable time after disclosure