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

ONLY NEED 1 OR MORE

(adult humans only)

Things included in Certificate of Incorporation

(K between corp and SHs, corp and state)

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

-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

-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

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

-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

person acting on behalf of a corporation not yet formed

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

Pre-Incorporation Contracts

Is corp. liable?

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

Adoption

express: board actoin

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

Pre-Incorporation Contracts

Is PROMOTER liable?

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)

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

Foreign Corporations

(incorporated outside NY)

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

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

-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)

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)

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

minimum issuance price

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

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

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

-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

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

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)

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?

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

1. unanimous written consent

2. meeting

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

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

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!!)

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?

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

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)

Misfeasance --> board does something that hurts corp.

apply BJR

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

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

Director cannot compete with her own corp.

If so, first corp. gets constructive trust on profits

(must account for profits)

Corporate Opportunity

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

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

remedy = constructive trust

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

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

Yes, if they have authority to do so

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

person can hold more than one office

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

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)

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

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

1. for acts in bad faith

2. intentional misconduct

3. receipt of improper financial benefit

4. approval of unlawful distribution or loan

1. few SHs

2. stock not publicly traded

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

-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

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

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

CLOSE CORPORATION

(non-publicly traded)

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)

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

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

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?

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

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.)

SHAREHOLDER VOTING

Record owner as of record date has right to vote.

What is record owner?

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

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)

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!!!

agreement in writing & signed

-apparently not enforceable

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

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

2. meeting

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

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)

-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)

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

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

YES.

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

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

Who can demand access to

1. minutes of SH proceedings, and

2. Record of SHs?

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)

Who can request corporations latest

1. annual balance sheet

2. profit and loss statemtn

3. interim statements distributed to SHs or public

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

1. dividend

2. payment to repurchase shares, or

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

When board declares it

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

surplus (assets-liabilities-stated capital)

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

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)

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

in certificate

must be done proportionately within each class of stock

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

so fundamental that most require board AND SH approval

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

-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

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

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)

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

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

2/3 of shares entitled to vote!!

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

MERGERS (A merges into B), OR

CONSOLIDATIONS (A + B = C)

needs:

-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

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

surviving corporation succeeds to all rights and liabilities of the constituents

-successor liability

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)

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

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)

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

Then certificate of dissolution delivered to DOS for filing

-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

PETITIONING FOR INVOLUTNARY DISSOLUTION IN A CLOSE CORPORATION

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

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

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)

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

Sale of Controlling SHs Interest

SH gets control premium UNLESS:

-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)

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:

transaction as a whole

-fair price

-fair course of dealing

-legit corporate purpose for the merger

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

NY: (breached duty to CORPORATION!)

corporation can sue to recover her profit

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

What are special facts?

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)