Corporations

article 13- foreign corpations

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dejure corporation

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executive compnesation

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ultra vires

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NYBCL Structure (tips)

102- deals with definitions of terms (corporation,

Duty of care

Addresses the attentiveness a dn prudence eo fmanager sin performing their decision and oversight functions.

Board meeting

At a board meeting, a quorum is usually a majority of the director in the office.

Shareholders meeting

At a shareholders meeting , a quorum is usually a majority of the outstanding shares

Qurorum

At both a shareholders meeting and a board of meeting directors meeting, no action may be taken without a quorum.

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Corporate managers owe two duties to the corporation: 1) Duty of Care 2) Duty of Loyal - good faith applies when directors act intentionally to violate positive law.

Piercign Corprote Veil of Parent Company and Subsidiary

Courts have a greater tendency to pierce parent companies. Veil will not be pierced if: 1) proepr corporate formalities are observed - will not be pierced merely because here is a close relationship between the two entities. * not enough that offers between the two may be the same, or they have common lawyer or accountants. * Domination of Affiars not enough- fact that parent excecises some control y haveng a veto power, or drain gin excess cash wil lento suffice for piercing. * As long as the degree of control is within the bounds usually found in corporate america, not pier cable. 2) the public is not confused about whether it is dealign with the parent or the subsidiary 3) the subsidiary is operated in a fair maker with some hope of making a profit 4) there is no manifest unfairness

Blasius Rule

DUTY OF CARE BLASIUS RULE: "Compelling Justification" Rule - If you are going to put in an impediment for the shareholders to vote, you better have a compelling justification for doing so o Blasius compelling justification rule applies the heightened scrutiny standard

Piercing the C. Veil

Disregarding the corporate entity - Piercing the corporate veil: -In some circumstances, even though corporation has been validly formed, courts will hold the shareholders, officers, or directors personally liable for corporate obligations because the corporation abused its privilege of conducting business in the corporate form. -When a valid corporate existence is ignored -Is invoked to prevent fraud or to achieve equity Typical example: Validly formed corporation goes bankrupt, creditors attempt to hold active owners personally liable, jointly and severally *Piercing the corporate veil is much more common than defective corporation scenario's *NY Bus. Corp. Law Section 630: states that if company is non-publicly traded corporation and it goes bankrupt, the 10 largest shareholders can be held liable for all back due debts, wages, and salaries due to its employees that are unpaid

Elements justyfing Piercing the Veil

Elements justifying piercing the corporate veil: -Each case treated differently, but 3 most common situations where veil is pierced: (1) when corporate formalities are ignored, (2) when the corporation is inadequately capitalized at its outset (insolvent) -Obligation to provide adequate capital beings with incorporation and is a continuing obligation during the corporations operations (3) to prevent fraud -Proof of clear fraud not required element in finding to disregard corporate veil¬ - fraud will almost certainly pierce the corporate veil, but may be pierced in absence of showing of fraud

Tort Veil Piercing

General rule on tort veil piercing: In any event, general rule is that even if a hazardous activity has inadequate capital and inadequate insurance to satisfy its potential tort liability, that alone is not sufficient to pierce the corporate veil Major consideration: Whether the 3rd party dealt voluntarily with the corporation(contract) or whether he is an involuntary creditor(tort) -Directors of a corporation can be held liable when they command the company to engage in certain activities and it results in a tort -Tort victim is usually successful plaintiff under theory of piercing corporate veil, because he has not be involved with corporation in transactional sense and should not be forced to sue an insolvent corporate shell for damages

Business Judgement Rule

Manageers have broad discretion in cases of business decision making.

insolvency Test

NA must be a positive do this by Total Aset (TA)- Total liability(TL) and if it is a positive number, then the company is solvent.

LEgal capital

NYBCL 510 DCL 170(a) DCL 154

NYBCL 1001-1002

Non judicial dissolution of corporations

Types of Promoters

Nonrecourse agent- there is no contract unless the corporation gets incorporated and adopted by the Board. Best Efforts Agent- promoter agrees to use their best efforts to bring the corprotiaon into existence, but there is no contract between the business and the corp until the company is incorporate and adopts the contract. Interim contracting party- The promoter accepts liability to the business for the contract until the comanpy is incorporated , adds the contract and is substituted in the promotes place. Additioanl Contracting Party- Promoter is liable for the contract, even if the contract is adopted by the corporation. Severl and jointly liable.

Parent/Subsidiary Liability

Parent/Subsidiary liability: -A Parent corporation can either operate a section of its business as (1) a separate subsidiary -if there is actual legal separation, parent will not be liable on subsidiary's obligations (2) a division or department of the parent corporation itself -no legal separation, parent is personally liable for obligations of that business -Courts use the "actual control" test to determine whether parent corporation actually controlled the subsidiary enough. If control is extensive enough, then it gives rise to indirect liability under the piercing doctrine. -Similar board members or directors and officers does not necessarily demonstrate the activities of the subsidiary To pierce the corporate veil and hold parent company liable, must show: (1) Control - not just of stock, but of policy and business practices (2) Such control must have been used to commit fraud or wrong (3) The control must have proximately caused the injury

earned surplus

Represents the accumulation of earnings or losses after its initial capitalization the coripaotions fincaincal affairs do not remain static. If all goes well assets will increase faster tan liabilities. (company sis making money) The business will show a profit (profit= gross sales - total cost- tax obligations)

Reverse Piercing

Reverse Piercing: when piercing is sought by a corporate creditor of the corporate shareholders -When a creditor of one of the main shareholders, not of the corporation, is trying to have the shareholder and the corporation treated as one equity -Is rarely ever allowed Notes on piercing the corporate veil: -Corporate veil is never pierced in publicly traded companies, always closely held with a few shareholders.

Shareholders Powers

Shareholders, as owners of the corproationmay: 1) Vote for directors 2) Approve fundamental changes to the corprotaton (ex: the corp cannot sell substantially all of its assists, or merge into another corp, unless the shareholders so vote and agree

Directors

The board of directors manages the corporation at the policy level. They can: 1) Appointmet of Officers - board votes to appoint officers, who are day to day mangers of the corp. 2) Setting of Policy: - the board sets major policy. (non trivial auaiistion of another comapnys stock would have to be approved by the Board Requirments for Board Action- - a key focus with respect to directors is, what are the requirement sfor valid action by the board

Duty of loyalty

addresses the fudiciaroes conflicts of interest and requires fiduciaries to put the corporations interest ahead of their own. ----- breach duty when: convert corporate assets, business pops, or proprietary info for personal gain

Piercing the Corporate Veils

Things that courts look at when decifin whtehtr or not to pierce the corporate veil 1) Whether the case involves tort or contract (courts more will gin to pierce in tort cases) - not dispositive, however the courts are subsintaially more likely to pierce the veil on behalf of a tort or other involuntary creditor. 2) Whether the defendant stockholders have engaged in fraud or wrongdoing - usually this refers to some means by which those controlling the corporation have siphoned out its assists, leaving too little in the corpotatio to satisfy creditors. 3) Whether the corporation was adequately capitizlaion - a very important factor in a couts decision to pierce a corporate veil especlaly a key factor when the credit is involuntary. (voluntary creditors are assumed to have willingly accepted the risk of dealing with an inadqualty funded corporation. - most courts require that there be either some affirmative fraud or wrongdoing by the shareholder or a gross failure to follows the formalities of a corporate existence. *however most courts do not just rely on this even in tort cases, where those people never willingly relied on the corporations credit worthiness. Zero Capital - when the shareholder invest no money whatsoever in the corporation, courts are espcelaly like yto pierce the veil. Syphoning of Corproate profits is a form of undercapitalization because it may leave the corpotion unable to fulfill its obligations to creditors. - excess fo salaries, excess dividimes, or other trmasfers to the shareholder that leave the corp unable to fuflil debts. Failure to Add new capital/ Business Grows - another form of undercapitalization 4) Whether corporate formalities (e.g. the issuance of stock certificates, the keeping of the minutes of corpora meetings) were followed. - ways in which failure to follow formalities might occur: 1) share are never formally issued. 2) shareholders meeting and directors are not held. 3) SHS do not sharply distinguish between corporate and personal proerty 4) corprote finaicnali records are not maintained.

defacto corporation

This requires: 1) some colorable and god faith attempt to incorporate and 2) actual use of the corporate form (such as carrying on business or contracting in corporate name) - not a defense if the state you incoorpated in is suing you.

Alter Ego Theory

To pierce the corporate veil on an alter ego theory, a plaintiff must show that the two corporations operated as a single economic entity and that an overall element of injustice or unfairness is present. -Among the factors to be considered in determining whether the two corporations operate as a single economic entity are: whether the corporation was adequately capitalized; whether the corporation was solvent; whether corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether in general the corporation simply functioned as a facade. (1) Ignoring corporate formalities: -Corporate formalities can be ignored in several ways: (a) shareholder treating assets of corporation as its own, (b) using corporate funds to pay private obligations, (c) failure to keep separate corporate books, (d) failing to meet corporate formalities of holding shareholder meetings and issuing stock -Sloppy administration alone is not enough to pierce corporate veil - must be some element of injustice -a subsidiary or affiliated corporation will not be considered a separate corporation if the formalities of separate corporate procedures are not observed Factors a court will consider: -Failure to observe corporate formalities (by itself is insufficient) -non payment of dividends -insolvency of the corporation -siphoning of funds of the corporation by the dominant shareholders -non functioning of other officers or directors *There must also be an element of injustice of fundamental unfairness

How to Pierce the Corporate Veil

To prevail on an alter ego claim under DE law, a plaintiff must show 2 elements: 1. The parent and the subsidiary "operated as a single economic entity" and a.Whether the corporation was adequately capitalized for the corporate undertaking • Inadequate capitalization do you have enough money to keep the corporation functional (MEASURED ONLY AT THE TIME WHEN THE CORPORATION IS FORMED) • Not a lot of discussion about this by the Court b. Whether the corporation was solvent • Insolvent being unable to pay your debts as they come to you in the usual course of the business (MEASURED LATER ON) • Not much discussion by the Court c. Whether dividends were paid, corporate records kept, officers and directors functioned property, and other corporate formalities were observed; • Corporate housekeeping annual shareholders meetings, regular board of director meetings, board of director resolutions, lawyer keeping records • Kodak has showed that Atex followed corporate formalities, and PL have offered no evidence to the contrary. • Board of directors held regular meetings, and prepared corporate minute books • Kept appropriate financial records and other files • Filed its own tax returns and paid its own taxes • Atex had its own employees and management executives who were responsible for the corporation's day-to-day business • Atex's board of director receiving house payment for loan is fine because corporate formality was observed • CORPORATE FORMALITIES IS IMPORTANT IF YOU WANT TO AVOID LIABILITY d. Whether the dominant shareholder siphoned corporate funds • The shareholder is essentially using the corporation as its personal ATM machine • PROBLEM with this is the lack of corporate formality • Parent corporations often go into their subsidiary corporation to draw funds • Kodak kept the funds in a centralized account to earn higher interest BUT the money always goes back to the subsidiary corporation when it is needed e. Whether, in general, the corporation simply functioned as a mere façade for the dominant shareholder • Alter ego notion are you hiding under the owner's agenda • The subsidiary operates for no other purpose other than shielding the parent corporation for liability • The fact that approval is needed by Kodak for Atex to enter into any major transaction is just typical controlling shareholder playing out in a context of a subsidiary • It is also common for board of directors to sit in on another subsidiary's board and it's also not true that they dominated Atex's board all the time 2. An "overall element of injustice or unfairness is present" • PL offered no facts that supports the finding • Injustice flows naturally from the lack of respect for the corporation

Unocal Defense

UNOCAL DEFENSE: The defense measure you take has to be in good-faith, reasonable, and proportional to the threat proposed ✩ The Court did not focus on the business judgment rule, instead the court focuses on the board's action in light of a struggle between shareholders and directors struggle for power • BUSINESS JUDGMENT - it is not a business decision when you decide to expand the board to screw the shareholders, it BLASIUS is a power struggle

insolvency

a corporation is insolvent if its liabilities are greater than its assets.

PROMOTER

a person who takes the initiative in founding and organzingin BUSINESS ENTERPRISE *arrange necessary capital acquire any assets or personnel necessary *arranging for the actual incorporation of the company IF Corporation Not Named In the Contract- Even if the promoter has the intent to assign the contract to the corporation at a later time, the promoter is personally liable. If the Contract is in the Corporations Name and It is Not Yet Incorpoarted, ANd the Business Does Not Know That BUT: If the promoter knows that the corporation has not yet been formed, he will almost certainly be personally liable if the corporation is never formed, or if it does but does not take over the contract. IF the Corporation is formed after the contract is signed - the corporation must adopt by novation the contract, the promoter has a somewhat better chance of escaping personal liability. If the promoter was unaware that the corporation hasn't been formed: - if the promoter honestly believes that the corporation has been formed, but due to technical defect, the corp really doesn't exist yet, the courts are more sympathetic to the promoter, and sometimes find ways to relive him of personal liability. If the business that the party the promoter is dealign with knows that the corp is not officially formed, but lets them makes deals in the corp's name, corts are more sympathetic to the promoter because there is no misrperestiton to the business. *drafters of these contracts must resolve and make clear wether the promoter is initially liable not eh contract, whether the corporation wil become liable, and whether the promoter remains liable even after corporate adoption.

Flagrant Diversion

a plain breach of he fiduciary's duty of loyalty because the diversion was unauthorized and the corprotoation received no benefit in the transaction. ex: executive compensation

blanket sheet

a snapshot of a companys finical position. Three categories of a balance sheet: 1) Assets 2) liabilities 3) shareholders equity

DGCL 510 (paying of dividends)

allows dividines to paid from a surplus Suprlus is defined as net assets minus liabilities

NYBCL 726

anything relating to directors and officers (quorum, elections, what is the scoop of duties)

corporation by estoppel

arise when the parties have death with each other under the assumption of corporation existence, even thug no colorable attempt to incprorpate. if outsiders depended on your represent ion, then the corp is estopped form denying corporate exstienvec or limited liabitly.

book value

assets on a balance sheet that are listed at their historical cost.

Self dealing

breach of duty of loyalty when a fiduciary enters into a transaction with the corporation on unfair terms. squeeze out situations

NYBCL 501-520

deals with corporate finance -authorizing shares, par value etc.

NYBCL 201- 203

deals with corporate purpose and powers

NYBCL 102

deals with definitions of terms

NYBCL 401- 403

deals with formation of corporations

NYBCL 912

deals with mergers and consolidations

NYBCL 601-630

deals with shareholders (by lass meeting, notice of meetings)

Liabilities

debts that a company owes to creditors.

Net assets

equals total assets minus total liabilities

straight vs. cumulative voting

in all elections of directors, the number of votes shareholder gets equal the number of shares they hold, multiplied by the number of directors standing for election.

cumulative voting

in cumulative votinga voter may vote a single share multiple times for a single candidate. This increases the power of minority shareholders, since a shareholder may cumulate al his votes as to be sure to elect a single director.

NYBCL 1101-1118

judicial dissolution of a corporation

Straignt voting

no share may be voted more than once for any given candidate.

preemptive rights

refers to a stockholders right to subscribe to new stock issuances in preference to persons who are not stockholders.

NYBCL 801- 804

relates to amendments and changes

Officers

the corporations officers administer the day to day affairs of the corporation Authority of Officers: Whenever an officer acts on behalf of the corporation,a key issue is, was this action authorized? If the action was not in any sense "authorized" its not binding on the corporation. An officers authority may be expess, implied, or apparent. Raification- However, even if the officer acted complexly without authority, later actions by other officers or by the board may a,mount to a ratification of the act, binding the corporation.

Voting Dilution

the reduction on a given stockholders voting power than results from an increase in the corporations number of outstanding shares.

Piercing the corporate veil

when all or some of shareholders are held personally liable for the corporations debt.

Blasius Rule

• INDUSTRIES v. ATLAS CORP: Blasius owned 9.1% of Atlas. Board of Atlas thought Blasius was planning a hostile takeover, and thus expanded the board from 7 members to 9 and appointed 2 of their own on the board. ✩ 13D is filed 10 days after you own more than 5% of the outstanding stock in a publicly traded company telling the world what your intentions are for buying (investment, or prelude to a takeover, etc.) ✩ PL alleged entrenchment, breach of fiduciary duty of care ✩ D argued the business judgment rule directors acted in good faith, informed basis, best interest in the shareholder in mind for the company • Unless the PL proffers particularized facts that conflicts the interest, and rebut the business judgment rule they have to show no rational business purpose for doing what they did ("Mere rationality") ✩ • DUTY OF CARE ✩