CORPORATIONS - NY
When sells all or substantially all of its assets to another company
When sells all or substantially all of its assets to another company and the agreement is silent on assumption of liabilities no liabilities are assumed by the purchasing company an exception to the rules is when the purchasing company operates as a mere continuation of the selling company in which case it is treated as having assumed the purchased company's liabilities.
PRE-INCORPORATION TRANSACTIONS: LIABILITY OF CORP FOR PRE-INCORP CONTRACTS*
-A PROMOTOR is one who acts on behalf of the corp to legally form a corp. Under NY BCL, a corp is NOT liable on pre-incorp contracts entered into by a promoter UNLESS the corp expressly or impliedly adopts the contracts post-incorp. -A corp. can expressly adopt a pre-incorp K by BOARD ACTION. -Implied adoption occurs when the corp : 1) KNOWS or has REASON TO KNOW of the material terms of the K 2) AND Accepts BENEFIT of the K
DUTY OF LOYALTY- COMPETITION WITH THE CORP
-A director owes the corp a duty of loyalty, which means that the director, in his dealings must act in good faith and w/ honest and fairness that the law imposes on fiduciaries. -Under the NY BCL, if a director COMPETES with a corp he is on the BOD of, he is in BREACH of his duty of loyalty. If a director is found to have breached his duty, he is liable to corp for its damages and lost profits caused by breach.
FIDUCUARY DUTIES: DUTY OF LOYALY*
-A director owes the corp the duty of loyalty, which means that the D in his dealings with the corp, must act in good faith with honesty and fairness that the law imposes on fiduciaries. -Under the NY BCL, an INTERESTED DIRECTOR TRANSACTION with the corp is a breach of the duty of loyalty UNLESS: the director shows: 1) The terms of the transaction were fair and reasonable OR 2) After full disclosure that transaction was approved by: a) majority of the shareholders b) a majority of the board with the interested director abstaining from voting, or c) unanimous vote of the disinterested directors (if the disinterested directors are insufficient to make up a quorum on behalf of the board)
DUTY OF LOYALTY- CORP OPPORTUNITY DOCTRINE*
-A director owes the corp the duty of loyalty, which means that the director, in his dealings with the corp, must act in good faith and with honesty and fairness that the law imposed on fiduciaries. -Under the NY BCL, usurpation of a corp opportunity is a breach of the duty of loyalty. A corp opportunity is ANY opportunity in which the corp has an interest/expectancy in OR if it is in the corp's line of business. -A corp opportunity is USURPED when a director PROFITS from any transaction that a reasonable director anticipates is of interest to the corp UNLESS: 1) The director informs the board of the opportunity AND 2) The board rejects it. -If a director is found to have breached duty of loyalty, she is liable to corp for its damages and lost profits caused by breach
IMPROPER LOANS OF CORP FUNDS*
-A loan to an interested director must be approved by the MAJORITY of the shares entitled to vote. Baring such approval, any director who concurred in the improper loan vote will be JOINTLY AND SEVERALLY LIABLE to the corp for the amt of the loan. it is IRRELEVANT whether the terms of the loan are fair. -A director is PRESUMED to have concurred with board UNLESS her dissent is noted in WRITING IN THE CORP RECORDS (an oral dissent has no affect). -In order for directors dissent to validly be in corp records, the director's dissent must either be: 1) In the minutes 2) In a writing given to corp secretary @ meeting OR 3) In a registered letter sent to the secretary promptly after adjournment of the meeting. -However, the director CANNOT dissent if she voted for the resolution @ the meeting.
CORPORATION FINANCE: PREEMPTIVE RIGHTS*
-A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corp by being offered the opp to purchase shares of the corp issues for cash before outsiders are permitted to purchase. -Under the NY BCL, for corporations formed AFTER FEB 22 1998, shareholders DO NOT enjoy preemptive rights UNLESS such rights are explicitly granted in the corp's certificate of incorp. -Preemptive rights also DO NOT exist when shares are issues for consideration other than cash OR when the shares issued are authorized shares included in the certificate of incorp and are sold within 2 years of incorp.
LIABILITY OF PROMOTER FOR PRE-INCOPORORATION CONTRACTS*
-A promoter is one who acts on behalf of the corp to legally form the corp -Under the NY BCL, a promoter can be held liable on a K until a NOVATION is executed. A NOVATION is a modification to an existing contract where the original parties and replace him with the NEW party. -A NOVATION discharges all of the obligations and liability on the K as to the party released.
DUTY OF LOYALTY - TRADING ON INSIDE INFORMATION
-A shareholder is NOT generally liable to other shareholders for his/her actions. However, a MAJORITY SHAREHOLDER or a SHAREHOLDER with influence on the board or access to CONFIDENTIAL INFORMATION owes a fiduciary duty to the other shareholders to NOT ACT on inside info to his/her advantage. -INSIDE INFO: any info which is not available to public @ large and one in which a reasonable investor would consider relevant in making his investment decisions. Where an insider shareholder trades on the basis of inside info, he breaches his fiduciary duty owed to the corp and to other shareholders. -The insider's profits may be disgorged by the imposition of a constructive trust or the affected shareholders of the corp can sue to recover profits.
BUSINESS JUDGMENT RULE*
-BJR protects directors and officers if they make decisions in GOOD FAITH, in which they are REASONABLY INFORMED and have a RATIONAL BASIS. -The court allows a director to rely on the reasonable advice of professional advisors, such as atty's, accountants, or committees of the board, where such reliance was reasonable and the professional advisor or committee was qualified to provide advice.
DIRECTORS: ENFORCEABILITY OF VOTING AGREEMENTS B/W DIRECTORS
-Directors CANNOT: 1) Give proxy for director voting OR 2) Enter into director voting agreements. -Both are VOID b/c of public policy reasons under the logic that directors are supposed to exercise independent judgment in managing the corp.
FIDUCIARY DUTIES: DUTY OF CARE*
-Directors are FIDUCIARIES of the corp, and as such owe a DUTY OF CARE to the corp. This means they must discharge their duties in GOOD FAITH & with the KNOWLEDGE, CARE, and SKILL of an ORDINARY PRUDENT PERSON in similar circumstances. -If a director breaches this duty, he may be held PERSONALLY LIABLE to the corp for any losses suffered as a result. However, to recover damages for the breach, it must be shown that the corp's injury was caused by the director's nonfeasance or misfeasance.
APPRAISAL RIGHTS OF SHAREHOLDERS- MERGERS AND CONSOLIDATIONS
-For certain fundamental corp changes, such mergers and consolidations, shareholders may have appraisal rights. -Appraisal rights allow a shareholder to require the corp to purchase their shares if the shareholder objects to the changes. Shareholders of BOTH companies in a consolidation have appraisal rights, but ONLY the shareholders of the acquired company in a merger have appraisal rights. If any corp is publicly traded, then the shareholders of that corp have NO appraisal rights. -To give effect to such appraisal rights, the shareholder MUST: 1) give notice to the secretary of the corp before the vote he intends to excercise his appraisal rights. 2) vote against the measure or abstain from voting AND 3) demand within a short time after the meeting that the corp repurchase his shares. -Only if ALL these formalities are complied with, can a shareholder exercise appraisal rights.
CORPORATION BUYING BACK SHARES FOR A PREMIUM
-Generally, a controlling shareholder is entitled to a premium on the sale of her stock. It is only when BAD FAITH is shown (ex: when the controlling shareholder sells her stock to looters for a premium w/ knowledge that they will loot the corp assets that a shareholder will be held liable for the sale of her stock premium. -Under the NY BCL, a corp is allowed to repurchase its shares and to discriminate in the repurchase by not offering the same terms to other (unless it is a closely held corp or the COI provides otherwise) -However, the corp must show that the repurchase served some legitimate, corp purpose. In addition, a corp cannot discriminate on redemption rights which are set forth in the COI
CLOSE CORPORATIONS: FIDUCIARY DUTY OWED BY SHAREHOLDERS IN CLOSE-CORPS
-Generally, shareholders do not owe fiduciary duties to fellow shareholders and they can act in their own self interest. However, courts have found that controlling shareholders in close corps owe a fid duty to MINORITY shareholders not to engage in OPPRESSIVE CONDUCT. -A close corp is a corp whose shares are not publicly traded and has a small number of shareholders
PROFESSIONAL CORPORATIONS (P.C's)
-In NY, the P.C is a business designation exclusively for professionals, such as lawyers, accountants, and architects. Shareholders, directors, and officers are NOT personally liable for the debts of the corp. -Each shareholder, director, or officer is personally liable for their own TORTIOUS acts and for acts of anyone under their supervision and control regarding business conducted for the corp.
DERIVATIVE SUITS*
-In a derivative suit, a shareholder is suing to enforce the corp's claim, not his/her own personal claim. The suit must be one in which the corp could have brought itself and has harmed the corp in some way, not merely the plaintiff-shareholder. -To bring a derivative suit under NY BCL, the P-shareholder must meet the following req's: 1) He must own the corp's stock at the time the cause of action accrued. 2) He must OWN stock by and through entry of judgment 3) He must adequately represent interests of the corp 4) He must post bond for the corp's reasonable litigation expenses, UNLESS he owns 5% or more of the corp's shares or his shares are worth more than 50,000 AND 5) He must make a demand upon BOD to sue or establish why such demand would be futile -For a demand upon BOD to be deemed futile, it must be the case that: 1) the board is dominated or composed of interested directors 2) the board failed to adequately inform itself of issue at hand 3) breach is so egregious that it couldn't possibly be the result of the sound business judgment. -The damages awarded in derivative suit will be paid to the corp (not shareholder), but shareholder can recover the reasonable cost of litigation. However, in certain instances the court will order the damages to be directly paid to shareholders if payment to the corp would benefit the D's
DIRECTORS: BOOARD OF DIRECTORS MANAGE CORP
-Management of a corp is a responsiblility of the BOARD OF DIRECTORS, UNLESS shareholder management is permitted pursuant to a provision in the COI. Issues of hiring officers and employees and the setting of salaries are part of the management of a corp, and THUS are responsibility of BOD, not shareholders.
ENFORCEABILITY OF VOTING AGREEMENTS BETWEEN SHAREHOLDERS
-Shareholder agreements ARE valid & enforceable in NY as to matters of shareholder voting. To be valid, the agreement must be in a signed writing.
FORMATION: CONFLICT B/W CERTIFICATE OF INCORPORATION AND BYLAWS
-The Certificate of Incorporation is a fundamental corporate document filed w/ the SECRETARY OF STATE. -The BYLAWS of a corporation are laws passed by its shareholders (or directors w/ shareholder permission) that govern the internal operations of a corporation. The Bylaws are simply procedural rules and are not binding on anyone who is NOT part of the corporation. -Under the NY Business Corporation Law (BCL), when there is a CONFLICT b/w the CERTIFICATE of INCORPORATION = COI CONTROLS! -In addition, certain changes are only valid when put in the COI and have no effect if put solely in the bylaws. One example is: a supermajority agreement (an agreement which usually states that all proposals must be passed by supermajority of the shareholders), which must be in the COI to be VALID and enforceable.
VOTING OF TREASURY STOCK AT SHAREHOLDER'S MEETING
-Treasury shares are shares that were originally issued to a shareholder, but were then subsequently REPURCHASED by the corp. -Under the NY BCL, a corp MAY NOT vote treasury shares at a shareholders meeting.
SHAREHOLDERS: RIGHT TO INSPECT BOOKS & RECORDS
-Under NY BCL, a shareholder has a right, upon 5 days written demand, to a list of all record shareholders and to inspect the shareholder meeting minutes. -The corp may require the shareholder to first furnish an affidavit that his interest is only in the best interest of the corp and that he has not sold shareholder lists to anyone within the last 5 years. If the shareholder refuses to provide this affidavit, the corp must deny the request. -Under the NY BCL, a shareholder also has a right to obtain a list of all directors and officers, upon 2 days written demand. A further right exists to obtain all profit and loss statements, balance sheets, and other public financial disclosures of the corp via regular mail. -A shareholder also has a common law right to inspect the books and records of the corp at a reasonable time and at a proper place if the inspection is for a PROPER PURPOSE.
SHAREHOLDERS: NOTICE REQUIRED FOR A SPECIAL MEETING OF THE SHAREHOLDERS
-Under NY BCL, notice of special meetings must be provided to ALL shareholders at least 10 days and more than 60 days PRIOR to the meeting. Failure to give proper notice VPIDS all decisions carried out at the meeting. -Notice must describe what will be discussed @ the meeting.
BUYOUT PROVISIONS ARE STRICTLY CONSTRUED
-Under NY law, restrictions on the sale of stock are strictly construed and are not favored due to the alienation it places on transferring property. However, they will be enforced if the restrictions are REASONABLE, which means that it is not an undue restraint on alienation. -Ordinarily, a RIGHT OF FIRST REFUSAL (which is a right to repurchase the shares of a selling shareholder before he/she sells it to a third party) is enforceable IF the officer is reasonable as to the dollar amt offered for the shares by the corp that retains the right. If the corp's offer is: 1) equal to an offer by another individual OR entity AND 2) The selling shareholder wishes to accept the offer, then the req that the selling shareholder sell the shares is NOT an undue restraint on alienation. -Shareholders CANNOT be compelled to sell their shares in a corp if they do not wish to sell their shares. -Even if a stock transfer restriction is valid and reasonable, it cannot be invoked against the transferee UNLESS: 1) it is conspiciously noted on stock certificate 2) transferee has actual knowledge of restriction.
OFFICERS: AUTHORITY OF OFFICERS
-Under the NY BCL, BOD is responsible for the MANAGEMENT of the corp. -An OFFICER has the authority to mange the DAILY BUSINESS of the corp. Board approval is required for all actions considered NOT to be in the ordinary course of management of the corporation. However, unauthorized office action may be ratified by subsequent board approval. Absent provisions in the COI or bylaws, the directors must decide whether or not to commence legal action.
PAR VALUE- CORP SELLS TREASURY SHARES BELOW PAR VALUE
-Under the NY BCL, a corp is liable for selling its issued stock below par value. However, treasury stock (stock that was previously issued and had been reacquired by the corp) may be sold for ANY amount, even below par value.
INDEMNIFICATION OF DIRECTORS
-Under the NY BCL, a corp may NOT indemnify an officer or director if she was HELD liable to the corp by a court. However, a corp MUST reimburse the director or officer if she was SUCCESSFUL in defending the action on the merits or otherwise.
DIRECTORS: REMOVAL OF DIRECTORS
-Under the NY BCL, a director may only be removed FOR CAUSE before expiration of their term by: 1) Shareholder vote OR 2) Vote of the board of directors (but only if COI or shareholder bylaws allow it) -A director may only be removed WITHOUT CAUSE before expiration of their term by a vote of the shareholders AND ONLY IF the COI or bylaws allow it. There is cause to remove a director when the director violates any fiduciary duty, including engaging in self-dealing, usurping a corp opportunity, or committing waste.
DIRECTORS: QUORUM REQUIREMENTS FOR A BOARD OF DIRECTOR'S MEETING
-Under the NY BCL, a majority of the board of directors is necessary to make a quorum, and a majority of those present must vote to take board action, unless there are provisions stating otherwise in the certificate of incorporation.
MERGERS AND CONSOLIDATIONS: SHAREHOLDER VOTE REQUIRED
-Under the NY BCL, a merger or consolidation requires either: 1) BOD approval plus 2/3 of the shares entitled to vote (for corps incorporated on or before feb 22, 1998) OR 2) BOD approval plus a majority of the shares entitled to vote (for corps incorporated AFTER feb 22, 1998) -NO shareholder approval is required for a short form merger, which is where a parent corp owns 90% or more of each class of stock of a subsidiary that is merged into the parent corp
JUDICIAL DISSOLUTION
-Under the NY BCL, a minority shareholder owning 20% or more of a corp's stock may petition the court to dissolve the corp if he can show that the controlling shareholders are: 1) Engaging in FRADULENT ACTIVITY 2) Committing WASTE OR 3) Acting in a way that is OPPRESSIVE to the minority shareholder, such that the minority shareholder is blocked from receiving his anticipated return on investment. -Within 90 days of the petition, the controlling shareholders MAY offer to purchase the minority shareholder's shares at a reasonable price to avoid dissolution. If parties CANNOT agree on a reasonable price, the court may SET one. The court could require the company to buy out the complaining shareholder in a close corp since there is no public market for the shares, and the shares are not traded on an exchange.
DIRECTORS: REQ'S FOR VALID SUPERMAJORITY VOTING AGREEMENT
-Under the NY BCL, a provision which mandates a SUPER MAJORITY voting restriction is NOT VALD, UNLESS it is contained in the corp's COI. -A super majority req in the BYLAWS is NOT VALID or BINDING. In the absence of such a provision in the COI, board action may be taken when a quorum of directors is present and a majority of those voting in favor of the action.
DIVIDENDS - SHAREHOLDER'S RIGHTS TO RECIEVE DIVIDENDS
-Under the NY BCL, a shareholder DOES NOT have the right to compel a corp to provide distribution, whether in the form of a dividend, or otherwise. Distributions are declared at the discretion of the BOD. -However, a court will interfere with the Board's discretion and upon a showing of BAD FAITH or dishonest purpose.
PIERCING THE CORPORATE VIEL*
-Under the NY BCL, a shareholder is NOT personally liable for the liabilities and obligations of a corp. -However, NY courts may disregard the corp form and hold individual corp shareholders personally liable for actions taken on behalf of the corp entity to prevent FRAUD or achieve EQUITY. -To PIERCE THE CORP VEIL & hold shareholders or parent corp PERSONALLY LIABLE, the following elements must be present: 1) D exercised Complete CONTROL/Domination of the corp in the transaction in question and such control/domination was used to commit fraud or wrong against P resulting in injury. *This test is very harshly construed in NY so that the courts will not pierce the corp veil if corp has mind of its own, independent business existence, or will of its own. -Piercing the corp veil will be generally be used by courts in 3 situations: 1) Failure to adhere to corp formalities 2) where the corp was UNDERCAPITALIZATed when formed 3) Commingling of personal and corp assets 4) Use of corporate funds for personal expenses -Where a parent corp exercises such direction and control over a subsidiary, to the extent that the subsidiary can be said to have NO identity of its own, a court can pierce the corp veil of the subsidiary to attach liability to the parent corp under the alter-ego doctrine.
PROXY VOTING AND REVOCATION OF A PROXY
-Under the NY BCL, a shareholder may vote her shares at a shareholders meeting without physically attending the meeting through use of a PROXY. -An individual who is granted the power to vote another's shares by proxy must act in accordance with any agreement b/w the parties. If the shareholder directs that proxy holder vote in a certain way, then proxy holder must do so. A shareholder may also grant a proxy holder the ability to vote shares as proxy holder deems appropriate. A valid proxy agreement cannot last longer than 11 months. -Proxy agreements are FREELY REVOCABLE by the shareholder, even if the proxy states it is irrevocable. *EXCEPTION: proxy coupled with an interest/ legal right - is irrevocable if the proxy expressly states that it is irrevocable.
OFFICERS: TERMINATIONF OF OFFICERS
-Under the NY BCL, only the BOD can appoint and remove officers UNLESS the COI allows the shareholders to elect officers. If the shareholders validly appoint an officer, then only the shareholders may terminate that officer, although BOD can still suspend a shareholder appointed officer's authority to act for cause
TOP 10 LARGEST SHAREHOLDER ARE PERSONALLY RESPONSIBLE FOR EMPLOYEE'S WAGES IN CLOSE CORPORATIONS
-Under the NY BCL, shareholders of a corp are generally NOT liable for the debts and liabilities of the corp. They are gnerally liable only to the extent of their investment. However, in a closely-held corp (a corp whose shares are not publicly traded) the TEN largest shareholders are PERSONALLY liable for unpaid employee wages.
CORPORATION FINANCE: CONSIDERATION IN EXCHANGE FOR SHARES
-Under the NY BCL, shares may be issued in exchange for almost any type of consideration, including: money, tangible or intangible property, past performance of services to the corp (including services in establishing the corp), and future promises of service or payment of money or property in the corp. -The BOD may determine the value of any monetary consideration given, and absent fraud or bad faith, their determination is CONCLUSIVE on the issue. The value determined is important primarily in the context of a corp whose certificate of incorp sets par value for shares, as shares may not be issues for less than PAR VALUE
SHAREHOLDER'S RIGHTS TO VOTE @ ANNUAL MEETINGS
-Under the NY BCL, the record date is set between 10 days and 60 days prior to a shareholder vote on which voting rights are locked. Thus, the owner of stock on the record date is entitled to vote the shares @ the upcoming shareholder meeting even if he/she sells the shares before meeting occurs