Term
NYCorps Question 1
On what date was the New York BCL changed? |
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Definition
NYCorps Answer 1
The New York BCL was changed on February 22, 1998. |
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Term
NYCorps Question 2
Can DaynaCorp. serve as an incorporator for You's Cars, Inc.? |
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Definition
NYCorps Answer 2
No. In NY, the incorporator must be adult human (a.k.a. real person, individual). It can't be an entity; in most other states, an entity can be an incorporator. |
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Term
NYCorps Question 3
Who files the certificate of incorporation? |
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Definition
NYCorps Answer 3
The NY Department of State files the certificate of incorporation. The incorporator Executes the certificate and delivers it to the Department of State, and holds the organizational meeting. |
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Term
NYCorps Question 4
What information is contained in the certificate of incorporation? |
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Definition
NYCorps Answer 4
Corporate name (including Inc., Corp., or Ltd.), county of incorporation, designation of secretary of state as agent for service of process, forwarding address for service of process, name and address of each incorporator, statement of corporate purpose, capital structure. |
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Term
NYCorps Question 5
Jeff is incorporating his paintball company. What capital structure information must be included in the certificate of incorporation? |
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Definition
NYCorps Answer 5
The capital structure information must be included in the certificate of incorporation is
(1) Authorized stock
(2) number of shares per class
(3) information on par value, rights, preferences and limitations of each class, and
(4) information on series of preferred shares. |
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Term
NYCorps Question 6
What is Authorized stock? |
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Definition
NYCorps Answer 6
Authorized stock: maximum number of shares the corporation can sell |
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Term
NYCorps Question 7
What is issued stock? |
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Definition
NYCorps Answer 7
Issued stock: number of shares the corporation actually sells. |
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Term
NYCorps Question 8
What is outstanding stock? |
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Definition
NYCorps Answer 8
Outstanding stock: shares that have been issued and not reacquired by the corporation. |
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Term
NYCorps Question 9
Which of the following is not necessary in the certificate of incorporation? Address of each incorporator, statement of duration, name of each director, number of shares per class of stock. |
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Definition
NYCorps Answer 9
The certificate of incorporation may include a statement of duration, but need not. When not noted, the duration is presumed to be unlimited. The certificate does not include the names of the directors. It must include the name and address of each incorporator, and the number of shares per class. |
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Term
NYCorps Question 10
When does the Board of Directors take over management of the corporation? |
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Definition
NYCorps Answer 10
At the organizational meeting. At the organizational meeting (or by written consent), the incorporators adopt any bylaws and elect the initial directors, who then take over management of the corporation. |
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Term
NYCorps Question 11
Oz Publishing Corp. wants to donate $10,000 each to the T.R. Conservation Fund, the Obama campaign, and to Jeff as a loan so he can buy a car. Can it? |
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Definition
NYCorps Answer 11
Yes, half, and yes with shareholder approval. There is no statutory ceiling for charitable contributions, regardless of corporate benefit (although a corporation can't give away everything). Under election law, a corporation can only donate $5,000 per year per candidate. To make a loan not in the furtherance of the corporation's business always requires the approval of 2/3 of shares entitled to vote. |
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Term
NYCorps Q12
Safia put together a proper certificate of incorporation for OCD Labels, Ltd. and delivered it to the Dept. of State. Unknown to Safia, they promptly lost it. A year later, her labels infect her customers. Can she avoid personal liability? |
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Definition
NYCorps Answer 12
Safia can avoid personal liability if she can show that OCD Labels, Ltd. is a De Facto Corporation:
1) there is a relevant incorporation statute
2) the parties made a good faith, colorable attempt to comply with it, and 3) some exercise of corporate privileges. |
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Term
NYCorps Question 13
The bylaws of Plackter Plaques, Inc. say the corporation's purpose is to sell U.N. Plaques, but the certificate of incorporation says it is to sell League of Nation Plaques. Which can shareholders stop the corporation from selling? |
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Definition
NYCorps Answer 13
U.N. Plaques. Where the bylaws and certificate of incorporation differ, bylaws lose. Selling U.N. Plaques is an ultra vires act (beyond the scope of the certificate). The contracts are still enforceable, but shareholders can seek an injunction, and the responsible directors and officers are liable to the corporation for losses from ultra vires actions. |
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Term
NYCorps Question 14
What is a promoter? |
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Definition
NYCorps Answer 14
A promoter is a person acting on behalf of a corporation not yet formed. Must have a promoter to have a pre-incorporation contract. |
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Term
NYCorps Question 15
As the promoter for a to-be-formed corporation, Ru leases office space from Emily. Ru incorporates, and skips the next three rent payments while using the office. Can Emily seek rent from the corporation? |
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Definition
NYCorps Answer 15
Yes. A corporation is liable on a pre-incorporation contract if it adopted the contract. Adoption can be express by directors' action. Adoption can be implied by the corporation's knowing acceptance of a benefit of the contract, such as using the leased premises. |
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Term
NYCorps Question 16
As the promoter for a to-be-formed corporation, Ru leases office space from Emily. Ru incorporates, and skips the next three rent payments while using the office. Can Emily seek rent from Ru? |
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Definition
NYCorps Answer 16
Yes. As a rule, the promoter remains liable on preincorporation contracts until there has been a novation. Ru will not be liable unless the contract clearly indicates that the parties do not intend the promoter to be liable. |
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Term
NYCorps Question 17
Jeff, a controlling shareholder at JeffCorp., wants to invest in JeffLtd., a corporation he owns. Oz, a minority shareholder in JeffCorp., thinks it's too risky. What duty does Jeff owe Oz? |
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Definition
NYCorps Answer 17
Utmost Good Faith. Controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the corporation or to oppress minority shareholders or the corporation. They owe a duty of utmost good faith. |
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Term
NYCorps Question 18
Michael wants to become a shareholder in Ruth's corporation FashionLaw, P.C. What's the best way for her to tell him "no" without hurting his feelings? |
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Definition
NYCorps Answer 18
Each shareholder in a professional corporation must be a licensed professional. Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation, usually abbreviated "P.C." |
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Term
NYCorps Q19
Michael wants to become an employee in Ruth's corporation FashionLaw, P.C. So as not to hurt his feelings, she tells him he can't because he's not a licensed professional. Will his feelings be hurt nonetheless once he flips this card? |
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Definition
NYCorps Answer 19
Yes. Although the shareholders, officers and directors of a professional corporation, abbreviated "P.C.", must be licensed professionals, employees do not need to be licensed professionals. |
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Term
NYCorps Question 20
What is a derivative suit? |
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Definition
NYCorps Answer 20
In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim (the directors are preventing it) , so a shareholder steps in to prosecute the claim. |
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Term
NYCorps Question 21
Ru just won a $50,000 derivative suit against the directors of JeffCorp. for usurping corporate opportunities, in which he is a minority shareholder. Can he use all that cash to party in Miami for a week? |
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Definition
NYCorps Answer 21
No. Generally, the recovery in any successful derivative suit goes to the corporation. Ru will probably only get back costs and attorney's fees from the judgment won for the corporation. |
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Term
NYCorps Question 22
Ruth and her cronies control the board of Ruthless, Inc. Representative shareholder Lemerson brings a derivative suit against them. Ruth cackles that no demand was made. Can the suit go forward? |
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Definition
NYCorps Answer 22
Yes. To bring a derivative lawsuit, the suing shareholder must also make a demand that directors bring suit, unless it would be futile. If majority of the board is interested or under the control of interested directors, a demand is futile, thus unnecessary to bring a derivative suit. |
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Term
NYCorps Q23
Brit brings a derivative suit, and OzCorp. wants it dismissed. Directors Jeff, Dayna and Plackter formed a "special litigation committee," which found that Brit's suit was stupid. How will the court decide whether to dismiss? |
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Definition
NYCorps Answer 23
In New York, the court will look at (1) independence of those making the investigation and (2) the sufficiency of the investigation. Delaware would also look at the merits, but New York does not. |
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Term
NYCorps Question 24
Brit and OzCorp. want to settle their derivative suit. Who needs to know? |
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Definition
NYCorps Answer 24
The court. Parties can dismiss or settle derivative suits only with court approal. The court may notify shareholders whose interests will be substantially affected and get their input. |
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Term
NYCorps Question 25
Plackter really wants to sue SafiaCorp. derivatively for breaches that occurred in 2005, but only became a shareholder in 2006. How can she do it? |
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Definition
NYCorps Answer 25
She must have gotten (or subsequently get) her stock by operation of law from someone who owned the stock when the claim arose. This includes by inheritance or by divorce decree. |
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Term
NYCorps Question 26
What is a proxy for shareholder voting? |
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Definition
NYCorps Answer 26
A proxy is a 1) writing, 2) signed by record shareholder or authorized agent, 3) directed to secretary of corporation, 4) authorizing another to vote the shares. In NY, a fax or email is a "writing." A proxy is only good for 11 months unless it says otherwise. There are no proxies for director voting. |
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Term
NYCorps Question 27
Shareholder Brit emails the secretary of OzCorp. that he wants Safia to vote as his proxy for the next 13 months. Valid? |
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Definition
NYCorps Answer 27
Yes. In NY, email counts as a signed writing. Although a proxy is only good for 11 months unless it says otherwise, here it validly says otherwise. |
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Term
NYCorps Q28
Emily wants Ru as her proxy, but he fears she'll revoke at the last minute. Accordingly, they make a five-year voting agreement and "irrevocable" proxies. Next meeting, Emily shows up and revokes Ru's proxy. Can Ru vote her shares anyway? |
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Definition
NYCorps Answer 28
Yes. This is a proxy coupled with an interest. Irrevocable proxies are only truly irrevocable when (1) the writing says "irrevocable" and (2) the proxy-holder has some interest in the shares other than voting. This includes sale of the stock, or a voting agreement. Because of the voting agreement and the writing, the shares are irrevocable, despite Emily's protestations. |
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Term
NYCorps Question 29
Emily and Safia write a trust agreement that Safia will decide both of their votes, and they give a copy to the corporation. Safia wants to vote to expand, but Emily hates the idea. Will a court force Emily to vote with Safia? |
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Definition
NYCorps Answer 29
Although they attempted to set up a voting trust, they were unsuccessful. A trust requires
(1) written trust agreement controlling how the shares will be voted
(2) copy to corporation
(3) transfer legal title of shares to voting trustee (hence it is a real trust under trust law), and
(4) original shareholders receive voting trust certificates and retain all shareholder rights except for voting. In fact, they only created a voting agreement. In New York, voting agreements are not specifically enforceable, even though some states allow it. Safia cannot force Emily to vote for expanding the business. |
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Term
NYCorps Question 30
As a shareholder in Katz, Inc., Brit wants to change the bylaws. Because it would probably require leaving Manhattan, he doesn't want to hold a meeting. Can he do it? |
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Definition
NYCorps Answer 30
Yes, if he can get unanimous written consent signed by holders of all voting shares. |
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Term
NYCorps Question 31
Misanthropes and Agoraphobes, Ltd. doesn't want to have their annual meeting this year. Shareholder Abe misses his pals. Can he ask the court to help him out? |
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Definition
NYCorps Answer 31
Courts can order the annual meeting. |
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Term
NYCorps Question 32
At the annual meeting, enough directors were elected, but it took so long that they didn't get through the agenda. If no one on the board wants to hold a special meeting of the shareholders, can one be called? |
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Definition
NYCorps Answer 32
Only if the certificate of incorporation provides for someone else who can call a special meeting. A special meeting to elect directors must be called by the Board if there is a failure to elect a sufficient number of directors to conduct the business of the corporation. If the Board fails to call such a meeting, the holders of 10 percent of the voting shares may demand in writing that the corporation hold the meeting. |
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Term
NYCorps Q33
OzCorp. held a special meeting of shareholders, arranged by email a week before. Everybody happily came, and the bylaws were changed. Shareholder Jeff later realized it was stupid. Can he void the change on the basis of inadequate notice? |
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Definition
NYCorps Answer 33
No. The consequence of failure to give proper notice to all shareholders: action taken at the meeting is void unless those not receiving notice waive the notice defect. Waiver can be given in a signed writing any time (express), or by attending the meeting without objection (implied). Since everyone showed up without objection, there was implied waiver and there is no notice objection. |
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Term
NYCorps Question 34
Can the certificate or bylaws reduce a shareholder vote quorum to less than a majority? |
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Definition
NYCorps Answer 34
Yes, but not less than one-third of the shares entitled to vote. If quorum is met, a majority may act to bind the corporation. Majority means majority of the shares actually voting in favor or against the proposal. (Abstentions don't count.) |
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Term
NYCorps Question 35
Safia has one more share than Plackter. The bylaws call for cumulative voting, the certificate is silent. In a three-director election, how many of Safia's candidates will take their seats? |
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Definition
NYCorps Answer 35
Three. If there were cumulative voting, Plackter could get one of her directors elected. The total share votes are thrown into a pile, and the top three vote-getters will take the seats. But cumulative voting exists only if the certificate of incorporation allows it. Because each seat is voted on separately, Safia's candidate will always have one vote more than Plackter's. |
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Term
NYCorps Q36
Ruth sold her stock in RuCorp. to Abe, despite the right of first refusal she granted when she bought the stock. In a suit, Ruth defends that the stock certificate only has the restraint on alienation written in Hindi. Is she off the hook? |
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Definition
NYCorps Answer 36
No. Stock transfer restrictions will be upheld provided that they are reasonable under the circumstances, which means not an undue restraint on alienation. A right of first refusal is acceptable so long as the price offered is reasonable. Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either 1) it is conspicuously noted on the stock certificate or 2) the transferee had actual knowledge of the restriction. Since Ruth knew about the restriction, it cannot be shot down because of invalid notice. |
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Term
NYCorps Question 37
Will a court interfere with the Board's discretion and order a distribution? |
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Definition
NYCorps Answer 37
Only on a showing of bad faith or dishonest purpose. |
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Term
NYCorps Question 38
How can a corporation make distributions (payments to shareholders)? |
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Definition
NYCorps Answer 38
Distributions can be (1) dividend or (2) payment to repurchase shares or (3) to redeem shares [forced sale to corporation at price set in certificate].) |
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Term
NYCorps Question 39
Preferred v. Preferred Participating. Which would you rather have? |
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Definition
NYCorps Answer 39
Preferred Participating. Preferred gets paid dividends before common stock. Participating means pay again. If you're preferred participating, you get paid first, then get paid again with everyone else. |
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Term
NYCorps Question 40
Ru has all 100 shares of $2 preferred cumulative stock in DYou, Inc. For three years DYou lost money, but this year finally had enough to distribute $800. How much does Ru get? |
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Definition
NYCorps Answer 40
All of it. As the only preferred shareholder, he gets his dividends before everybody else. Cumulative means add them up -- for the years in which no dividend was paid, the cumulative holders' dividend is adding up. Because Ru's shares are cumulative, he is owed that money even in the years where no dividend was paid. Ru is entitled to $200 per year, and gets all $800 of the distribution before the common stock dividends are paid. |
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Term
NYCorps Question 41
Which funds may be used for any distribution (dividend, repurchase, redemption)? |
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Definition
NYCorps Answer 41
Surplus. Surplus is assets minus liabilities minus stated capital. It is also Net assets minus stated capital. Stated capital cannot be used for distributions. Stated capital is the par value of the issuance. |
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Term
NYCorps Question 42
C Corp. has issued 10,000 shares of $2 par stock for $50,000 and 4,000 shares of no par stock for $70,000. What is the stated capital? |
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Definition
NYCorps Answer 42
ON THE PAR STOCK: $20,000 goes to stated capital (the par value of the issuance) and $30,000 goes to surplus;ON THE NO-PAR STOCK: Within 60 days after issuance, the Board can allocate any part, but not all, to surplus. If the Board does not do this, it is all stated capital. |
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Term
NYCorps Question 43
A corporation cannot make distributions if it is insolvent or if the distribution would render it insolvent What does "insolvent" mean? |
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Definition
NYCorps Answer 43
The corporation is unable to pay its debts as they come due in the ordinary course of business. |
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Term
NYCorps Question 44
Last year, JeffCorp. made no money. Can it offer a dividend this year? |
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Definition
NYCorps Answer 44
Yes. A corporation can make distributions even though it lost money last year |
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Term
NYCorps Question 45
Director Ru distributed dividends in OzCorp., knowing that it would mean it couldn't pay rent without some unexpected cash inflow. Is Ru's personal fortune endangered? |
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Definition
NYCorps Answer 45
Yes. Directors are personally liable for unlawful distributions, as are shareholders who knew the distribution was unlawful when they received it. The suit could be brought by the corporation, a director or officer, or by a shareholder as a derivative suit. |
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Term
NYCorps Question 46
Oz wants fair market value in his shares for the closely held Dunn Handbags, Ltd. before it expands to sell shoes. Dunn tells him to suck it. What does Oz have to do to get the court’s help? |
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Definition
NYCorps Answer 46
Oz will hope to perfect his shareholder right of appraisal. Must do 3 things:
(1) Before the shareholder vote, file written objection and intent to demand payment,
(2) either abstain or vote against the proposed change and
(3) after vote make written demand to be bought out.
If the shareholder and the corporation cannot agree on fair value, the corporation sues and the court determines the value. NY does not have a minority discount accounting for the value of a controlling stake. |
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Term
NYCorps Question 47
Jared Ltd. wants to merge with Plackter, Inc. to form RubinCorp. What approvals does Jared need? |
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Definition
NYCorps Answer 47
A merger is a fundamental change that requires both that the directors approve and that the shareholders approve. Also, Jared must notify the Department of State. Plackter needs to do the same.
The shareholder approvals for corporations formed on or before February 22, 1998 require two thirds of shares entitled to vote. For corporations formed after February 22, 1998, a majority of shares entitled to vote. |
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Term
NYCorps Question 48
In setting the value of the stock, can the court discount the value to reflect the fact that minority shares may be worth less than controlling shares, because they carry no control? |
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Definition
NYCorps Answer 48
No. NY does not have a "minority discount." Some states reduce values to reflect inability to control the corporation. |
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Term
NYCorps Question 49
Which certificate of incorporation changes can the board make alone by amendments: corporate name, office location, registered agent, new classes of stock, statement of purpose, decrease of par, limitation of preemptive rights. |
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Definition
NYCorps Answer 49
Minor changes only: office location and registered agent. Other amendments, such as change of name, purpose or duration, increase or decrease of shares or par, creation of new classes of stock, denial or grant or limitation of preemptive rights, must be approved by (1) director action and (2) a majority of the shares entitled to vote. The directors approve an amendment and recommend it to the shareholders. |
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Term
NYCorps Q50
4,000 outstanding shares entitled to vote for an amendment to the certificate of incorp., but only 2,400 shares attend the meeting to vote on the amendment, and only 2,200 shares actually vote. How many must vote in favor for it to pass? |
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Definition
NYCorps Answer 50
2,001, a majority of the shares entitled to vote, regardless of how many show up at the meeting, or how many actually vote. |
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Term
NYCorps Question 51
S Corp. wants to sell all of its assets to B, Inc. Voting? |
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Definition
NYCorps Answer 51
To sell substantially all of a corporations assets or shares
(1) Each corporation's board of directors authorizes the deal and
(2) Approval by selling corporation's shareholders.
*For corporations formed on or before February 22, 1998: At least two thirds of shares entitled to vote.
*For corporations formed after February 22, 1998: A majority of shares entitled to vote.
B shareholders get no vote: it is not a fundamental change for the buyer.
In the share exchange, deliver plan of exchange with the Department of State for filing. In the transfer of assets, no such filing is required. |
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Term
NYCorps Question 52
Shareholders Ruth, Lemerson and Safia are running roughshod over shareholders Jeff and Oz. Since each holds one fifth, Jeff and Oz get oppressed, even when they team up. Can they seek Judicial Dissolution? |
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Definition
NYCorps Answer 52
Yes. Twenty percent or more of voting shares in corporation whose shares are not traded on a securities market may petition on either of these grounds:
(1) Management's illegal, oppressive or fraudulent acts toward complaining shareholders or
(2) Management's wasting, diverting, or looting assets. |
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Term
NYCorps Q53
Just born-again, Abe hates PornCorp., the corporation he started equally with the other shareholders Safia and Dayna, who now oppress him. They would buy him out, but to kill the company, he seeks judicial dissolution. Will he get it? |
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Definition
NYCorps Answer 53
No. The court may deny dissolution if there is some other way the complaining shareholder can obtain a fair return on his investment, e.g., by ordering buy out. |
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Term
NYCorps Question 54
How may the corporation or non-complaining shareholders try to avoid dissolution here? |
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Definition
NYCorps Answer 54
Within 90 days of the petition buy the petitioner's shares at fair value on terms approved by the court. |
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Term
NYCorps Question 55
What does OzCorp. have to do in order to properly wind up the corporation? |
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Definition
NYCorps Answer 55
To properly liquidate, a company will
1) gather all assets,
2) convert to cash,
3) pay creditors, and
4) distribute remainder to shareholders, pro-rata by share unless there's a dissolution preference. |
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Term
NYCorps Question 56
As the controlling shareholder, Safia sells her shares in Little Devil Duck Corp. at a premium. Can she keep the money? |
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Definition
NYCorps Answer 56
Yes. No case imposes liability for selling a control premium, unless the controlling shareholder sells without reasonable investigation to somebody who then loots the corporation. The court may disgorge seller's profit and seller is probably liable for all damages to the corporation. |
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Term
NYCorps Question 57
JeffCorp is merging into Williams, Inc., which is wholly owned by the majority shareholders of JeffCorp. Minority shareholder Dayna is being bought out for cash, leaving her with no interest in either. What will the court look at? |
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Definition
NYCorps Answer 57
JeffCorp and Williams are trying to effect a freeze-out merger. The court will view the transaction as a whole. It will look at price and the entire course of dealing. The factors include:
(1) whether the deal is tainted by self-dealing or fraud,
(2) whether the minority shareholders are dealt with fairly, and
(3) whether there is a legitimate business reason for the merger. |
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Term
NYCorps Question 58
Brit is ready to retire from Payne, Inc. He sells his controlling shares to Dayna and agrees that he and “his” directors will resign from the board. Minority Payne shareholder Ruth thinks that sucks. If she’s right, what remedy? |
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Definition
NYCorps Answer 58
Disgorgement of profits. Fiduciaries cannot sell their positions on boards. The profit that Brit made in the sale to Dayna will be disgorged to the board in a successful suit by Ruth, after paying her costs and legal expenses. |
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Term
NYCorps Question 59
Oz Print Co. will provide signage for the iTeleporter, about to be shown to the public. As treasurer, Abe knows, and buys lots of stock in Apple the day before the surprise unveiling. Seeing all the cash Abe made, Oz is pissed. What |
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Definition
NYCorps Answer 59
Oz Print Co. can sue Abe for market trading on inside information. The corporation can sue to recover the profit made in market trading, but has to be a market deal. |
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Term
NYCorps Question 60
RuCorp is about to announce huge profits. Shareholder Emily complains to Director Bhatt that the stock has been stuck at $10 for two years. Bhatt offers to buy her shares at $15, and she sells. When the stock jumps to $50, can Emily |
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Definition
NYCorps Answer 60
Yes. All directors and officers (and probably controlling shareholders) owe an affirmative duty to disclose special facts in a securities transaction with a non-insider. Directors must disclose special facts or abstain from dealing. This is common law insider trading. Bhatt’s actions meet all three elements:
(1) The information about unannounced profits is clearly a “special fact,” because a reasonable investor would consider that important in making an investment decision
(2) Emily is a shareholder, who does not know the inside information. Bhatt is a director, who has inside information. Bhatt traded on that inside info without disclosing it. He thereby breached a duty to Emily
(3) As damages, Emily can recover the difference between the price paid and price after the market digests the information. $50 - $15 = $35 a share. |
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Term
NYCorps Q61
In 2006, Brit started promoting Payne, Inc., which became a corporation in 2007. He sold Payne his apartment for $900K, which everybody knew he bought for $150K in 2000. Shareholder Ruth suspects the fair market value is $500K. Can she sue? |
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Definition
NYCorps Answer 61
No. A promoter cannot make a secret profit on her dealings with the corporation. If he does, he's going to be liable to the corporation for the secret profit. Can make a profit, just not a secret profit. Here, the profit was not a secret, so no suit. |
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Term
NYCorps Q62
In 2003, Brit promoted Payne, Inc., which incorporated in 2006. In 2007, Payne bought an apartment for $900K, which only the board knew Brit bought for $150K in 2004. Shareholder Ruth suspects the fair market value is $500K. Can she sue? |
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Definition
NYCorps Answer 62
No. Ruth thinks the promoter made a secret profit by selling property to the corporation acquired after becoming promoter. Brit did make a profit, but not a secret profit. Brit is not liable to the corporation for secret profit if the board consents or ratifies the profit. Because the board knew all of the details, it is not secret, and Brit is not liable for the profit. |
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Term
NYCorps Question 63
Are subscriptions revocable? |
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Definition
NYCorps Answer 63
Yes, but with limitations. A subscription is a written, signed (never just oral) offer to buy stock from the corporation. A pre-incorporation subscription is irrevocable for 3 months unless it says otherwise or all subscribers agree. This way, people forming the corporation can rely on the money being there. Post-incorporation subscriptions are revocable until acceptance. |
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Term
NYCorps Q64
OzCorp, a NJ corp. in good standing that has never dealt with the NY Dept. of State, got totally ripped off by Ruthless, Inc. in Chelsea. OzCorp threatens to sue in NY. Ruthless says "Suck it - you're not qualified!" Must OzCorp suck it? |
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Definition
NYCorps Answer 64
Yes. Foreign corporations doing business in New York must qualify. NJ or any other state counts as foreign. To qualify, a foreign corporation applies to the NY Department of State designating the Secretary of State as agent for service of process. Where a foreign corporation does business in N.Y. without qualifying, there is a monetary penalty when the corporation does qualify, and until qualifying the foreign corporation can't sue in NY, but can be sued. Because OzCorp never dealt with the Dept of State, it cannot have qualified, and can't sue in New York. |
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Term
NYCorps Question 65
Jeff bought bonds issued by Elissa, Ltd. Jeff climbed a mountain and shouted to the valley, "I have an equity interest in Elissa, Ltd.!" Is Jeff a dope? |
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Definition
NYCorps Answer 65
Yes. Issuance of stock distributes equity in a company, which is not the case with the issuance of bonds. A bond investor makes a loan to the corporation, to be repaid (usually with interest) as agreed in the contract. The holder of a bond is a creditor (not an owner) of the corporation. |
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Term
NYCorps Question 66
What is a "debenture"? |
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Definition
NYCorps Answer 66
A debenture is when the repayment of a loan is not secured by corporate assets (a bond). |
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Term
NYCorps Question 67
What is an "issuance"? |
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Definition
NYCorps Answer 67
An issuance is when a corporation sells its own stock. Shareholders selling to other shareholders is not an issuance. |
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Term
NYCorps Question 68
What are the permitted forms of consideration for an issuance of stock? |
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Definition
NYCorps Answer 68
There are five permitted forms of consideration for an issuance:
(1) money (cash or check)
(2) tangible or intangible property
(3) Labor or services already performed for the corporation
(4) A binding obligation to pay in the future in cash or property (e.g. a note)
(5) a binding obligation to perform future services having an agreed value. 4 and 5 were added to the BCL in 1998, other states might not allow them. |
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Term
NYCorps Question 69
What the hell is par? |
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Definition
NYCorps Answer 69
Par means "minimum issuance price." If C Corp. issues 10,000 shares of $3 par stock, it must receive at least: $30,000. It can issue for more. |
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Term
NYCorps Question 70
Can Payne, Inc. buy Brit's laptop for 5,000 shares of $3 par stock? |
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Definition
NYCorps Answer 70
Probably not. Par stock can't be issued for less than the par value. The board always values the consideration needed for the property in a par issuance. 5,000 shares of $3 par stock cannot be exchanged for property valued less than $15,000. Brit's laptop is used, and he bought it for under $1,500, so it is probably not adequate consideration. |
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Term
NYCorps Question 71
The board of Payne, Inc. buys Brit's laptop without appraisal for 5,000 shares of $3 par stock after valuing it at $16,000. Turns out, a new identical model could have been bought for $2,000. Actionable par value problem? |
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Definition
NYCorps Answer 71
No, if it made without fraud. When the board determines the value of the consideration for an issuance, is its determination of value conclusive. To defend themselves against that charge latter the directors will hire an outside appraiser beforehand, but technically they don't have to. |
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Term
NYCorps Question 72
The board of Payne, Inc. buys Brit's laptop for 5,000 shares of $3 par treasury stock, knowing that a new identical model could have been bought for $2,000. Actionable par value problem? |
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Definition
NYCorps Answer 72
No. Treasury stock is stock that was previously issued and had been reacquired by the corporation. The corporation may then sell the treasury stock. Treasury stock is always treated as no par, and can be sold at any price. |
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Term
NYCorps Question 73
What is "watered stock"? |
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Definition
NYCorps Answer 73
Watered stock is stock issued for less than the par value. Directors are liable for the "water" (the difference between par value and issue value) if they knowingly authorized the issue. The shareholder can also be on the hook if he knew what was going on. |
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Term
NYCorps Question 74
Oz has preemptive rights in his 1,000 shares of SafiaCorp. SafiaCorp is planning to issue an additional 3,000 shares, with 10,000 outstanding. What right does this give Oz? |
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Definition
NYCorps Answer 74
Oz can buy 300 shares (10% of 3,000) before they are available for purchase to any other buyer. Preemptive right is the right of an existing shareholder to (1) maintain her percentage of ownership by (2) buying stock (3) whenever there is a new issuance of common stock (4) for money |
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Term
NYCorps Question 75
What is the default rule on preemptive rights where the certificate of incorporations is silent? |
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Definition
NYCorps Answer 75
There is a split in the law depending on the date of incorporation: For corporations formed before February 22, 1998, preemptive rights exist when the certificate is silent. For corporations formed on or after February 22, 1998, preemptive rights do not exist unless the certificate specifically says they do. |
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Term
NYCorps Question 76
What is a "classified board"? |
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Definition
NYCorps Answer 76
A classified board is a board that is split into two, three, or four classes of at least three directors, with one class elected each year. "Classified board" is the NY term, other states call this a "staggered board." |
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Term
NYCorps Question 77
Abe has been a disastrous treasurer for Salcedo, Inc. Who can remove him? |
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Definition
NYCorps Answer 77
Shareholders can remove a director for cause. The board cannot remove a director with cause unless permitted in the certificate of incorporation or bylaws. In New York, only the shareholders can remove a director without cause, and only if the certificate or bylaws allow it. |
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Term
NYCorps Question 78
Ruth is a beloved treasurer for Handbag Corp. Unfortunately, she dies from smoking. Who decides who finishes her term? |
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Definition
NYCorps Answer 78
When a seat on the board is vacated, the general rule is that the remaining directors select the director to finish the term. The special rule is that when a director is removed by shareholders without cause, the shareholders select the person to serve the remainder of the term. |
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Term
NYCorps Q79
Director Oz called Director Dayna, and they agreed to double the output of Ru Bats, Inc., which requires board action. Dayna then called the only other director, Ruth, and got her approval. Dayna gave the plant the doubling order. Valid? |
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Definition
NYCorps Answer 79
No. There are only two ways in which the board can take a valid act:
(1) unanimous written consent to act without a meeting OR
(2) a meeting.
If neither is met, the "act" taken is void unless later ratified by a valid act.
A meeting by conference call is OK if the directors can hear all participating directors simultaneously (unless the certificate or bylaws provide that no conference call meetings are allowed). |
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Term
NYCorps Question 80
Board members Oz, Ru, and Abe want to pass an act opposed by the other six members. How can they do it? |
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Definition
NYCorps Answer 80
It would be tough. Call for a special meeting when four of their opponents can't be there. Give notice according to the bylaws, which will make it easier if the bylaws have a very short notice requirement (there is no minimum required by law). With five members of a nine person board present, they have a quorum. Because their three votes form a majority of the five votes present, their resolutions will pass. However, if one of their opponents leaves, there is no longer a quorum, and the board cannot continue to do business.;This answer presumes the quorum is majority. Bylaws and certificates can reduce quorum to as low as one-third. |
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Term
NYCorps Question 81
What is the duty of care standard for a director? |
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Definition
NYCorps Answer 81
A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position or face liability. BUT he is liable only if his breach caused a loss to the corporation. |
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Term
NYCorps Question 82
What is the business judgment rule? |
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Definition
NYCorps Answer 82
Under the business judgment rule, a court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis. To fail the business judgment rule you need irrational or grossly negligent action. |
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Term
NYCorps Question 83
What is the Duty of Loyalty standard? |
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Definition
NYCorps Answer 83
A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries or face liability. The duty of loyalty standard largely refers to director conflict of interest. |
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Term
NYCorps Question 84
What is an Interested Director Transaction? |
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Definition
NYCorps Answer 84
An Interested Director Transaction is any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest). |
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Term
NYCorps Question 85
When will an Interested director transaction not be set aside? |
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Definition
NYCorps Answer 85
Interested director transactions will be set aside UNLESS the director shows either
(1) the deal was fair and reasonable to the corporation when approved OR
(2)(A) the material facts and her interest were disclosed or known and
(2)(B) the deal was approved by any of these:
* shareholder action
* Board approval by sufficient vote, not counting the votes of interested Directors (majority of directors present, with interested directors not voting)
* Unanimous approval of disinterested directors if there are too few disinterested directors to approve of the action. (i.e. the majority of the Board is made up of interested directors). |
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Term
NYCorps Question 86
On a board of nine, two directors want to sell their cars to the corporation at the next meeting, which they will attend. To their plan approved, how many disinterested directors need to be present for a quorum? |
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Definition
NYCorps Answer 86
Three. Interested directors count toward a quorum of the board. |
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Term
NYCorps Question 87
Oz is the treasurer of Britton Penne Corp. In his spare time, he starts up Benve Noodles, Inc., which becomes wildly successful. Can Oz buy himself his dream house in St. Kitt's? |
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Definition
NYCorps Answer 87
Not likely. Under the Duty of Loyalty a Director cannot go into competition with his Corporation without facing liability. Since the Penne company and the Noodle company compete in the same market, a constructive trust may be placed on the profits of Benve Noodles, and Britton Penne may get damages for any harm caused by Oz's company. |
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Term
NYCorps Question 88
Emily is a director of You Realty Corp., which develops condo projects. Emily learns of a parcel of land that has been zoned for condos and buys it for herself as an investment. What are You's rights, if any, against Emily? |
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Definition
NYCorps Answer 88
Emily probably must sell the parcel to You at cost. Under the Duty of Loyalty a Director cannot go into competition with his Corporation without facing liability. A Director cannot usurp a corporate opportunity until informing the board and waiting for the board to reject it. If there is usurpation, the usual remedy is a constructive trust. So if Emily still has it, she must sell it to the corporation at her cost. If Emily has sold it at a profit, You gets the profit. |
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Term
NYCorps Question 89
What qualifies as a corporate opportunity? |
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Definition
NYCorps Answer 89
Something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to the business. |
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Term
NYCorps Question 90
The board of directors votes to lend director Safia $100,000 of corporate funds. The certificate of incorporation is silent on director loans. How can they do it? |
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Definition
NYCorps Answer 90
For corporations formed on or before February 22, 1998: shareholder vote required (in which a quorum is a majority of disinterested shares). For corporations formed after February 22, 1998, the board must conclude that the loan benefited to corporation (so the new law is less protective). |
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Term
NYCorps Question 91
Sarbanes-Oxley blah blah blah. |
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Definition
NYCorps Answer 91
Nothing about Sarbanes Oxley has ever been on the test. |
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Term
NYCorps Question 92
The board of RuCorp votes to stop selling shoes. At the meeting, director Ruth says "That sucks. Would never vote for such a stupid idea." This turns out to be an act that the board can't do. Can Ruth say "Ha!"? |
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Definition
NYCorps Answer 92
No, because she did not properly dissent, and did not avert liability. A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records:
(1) in the minutes
(2) in writing to the corporate secretary at the meeting
(3) registered letter to the corporation promptly after adjournment.
Oral dissent is not enough. |
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Term
NYCorps Q92
Based on a thorough reading treasurer Abe's report, director Lemerson voted to approve a huge plant expenditure. Abe's has always done good work, but this time, he made the whole thing up. How can Lemerson dodge liability for her vote? |
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Definition
NYCorps Answer 92
She can avoid liability if she can claim Good faith reliance on information, opinions, reports, or statements by (1) officers or employees of the corporation whom the director or officer believes competent and reliable, (2) lawyers or public accountants whom the director or officer believes are acting within their competence, or (3) a committee of which the person relying is not a member, as to matters within its designated authority. Since Abe seems pretty reliable, Lemersons actions seem to be in good faith. |
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Term
NYCorps Question 93
Who hires and fires directors? |
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Definition
NYCorps Answer 93
The shareholders. |
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Term
NYCorps Question 94
Who hires and fires officers? |
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Definition
NYCorps Answer 94
The directors. They also set the compensation of the directors. |
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Term
NYCorps Question 95
Where will a court step in and remove a director for cause? |
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Definition
NYCorps Answer 95
The attorney general or holders of 10 percent of all shares may sue for a judgment removing an officer for cause. The court can bar reappointment of a person so removed from office. |
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Term
NYCorps Q96
Director Jeff did some awful stuff, really bad, and was the target of a derivative action. Eventually, the suit was dismissed because of the Statute of Limitations. Jeff had the gall to ask for reimbursement of costs and fees. What ruling? |
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Definition
NYCorps Answer 96
He gets reimbursed. In an action by or on behalf of the corporation against an officer or director, the corporation must reimburse the director or officer if: he was successful in defending the action, on the merits or otherwise (a procedure win, such as the statute of limitations has run). If he had been held liable, the reimbursement would have been prohibited. |
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Term
NYCorps Question 97
Who determines whether permissive reimbursement for costs and fees is paid to the target of a derivative suit? |
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Definition
NYCorps Answer 97
For permissive reimbursement, eligibility is determined by
(1) The Board (with a quorum of directors being non-parties) or
(2) if there is no such quorum, Shareholders or a quorum of those directors who are disinterested, or
(3) The Board pursuant to report from independent legal counsel. |
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Term
NYCorps Question 98
Can the bylaws provide for total indemnification for director acts? |
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Definition
NYCorps Answer 98
No. Certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the judgment adverse to the director or officer established that he
(1) acted in bad faith OR
(2) acted with intentional misconduct OR
(3) received an improper financial benefit OR
(4)approved an unlawful distribution or loan. |
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Term
NYCorps Question 99
When can a corporation pierce the corporate veil and hold shareholders personally liable? |
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Definition
NYCorps Answer 99
Generally, a shareholder is not liable for the debts or acts of a corporation. But a court may "pierce the corporate veil" and hold shareholders personally liable if they (1) have abused the privilege of incorporating and (2) if fairness demands that the shareholders not have limited liability. |
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Term
NYCorps Q100
Ru and Oz are the shareholders of OzRuCorp, Ru as CEO. Ru mixes personal and OzRu funds, and uses the OzRu credit card for personal purchases. Jeff has been unable to collect his claim from the OzRu? Can he seek it from either Ru or Oz? |
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Definition
NYCorps Answer 100
No, only Ru. Shareholders are generally not liable for debts or acts of corporation. But a court may "pierce the corporate veil" and hold shareholders personally liable if they (1) have abused the privilege of incorporating and (2) if fairness demands that the shareholders not have limited liability. In NY there is no piercing the corporate veil if the corporation has any mind, existence or will of its own. Since Ru is the shareholder treating OzRu as his alter ego, a court may pierce and hold him liable, but not Oz, who did nothing wrong. |
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Term
NYCorps Q101
Dunn Shipping, Inc. has an initial capitalization of $10K, not enough for insurance, says shareholder Ruth. Dunn's driver Jeff crashes into Abe, breaking his elbow, and ruins the truck, preventing OzRuCorp's deliveries. Veil piercing? |
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Definition
NYCorps Answer 101
Only if they can prove excessive domination, fraud, or illegality. Dunn is undercapitalized: the shareholders failed to invest enough to cover prospective liabilities. Shareholders are generally not liable for debts or acts of corporation. But a court may "pierce the corporate veil" and hold shareholders personally liable if they (1) have abused the privilege of incorporating and (2) if fairness demands that the shareholders not have limited liability. Dunn does not have enough money to cover either Abe's injuries or OzRu's losses from frustrated delivery. But in New York, undercapitalization is not enough for veil piercing. There also needs to be (1) excessive domination, (2) fraud or (3) illegality. |
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Term
NYCorps Q102
Dunn Shipping, Inc. has abused some privileges of incorporation. Dunn's driver Jeff crashes into Abe, breaking his elbow, and ruins the truck, preventing OzRuCorp's deliveries. Which is more likely to compel a court to pierce the veil? |
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Definition
NYCorps Answer 102
Abe. As a general rule, we expect piercing the corporate veil more readily in tort cases than in contract cases. |
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Term
NYCorps Question 103
Lemerson works for closely held PlacktCorp. Because of low company sales, her paycheck this month is half what she expected, but there's no more money in PlacktCorp. Steamed, she wants her pay. What can she do? |
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Definition
NYCorps Answer 103
Go after the top ten shareholders. In a closely held corporation, the ten largest shareholders are personally liable for wages and benefits to the corporation's employees. |
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Term
NYCorps Question 104
What is a closely held corporation? |
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Definition
NYCorps Answer 104
A close (or "closely held") corporation is one with few shareholders and no public market for the stock. Most corporations in real life, and on the bar, are closely held. |
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