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What three overarching concepts must be considered in discussing requirements for the FORMATION of a CORPORATION

Corporation Formation requires: 1) People, 2) Paper, 3) Acts

Who are the relevant PEOPLE, and what must they do to assure valid formation by the Corporation

People = Incorporators. Incorporators include one or more human persons.

What "PAPER" is relevant for the purpose of forming a Corporation

Paper = Certificate of Incorporation. The Certificate (Articles) of Incorporation are a contract between the Corporation and the State.

(??) What must go into the Certificate of Incorporation

1) Corporate name (must have corp, inc, or ltd), 2) Address (? look this up, Salaam says "count in NY of the office of corporation," 3) Name and address of each incorporator. 4) Statement of duration is permissible, 5) Corporate purpose - statement of corporate purpose is required 6) Information about Capital Structure

What is a Ultra Vires act? What is the effect at common law? What is the current NY rule?

If the Corporate Purpose stated is different from performance, this is an Ultra Vires act (beyond the scope of the certificate.) Voided at CL. Today, UV Ks are valid. Shareholder can seek an injunction of a UV act, and responsible managers are liable to the corporation for UV losses.

What are the three types of Corporate stock?

1) Authorized stock = the maximum number of shares the corporation can sell. 2) Issued stock = the number of shares the corp actually sells, 3) Outstanding stock = stock that the corp has sold and has not reacquired.

What must be included in the Certificate of Incorporation about Stock?

1) Authorized stock, 2) Number of shares per class, 3) par value, 4) preferences, rights, and limitations of each class, 5) Info on any series of preferred shares. NOTE: at least one class of stock or bonds MUST have unlimited voting rights and at least one class of stock MUST have unlimited dividend rights

What ACTS must be performed for valid formation of a corporation?

1) Each incorporator must sign the Certificate of Incorporation, 2) Acknowledge the Certificate of Incorporation before a notary. 3) Deliver the CI to NY dept of state. 4) Incorporators must hold an organizational meeting where they adopt any bylaws and elect an initial board of directors. NOTE: Dept's filing is conclusive evidence of a de jure corporation.

What are rights and responsibilities of a validly formed corporation

1) Internal affairs (duties, relationship among directors, officers, shareholders, etc) of a NY corporation are governed by NY law, even if external affairs are exclusively foreign. 2)
A corporation is a separate legal person: By statute, they can enter into Ks, transfer property, buy and sell securities, sue or be sued. 3) Can make political contributions no more than 4k per year per candidate or org (election law), 4) Can make charitable contributions, 5) Can guaranty a loan that is not in furtherance of corporate business if approved by 2/3 of the shares entitled to vote (possible MBE question)

Who is liable for the acts (breach of K, torts, debts) of the Corporation?

The corporation is liable, not the directors or officers.

(??) What is a de facto corporation

A de facto corporation is where Incorporators fail to form a de jure corporation, yet argue in equity for it's existence.

(??)What is required to prove the existence of a de facto corporation?

1) Parties made a good faith, colorable attempt to comply with the relevant incorporation statute. 2) The business is being run as a corporation. NOTE: If applicable, business is treated as a corporation for all purposes except in an action by the state. NY RULE: De facto corps in NY are seen as abolished. Might be alive in some circumstances - if DOS failed to file certificate, then there is no de jure, but can argue for de facto.

What is Corporation by Estoppel and when will it be found?

CE is the Common Law theory that if one is dealing with a business as a corp, and treating it as a corporation, they should be estopped from denying the business's corporate status. So such a person, under this theory, cannot sue the individual proprietors. However, today CE is is abolished. Proprietors are personally liable if there's no de jure corp.

If Bylaws conflict with the CI, which controls?

If bylaws are inconsistent with the certificate, certificate controls because it is a K with the state. This is because bylaws not filed with state. Outsiders are not bound by the bylaws.

Who adopts bylaws? Who can amend or repeal bylaws?

Bylaws are adopted by Incorporators at organizational meetings. SHAREHOLDERS can amend or repeal bylaws. The BOARD OF DIRECTORS can amend or repeal bylaws, BUT ONLY IF allowed by the CI, or by SH bylaw.

New Topic - Pre-incorporation contracts: Who may be liable on pre-incorporation contracts

Promoters and Corporations MAY be liable on pre-incorporation contracts

What is a promoter

A promoter is a person acting on behalf of a corporation not yet formed. She might enter a K with a third party on behalf of the corporation not yet formed

When may a corporation be liable on pre-incorporation contracts?

Sample Question and Answer: "1/10/11, P, acting as a promoter for a not yet formed corp, leases a building from J and signs it 'X inc'. On 2/20, X inc is incorporated." THE CORPORATION IS LIABLE ONLY IF IT ADOPTS the K.

How may adoption occur?

Adoption happens two ways: 1) Express adoption by board action. 2) Implied adoption arises if the corporation knowingly accepts a benefit of the K

When may a promoter be liable on pre-incorporation contracts?

Generally, P will be liable unless K states otherwise OR there is a novation. If X inc is formed and ADOPTS the terms of K b/t P and third party, P is still liable until NOVATION.

What is novation?

Novation is an agreement among the promoter, corporation, and the other contracting party that the corporation will REPLACE the promoter under the K

What is the secret profit rule with respect to promoters?

P cannot make a SECRET profit on her dealings with the Corp. If she does, she is liable and has to ACCOUNT for the profit. (Account = return profit to the corporation)

How is "profit" calculated for the purpose of returning secret profits to the corporation?

Sale to Corp of property acquired before becoming promoter = [profit equals price paid by the Corp MINUS the fair market value]

Sale to Corp of property acquired AFTER becoming promoter = [profit equals price paid by Corp minus the price paid by promoter.] PROFIT MUST BE SECRET.

What is a foreign corporation?

A foreign corporation is one incorporated outside New York (even another state is "foreign").

What is the rule for foreign corporations seeking to do business in NY?

Foreign corporations doing business in NY must QUALIFY to do business in NY. Foreign corporations can qualify by 1) applying to the NY Dept of State and designating the Secretary of State as agent for service of process. 2)In applying to qualify, foreign corp provides sec of state with Info from its certificate and proof of good standing in the home state. 3) FC also has to pay fees to New York for the privilege of doing business here.)

What happens if a foreign corporation does business in N.Y. without qualifying?

It cannot sue in NY until it qualifies, pays fees taxes, penalties and interest accrued.

Fact Pattern 2 - Issuance of Stock

ALL THE RULES IN FACT PATTERN 2 APPLY ONLY WHEN THERE IS AN ISSUANCE. THEY DO NOT APPLY WHEN YOU OR I SELL STOCK

What is Issuance of Stock?

Issuance of stock occurs when a corporation sells its own stock. Investors buy stock and become holders of an "equity security." They are owners of the corporation.

How is Issuance of Bonds Distinguished from Issuance of Stock?

With a bond, the 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. She holds a "debt security."

(??)What is a debenture?

A Debenture is a loan, the repayment of which is not secured by corporate assets. (third party payment? need example)

What is a Subscription?

A subscription is a written, signed OFFER to buy stock from the corporation. One important consideration is whether a subscription can be revoked

What is the rule for revocation of pre-incorporation subscriptions?

The pre-incorporation subscription is an irrevocable offer for 3 months, UNLESS the subscription provides otherwise or all subscribers agree to let you revoke. EXAMPLE:

(??)What is the rule for revocation of pre-incorporation subscriptions?

Post-incorporation subscriptions are revocable, until accepted by the corporation. The corporation and the subscriber become obligated under a subscription when the board accepts the offer. The corporation cannot decide to sell only to some subscribers and not others - must be uniform within each class or series of stock (this last point requires further elaboration) .

If the corporation accepts the offer and the subscriber defaults on payment, what happens to the shares?

DEPENDS. (1) If S has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and CANCEL the shares. The stock becomes authorized and un-issued. (the corp. can resell it). (2) If S has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay cash). If nobody buys, then the stock becomes authorized and un-issued. NOTE: If someone pays more than the remaining balance due, then the defaulting S recovers ANY EXCESS over what she agreed to pay (deduct for the corp's expenses)

CONSIDERATION - What must the corporation RECEIVE when it issues stock?

There are 5 permissible forms of consideration for issuance of stock: 1) Money, 2) tangible or intangible property, 3) services already performed for the corp, 4) a binding obligation to pay in the future in money or property (A note is ok), 5) a binding obligation to perform future services having an agreed value. NOTE: IF any other form of consideration is used, the stock will be considered UNPAID, WATERED STOCK.

The Amount of Consideration - What is par?

Par means minimum issuance price. EXAMPLE - If C Corp. issues 10,000 shares of $3 par stock, it must receive at least: 30k. Anything more is fine bc par is a MINIMUM.

What happens if NO PAR is set?

Then there is no minimum issuance price. Stock can be sold for any price. The BOD sets price for no par stock, unless the CI says the Shareholders can do it.

What is treasury stock

Treasury stock is stock previously issued and has been REACQUIRED by the corp. The corporation may then sell the treasury stock. Treasury Stock is always treated as no par (no minimum issuance price). EXAMPLE -C Corp. is selling $3 par treasury stock. It must receive at least what? There is no minimum.

Additional notes regarding consideration

In determining whether consideration is OK with respect to tangible property, the amount of consideration must be = the value of the property.

BOD determination of the value is conclusive if made w/o fraud. EXAMPLE OF FRAUD: Corp. issues $1,000,000 worth of its stock to pay a director's nephew for sweeping up the office for one week. This is fraud. This is a waste of corporate assets. Directors will be liable.

What are the consequences of issuing par stock for LESS than par value;

The stock is considered watered stock. The directors are liable for the water if they knowingly authorized the issuance. The purchaser of the watered stock is liable. He is charged with notice of the par value.

EXAMPLE: C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation (or creditors if the company is insolvent) can sue for the $8,000 of "water."

What if X buys the watered stock and transfers it to a third-party (TP)?

TP is not liable if she acts in good faith. (she did not know about the water) TP's status has no effect on liability of X and the directors.

What are PRE-EMPTIVE RIGHTS?

Rights of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for MONEY (which includes cash or checks). Pre-emptive rights only exist if they are outlined in the CI. If the certificate is silent, the new issuance does not include sale of treasury stock. If the certificate is silent, "new issuance" does not include sale of shares authorized by the original certificate and sold within two years of formation because this is not a new issuance.

Example of a Pre-emptive rights question:

S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has preemptive rights, then S has the right to do what? To buy 600 shares. That is 20% of 3k. you can buy whatever your percentage is.

Suppose the certificate provides for preemptive rights and C Corp. is issuing stock to G to acquire Green Acres from G. Are there preemptive rights? No because this is not an issuance for money.

FACT PATTERN 3 - Officers and Directors

...

(??) How many directors can there be?

One or more adult natural persons. Number is set in the bylaws, by SH act, or by the BOD if a SH bylaw allows. If no numbers set at all, then there is 1 Director. (Must there be one director, or should there be?)

Who elects directors, and when?

Incorporators elect initial directors. SH elect the BOD at annual mtg after that.

Who can remove directors, and when?

SH can always remove a director for cause. BOD can remove a Director only if the certificate or SH bylaw allows.
Only SH can remove a director without cause and only if the certificate or bylaws allow.

How can the board of directors make a valid act?

By only one of two ways. Unanimous (100%) written consent or a meeting. BOD must act as a group
If the directors purport to take an act in some other way (e.g., individual conversations), the act is void, unless ratified by a valid act.

What are the Notice Requirements for Regular board meetings?

Notice is not required for regular meetings if they are set in the bylaws or by the BOD

What are the notice requirements for special board meetings?

Notice is required for special meetings of the board and it must state the time and place but DOES NOT HAVE TO state the purpose.

What happens if directors are NOT given notice of a special meeting?

If required notice for a special meeting is not given to a director, then any action taken at the meeting is void UNLESS the director not given notice waives the notice defect. Directors may waive by writing (signed) anytime, OR by attending the meeting without objection.

May a director give a proxy for director voting?

No

May directors enter voting agreeements on how they will vote as directors?

No

What is a quorum, and how is it reached?

To do business, we must have a majority of "entire board." (duly constituted board - that means the number of positions if no vacancies).

How many votes are required to pass a resolution in a BOD meeting?

Once we have a quorum, passing a resolution (which is how the board takes an act at a meeting) requires majority vote of those PRESENT. The corporation can require a supermajority vote to pass a resolution (e.g., 60% of the directors present must approve the resolution), but in the certificate only. Not the bylaws.

What happens if a director leaves a meeting, and it affects quorum?

If one director leaves during the meeting and this affects quorum, then quorum is broken and business stops.

When may a quorum be decreased, and by how much?

The corporation can decrease a quorum to less than a majority of directors in the certificate or bylaws. But never to fewer then 1/3 of the entire BOD.

When may a quorum be increased, and by how much?

The corporation can increase a quorum to greater than a majority of directors, but in the certificate only. NOT in the bylaws.

What does the BOD do?

manages business of corp. It sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corporation will issue stock, recommends fundamental corporate changes (do not need to memorize this)

What is a committee? How is a committee formed?

If the certificate or bylaws allow, a majority of the "entire board" can delegate substantial management functions to a committee of ONE or more directors. But, the board cannot delegate all powers and responsibilities to a committee.

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