Corporations 4

• NO, unless the corporation is a CLOSE (CLOSELY-HELD) corporation
• Management is the responsibility of the BOD

1) Corp. having FEW S/H, and whose stock is NOT PUBLICLY TRADED

2) CERTIFICATE transfers management power to S/H, and each of the following

• all incorporators or SHs (both voting & nonvoting) approve it
• SH management power is CONSPICUOUSLY NOTED on the FRONT AND BACK of all shares
• all SUBSEQUENT SHs have NOTICE
• shares not publicly traded (not listed on an exchange or regularly quoted OTC)

Duty of UTMOST GOOD FAITH to minority SHs

• cannot use power for personal gain at expense of minority SHs or corporation
• cannot OPPRESS† the minority SHs or corporation

†OPPRESS means "defeating the reasonable expectations of a shareholder for buying her stock"

1) ALL S/H and D/O

2) Each member liable for his own malpractice (but not that of other members)

3) Members not liable for PC debts (PC is liable for things like rent, utilities, etc.)

4) PC MUST buy back dead/disqualified member's shares

1) CLOSE CORPS only

2) S/H must have (i) ABUSED THE PRIVILEGE of incorporating, and (ii) FAIRNESS requires holding them liable

3) COMMON FACT PATTERNS include

• Alter ego, excessive domination (e.g., commingling of properties, use of corp. property as one's own)
• Undercapitalization (e.g., not enough capital to satisfy prospective liabilities) AND bad acts (e.g., excessive domination, fraud, illegality)

WAGES & BENEFITS owed to the corp's employees

1) S/H sues to enforce the corporation's claim (not her own claims against the corp., or its D/O)

2) ASK: Could the corporation have brought the suit on its own behalf? If so, the suit is probably derivative.

3) Corp. (not the S/H) is entitled to recovery

1) YES, if recovery by the corp. would RETURN MONEY to the BAD GUYS

2) May recover costs and attorney's fees from the JUDGMENT for the CORPORATION

3) if S/H loses

• cannot recover costs or attorney's fees
• S/H may be liable for ∆'s costs
• precludes other S/Hs from suing same ∆s on the SAME TRANSACTION (res judicata)

1) STOCK OWNERSHIP when claim arose (or acquired by operation of law)

2) S/H ADEQUATELY REPRESENTS interests of CORP. and the other S/Hs

3) BOND for ∆'s costs

4) PRE-SUIT DEMAND (unless demand would be FUTILE)

5) SPECIALLY PLEAD (i) efforts to get BOD to sue, OR (ii) why demand would be futile

6) CORP JOINED AS ∆

ONLY IF S/H CAN SHOW

• majority of BOD is INTERESTED, or
• Board's procedure in deciding was incomplete or INADEQUATE

• INDEPENDENCE of those making the investigation, AND
• SUFFICIENCY of the investigation

ONLY WITH COURT approval

NO, BUT

• D/O can sue another D/O to compel him to ACCOUNT for breach of duties, ALSO
• need not make same showing required of S/H in a derivative suit (e.g., demand, representation of interests, etc.)

1) RECORD OWNER on the RECORD DATE has the right to vote

2) EXCEPTIONS

• DEATH OF A S/H: Executor can vote the shares
• PROXIES: OK for S/H voting

3) SPECIAL RULES FOR PROXIES

• Must be (i) writing signed by S/H, (ii) directed to secretary of corp., (iii) authorizing another to vote shares
• Proxy is good for 11 months
• Proxy is REVOCABLE, EVEN IF it says that it is "irrevocable" (unless proxy-holder has ANY INTEREST in the shares other than voting (e.g., an option to purchase))

1) VOTING TRUST REQUIREMENTS

• WRITTEN trust agreement
• COPY to corporation
• TRANSFER of LEGAL TITLE to voting trustee
• VOTING TRUST CERTIFICATES issued to original shareholders (retain all rights, except voting)
• 10-YEAR max (but may be renewed)

2) VOTING AGREEMENT REQUIREMENTS

• SIGNED WRITING is all that's required
• BUT, probably not specifically enforceable

1) WRITTEN CONSENT SIGNED by holder of all VOTING SHARES

2) S/H MEETING

1) ELECT DIRECTORS

2) ANYWHERE—need not be in NY

3) HIGHEST VOTE-GETTER for each seat on the board winds—EVEN IF the candidate DID NOT get a majority of votes

4) NOTICE REQUIREMENT

• EACH S/H ENTITLED TO VOTE must receive between 10 to 60 DAYS ADVANCED NOTICE of the meeting
• notice must include TIME & PLACE for meeting (and PURPOSE, if meeting is special)
• DEFECTIVE NOTICE voids any action taken at the meeting
• DEFECT MAY BE CURED by S/H waiver—i.e., (i) signed writing, or (ii) attend meeting w/o objection

1) ANYTHING OTHER THAN the regular annual election of directors

2) BOD can call a special meeting, or ANYONE authorized in the CERTIFICATE or BL

3) NOTICE REQUIREMENT

• must receive between 10 to 60 DAYS ADVANCED NOTICE of the meeting
• notice must include TIME, PLACE and PURPOSE of meeting
• DEFECTIVE NOTICE voids any action taken at the meeting
• DEFECT MAY BE CURED by S/H waiver—i.e., (i) signed writing, or (ii) attend meeting w/o objection

1) MAJORITY of outstanding SHARES (not shareholders) is represented at the meeting

2) CERTIFICATE or BL may decrease quorum requirements—BUT NEVER less than 1/3 of all shares entitled to vote

3) MAJORITY APPROVAL of shares ACTUALLY VOTING (abstentions don't count)

4) NO—cannot decrease requirement of majority approval

5) MAY INCREASE through the certificate only

6) MAY INCREASE through certificate only

1) DIRECTOR ELECTIONS—can't be used for any other purpose

2) CERTIFICATE of incorporation must provide for cumulative voting

3) Number of shares OWNED x number of DIRECTORS to be elected

4) ONE SHARE MORE than 100 ÷ (X + 1), where X is the number of directors to be elected

1) S/H can sell for less than par value—NOT an issuance

2) TRANSFER RESTRICTIONS

• may be set by CERTIFICATE, BYLAWS, or AGREEMENT
• must be REASONABLE to be enforceable

3) ENFORCING RESTRICTIONS against transferees

• must be CONSPICUOUSLY NOTED on stock certificate, OR
• transferee must have had ACTUAL KNOWLEDGE of restriction

1) ANY S/H MAY DEMAND with 5-days advanced written demand

2) Corp. can demand an AFFIDAVIT that

• confirms that S/H's purpose is not contrary to the interests of the corporation, and
• that S/H has not tried within 5 years to sell any list of S/Hs

BUT CORP. CANNOT DEMAND ANYTHING MORE THAN THAT

1) ANY S/H can demand with 2-days written demand

2) No affidavit requirement

1) ANY S/H can demand with a written request

2) Corp. cannot impose conditions on access—MUST provide the documents (by mail is permissible)

• Dividend
• Payment to repurchase shares
• Redemption of shares (forced sale to corp., at price set in certificate)

NO—not until a distribution is DECLARED by the BOD

1) SURPLUS

• surplus = total owner's equity – stated capital
• stated capital = total par value of issued stock

2) PROHIBITED FROM MAKING DISTRIBUTIONS when

• insolvent, or
• distribution would make corp. insolvent
• ("insolvent" means unable to satisfy debts as they come due)

3) WHO IS LIABLE FOR UNLAWFUL DISTRIBUTIONS?

• DIRECTORS are personally liable (but may be saved by good faith reliance on accountant, etc.)
• SHAREHOLDERS are also personally liable, IF they knew it was unlawful WHEN RECEIVED

1) Cumulative dividends

2) Preferred dividend preference

3) Preferred participating

4) Common shares