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TWIST can pierce the corporate veil
- o T: NY holds the TEN largest SHs of a NY corporation personally liable for unpaid wages/sick pay/vacation pay provided the corporate stock is not sold on a public stock exchange
- Within 180 days from termination of employment, the unpaid employee must give written notice to each SH that the employee intends to hold them personally liable.
- She must then sue the NY corporation and when the judgment is returned unsatisfied by the sherriff (after she delivers the sheriff judgment), sue the SHs within 90 days (Essay 6 July 2000).
- • Note: so, make sure employees are paid
- o W: corporate officers are criminally and strictly liable if the corporation failed to obtain workers compensation insurance and a corporate employee is injured ( allows court to PCV.
- Note: Workers comp is an expense.
- o I: Illegal conduct by SHs or corp fiduciaries allow for PCV [essay 1 feb 2005]
- o S: Sales tax or corporate income tax not paid by the corporate fiduciary responsible for corporate finances renders that person
- Place PVT MCLLAW in the Certificate of Incorpration.
- o In order to be binding on 3rd Parties who subsequently become shareholders in the corporation, the following MUST BE PLACED IN THE COI PVT MC-LLAW:
- Note: The following PVT MCLLAW must be in the CoI; they can’t just be in the corp’s bylaws.
- P – PREEMPTIVE rights
- • SHs in new corporations have no Preemptive Rights unless the of CoI expressly grants them to SHs.
- • This is the opposite for old corps where it was assumed SHs received PREEMPTIVE rights unless expressly precluded in the CoI
- V – if the VALUE of no par shares is to be fixed by SHs and not by the BoD, then this SH rights have to be placed in the CoI.
- • A Certificate of Incorporation states the authorized # of shares to be issued by the corp (usually 200 shares).
- • It must state whether these shares are to be par value (stated value) (i.e. $100/share) or no par value.
- • If par value is fixed in the CoI, then the shares must be sold by the corp for at least par value.
- • Par value can be reduced by amending the
- Shareholders must approve DAMM SLAP
- • Although the BoD and corporate officers manage the corporation’s day to day activities, the following corporate decisions, once adopted by the BoD, must also be taken before SHs and approved by them: “DAMM SLAP PLAN”
- o D: voluntary DISSOLUTION
- For new corps, majority vote required for DISSOLUTION
- For old corps, 2/3 vote required for DISSOLUTION
- o A: to sell/lease/exchange substantially ALL of the corporate assets which is not done in the regular course of the corp’s assets
- New Corps: require majority vote to sell/lease/exchange substantially all of the corp assets.
- Old Corps, require 2/3 vote to do the same
- If this SH approval is not obtained, then this transaction can be set aside within 12 months (SoL).
- Note: The new corp requirements are about making it easier for corps to incorporate and controlling powers that be to stay in power. NYS trying to compete with Delaware, in a being corporation friendly state.
- o M: amend the CoI to change the shareholder MAXI-VOTING o
- Appraisal rights arise if a dissenting shareholder goes to CAMP
- • To exercise Appraisal Rights,
- o the SH must file an objection with corporate officials, before the SH’s vote on the CAMP:
- C: vote to abolish CUMULATIVE voting
- A: sell/lease/exchange substantially all of the corporation’s ASSETS
- M: MERGER/consolidation of corporation
- P: abolishing PREMPTIVE/redemptive/other stock rights
- • Redemptive rights: corp buyback at SH will…
- o Why does SH have to do this? Put corp’s officials on notice before the meeting.
a court will AIM for fair value in appraisal rights.
- • For a corporately held family owned business, there is no single factor to calculate the value of a minority interests. But, court considers 3 AIM factors for stock valuation
- o A: net ASSET value after subtracting corporate liability (“net asset value”)
- This is used for real estate corporations or corporations holding substantial tangible assets.
- Note: This method wouldn’t be used for say, Pieper Bar Review, that is a service oriented business.
- o I: INVESTMENT value in which the court looks at the earning capacity of the corporate stock
- This looks at the price: earnings ratio
- • Note: Generally, Pieper Bar Review don’t dish out dividends cause its taxed twice.
- o We pay bonuses, cause that’s deductible and we pass out earnings as wages.
- o MARKET value of the stock based upon what a willing buyer would have offered for the same shares of stock
- Note: This might not also work well for Pieper Bar Review. There is not a lot of sale of bar review companies going around.
- a PEACE proxy is irrevocable
- • A proxy is revocable at the SH at his whim of the SH.
- o EXCEPT for an IRREVOCABLE PROXY PROXY+INTEREST (‘‘PEACE’)
- Irrevocable Proxies can be either:
- • P: PLEDGED shares for a loan
- • E: person ENTITLED to the shares – either because person was contracted to buy them or now, in fact, owns the shares, but she was not the owner on record on the corporate books when the corporation scheduled the meeting
- • A:
- o AGREEMENT between shareholders to vote shares in a particular way (PVT MCLLAW) and the shareholders executed irrevocable proxies for that purpose
- • C: CORPORATE CREDITOR who has received an irrevocable proxy for extending new credit or has agreed to continue credit to the corporation
- o Ex: We’ll give you corp credit, provided you give us irrevocable proxy and if we don’t like we vote against
- • EMPLOYEE:
- o Ex: Bill Parcells, Pat Riley – Say, Bill wants to control the show and he wants an irrevocable proxy during my period of management, as an inducement to stay
COOTE has not preemptive rights
- • Even though a SH has Preemptive Rights, they do not apply when the corporation issues stock for a COOTE
- o C: shares issued for CONSIDERATION other than cash
- Ex: corp issues shares to purchase property or to extinguish a corporate debt
- o O: shares issued for ORGANIC change such as consolidation/merger but the SH who opposes that change has the right to demand APPRAISAL RIGHTS
- o O: shares ORIGINALLY authorized in the CoI and sold by the Corp during the first 2 years of its existence. PRs do not attach for 2 years the CoI was filed.
- o T: TREASURY shares are shares which were previously owned by a shareholder that were purchased back by the corporation and held in its treasury. PRs don’t attach to these shares because their reissuance by the corporation – DOES not dilute the interest of a present SH – because such shares were originally outstanding and should not have been considered in determining a SH percentage of owenrship.
- o E: shares issues to keep/attract corporate EMPLOYEES. These share
- judicial review is precluded if the board shopped at the GAP
- • Judicial review of BoD action is prohibited as long as it falls within the business judgment GAP
- o G: BoD acted in GOOD faith
- o ACTED within scope of their authority
- o P: acted in furtherance of the corporation’s PURPOSE
- Note: This has been applied to even coops decisions on whether to add a kitchen fixture.
The Board of Director's committees cannot take a V-CAB
- • BoD cannot delegate Committees for the following V-CAB Commitees
- o THE FOLLOWING V-CAB CANNOT BE DELEGATED TO COMMITEES
- V: fill VACANCIES on the BoD
- C: fix director COMPENSATION
- A: AMEND, ADOPT or REPEAL bylaws
- B: BYPASS the BoD and the Committee directly submit to SHs any ‘DAM LAP’ plan/activity (which has to be decided first by the BoD).
Interested Directors benefit from 2Fs
- • The BoD’s activity is not voidable merely because a Director or relative had a financial interest in the transaction.
- o A challenge to the transaction can be defeated by 2 Fs
- F: director proving the transaction was FAIR and reasonable to the Corporation at the time it was approved by the BoD
- • This burden of proof is on the interested director.
- • Ex: If Director got 2 offers of $400K on property and sells it to corp for $350k, that is fair and reasonable.
- F: there was FULL disclosure of the director’s interest and either it was
- • A) transaction was submitted to shareholders for approval
- • B) BoD approved the contract by a board of disinterested directors
- o If the number of disinterested directors is insufficient to constitute board action, then transaction can nevertheless be approved, by a unanimous vote of the disinterested directors.
- Ex: 5 person BoD. 3 are interested. 2 disinterested. 2/5 does not constitute BoD Action. Now, even though ordinarily that would not
- a director cannot be indemnified by BIG DR. AL
- • To encourage capable people to serve as Directors, Corporations may alter/abolish/limit the personal liability of Directors but notice of this intent must be placed in the CoI.
- o Old Corps: can amend their CoI to prospectively limit their Director liability but they cannot limit their past liability
- o However, a corporation cannot limit a Director’s liability or indemnify a Director for liability if the Director’s activities were conducted with BIG DOCTOR AL:
- B: involved BAD faith (nyaa pg. 275)
- I: INTENTIONAL misconduct or a knowing violation of the law (knew it was wrong)
- G: misconduct undertaken for personal GAIN (e.g. insider trading, misappropriation of a corporate opportunity) (NYAA pg. 276)
- D: DECLARE an improper DIVIDEND (no surplus
- R: improper REDEMPTION of corporate shres (no surplus)
- A: ASSETS distributed to corp shareholders without paying corporate creditors (constructive fraud =trust fund liability)
- L: not dissenting to improper LOAN to a fellow director
20% of corporate shares can ID-FLOW to a dissolution.
- •To ease the plight of a minority shareholder who is locked into a closely held corporation due to the un-marketability of her shares, but who in effect, has been locked out from management, salary, or dividends, by those in control of the corporation, the BCL allows, for 20% of the shares to directly petition the court for DISSOLUTION upon a showing that the majority shareholders are engaged in any of the following “ID FLOW” activities:
- ILLEGAL conduct
- DIVERSION of corporate assets to those in control
- FRAUDULENT conduct to the minority
- OPPRESSIVE conduct/actions
- WASTE or depleting assets
- oNote: These things can happen when real small corporations get acrimonious. It’s a situation that can arise for a young attorney.