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Powers of a Corporation in New York

Michael Decker
Michael Decker

What is and what is not legal for a company to do in New York state? Once a company has been duly incorporated, the scope of its actions is limited both by state laws and its own bylaws. In this article, a corporate law attorney describes the powers of a corporation in New York.

Which statutory powers apply?

Section 202 of the New York Business Corporation Law (“BCL”) sets out a broad array of statutory powers which may be exercised by a corporation, whether or not these be explicitly provided for in the certificate of incorporation. The certificate of incorporation or statute may, however, qualify these powers, such as the proscription on engaging in contracts of an illegal nature. Critically, the statutory powers of a corporation may be exercised solely “in furtherance of its corporate purposes.”

Transfer of property – A corporation may transfer or mortgage its assets in whole or in part.

Money lending – A corporation does not have banking powers whatsoever. It may, however, lend money, invest its funds and acquire collateral in connection with the operation of a business other than banking.

Acquisition and sale of securities – Irrespective of the business of any other issuer, a corporation may acquire, hold, vote and dispose of bonds, shares and other securities.

Contracting and borrowing – A corporation may bind itself in contract, borrow money and issue notes, bonds and other obligations. So too, it is entitled to mortgage its property as security.

Compensate employees – In respect of employees, officers and directors, a corporation may fix their compensation, pay them pensions and establish for them retirement, incentive and benefit plans and trusts. This rubric includes pensions, profit-sharing plans, share purchase, option and bonus plans.

Participation in alternate ventures – A corporation may promote, partner or associate with and manage other enterprises and ventures. A New York corporation may act as an incorporator of a foreign corporation if this is permissible by the jurisdiction in which it is incorporated.

Powers of a Corporation in New York

Residuary powers

The BCL accords a corporation broad residuary powers to do what is “necessary or convenient to effect any or all of the purposes for which the corporation is formed.”

What about contributions?

The BCL makes a distinction between charitable and political contributions undertaken by a corporation. In respect of the former, a corporation may make donations, without regard to corporate benefit it may accrue, to charitable, scientific, civic or similarly purposed causes, unless a provision in the certificate of incorporation circumscribes this right.

In contrast, the Federal Election Campaign Act places limitations on direct or indirect annual contributions in money or property made to a political organization or candidate. It should be noted that a corporation existing solely for political purposes is exempted from this rule. An officer, director, shareholder, attorney or agent who acts in contravention to these provisions will be found criminally liable for a misdemeanor.

Guarantees

A corporation may give a guarantee towards the end of furthering a corporate purpose. If it wishes to provide a guarantee which is not in furtherance of corporate business, it would require the consent of two-thirds of the shares entitled to vote.

Legal practice

An ordinary business corporation is forbidden to engage in the practice of law. An exception is made for court-approved charitable organizations assisting indigents in their pursuit of legal remedies.

Indemnifying directors and officers

The law places strict provisions on the extent to which a corporation may or is required to indemnify its directors and officers for litigation-related fees.

Can a corporation acquire its own shares?

While a corporation is forbidden to vote its own shares, it may acquire, hold and dispose of them, subject to certain limitations.

What is “Ultra Vires?”

An act or transfer of property by or to a corporation will not be invalidated as a result of it lacking capacity or power to undertake this act provided that it is otherwise lawful. The term ultra vires traditionally refers to an act which exceeds the scope of a corporation’s or municipality’s lawfully conferred powers of performance under any circumstances and without regard to the purpose. The BCL seeks to severely limit use of the ultra vires defense even in respect of executory contracts, which are contractual expectations yet to be fulfilled by a party, such as an ongoing lease agreement. Yet, limitations on making use of the ultra vires defense do not extend themselves to unlawful acts. The court made this point clear when it ruled on discount loans which were made in violation of banking law.

Ultra vires in New York

In spite of these limitations, the ultra vires doctrine still has applicability in New York since it holds the directors of a corporation personally liable to it for any losses it has sustained as a result of the commission of ultra vires activities by the corporation.

Who may invoke an ultra vires defense?

The BCL allows for an ultra vires defense to be asserted in three scenarios. One of these involves a derivative action, or action by or in the right of the corporation, for a favorable judgment against incumbent or former officers or directors for damages resulting from an unauthorized act. Ultra vires also applies in an instance of the attorney general acting to annul or dissolve a corporation or enjoin it from engaging in unauthorized business. Finally, It applies to an action by a shareholder to enjoin a corporation from engaging in the unauthorized transfer to or by it of property.

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