Key Takeaways

  • Section 402 BCL specifies the required elements in a Certificate of Incorporation for New York corporations.
  • The section mandates inclusion of incorporator details, corporate name, business purpose, stock information, and registered agent details.
  • It allows optional provisions like limiting director liability and setting corporate duration.
  • The law provides flexibility for corporations to customize governance structures, including board authority and share classifications.
  • Compliance with Section 402 BCL is essential for legal formation and operation of a New York corporation.

Section 402 of the business corporation law covers the information that you must include in the Certificate of Corporation for your company. 

Contents of Section 402

First and foremost, your company's Certificate of Incorporation must include the signature and name and address of each of your company's incorporators. Once you've made sure your incorporation has all the required information, it will need to be submitted to your state.

Be certain that your Certificate of Incorporation includes the name of your company. You also need to be sure you've followed your state's naming conventions.

Next, your Certificate needs to detail your reasons for forming of your company. In most cases, you can simply state that your company's purpose is to engage in legal business activities. However, you must also make clear that your business will not take part in any activity that requires approval from a state agency, department, or official unless you have already received approval. If you state your purpose correctly, you should be able to perform business legally.

You will also need to list the county where your company will be physically located.

Your Certificate of Incorporation should describe the aggregate shares that will be issued by your company. When you are using a single class of shares, you must state their par value or include a statement that they have no par value. If you decide to issue multiple classes of shares, you will also need to indicate which shares in which class are with or without par value.

Companies that decide to divide their shares into classes will need to list:

  • The relative rights provided by the shares
  • Share preferences
  • Limitations of shares

If your company is going to issue shares in series, you need to designate each series while describing how the rights, limitations, and preferences will vary between the series. You will also need to include a statement about what authority the company board has to designate series of shares and to fix their different limitations, preferences, and rights. There also should be a statement describing any limitations on the ability of the board to change how many preferred shares are in a series.

In your Certificate of Incorporation, you must list the secretary of state as a corporate agent that is allowed to receive service of process on your company's behalf. You also must list an address where the secretary of state can mail process after it has been received.

If your state requires your company to have a registered agent, your Certificate must include:

  • The name of your registered agent
  • Your registered agent's address in the state where your business will operate
  • A statement that your registered agent is willing to accept service of process for your company

Unless your company lasts in perpetuity, you need to describe the planned duration of your company.

It's possible to include a provision in your Certificate of Incorporation that either limits or eliminates your director's personal liability if the director violates their duties and a lawsuit results in damages. However, this provision is not allowed to eliminate or limit liability in the case of a judgment that decides the actions of the director in question were made in bad faith, violated a law intentionally, or resulted in personal gain to which the director was not entitled. The provision also cannot limit liability for actions that took place before the provision was written.

You have the ability to add any provisions that you wish in your Certificate as long as they don't violate state law or are contradictory to the rules of Section 402.

Additional Certificate Provisions and Limitations

Section 402 of the Business Corporation Law (“402 BCL – Business Corporation Law”) also permits corporations to include additional, non-mandatory provisions in their Certificate of Incorporation. These may include:

  • Restrictions on Transfer of Shares: Corporations may include restrictions on the transfer or sale of shares to protect closely held ownership.
  • Voting Requirements: Provisions that establish supermajority voting thresholds for certain decisions, such as mergers or amendments to bylaws.
  • Preemptive Rights: Companies may grant existing shareholders the right to purchase new shares before they are offered to third parties.
  • Quorum Requirements: Adjustments to default quorum rules for board or shareholder meetings.
  • Limitation of Director Liability: Although director liability cannot be fully eliminated for willful misconduct or illegal acts, the Certificate may limit liability for monetary damages in cases of good faith business decisions.

These optional provisions enable businesses to tailor corporate governance and shareholder protections to their specific needs while still complying with state requirements.

Forming a Corporation

Section 301 of the Business Corporate Law offers guidance on the allowed descriptors for your corporation in the State of New York. In this state, the name of a corporation is required to include the words “Incorporated,” “Limited,” or “Corporation," or abbreviations of these words. Section 301 also describes what words are allowed when naming your corporation.

Using certain words in the name of your corporation requires seeking approval from the state. In addition, the name of your company must be distinct from the names of other New York limited partnerships, corporations, and limited liability companies.

Legal Consequences of Incomplete or Noncompliant Certificates

Failure to comply with the specific requirements under Section 402 BCL can result in significant legal and administrative consequences, such as:

  • Rejection of Incorporation Filing: The New York Department of State may reject a Certificate that lacks mandatory information or uses disallowed language.
  • Limited Legal Recognition: If incorporation is incomplete or defective, the entity may lack standing to sue or enter contracts as a corporation.
  • Personal Liability Risks: Without proper corporate formation, owners may lose the liability protections typically granted to shareholders.
  • Administrative Dissolution: Failure to amend or correct Certificate deficiencies may lead to future penalties or administrative dissolution.

Ensuring full compliance with 402 BCL is crucial to gain corporate status and shield shareholders and directors from personal liability.

Board Authority and Share Class Flexibility

The 402 BCL – Business Corporation Law grants corporations the flexibility to empower their board of directors with specific authorities in the Certificate of Incorporation. These include:

  • Authority to Classify Shares: Boards may be authorized to establish and issue shares in one or more series within a class, including rights, preferences, and limitations.
  • Adjustment of Share Terms: The board may have discretion to change share designations or rights, provided such authority is clearly stated in the Certificate.
  • Limits on Board Powers: Any constraints on the board’s ability to issue or modify shares must also be explicitly stated in the Certificate.

This flexibility is particularly useful for companies anticipating future rounds of funding or complex shareholder structures, as it allows strategic issuance and management of stock without the need for shareholder approval every time.

Frequently Asked Questions

  1. What does Section 402 BCL require in a Certificate of Incorporation?
    A: It requires the corporate name, incorporator information, purpose, stock details, registered agent, and other foundational corporate data.
  2. Can a New York corporation include additional governance rules in the Certificate?
    A: Yes, Section 402 allows optional provisions like share restrictions, voting thresholds, and limits on director liability.
  3. What happens if a Certificate does not comply with 402 BCL?
    A: The state may reject the filing, and the corporation may face legal limitations or even dissolution.
  4. Does Section 402 BCL apply to LLCs or only corporations?
    A: It applies specifically to business corporations formed under New York’s Business Corporation Law, not LLCs.
  5. Can the board of directors alter share classes after formation?
    A: Only if the Certificate of Incorporation grants them that authority under Section 402.

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