BUL ch 30

In the conduct of corporate affairs, directors must exercise a different degree of care than in conducting their own personal affairs.

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corps must file with?

financial & stock-transaction reports w/ SEC

removal of directors

for cause: breach of duty or misconduct -specified in articles, bylaws, or SH action -cannot be removed w/o cause unless corp previously authorized

removal of corp officers

BOD can remove officers @ any time with or without cause -except in violation of an employment contract

Directors have a right to inspect corporate books and records.

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Local Corporation invests in intrastate businesses. In Local's state, as in most states, the minimum number of directors that must be present before a board can transact business is all of the directors authorized in the articles. a majority of the number authorized in the articles or bylaws. any odd number. one.

a majority of the number authorized in the articles or bylaws.

common practice

elect 1/3 of the board members each year for a 3 yr term greater management continuity

subsequent directors

elected by majority vote of SH serve 1 year

Godfrey is a director of Hospitality Hotel Corporation. Like most directors, Godfrey was most likely appointed by the secretary of state in the state of incorporation. chosen by a vote of the corporate managers. elected by the corporation's shareholders. selected by the corporation's chief executive officer.

elected by the corporation's shareholders.

officer rights are defined in

employment contracts

The board of directors of Tiger's Pipes & Fittings approves a new line of products for the company to sell and oversees contract negotiations for obtaining the products from the supplier. This is a corporate conflict of interest. a usurpation of the corporate officers' duties. a violation of state corporate law. within the general area of the board's responsibilities.

within the general area of the board's responsibilities.

An officer may be removed from office: a. by the other officers at any time for any reason. b. by the directors at any time for any reason. c. by the shareholders but only for cause. d. by the directors but only for cause.

b. by the directors at any time for any reason.

board of directors meetings

-formal -record mins -dates specified in articles, bylaws, resolutions -quorum req: corp articles, bylaws -voting: each director has 1 vote, ordinary matters: majority vote, certain: more than majority

when directors & officers don't act in best interest of corp

SH may sue on company's behalf -> shareholders derivative suits

directors responsibilities

1. authorization of major corp policy decisions 2. appointment, supervision, & removal of corp officers & other managerial employees -determine compensation 3.financial decisions

Both directors and officers may be immunized from liability for poor business decisions under the business judgment rule.

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Mark is a director of Bromley Corp. Mark owns a printing company, and Bromley needs to have a book printed. If Mark contracts with Bromley to print the book, he must: a. fully disclose his interest to the other board members and abstain from voting on the matter. b. resign from the board if anyone questions the conflict of interest. c. never enter into a contract like this. d. do nothing special; the contract is valid.

a. fully disclose his interest to the other board members and abstain from voting on the matter.

The initial board of directors of a corporation is appointed by the: a. incorporators. b. officers. c. members. d. shareholders.

a. incorporators.

f a director has expenses related to being sued as a director of the corporation, the corporation has a duty to a. indemnify the director. b. inspect the court records. c. initiate a shareholder derivative suit. d. give notice of termination to the director.

a. indemnify the director.

A board of directors does not have responsibility over: a. the election and removal of members of the board. b. the declaration and payment of corporate dividends. c. financial decisions, such as issuing shares of stock or bonds. d. the appointment, supervision, and removal of corporate officers.

a. the election and removal of members of the board.

officers act as

agents of the corp

The duty of loyalty for directors requires that a director: a. quit all other professional positions and only work for the corporation. b. make a full disclosure of any potential conflicts of interest. c. also serve as an officer of the corporation to ensure consistency. d. carry out responsibilities in an informed, business-like manner.

b. make a full disclosure of any potential conflicts of interest.

Paul is an officer of Lumberjack Corp. His employment at the company is under the direction of: a. the other officers of Lumberjack Corp. b. the shareholders of Lumberjack Corp. c. the directors of Lumberjack Corp. d. state statute.

c. the directors of Lumberjack Corp.

The officers of Stamford Corp. decide to acquire the floundering Cirrus, Inc. They think that the company will be a good addition and the product line will fare better under their leadership than it has at Cirrus. The board agrees, and the acquisition is made. However, the Cirrus line proves to be a drain on Stamford and ends up losing money for the company. Stamford shareholders: a. can recover their personal losses by bringing a derivative suit. b. can take action against Stamford for breach of care. c. will likely have no recourse under the business judgment rule. d. can take action against Stamford for breach of loyalty.

c. will likely have no recourse under the business judgment rule.

The Sarbanes-Oxley Act of 2002 requires officers to: a. follow proper hiring procedures and do background checks on employees. b. fully disclose any potential harm to consumers of the corporation's products. c. disclose any potential torts or crimes committed by employees under their supervision. d. maintain effective controls to ensure financial reporting is accurate.

d. maintain effective controls to ensure financial reporting is accurate.

Business Judgement Rule

*rule that immunizes management from liability for actions undertaken in good faith* -protects directors & officers for being liable for honest mistakes of judgement & bad business decisions -court wont interfere unless: bad faith, fraud, breach of fiduciary duty

Directors rights

-right to participation: BOD meetings -scheduled so no notification req -right of inspection: cannot be restricted -right to indemnification: involved in litigation b/c of his position may have a right to be reimbursed (corp may buy liability insurance)

The business judgment rule makes a director liable for losses to the firm that result from the director's authorized, good faith business decisions.

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Unlike managers, officers are not corporate employees.

F

Officers, but not directors, owe a duty of loyalty to the corporation.

F (both)

For breaching their duty of care, directors may be liable to the corporation.

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Officers have the same fiduciary duties as directors.

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When directors do not act in the best interests of their corporation, the shareholders may sue them on the company's behalf.

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Based on its poor financial performance in the past year, Gillian Corporation decides against paying dividends. That decision was made by Gillian's: a. board of directors. b. shareholders. c. external auditor. d. accounting department.

a. board of directors.

Genevieve is a member of the board of directors and the chief financial officer of The Shoe Fits. Under the duty of due care that she owes the corporation, Genevieve does not need to: a. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services. b. attend presentations and make a careful study of business choices before making decisions. c. attend board meetings and oversee the corporation's employees and other officers. d. subordinate her personal interests to the welfare of the corporation.

a. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.

how many directors serve determined by

articles of incorp

Curt was one of nine directors of Indigicorp. The board had regular meetings on the first Tuesday of March and September at the corporate headquarters in Phoenix. Curt recently left for a cruise around the Mediterranean. On the cruise he did not have Internet access and was not able to get mail. Because of a financial crisis in the Phoenix area, the chair of the board called a special meeting of the board for July 15. On June 25, notice was sent to all directors both in letter and e-mail format. Due to his e-mail and mail issues, Curt did not receive the notice in time to go to the meeting. With regard to his right to participate: a. Curt has waived his right to participate by living far from mail service and not having adequate Internet connections. b. Indigicorp likely did not violate Curt's right because they sent notice via common methods. c. Indigicorp likely violated Curt's right by not ensuring that he had actual notice of the meeting. d. Because there are so many directors, only a majority have a right to participate and so Curt does not have, or need, that right.

b. Indigicorp likely did not violate Curt's right because they sent notice via common methods.

Salvatore, a director for Bernard Incorporated, has been hiring companies owned by families and friends as suppliers of Bernard and paying them grossly inflated prices, causing Bernard to suffer financially. Bernard's shareholders: a. must defer to Bernard's board for any action taken against Salvatore. b. may remove Salvatore for cause. c. may only remove Salvatore if it's allowed in the company's bylaws. d. must win a civil suit against Salvatore before he can be removed.

b. may remove Salvatore for cause.

Abe Schultz, Sol Schultz, and Lawrence Newfeld were the managing directors and officers of Chemical Dynamics, Inc., a close corporation. The corporation leased a building for its offices and operations. The lease agreement gave Chemical Dynamics an option to purchase the property for $300,000. Three years later, Chemical Dynamics was experiencing financial problems and the two Schultz brothers voted to assign the lease and the purchase option to Newfeld in return for Newfeld's loan to the corporation of $21,500. Newfield did not vote on the proposal. Newfeld purchased the property and continued to lease it to the corporation. When the corporation's financial situation improved, the Schultz brothers filed a lawsuit against Newfeld on behalf of the corporation, claiming that Newfeld had breached his fiduciary duty by taking over the lease and then purchasing the property. The court most likely held that Newfeld was: a. liable to the corporation, because he failed to disclose the conflict of interest. b. not liable to the corporation, because the option to purchase the property rightfully belonged to Newfeld, not to the corporation. c. not liable to the corporation, because as a shareholder in the corporation, any financial action he took that affected the corporation also affected him personally. d. liable to the corporation, because he had breached the duty of loyalty by putting his own interests above those of the corporation.

b. not liable to the corporation, because the option to purchase the property rightfully belonged to Newfeld, not to the corporation.

Carmen is the Vice President of Human Relations at Tech Corp. She is responsible for overseeing the hiring process, as well as directly hiring staff to deal with payroll, staff development, and similar HR functions. Carmen has a friend named Jody who referred Jody's friend Jess for a position. Carmen hired Jess as a favor to Jody and did not complete a background check. A few weeks later, Jess punched another employee when they had a small argument. If Carmen had run a background check, she would have found that Jess had been in jail at least two times for punching people. In this situation, if the employee Jess punched sued Carmen, she: a. would not be liable because she did not commit any tort herself. b. would be liable because failing to conduct the background check would be considered negligence. c. would not be liable because she hired Jess as part of her job. d. would be liable because an officer is always responsible for the torts and crimes of their employees.

b. would be liable because failing to conduct the background check would be considered negligence.

managing a corp relies on

board of directors & officers

Kate is the president of TheatreDepot Inc. As an officer, her role is to: a. make decisions regarding issuing stocks or bonds. b. determine the appropriate salaries for the officers. c. oversee the day-to-day operations of the business. d. declare dividends.

c. oversee the day-to-day operations of the business.

board of directors delegate?

can delegate some of its function to an executive committee or to corp officers ->make decisions relating to daily corp affairs w/in guidelines -board still has overall resp for directing corp affairs

who is responsible for the accuracy of financial statements & reports filed w/ SEC

chief corporate executives officers -sarbanes oxley

A director can be removed from the position if the term expires and the director is not reelected by the shareholders or: a. by the other directors for any reason. b. by the shareholders for any reason. c. by the officers of the company but only for cause. d. by the shareholders but only for cause.

d. by the shareholders but only for cause.

Directors' duty of care includes: a. refraining from using confidential corporate information for personal advantage. b. subordinating their personal interests to the corporation's welfare. c. being faithful to their obligations and duties. d. carrying out their responsibilities in an informed, business-like manner.

d. carrying out their responsibilities in an informed, business-like manner.

The business judgment rule states that: a. directors and officers are never immune from liability for exercising poor business judgment, regardless of the circumstances. b. shareholders may be personally liable for the negligent torts committed by the directors of a corporation if these torts are the result of a lack of oversight. c. directors may never be held liable for corporate harms or losses, as long as they have attended board meetings and agreed to corporate actions. d. directors and officers are immune from liability for exercising poor business judgment in certain circumstances.

d. directors and officers are immune from liability for exercising poor business judgment in certain circumstances.

Juan is a director of Poder Company. He has a particular interest in environmentally-friendly processes. The other directors want to meet without Juan to have a discussion about some possible process changes without a need to discuss the environmental impacts yet so they schedule a phone conference without telling him. This likely: a. is a violation of Juan's right of inspection. b. is a violation of Juan's right to indemnification. c. is not a violation of any of Juan's rights. d. is a violation of Juan's right to participation.

d. is a violation of Juan's right to participation.

StarGuild, Inc., a limousine service, has approximately five hundred shareholders. Its board of directors consists of three members—Duong, Eckhart, and Flores. Flores oversees the acquisition of vehicles and the maintenance of the fleet. Flores has a friend, Mitchell, who runs a business about 100 miles from your town. Mitchell called Flores and offered him approximately 20 popular model cars at a low, but reasonable, price. Flores drove to Mitchell's town and inspected the cars. He also had a mechanic look the cars over. After the mechanic gave an opinion that the cars were in good mechanical condition, Flores purchased the cars for the corporation. When the cars arrived and were put on the road, it became clear that they were completely unusable for the business because customers did not like the look of the model or the feel of the ride. If the corporation has a loss on the purchase of the unusable cars, Flores likely: a. is not personally liable because the mechanic lied to him. b. is personally liable because he violated his duty of care. c. is personally liable because he bought the cars without a vote of the board. d. is not personally liable because of the business judgment rule.

d. is not personally liable because of the business judgment rule.

The bylaws of Landry, Inc., state that business can only be transacted at a board meeting if 50 percent or more of the members are present. If three of its ten members are present at the meeting, two are conferenced in on the Web, and one is on the telephone, does a quorum exist? a. there is no quorum because all members must be physically present to be counted. b. a quorum exists due to the video conferencing, though the member on the phone is not counted. c. the member on the phone can be considered present, but there is no quorum because the Web conferencing is not allowed. d. most states would say that a quorum exists.

d. most states would say that a quorum exists.

A quorum consists of: a. 51 percent of all shareholders. b. 66 percent of all directors. c. the number of voters who must agree to a revision before corporate bylaws may be changed or otherwise amended. d. the minimum number of members of a decision-making body that must be present before business may be transacted.

d. the minimum number of members of a decision-making body that must be present before business may be transacted.

who can be held answerable to corp & SH for breaching duty of care

directors -> use reasonable amount of supervision or will be held liable for negligence or mismanagement of corp personnel

Directors and Officers duty of loyalty

faithfulness to one's obligations & duties req directors & officers to subordinate their personal interests to the corp's welfare -directors cannot use corp funds or confidential info for personal adv -> conflict of interest: abstain from voting, full disclosure

overall duties of DIRECTORS & OFFICERS

fiduciaries of the corp: act primarily for another's benefit -trust & confidence -Duty of Care -Duty of Loyalty

Like the boards of most corporations, the board of directors of Paolo's Pizzas, Inc. conducts business through annual shareholders' meetings. consultations with corporate officers and employees. formal board meetings with recorded minutes. informal conferences with corporate power brokers.

formal board meetings with recorded minutes.

Bree is an officer of Chic Petites Corporation. Like most corporate officers, Bree can act as Chic's agent. can participate in managing Chic's day-to-day operations. must carry out the duties spelled out in Chic's bylaws. has all of these options.

has all of these options.

directors & officers duty of care

honest & use prudent business judgement exercise same degree of care that reasonable prudent people use in conducting their own affairs carry out resp in an informed business manner w/ knowledge & training

initial board appointed by

incorporators serves until 1st annual SH meeting

higher-level managers must

maintain an effective system of control w/in the corp to ensure the reports are accurate -sarbanes oxley

corporate management: Officers

manage corp policies & day to day ops -president, secretary, treasurer etc -most states: can hold more than 1 office (president & secretary) (officer & director)

Business Judgement Rule: directors & officers must act w/in

managerial authority powers of the corp exercise due care

Liability for DIRECTORS & OFFICERS

negligence in performance of duties torts & crimes of employees under their supervision violations of variety of statutes (inc. protect consumers & env)

The board of Consumer Sales Corporation delegates work to corporate officers and employees. If the directors do not use a reasonable amount of supervision, they could be held liable for negligence only. mismanagement of corporate personnel only. negligence or mismanagement of corporate personnel. none of the above.

negligence or mismanagement of corporate personnel.

Ron is a director of Standard Company. Ron has a right to compensation for his efforts on Standard's behalf. transfer shares of Standard stock. participate in Standard board meetings. preemptive rights to buy Standard shares on any new issue.

participate in Standard board meetings.

Nationwide Company's chief financial officer resigns. After a personnel search, an investigation, and an interview, the board of directors hires Ed. Ed turns out to be dishonest. Nationwide's shareholders sue the board. The board's best defense is the business judgment rule. the directors' duty of care. the directors' duty of loyalty. a shareholder's derivative suit.

the business judgment rule.

Julio and Gloria are officers of World Export Corporation. As corporate officers, their rights are set out in state corporation statutes. World Export's certificate of authority. their employment contracts with World Export. international agreements with nonresident shareholders.

their employment contracts with World Export.

Directors

ultimate authority responsibility for all policymaking decisions necessary to the management of corp affairs -hiring corp officers & executives