Chapter 35: Management Structure of Corporations
Delegation of Board Powers
Committees may be appointed to perform some but not all of the board's functions
Officer Rights
- President, vice presidents, treasurer, secretary, CEO, CFO, etc. - Run the day-to-day operations of the corporation - may effectively control selection of directors and control proxy votes
Function of the Board of Directors
- Selection and Removal of Officers - Capital Structures - Fundamental Changes - Dividends - Management Compensation - Vacancies in the Board
Shareholder Rights
- elect and remove directors, often by proxy - approve fundamental changes to articles and bylaws - buy and sell shares, receive dividends
Indemnification
A corporation may indemnify a director or officer for liability incurred if he acted in good faith and was not adjusted negligent or liable for misconduct
Ratification--Authority of Officers
A corporation may ratify the unauthorized acts of its officers
Shareholder's Right to Dissent
A shareholder has the right to dissent from certain corporate actions that require shareholder approval
Apparent Authority--Authority of Officers
Acts of the principal that lead to a third party to believe reasonably and in good faith that an officer has the required authority
Actual Express Authority--Authority of Officers
Arises from the incorporation statute, the charter, the bylaws, and resolutions of the directors
Actual Implied Authority--Authority of Officers
Authority to do what is reasonably necessary to perform actual authority
Proxy
Authorization to vote another's shares at a shareholder meeting
Derivative Suits
Brought by a shareholder on behalf of the corporation to enforce a right belonging to the corporation
Director Suits
Brought by a shareholder or a class of shareholders against the corporation based upon the ownership of shares
Dividends
Directors declare the amount and type of dividends
Meeting-- Exercise of Directors' functions
Directors have the power to bind the corporation only when acting as a board
Directors' Inspection Rights
Directors have the right to inspect corporate books and records
Straight Voting
Each shareholder gets one vote for each share, winner is elected by either plurality or majority. Thus, a group of shareholders who hold a majority of the voting share can always elect the entire board of directors.
Cumulative Voting
Each shareholder multiplies the number of shares he or she owns by the number of directors to be elected, for a total number of votes, then can last these votes however he wants--distributed among or or more candidates. This enables minority shareholders to obtain minority representation. X = ((ac)/(b+1))+1 a = number of shares voting b = number of directors to be elected. c = number of directors desired to be elected. X = number of shares necessary to elect the number of directors desired to be elected.
Rights to Inspect Books and Records-- Shareholders
If the demand is made in good faith and for a proper purpose
Liability Limitation Statues
Many states now authorize corporations--with shareholder approval--to limit or eliminate the liability of directors for some breaches of duty
Vacancies in the Board
May be filled by the vote a majority of the remaining directors
Quorum
Minimum number of necessary to be present at a meeting to transact business
Duty of Obedience--Duties of Officers and Directors
Must act within respective authority
Restriction on Transfer of Shares--Shareholders
Must be reasonable and conspicuously noted on stock certificate
Duty of Diligence--Duties of Officers and Directors
Must exercise ordinary care and prudence
Action Taken Without a Meeting
Permitted if consent in writing is signed by all directors
Business Judgement Rule--Duties of Officers and Directors
Precludes imposing liability on directors and officers for honest mistakes in judgement if they act with - due care (the care that an ordinarily prudent person in a similar position would exercise under a similar circumstances) - in good faith (without conflicts of interest) - in a manner reasonably believed to be in the best interests of the corporation
Duty of Loyalty--Duties of Officers and Directors
Requires undeviating loyalty to the corporation
management structure of corporations: officers
Run the day-to-day operations of the corporation; hire and fire all necessary operating personnel.
Approval of Fundamental Changes
Shareholder approval is required for charter amendments, most acquisitions, and dissolution
management structure of corporations: Board of directors
Shareholder's elected representatives; manage corporation and create vision for the corporation; declare dividends; delgate authority to officers; manage the business of the corporation; select, remove, and determine compensation of officers.
Shareholder meetings
Shareholders may exercise their voting rights at both annual and special shareholder meetings
management structure of typical publicly held corporation
Shareholders; Board of directors; officers
Typically closely held corporation
Shareholders= Directors=Officer. Some states allow closely held corporations to forgo some corporate formalities term-0without sacrificing shareholder's limited liability.
Fundamental Changes
The directors have the power to make, amend, or repeal the bylaws, unless this power is exclusively reserved to the shareholders
Removal of Directors
The shareholders may by majority vote remove directors with or without cause, subject to cumulative voting rights
Voting Trust
Transfer of corporate shares' voting rights to a trustee
Shareholder Voting Agreement
Used to provide shareholders with great control over the election and removal of directors and other matters
Annual meetings
are required and must be held at a time fixed by the corporations bylaws. -if the shareholder meeting is not held within the earlier of six months after the end of the corporation's fiscal year or 15 months after is last annual meeting, any shareholder may petition and obtain a court order requiring that a meeting be held. --close corporation supplement proides that npo annual meeting of shareholders need be held unless a shareholder of makes a written request at least 30 days in advance of the date specified for the meeting.
management structure of corporations: shareholders
elect and remove directs; approve fundamental changes; owners of the corporation.
the role of the shareholders in managing the corporation is generally restricted to the:
election of board of directors, the approval of corporate transactions that are void or voidable uness ratified, and the right to bring suits to enforce these rights.
Board of directos
members of the Board of directors are elected by the shareholders. there can be two classifications of individual directors: -inside directors: individuals who are on the board of directors, but who also have another role in the corporation, EX: an officer. -outside directors: individuals who do not have another role in the corporation. --they can be unaffiliated, with no relationship to the corporation. --they can be affiliated, with some relationship, but not an official role in the corporation.
Liability of officers and board of directors
officers and directors cannot be held personally liable. -however, a plaintiff may try to pierce the corporate veil to hold them liable. this may occur if the plaintiff can allege that the officers of dirctors impropery comingled the funds of th corporation with personal funds or that they failed to follow corporate formalities. --in these instances, the directors and officers can look to liability insurance. --additionally, the corporation can indemnify (defend) the officers and directors.
officer action:
officers must always act with a duty of loyalty toward the corporation, and act in the best interest of the corporation. this means they must avoid conflicts of interest. they must also use the business judgement rule when making decisions. that is, they must act: -with due care. -in good faith. -with a rational basis for making the decision in the best interest of the corporation.
management structure of corporations: the statutory model
officers. Board of directors. shareholders
Action by Board of Directors
the board of directors may only act in accordance with the terms of the corporation's bylaws. typically, the bylaws will proide how many members of the board of directors are required for a quorum. they will also detail the form the meeting must take, EX: in person, etc. it is very commo for the board of directors to be able to take action with unanimous consent. this allows the board of directors to take action quickly if they al agree without the need to formally call a meeting.
Duties of Board of Directors
the board of directos has the important duty of overall management of the corporation and responsibility for the corporation's performance. to meet this duty, the board of directors may: -control the state of officers for the corporation. - vote on fundamental corporate changes. - set management, including officers, compensation. - inspect the financial records of the corporation.
Bylaws
the bylaws are the most important document regarding the operational management of the corporation. they detial, among other things: - the number of directors. - the number of officers. - the requirement for officer and shareholder meetings. - the duties of officers and directors.
officers
the officers of a corporation usually consist of: -president or CEO, ultimate day to day management responsibility. -treasurer or CFO, ultimate authority for management of corporations finances. -secretary, authority for management of corporation's books and responsibility to maintain corporate compliance. Each of these categories can include assistant or vice level positions such as; vice president.
Voting Rights of Shareholders
the shareholder's right to vote is fundamental to the concept of the corporation and its management structure. -in most states, a shareholder is entitled to one vote for each stock the s/he owns, unless the articles of incorporation provide otherwise: the article may provide for more or less than one vote for any share. --in addition, the incorporation statutes generally permit the issuance of one or more classes of nonvoting stock, as long as at least one class of share has voting rights.