business law chapter 34

if a manager has acted in good faith

a court will not hold her personally liable for any harm her decision has caused the company, nor will the court rescind her decision

tender offer

a public offer to buy a block of stick directly from shareholders

legality

courts are generally unsympathetic to managers who engage in illegal behavior, even if their goal is to help the company

rational business purpose

courts generally agree in principle that directors and officers are liable for decisions that have no rational business purpose

anti takeover devices and shark repellents:

defensive measures to protect against a hostile takeover

corporations have two sets of managers:

directors and officers

informed decision

generally courts will protect managers who make an informed decision even if the decision ultimately harms the company

special committee

independent board members form a committee to review a self-dealing transaction and determine if it is entirely fair to the corporation

a fundamental problem of the modern corporation is that

interests of managers, shareholders, and stakeholders often conflict

corporate opportunity

managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent --the manager can still avoid liability by showing that the company would have been unable to benefit from the opportunity

self-dealing

means that a manager makes a decision benefiting either himself or another company with which he has a relationship -once a manager engages in self-dealing, the business judgment rule no longer applies

the:

officers and directors of a corporation owe a fiduciary duty to both the corporation and its shareholder

the law provides two sets of corporate rules:

one to govern a managers relationship with stakeholders and another for the relationship among managers the corporation and its shareholders

to find capital, firms sought

outside investors, who often had neither the knowledge nor the desire to manage the enterprise

the business judgment rule

provides that managers are not liable for decisions they make in good faith

_______ and the ___________

shareholders elect directors who set policy, directors appoint officers to implement those corporate goals

duty of care

the duty of care requires officers and directors to act in the best interests of the corporation and to use the same care that an ordinarily prudent person would in a similar situation --the requirement that a manager act with care and in the best interests of the corporation

duty of loyalty

the obligation of a manager to act without a conflict of interest -the duty of loyalty prohibits managers from making a decision that benefits the, at the expense of the corporation

because of corporate abuses and fraud, congress and other regulators have tried to rebalance the power inside corporations

their goal is to provide managers the freedom to run a business while ensuring that they act in the best interests of their shareholders

investors without management skills complemented managers without capital

true

takeovers: the business judgment rule

when establishing takeover defenses, shareholder welfare must be the boards primary concern -if it is clear that the company will ultimately be sold, the board must auction the company to the highest bidder; it cannot give preferential treatment to a lower bidder

the business judgment rule accomplishes three goals

1. it permits directors to do their jobs 2. it keeps judges out of corporate management 3. it encourages directors to serve

common shark repellents include these:

-Poison Pill(aka shareholder rights plan); when an outside shareholder acquires more than a certain percentage of company stock, a poison pill dilutes the value of these shares; the US is the only developed country that allows boards this power -Blank Check Preferred Stock; many firms have blank check preferred stock in their charters; when this stock is authorized, its rights and other characteristics are left blank, to be filled in by the board of directors upon issuance; like an unloaded gun that can be armed by the board

takeover legislation a federal statute: the williams act

-any individual or group who together acquire more than 5% of a company's stock must file within 10 days, a public disclosures document with the SEC; the filer must disclose any plans it has to acquire the target firm; other requirements

anti takeover devices and shark repellents

-asset lockup: the target sells off the assets that the shark most wants -greenmail; the target buy back the sharks stock at a premium price -staggered board of directors; typically, all directos run for election each year, which means the entire board can be voted at one time; with a staggered board, only a portion of directors are elected each year, which makes replacing the entire board a task taking years -supermajority voting; ordinarily, shareholders can approve charter amendments by a majority vote, but some firms require a higher percentage to improve important changes

there are 3 ways to acquire control of a company:

-buy the company's assets -merge with the company -buy stock from the shareholders

managers, shareholders and stakeholders have a conflict of interest because they each have different goals:

-managers want three things: 1. to maximize their income, 2. keep their jobs, 3. and build an institution that will survive them -shareholders want a high stock price, right now, not 5 years from now -stakeholders want the business to survive in their community and continue to provide jobs and customers

takeover: state statutes

-most states have now passed laws to deter hostile takeovers; kinds: -statutes that automatically impede hostile takeovers -statutes that authorize firms to fight off hostile takeovers

a self dealing transaction is valid in any one of the following situations

-the disinterested members of the board of directors form a special committee that approves the transaction -the disinterested shareholders approve it -the transaction was entirely fair to the corporation --in the case of self-dealing by a controlling shareholder of the firm, a court will always examine the fairness of the transaction, no matter how the special committee votes

2 scenarios are common in hostile takeovers:

-the target has assets that the bidder genuinely wants -a speculator plans to acquire control and then resell all or part of the company at a profit

the unocal case and equivalent state statutes permit managers to consider the interests of stakeholders

but MANAGERS HAVE AN AFFIRMATIVE DUTY TO PROTECT THE INTERESTS OF SHAREHOLDERS AND THE CORPORATION

but the ____ of the great manufacturing enterprises spawned by the industrial revolution were larger than any small group of individuals could supply

cash needs

the model business corporation act describes the directors' role:

all corporate powers- shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its -board of directors

hostile takeover:

an attempt by an outsider to acquire a company in the face of opposition from the target corporation's board of directors

stakeholder

anyone who is affected by the activities of a corporation, such as employees, customers, creditors, suppliers, shareholders and the communities in which they operate

these statutes permit directors, when making a decision, to consider, for example:

both the SHORT-TERM and LONG-TERM BEST INTERESTS of the corporation, taking into account, and weighing as the directors deem appropriate, the effects thereof on the CORPORATIONS SHAREHOLDERS and the other corporate constituent groups

before the industrial revolution in the 18th & 19th centuries a

business owner typically supplied both capital and management