Ch. 29 terms and homework
Directors are not agents for the corporation by virtue of that office.
True Explanation Directors are not agents for the corporation by virtue of that office.
Someone with confidential, material information concerning the corporation is referred to as a(n):
insider Explanation An insider is someone with confidential, material information concerning the corporation.
Crimes:
Responsible Corporate Officer: Courts may find criminal liability when high level officials request or authorize illegal acts.
Mark, a director of ABC Corporation who also owned a business selling office equipment, wanted to sell a new copier to ABC Corporation. Mark made full disclosure of his interests to the full board, and the disinterested members of the board approved the sale of the copier by Mark to ABC Corporation. Under the MBCA, which of the following is true regarding the transaction?
After proper approval by the board of directors or shareholders, the burden of establishing unfairness shifts to the corporation. Explanation Under the MBCA, the initial burden of proving the fairness of the transaction lies with the self-dealing director or officer. After proper approval by the board of directors or shareholders, the burden of establishing unfairness merely shifts to the corporation.
Directors are not agents of the corporation; set policy. •Can act only as part of the board, not as individuals. •M B C A permits directors to fix their own compensation.
Can act only as part of the board, not as individuals. •M B C A permits directors to fix their own compensation.
Alice, an officer of ABC Company, won a lawsuit filed against her in which the plaintiff claimed that she was personally liable for some problems with products of ABC Company that resulted in injuries to consumers. Alice reasonably and personally expended significant sums defending the lawsuit. Which of the following is true regarding indemnification rights, if any, that she would have?
Indemnification of such expenses is mandatory because she prevailed in the litigation. Explanation Indemnification is mandatory if the officer or director prevails on the merits of the suit against him.
Which of the following is not true of shareholders?
Shareholders make management decisions. Explanation Shareholders are the owners of the corporation and can amend the articles of incorporation and elect directors. Shareholders do not make management decisions.
Which of the following is false regarding the duty of due care and diligence imposed on directors and officers of a corporation?
The MBCA standard requires officers to personally investigate all facets of decisions and prohibits reliance on the opinions of others. Explanation It would be impossible for any manager to personally investigate every facet of every business decision. As a result, the MBCA standard permits directors and officers to rely on the opinions, reports, and statements of persons who reasonably appear to be competent and reliable.
In the course of her employment, Deborah, vice president of "Garden Hoses, Ltd.", received information about a new product that would revolutionize the garden hose industry. Deborah purchased the rights to the new technology personally and offered to sell it to Garden Hoses, Ltd. Garden Hoses, Ltd. would have been interested in and able to purchase the new product, but Deborah decided that she got to it first and that she had the right to assert dominion over the opportunity. Deborah is guilty of:
Usurping a corporate opportunity. Explanation Three elements must be met before directors or officers may be found to have usurped a corporate opportunity: The opportunity must have come to them in their corporate capacity. The opportunity must be related to the corporate business. The corporation must have been able to take advantage of the opportunity.
•Prohibition of Usurping Corporate Opportunity.
directors and officers may not usurp a corporate opportunity, occurs when a business opportunity comes to them in their official capacities and the opportunity is within the corps normal scope of business.
•Business Judgment Rule.
directors are not liable for mere errors of judgment when they act with care and good faith.
Tort liability:
A corporation is liable under agency doctrine of respondent superior for all torts committed by employees acting within the scope of employment. •Alien Tort Statute.
Many criminal statutes were not intended to apply to corporations.
False Explanation Many criminal statutes are clearly intended to apply to corporations.
The business judgment rule allows the courts to substitute their business judgment for that of the corporation's managers.
False Explanation Directors are not liable for mere errors of judgment when they act with care and good faith. This is the business judgment rule. The rule precludes the courts from substituting their business judgment for that of the corporation's managers.
The Sarbanes-Oxley Act requires CEOs and CFOs of private corporations to certify that, to their knowledge, all financial information in quarterly and annual reports is not false or misleading.
False Explanation The Sarbanes-Oxley Act requires CEOs and CFOs of publicly traded corporations to certify that, to their knowledge, all financial information in quarterly and annual reports is not false or misleading.
Mike, the CEO, of ABC Corporation, made an informed decision about purchasing the assets of a competing company for ABC Corporation. There was no conflict of interest, and he had a rational basis for the decision. Unfortunately, the decision turned out to be a bad one, and ABC Corporation lost significant amounts of money based on the transaction. Which of the following would be the most likely result should a group of shareholders seek to hold Mike personally liable for that decision?
Mike would likely not be held responsible for the losses based on the business judgment rule. Explanation Directors are not liable for mere errors of judgment when they act with care and good faith. This is the business judgment rule. In order to obtain the protection of the business judgment rule, the directors must meet three requirements in arriving at their decision: 1. An informed decision; 2. No conflict of interest; 3. Rational basis.
Liability of Officers and Directors
Modern courts are more willing to hold directors and board members liable for negligence (torts).
The secretary, treasurer and president are examples of:
Officers Explanation The secretary, treasurer and president are examples of officers of the corporation.
Which of the following was the result in Friedman v. Sebelius, the case in the text in which corporate officers were charged criminally for their corporation's misbranding of a painkiller on the basis of the responsible corporate officer doctrine under which corporate officers may be held criminally liable for corporate violations of the Food, Drug, and Cosmetic Act?
The criminal convictions were upheld because criminal liability under the responsible corporate officer doctrine extended to those who had the authority to prevent or correct the misbranding and failed to act even if knowledge of the wrongdoing and personal participation on the part of the accused was lacking. Explanation According to the court, "A corporate officer may therefore be guilty of misbranding without knowledge of, or personal participation in, the underlying fraudulent conduct. These three officers, despite the authority to prevent or correct the misbranding, failed to act. Accordingly, they may be found guilty and excluded from participation in federal health care programs."
Which of the following has the power to pay out corporate funds for proper purposes and can properly receive payments for the corporation?
Treasurer Explanation The treasurer has the power to pay out corporate funds for proper purposes and can receive payments for the corporation.
When a takeover attempt is involved, the directors must meet before they are afforded the business judgment rule defense when they oppose takeover attempts.
True Explanation There seems to be a preliminary burden that the directors must meet before they are accorded the business judgment rule defense when they oppose takeover attempts.
•Duty of Loyalty and Good Faith.
directors and officers must act in the best interests of the corporation. they breach their duty if they try to profit personally at the expense of the corporation.
•Prohibition of Self Dealing.
directors and offices are not prohibited from entering into transactions with the corporation. however before a director enters a contract with the corporation, the director should make full disclosure of her interest.
Authority by virtue of an office is referred to as:
ex officio authority.
A corporate officer can be found liable for the illegal behavior of a subordinate:
when the officer knew of or should have known of the illegal conduct and failed to take reasonable measures to prevent it. Explanation Specifically, an officer can be found criminally liable for the illegal behavior of a subordinate when the officer (1) knew of or should have known of the illegal conduct and (2) failed to take reasonable measures to prevent it.
A corporation is liable for all torts committed by its employees:
while acting within the scope of their employment. Explanation A corporation is liable for all torts committed by its employees while acting in the course of and within the scope of their employment. This may be true even when the corporation has instructed the employee to avoid the act.
Most incorporation statutes declare that a board of directors must manage the business of a corporation.
•Board members may have other jobs. •The M B C A recognizes this and says: "All corporate powers shall be exercised by or under the authority of, and the business and affairs of a corporation shall be managed under the direction of, a board of directors."
Director and Officer Duty Expectations
•Business Judgment Rule. •No Freeze-Outs, Oppression, Bad Faith •Duty of Loyalty and Good Faith. •Prohibition of Self Dealing. •Prohibition of Usurping Corporate Opportunity. •No Insider Trading of Stock. •Directors Right to Dissent.
Sarbanes-Oxley
•C E O s and C F O s must certify to the best of their knowledge, annual and quarterly reports are not misleading.
Indemnification
•Corporations may pay legal fees for officers and directors.
The board of directors may act alone to take certain corporate actions as per its articles and bylaws. According to M C B A, boards can:
•Declare a dividend. •Fill vacancies on the board. •Sell, lease, and mortgage assets within the normal course of business.
The duty to act within one's authority and the power of the corporation
•Directors or officers may be liable if the corporation is damaged by acts outside their scope of authority. •Not held liable for ultra vires transactions. •Corporations may ratify unauthorized acts.
The duty to act with loyalty and good faith for the benefit of the corporation
•Forbidden from trying to personally profit at the expense of the corporation. •Directors and officers cannot enter into transactions with the corporation.
Some actions require board initiative (shareholder approval).
•Fundamental changes in the corporation.
President
•Has authority to bind the corporation. •Has express and implied authority and may have ex officio authority.
Treasurer
•Has charge of the funds of the corporation. •Has the power to pay out corporate funds for proper purposes. •Binds the corporation on receipts, checks, and endorsements.
Vice President
•Has no authority by virtue of the Vice President's Office. •May have considerable apparent authority when acting as the principal officer of an area of the business.
Secretary
•Keeps the official corporate board minutes of meetings. •Has no express authority to bind the corporation but may affix the corporate seal on documents, which are then considered authorized.
The M B C A requires a president; vice president; a secretary and a treasurer.
•One person may hold multiple offices.
Election of directors.
•Some states require a minimum number of directors, otherwise set by corporate articles and bylaws. •Directors may be required to be shareholders. •Directors are elected at annual shareholder meeting, usually hold one year terms to next annual meeting. •Vacancies may be filled by board of director votes until next shareholder meeting. •Directors may be removed with cause per its bylaws.
The duty to act diligently and with due care in conducting corporate affairs
•The MBCA requires "such care as an ordinarily prudent person in a like position would exhibit under the circumstances." •Not liable if they act with common sense, wisdom, and informed judgment. •Must act in good faith and under the reasonable belief they are acting in the corporation's best interests. •Business judgment rule: directors aren't liable for mistakes in judgment "Prudent Person Standard."
Responsible Corporate Officers may be criminally liable for illegal behavior if:
•They knew or should have known of the illegal act. They failed to take reasonable measures to prevent it.
