40

The Business Judgment Rule

A corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgment and bad business decisions as long as there is no evidence of bad faith, fraud or clear breach of fiduciary duties.

Quorum Other Voting Techniques

A group of shareholders can agree in writing prior to the meeting in a shareholder voting agreement. Can also enter voting trust; an agreement under which a shareholder assigns the right to vote his/her shares to a trustee, usually for a specified period of time. Trustee is then responsible for voting the shares on behalf of all the shareholders in the trust.

Quorum Voting Lists

Alphabetical voting list of shareholders with name, address and given cutoff date (record date)

Shareholders Transfer of Shares

Corporate stock represents an ownership right in intangible personal property. Law generally recognizes right of an owner to transfer property to another person unless there are valid restrictions on the transferability.

Outside Director

Director who does not hold a management position.

Inside Director

Director who is also an officer of the corporation

Dissenting Directors

Directors are expected to attend board of director's meetings and their votes should be entered into the minutes. Unless a dissent is entered into the minutes it is presumed that the director has assented.

Disclosure of Potential Conflicts of Interest

Directors are precluded from entering into or supporting businesses that operate in direct competition with corporations on whose boards they serve. Their fiduciary duty requires them to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.

Duty of Care

Due Care; act in good faith, Duty to Make Informed Decisions, Duty to Exercise Reasonable Supervision

Shareholder Voting

Quorum, voting lists, cumulative voting, others.

Rights of Directors Include

Right to participation, inspection and indemnification

The Role of Shareholders

The acquisition of a share of stock makes a person an owner and shareholder in a corporation - equitable interest in the firm.

The Shareholder's Derivative Suit

When a corp is harmed by actions of a third party, directors can bring a lawsuit in name of corp against the party. If corporate directors fail to do this, shareholders can do so derivatively. Must: submit written demand to corporation and board has 90 days to act. Only if they refuse to do so does the derivative suit go forward. Shareholders are acting as guardians of corporate entity, not used for pursuing rights or benefits for themselves

Shareholder Proposals

When shareholders want to change a company policy they can put their ideas up for shareholder vote. The SEC has special provisions relating to proxies and shareholder proposals: all public companies must post their proxy materials on the internet and notify shareholders how to find that information.

Shareholders' Preemptive Rights

a shareholder receives a preference over all other purchases to subscribe to or purchase a prorated share of a new issue of stock. - shareholder can purchase a percentage of the new shares that is equal to his/her current percentage of ownership in the corporation.

Purpose of shareholders' preemptive rights

allows each shareholder to maintain his/her proportionate control, voting power, or financial interest in the corporation.

Removal of Directors

can be removed for cause

Board of Directors Nominating Committee

chooses candidates for board of directors that management wishes to submit to the shareholders in the next elect

When a single shareholder, or a few, owns a sufficient number of shares to exercise

de facto control over the corporation.

Directors Right of Inspection

director can access corporation's books and records, facilities and premises to make informed decisions

Duties and Liabilities of Directors and Officers

directors and officers are fiduciaries of the corporation. - legal and ethical duties. Include Duty of care, business judgment rule, duty of loyalty, disclosure of potential conflicts of interest and liability of directors and officers

Dividend

distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their shares. Can be paid in: Retained earnings, net profits, and surplus

Duty of Loyalty

faithfulness to one's obligations and duties. requires officers and directors to subordinate their personal interests to the welfare of the corporation.

Committees of the Board of Directors

focus on individual subjects and increase efficiency of the board

Board of Directors Executive Committee

handle interim management decisions between board meetings

Directors Right to participation

have right to be notified of and be able to attend board of director's meetings

Liability of Directors and Officers

held liable for torts, crimes, statutes, and not acting in business' best interest.

Election of Directors

historically three and serve as initial board until first annual shareholder's meeting where other directors are voted. Usually serves for one year.

Compensation of Directors

in the past, weren't paid but now nominal sums in addition compensation for time, work, effort, and risk involved.

Duties of Majority Shareholders

majority shareholders have a fiduciary duty to the corporation and to the minority shareholders.

Quorum Cumulative Voting

most states permit, sometimes require, shareholders to elect directors by cumulative voting. Designed to allow minority shareholders to be represented on the board of directors.

Stock Certificates

most stocks today are uncertified

Shareholder's Powers

must approve fundamental changes affecting corporation before the changes can be implemented. Power to vote/elect board of directors Inherent power to remove directors for cause by majority of vote

Shareholder's Meetings

must occur at least annually, notice of meetings, proxies, and shareholder proposals

Board of Director's Meetings

normally a majority of the board of directors must be present to constitute a quorum (minion). The affirmative vote of a majority of the directors present at a meeting binds the board of directors with regard to most decisions.

Board of Directors are in charge of

policymaking, carryout business, determines capital structure, selects and removes corporate officers and declares dividends are NOT agents

Directors Right to Indemnification

reimbursement for legal costs, fees and damages incurred during litigation by virtue of his/her position

Stock Warrants

rights to buy stock at a stated price by a specified date that are given by the company.

Board of Directors Audit Committee

selection, compensation and oversight of accountants (requirement post SOX)

Directors' failure to Declare a Dividend

shareholders can ask a court to compel the directors to meet and declare a dividend.

Shareholders Inspection Rights

shareholders in a corporation enjoy both common law and statutory inspection rights. Is limited to the inspection and copying and corporate records for a proper purpose and the request to inspect must be in advance. A shareholder who is denied inspection can seek a court to compel the inspection

Illegal dividends

shareholders must return these and board of directors can be held personally liable for the amount of payment

Vacancies on Board

shareholders or board can fill the position

When majority shareholder breaches his/her fiduciary duty to the minority shareholders, the minority can

sue for damages.

Board of directors is the ___________ authority in every corporation

ultimate

Quorum Requirements

usually exists when more than 50% of outstanding shares are present. For the most part, voting is straight majority vote. (not with extraordinary corporate maters - will ask for higher than majority)

Liability of Shareholders

usually not personally liable. Can be liable for fraud, undercapitalization, careless observance of corporate formalities, and...

Proxies

usually not practical for owners of only a few shares of stock of publically traded corps to attend shareholder's meetings. Therefore, law allows stockholders to appoint another person to act as their agent.

Shareholders Rights on dissolution

when a corp is dissolved and its outstanding debts and claims of its creditors are satisfied, the remaining assets are distributed to the shareholders proportionately.

Watered Stock

when a corporation issues shares for less than their FMV it is considered watered stock. The shareholder that receives watered stock must pay the difference to the corporation.