Chapter 37: Corporate Governance and the Sarbanes-Oxley Act

record date

a date specified in corporate bylaws that determines whether a shareholder can vote at a shareholders' meeting. can be no more than 70 days before the meeting. shareholders' list containing names, addresses, of the shareholders as of the record date with class and number of shares must be available for inspection at the corporation's main office.

piercing the corporate veil (alter ego)

a doctrine that says if a shareholder dominates a corporate and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations. often resorted to by unpaid creditors who are trying to collect from shareholders a debt owed by the corporation. courts will pierce the corporate veil if (1) corporation has been formed without sufficient capital (thin capitalization) or (2) separateness has been maintained between corporation and its shareholders

sarbanes-oxley act

a federal statute from 2002 that establishes rules to improve corporate governance, prevent fraud, and add transparency to corporate operations. applies only to public companies. added criminal penalties to certain conduct.

duty of care

a fiduciary duty owed by directors and officers that requires them to use care and diligence when acting on behalf of the corporation. duties must be discharged in (1) good faith, (2) with the care that an ordinary prudent person in a like position would use under similar circumstances and (3) in a matter they reasonably believe to be in the best interests of the corporation. breaches of this duty are normally caused by negligence, such as an officer's or director's failure to (1) make a reasonable investigation of a corporate matter, (2) attend board meetings on a regular basis, (3) properly supervise a subordinate who causes a loss to the corporation through something like embezzlement, (4) keep adequately informed about corporate affairs

derivative lawsuit or derivative action

a lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit. can be brought if (1) shareholder at time of the act complained of, (2) fairly and adequately represents the interests of the corporations, and (3) made a written demand on the corporation to take suitable actions and either the corporation rejected the demand or 90 days have expired since the date of the demand. the third party who damaged the corporation is often one or more of the corporation's own directors or officers. lawsuit will be dismissed by the court if either a majority of independent directors or a panel of independent persons appointed by the court determines that the lawsuit is not the best interests of the corporation. decision must be reached in good faith and only after conducting a reasonable inquiry. if action is successful, any award goes to the corporate treasury. plaintiff-shareholder is entitled to have reasonable expenses covered.

Board of directors

a panel of decision makers who are elected by the shareholders. responsible for formulating policy decisions. while originally unpaid, most are now paid an annual retainer and an attendance fee for each meeting attended. have absolute right of inspection.

cumulative voting

a type of voting that may be provided by the articles of incorporation. each shareholder is entitled to multiple the number of shares owned by the number of directors to be the elected and cast the accumulative number for a single candidate or distribute the product among two or more candidates. gives minority shareholders a better opportunity to elect someone to be BoD.

resolution

a vote taken by the BoJ of a corporation that authorizes certain actions to be taken on behalf of the corporation. put forward by a member of the board, usually seconded by another. most pass. recorded in the written minutes. may initiate certain actions that require shareholders' approval.

stock dividends

additional shares of stock distributed as a dividend. distributed in proportion to the existing ownership interests of shareholders, so they do increase a shareholder's proportionate ownership interest.

shareholder voting agreement

agreement between two or more shareholders that stipulates how they will vote their shares. not limited in duration and do not have to be filed with the corporation. specifically enforceable. can be either revocable or irrevocable.

right of first refusal

an agreement that shareholders enter into whereby they grant each other the right of first refusal to purchase shares they are going to sell. can be granted to the corporation as well.

voting trust

an arrangement whereby shareholders transfer their stock certificates to a trustee. legal title to these shares is held in the name of the trustee. trustee is empowered to vote the shares held by the trust and trust may specify how to vote or leave it to the discretion of the trustee. members of the trust retain all other incidents of ownership of the stock. cannot exceed 10 years. must be filed with corporation and open to inspection by shareholders

special shareholder meetings

can be called by the BoD, the holders of at least 10% of the voting shares, or any other person authorized to do so by the articles of incorporation of the bylaws. held to consider import issues, such as merger or consolidation of the corporation with one or more other corporations, the removal of directors, amendment to the articles of incorporation, or dissolution of the corporation.

inside director

director who is also an officer of the corporation

duty of obedience

directors and officers must act within the authority conferred on them by the state's corporation code, articles of incorporation, corporate bylaws, and resolutions

usurping a corporate opportunity

directors or officers may not personally steal a corporate opportunity for themselves. the following elements must be shown: (1) opprotunity was presented in a corporate capacity (2) opportunity is related to or connected with the corporation's current or proposed business (3) corporation has the financial ability to take advantage of the opportunity (4) corporate officer or director took opportunity for themselves

dividends

distribution of profits of the corporation to shareholders. paid at the discretion of the BoD. directors may opt to retain the profits in the corporation to be used for corporate purposes rather than as dividends. when a dividend is declared, it sets a record date so that people who are shareholders on that date are entitled to receive the dividend even if they sell their shares before payment date. once declared, a cash or property dividend cannot be revoked

corporate officers

elected by the BoD. at minimum, most corporations must have the following- president, one or more vice presidents, secretary, and a treasurer. can be removed by the BoD if it is in the best interest of the corporation. have authority as provided by corporate bylaws and resolutions of the BoD. they are agents and therefore have the express authority granted to them, as well as implied authority and apparent authority, to enter the corporation into contracts.

preemptive rights

give existing shareholders the right to purchase new shares being issued by the corporation in proportion to their current ownership interests to prevent a shareholder's interest from being diluted.

annual shareholders' meetings

held to elect directors, choose an independent auditor, and take other actions. meetings must be held at the times fixed in the bylaws. if meeting is not held within either 15 months of the last annual meeting or 6 months after the end of the corporation's fiscal year, shareholder may petition the court in order for a meeting to be held.

outside director

person who sits on the board but is not an officer. often are directors of other corporations, bankers, lawyers, professors, and so on. often selected for business knowledge and expertise.

duty of loyalty

require directors and officers to subordinate their personal interests to those of the corporation and its shareholders

buy-and-sell agreement

requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement (normally determined by a formula)

quorum to hold a meeting of the shareholders

the required number of shares that must be represented in person or by proxy to hold a shareholders' meeting. The RMBCA establishes a majority of outstanding shares as quorum.once a quorum is present, the withdrawal of shares does not affect the quorum of the meeting.

straight (noncumulative) voting

type of voting unless otherwise required by articles of incorporation. each shareholder votes the number of shares he or she owns for candidates for the positions open for election. this allows a majority shareholder to elect the entire board of directors.

supramajority voting requirement

when the articles of incorporation or the bylaws of the corporation require a greater than majority of the shares to constitute a quorum of the vote of the shareholders. to add this, the amendment must be adopted by the number of shares of the proposed increased, e.g. increasing a majority voting requirement to an 80% supramajority voting requirement would require an 80% affirmative vote.