Chapter 40 Corporate Directors, Officers and Shareholders

Rights and Duties of Shareholders

Acquisition of shares grants equitable ownership in corporation Shareholders do not directly manage daily operations, but influence management via election of Board of Directors Approve all changes to corporation and amend Articles of Incorporation Approve merger, acquisition, sale of corporate assets or dissolution. Elect and remove the Board of Directors

Rights of Board Members - Right of inspection

All board members are entitled to inspect the books of the corporation

Rights of Board Members - Right to participation

All board members are entitled to notification of meeting and right to participate.

Dividends

Can be paid in cash, stock or other property Illegal Dividends-paid from an unauthorized account or cause the corporation to be insolvent

Rights of Shareholders - Right to inspect may be abused.

Corporation has right to refuse inspection to protect trade secrets or confidential corporate information.

Rights of Board Members - Right of indemnification

Corporation should indemnify or purchase liability insurance for all board members to protect them from personal liability.

Duty of Care - Dissenting Directors

Director can register his dissent which is reflected in the corporate minutes

Rights of Shareholders - Dividends

Distribution of corporate profits or income to shareholders based in proportion to their shares Can be paid in cash, stock or other property

Duty of Care

Duty to act in good faith Duty to exercise care of a reasonably prudent person Duty to act in the best interest of the corporation Duty to make informed decisions; stay reasonably informed and make reasonable investigation into corporate matters

Election of board members

Election procedures set forth in Articles of Incorporation Board members can be removed for cause. Vacancies are filled by election by the shareholders Outside director does not have a management position in the corporation.

Duties of Directors and Officers

Fiduciaries of the corporation and owe and ethical and legal duty. Fiduciary duties include the Duty of Care and Duty of Loyalty to the corporation.

Role of Directors and Officers

Governed by board of directors who are elected by shareholders Only the board of directors can bind the corporation; individual directors are not agents of the corporation and cannot bind it themselves. Few if any qualifications to be a board member. Shareholders can also be board members.

Corporate Officers and Executives

Hired by the board of directors Their rights are defined by employment contracts or the laws of the state of incorporation

Business Judgment Rule

Immunizes a Director of Officer from bad business decisions Courts will not examine decisions in hindsight Most courts will apply the rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.

Shareholder Derivative Suit

Lawsuit filed by shareholders against a third party for damages when Board of Directors fails to file suit.

Liability of Directors and Officers

Liable for crimes and torts committed by employees under their supervision

Personal Liability of Shareholders

Majority shareholders own enough stock to have de facto control over the corporation Majority shareholder who excludes minority shareholders from obtaining benefits or seeks to oppress them can be held personally liable Majority shareholder owe fiduciary duty to corporation, minority shareholders and creditors when they sell their shares due to the transfer of control

Board of Directors Meetings

Meetings conducted with formal minutes prepared Must have a quorum, or majority, of board present to conduct a meeting and vote

Rights of Shareholders

Right to inspect corporate books for a proper purpose. Right to inspect may be abused. Shareholders have right to transfer shares, unless there is a restriction on transferability.

Liability of Directors and Officers - Shareholder Derivative Suit

Shareholders file suit if the Directors and Officers are not acting in the corporation's best interest

Shareholder Meetings

Shareholders must meet at least annually. Shareholders can give their "proxy" to allow another to vote in his place Corporate business is presented in the form of a "resolution" Shareholder with greater than 50% of the outstanding shares must be present

Personal Liability of Shareholders - Shareholder holding "watered stock" also liable

Shares a corporation issues for less than fair market value Shareholder must pay the corporation the difference in value Some states, shareholder may also be liable to corporate creditors

Duty of Loyalty

Subordination of personal interest to the corporation Avoid conflicts of interest Avoid insider trading

Rights of Shareholders - Preemptive Rights

allows each shareholder to maintain proportional control based on number of shares owned

Rights of Shareholders - Stock Warrants

right to buy stock at a given price by a given date