Chapter 6 - Corporate Authority

Shareholders' Meetings

- Annual meetings are required, usually every year. - There must be notice given and a quorum must be present. - Model Act sets quorum at a majority of shares entitled to vote. A different requirement can be included in the Articles. - At an annual meeting, shareholders elect directors. - Shareholders vote on matters such as fundamental corporate changes. - Special meetings may be called by the Board, an authorized person by the Articles or Bylaws, or the holders of at least 10% of share entitled to vote.

Secretary - Actual Authority

- A corporation's secretary acting with actual authority may bind the company in a transaction with a third party. - A principal can ratify an act when there is no original authority. -Example: the corporation can ratify her signature by action and by receiving the benefits. - Example: Secretary signed the affidavit because the president was unavailable. Secretary had no inherent or apparent authority, but she had actual authority.

Officers - Scope of Power

- Agents of the Board acting collectively as the corporation, not the shareholders. - Under the Model Act, only one officer is required: secretary (title doesn't matter, so long as their duty is to keep records). - In theory, the VP takes over when the President is unable to act. - Secretary & Treasurer position can be combined; also, VP and Secretary. - President should not overlap with VP or Secretary.

Circumstances where the Board must vote on the action and then sent it to the shareholders for their consent:

- Amendments to the Articles of Incorporation - Mergers and share exchanges - Certain dispositions of corporate assets - Voluntary dissolution

General Overview of Powers

- Board of directors: acting collectively, have oversight responsibility for managing the corporation and making important policy decisions; appoint officers. - Officers: supervise day to day operations of the company. - Shareholders: elect directors and approve fundamental corporate changes, such as mergers with other companies, amendments to the articles of incorporation, etc.; have a more active role regarding company management in closely held companies; have virtually no say regarding director appointment in publicly traded companies. *Shareholders do not act for the corporation; the Board of Directors only acts for the corporation, but the Board must act collectively, not individually in their shareholder capacities (unless the individual has been delegated authority by the Board collectively).

Treasurer - Pattern of Conduct

- Court requires a serious of actions, versus relying on a single transaction. There must have been some prior dealing. - Example: Treasurer didn't have apparent authority to act as a guarantor on a note for a third party. No apparent authority because there was no pattern of conduct. - Practical takeaways: Unless there is a "pattern of dealing," if you're unsure and need assurance, ask for a board resolution.

Directors - Scope of Power

- General power over the management of a corporation; they are not required to manage a corporation directly on a day-to-day basis, but may do so through delegation and oversight. - Must act as a cohesive union; directors cannot act individually unless they are granted permission/authority.

President - Initiating a Lawsuit

- If a president can take the necessary steps in defense of litigation prosecuted against his corporation in order to preserve the corporate assets, then it follows that a president can also employ and authorize counsel to institute necessary legal proceedings for the same purpose of preserving the interests of his corporation. - True even if the president is suing the board members. However, must be within ordinary business of the corporation.

Delaware rule re: Inspection of Corporate Books and Recods

- In Delaware a stockholder may only compel inspection of corporate records if there is "some evidence" to show a "proper basis" that would allow a court to infer mismanagement, waste, or wrongdoing. - Two requirements to compel inspection: (1) Proper basis and (2) some evidence - Proper basis: fraud; - Improper basis: competition or curiosity; suspicion of wrongdoing is not enough. *Catch 22!! Need evidence to prove fraud, and need to see the documents to get evidence! Seems like a reasonable standard, but in reality it is very difficult for the shareholders to meet.

Shareholders' Information Rights - Access to Corporate Financial Statements

- In Model Act states, the corporation must provide shareholders with annual financial statements - including (1) a balance sheet covering the most recently completed fiscal year, (2) an income statement, and (3) a statement of changes in shareholders' equity for the same accounting period. - The company must send the financial statements to the shareholders within 120 days after the close of the fiscal year.

Methods of Casting Shareholders' Votes

- In person, by proxy, by electronic means, or by using written consents. - Voting by electronic means still requires the holding of a shareholder meeting at a physical location. - Shareholders can take action by using written (including electronic) consents instead of holding a meeting. There must be unanimous consent of all shareholders entitled to vote for a written vote to be effective.

Officers - Secretary

- Inherent power: relates only to the internal affairs of the corporation, not to its business. - Power to keep the minutes of meetings and other nonfinancial corporate records, have custody of the corporate seal, to attest the seal, to certify corporate records, etc. - No power to transact business on behalf of the corporation.

Officers - Treasurer

- Largely responsible for the receipt and disbursement of company funds and for company loans and their repayment. Responsible for investing a company's funds and creating and monitoring a company's budget. - Inherent power: relates only to the company's internal affairs; administrative power. - Lack the implied or apparent authority to bind the corporation in contracts and other transactions with third parties. - Different than the CFO, who has a lot of power to enter into financial transactions.

Officers - Vice President

- One inherent power: to serve in the place of the president, most commonly in the event of the president's death, incapacity, or absence. - Two issues: (1) If more than one VP, how do they share the power? (2) What constitutes "incapacity" or "absence"? Rule: Unless a corporation's bylaws limit the authority of the vice president, the vice president may act as a substitute for the president if the president is absent or disqualified.

Shareholders - Main Powers

- To elect directors and choose directors of their liking; - To remove directors at any time with or without cause (Model Act § 8.08(a)); and - To elect new directors to fill vacancies (Model Act § 8.10(a)(1)). - To amend the corporation's bylaws (unless the Articles provide otherwise) - Model Act § 8.05, 8.06: the authority to amend bylaws resides with the shareholders and directors, unless shareholders reserve to themselves exclusive power to amend particular provision or the bylaws as a whole.

Shareholders - Power to Vote

Model Act § 7.21 says only shares are entitled to vote (some alternatives are available, such as creating a special class, voting trusts, proxy, etc.)

Voting Rules in Director Elections

- "Plurality of the vote" - the director with the most votes win even if they have not achieved a majority of votes cast. However, the Articles may require a majority or supermajority for the election of directors. - Two voting options: yes or abstention - Can't vote no; negative votes are not counted, instead they are withheld - "Holdover rule" - a director continues to serve until a successor is elected and qualifies. - Corporations can change the procedures by including a provision in the Bylaws or Articles.

Secretary - Implied/Incidental Authority

- Secretary has the implied power to deliver certified lists of the corporation's officers and the attestation of the officer's signatures. - For practical reasons, certified board resolutions must be upheld regardless of whether it was in fact adopted.

Shareholders' Information Rights - Inspection of Corporate Books and Records

- Shareholders have the right to inspect and make copies of certain corporate records, such as: shareholders' lists, corporate accounting records, and minutes from Board meetings. - Shareholders lists must be available for inspection at the time the company sends notice of a shareholder meeting and through the meeting itself.

Directors - Board must be able to function

- Shareholders may not create a passive board of directors so that the shareholders may control the corporation. - Stockholders cannot act in relation to the ordinary business of the corporation, nor can they control the directors in the exercise of the judgment vested in them by virtue of their offices. - Board must be able to function; cannot be a "dummy board."

Vice President - Additional Inherent Authority

Additional authority inherent in the titles (the two exceptions): - "Executive VP" - has inherent authority - "Specialized VP" - has apparent authority; ex: VP of Human Resources

Types of Shareholders

Can be individuals and -- For closely held corporations, shareholders can also be other corporations, any type of unincorporated business entity, or other form of legal entity. -- For publicly traded companies, shareholders are usually institutional investors, such as mutual funds and pension funds. *Note: nominees are not "counted" as shareholders

Officers - President

Has the power to run day-to-day operations; ordinary business of the corporation.

Shareholder Ballot Access

Historically, the Board nominates their own directors and presents its nominations in annual proxy statements at the company's expense. Shareholders who wish to nominate a different slate of directors must prepare and circulate their own proxy statement on their own dime.

Shareholders - Scope of Power

In closely held corporations, shareholders are free to design a management structure that suits their needs so long as all shareholders agree to the change.

President - Ordinary Course of Business Rule

The president has the power to bind the corporation in the usual course of its business. For matters outside the usual course of business, the president's authority to act must be granted by: a state statue, the corporation's Articles or bylaws, a resolution of the Board, or after-the-fact ratification by the Board. - A corporation will not be bound by the unauthorized act of the president guaranteeing a personal loan to a corporate officer. - Example: guaranteeing a loan is personal business, not ordinary business of the corporation.

Shareholders - Eligibility to Vote

The registered owner is usually deemed to be the owner of shares; other special rules apply.

Officers - Chair of the Board

Usually the former CEO; has no inherent powers; must act collectively.