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For a corporation to rely on the Business Judgement rule, What 3 requirements must be met?

!) Board must make an *informed* decision 2) Board must have *no conflicts of interest* 3) Board must have a *rational basis* for believing that their decision is in the best interests of the corporation.

Ultra Vires means

"Beyond the power" Today, corporate purposes are broadly stated, limiting the relevance of the ultra vires doctrine.

__________ have ______authority given to them by the bylaws or the board of directors and _____ authority to do things reasonably necessary to accomplish their duties.

*Officers* have *express* authority given to them by the bylaws or the board of directors and *implied* authority to do things reasonably necessary to accomplish their duties.

______ own the corporation, but elect a ________________to manage the firm and, typically, the ________________ delegate most management duties to ________, who in turn hire ______ and _______.

*Shareholders* own the corporation, but elect a *board of directors* to manage the firm and, typically, the *board of directors* delegate most management duties to *officers*, who in turn hire *managers* and *employees*.

The board may issue and repurchase stock, declare dividends, adopt and amend bylaws, elect and remove officers and fill board vacancies. What corporate action requires both the boards recommendation *and* shareholder approval?

*to amend articles of incorporation*, mergers, sale of all corporate assets, dissolution.

If a director has a conflict of interest, a court may void the transaction with the corporation, unless the:

-transaction has been approved by a majority of informed & disinterested directors, " or" -transaction has been approved by a majority of informed & disinterested shareholders, *AND* -transaction is fair to the corporation. Intrinsic fairness standard: transaction is fair if a *reasonable person* in an *arm's-length transaction* would have entered into the contract.

Directors and officers owe a *fiduciary* duty to the corporation, which includes

1) a duty to act within the authority of their position and within the powers of the corporation, as stated in the articles of incorporation, the bylaws, and by the board of directors 2) a duty to act with due care 3) a duty of loyalty to the coporation

Because corporations have a broad purpose, corporate actions may not be challenged on the ground that it lacks the power to act, except by:

1) a shareholder to prevent a corp. from acting; 2) the corp. suing its management for damages caused by exceeding corporate powers; 3) the state's attorney general to prevent a corp. from acting.

As fiduciaries, directors and officers are liable to their corporation for stealing corporate opportunities if:

1) the opportunity came to the director or officer in his corporate capacity (he found out about the opportunity while looking for corporate stuff) ; and 2) the opportunity has some relation to an existing or prospective corporate activity (corporation could have used what he bought for himself instead); and 3) the corporation must be financially able to take advantage of the opportunity.

Whats a Tender offer and who makes them?

A "raider" can gain control of a publicly held corporation (the target) by making a "tender offer" (an offer to the s/h's to buy their shares at a price > current market price.) Raider hopes to acquire a majority of shares, thus giving it control of the target corp.

. the business and affairs of the corporation shall be managed under the direction of its

Board of directors

The greatest protection directors and officers have comes in the form of the

Business Judgment Rule because it protects directors and officers from liability to the corporation for bad decisions.

Minus ___________, _______, or ______________, the judgement of the directors and officers is _______________

Business judgment rule: *absent bad faith, fraud, or breach of fiduciary duty*, the judgment of the directors and officers is *conclusive*.

___________may be liable for crimes when the criminal act is requested, authorized, or performed by: (a) board of directors, (b) an officer, (c) another person with responsibility for formulating company policy, or (d) a high-level administrator with supervisory responsibility over the subject matter of the offense and acting within the scope of his employment.

Corporations

Which of the following corporate actions generally requires board recommendation and shareholder approval? To issue and repurchase stock. To declare dividends. To elect and remove officers. To amend the articles of incorporation.

D

Because corporations have a broad purpose, corporate actions may not be challenged on the ground of ultra vires, except by: A) a shareholder to prevent a corp. from acting. B) the corp. suing its management for damages caused by exceeding corporate powers. C) the state's attorney general to prevent a corp. from acting. D) A third-party to a contract with the corporation. E) A, B and C, but not D.

E) A, B and C, but not D.

This is the most common board committee, and has authority to act for the board on most matters when the board is not in session.

Executive Committee

Directors and officers are not *liable* for losses to the corporation caused by their breach of fiduciary duty.

False.

Class voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors.

False. *Cumulative voting* permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors. *Class voting* may give certain shareholder classes the right to elect a specified number of directors.

A "hostile takeover" occurs when there is an offer to the shareholders of the target corp. to buy their shares at a price above current market price.

False. A tender offer is an offer to shareholders to buy their shares at a price above current market price.

The business and affairs of the corporation are managed by the officers.

False. The board of directors manage the business and affairs of the corporation.

type of oppression in which the old corp. merges with a newly formed corp. under terms by which the majority s/h's of the old corp. receive stock in the new corp., but the minority s/h's of the old corp. receive cash instead of stock in the new corp.

Freeze out

Every corporation "has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation." How does utlra Vires relate to this?

Historically, a corporate act that was beyond its powers was a nullity (void, due to lack of capacity) since it was ultra vires ("beyond the powers"). Today, corporate purposes are broadly stated, limiting the relevance of the ultra vires doctrine.

Who are considered agents of the corporation?

Officers

Minority shareholders who are harmed by the majority shareholders may complain of

Opression (example was when the 3 directors voted for them selves as officers and added there mom as an officer instead of the shareholder who made of the other 1/3), and then made the salaries of the officers high and did not give out dividends so the minority shareholder here got no return on his investment)

What is the motivation for a raider to make a tender offer?

Raider hopes to acquire a majority of shares, thus giving it control of the target corp.

This is the more common method, and is where a shareholder may cast as many votes for *each nominee* as she owns shares, and those nominees with the most votes are elected as directors. Ex.: Sue owns 100 shares (each share is entitled to 1 vote); 10 directors are to be elected. Sue can cast up to 100 votes for *each* nominee (for a total of 1,000 votes). Straight voting Class voting Cumulative voting

Straight Voting

Officers are agents of the corporationt

T

Who supervises the actions of its committees, the chairman, and officers to ensure the board's policies are being carried out and the corporation is managed wisely?

The Board of Directors

Absent bad faith, fraud, or breach of fiduciary duty, the rule that the judgment of directors and officers is conclusive is known as:

The business judgment rule

Which of the following statements is false? -Each person is liable for his/her own torts -A corporation may be criminally liable if an officer or director authorized an employee to commit a criminal act. -A director or officer cannot be personally liable for a crime. -Corporations may protect or insure their officers and directors from the risk of liability.

The correct answer is (C). A director or officer may have criminal liability if he or she requests, conspires, authorizes, or aids and abets the commission of a crime by an employee.

Audit Committee:

This committee is responsible for appointment, compensation, and oversight of independent public accountants.

A corporate officer usually has no personal liability on contracts made for the corporation if the officer signs on behalf of the corporation rather than in his personal capacity.

True

If a director has a conflict of interest, a court may void the transaction with the corporation if it is unfair to the corporation

True. A director has a duty of loyalty to the corporation

Sarbanes-Oxley Act requires that

all publicly held firms have audit committees comprised of *independent* directors (members of board who are *not* full time employees.)

Class voting:

certain classes of shareholders have the right to elect a specified number of directors. Ex.: Shareholders who own Common Stock Class A may vote for 3 directors, and those who own Common Stock Class B may vote for 2 directors.

Most states apply total fairness test to freeze-outs

fair dealing (disclose all material information to directors and shareholders) and fair price (consider all factors to determine a fair value of the shares). Some states apply business purpose test: freeze-out must accomplish some legitimate business purpose.

When are directors and officer liable for an employees tort?

if they authorized the tort or participated in its commission. Basically if directly connected with empolyee

Because directors and officers have a risk of liability, corps. often _______ those individuals as long as they have...

indemnify; acted in good faith and in the best interests of the corporation.

The target-board usually opposes tender offers from raider. The business judgment rule protects the boards express oposiotn to the shareholders as long as the board makes an _________ ________

informed Decision.

Stock options are

issued by a corporation giving the holder the right to purchase a *specific number* of shares at a specified price (exercise price) for a *specified period* of time. (used as managerial incentives)

_________ > ___________ for a stock option to have value aka "in the money"

market price > exercise price

Cumulative Voting permits shareholders to

multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors. Ex.: Sue owns 100 shares; 10 directors to be elected. 100 x 10 = 1,000 votes, allocated any way she likes, i.e., 100 votes for each director, or 999 votes for Joe and 1 vote for Mark.

What are the requirements to backdate a stockoption?

must be properly *accounted for* and *disclosed*, and if so, is not illegal *unless* done for a fraudulent purpose. -Goes on record as an expense so net income is lowered

The 4 duties of loyalty owed by Directors and officers to the corporation are

not to self-deal (a conflict of interest); not to usurp a corporate opportunity; not to oppress minority shareholders; and not to trade on inside information.

In order to obtain at least 50%, a *publicly* held corporation must solicit _____ from shareholders. The _______ form designates a person to vote for the shareholder.

proxie, proxies

In order to have a valid shareholder vote, a _____ must be achieved. Usually, this requires that at least 50% or more of the outstanding *shares* must vote.

quorum

When are directors and officer liable for an employees crimes?

requests, conspires, authorizes, or aids and abets the commission of a crime by an employee. Basically if directly connected

Under the doctrine of ____________, a *corporation* is liable for an employee's tort if at the time of the tort, the employee was acting *within the scope of his employment.*

respondeat superior