BL2 - CH 40: Corporate Directors, Officers, and Shareholders

Give an example where the removal of director was done by appropriate action:

*Example:* Someone on the board is a CEO at another competing company and discloses secrets to that company.

Name some examples of the board of directors making executive-level personnel decisions:

*Examples*: - Engage in selection of officers and determine their appropriate total compensation. - Supervise managerial employees and make decisions regarding their termination.

Name some examples of the board of directors exercises their authority on major corporate policy decisions:

*Examples*: - Overseeing major contract and management-labor negotiations. - Initiate negotiations on the sale or lease of corporate assets outside the regular course of business. - Decide whether to pursue new product lines or business opportunities.

Name some examples of the board of directors making financial decisions:

*Examples:* - Make decisions regarding the issuance of authorized shares and bonds. - Decide when to declare dividends to be paid to shareholders.

Explain the difference between an inside director and an outside director:

*Inside director*: an officer in the corporation as well as a board director. *Outside director*: a board director that does not hold a management position in the company.

T/F Directors and officers must exercise their due care in performing their duties.

*TRUE*

T/F Directors are expected to exercise a reasonable amount of supervision when they delegate work to corporate officers and employees.

*TRUE*

T/F The CEO has no direct responsibility to the shareholders.

*TRUE*

T/F The board of directors is the ultimate authority in every corporation.

*TRUE* The board selects and removes corporate officers, determines the capital structure of the corporation, and declares dividends.

The following must receive shareholder approval before be enacted upon:

- Amendment to the articles of incorporation or bylaws. - Conducting a merger or dissolving the corporation. - To sell all or substantially all of the corporation's assets.

Cases where Duty of Loyalty come into play:

- Competing with the corporation. - Taking personal advantage of a corporate opportunity. - Pursuing an interest that conflicts with that of the corporation. - Using information that is not available to the public to make a profit trading security (insider trading). - Authorizing a corporate transaction that is detrimental to minority stakeholders. - Selling control over the corporation.

What are some of the rights of directors?

- Right to Participate - Right of Inspection - Right to Indemnification

What are the three main responsibilities of the board of directors?

1) Authorize major corporate policy decisions. 2) Make executive-level personnel decisions. 3) Make financial decisions.

From the previous question, how do directors and officers carry this out?

1. Act in good faith - honesty. 2. Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances. - Example: on who they hire. 3. Do what she or he believes is in the best interest of the corporation (rather than their own self-interest).

The business judgement rule applies as long as the board of director or officer:

1. Took reasonable steps to become informed about the matter. 2. Had a rational basis for his or her decision. 3. Did not have a conflict between her or his personal interest and the interest of the corporation.

*Definition*: The minimum number of members of a body of officials or other group that must be present for business to validly transacted.

A Quorum *Note*: The usual minimum is three board directors.

Loyalty can be defined as faithfulness to one's obligations and duties. In the corporate context, what is a duty of loyalty?

A requirement for directors and officers to put the corporation's well-being above their own. *Note*: Acts for longevity of a company, even if that means short-term loss to stockholders.

How often must a shareholders meeting occur?

At least once annually

How are the board of directors meetings conducted?

By holding formal meetings with recorded minutes. - Dates of meeting should be set in a reasonable time in advance and should be in the bylaws or board resolution. - Most states allow directors to participate in board meeting from remote locations (such as Skype or by telephone).

Define what a shareholder's derivative suit is:

If shareholders perceive that the director is not acting in the best interest of the corporation, they may sue the director on behalf of the corporation. *Note*: Most of the time, shareholder derivate suits are unsuccessful because suits can be made for any reason.

How can a director on the board be removed?

Must be done through outside elections and it must be done "by cause". *Note*: "By cause" means that the director has failed to perform a required duty, upon the articles in the bylaws or by shareholder action.

What is the role of shareholders?

No legal title to corporate property (such as buildings or equipment) - Although, they do have equitable ownership/interest in the firm. No responsibility for the daily management of the corporation. - But, they are ultimately responsible for choosing the board of directors.

What is a dissenting director?

One who votes against something that later becomes liable. - Due to their lack of support on the policy that was carried out, they cannot be held liable.

What does the business judgement rule provide to directors and officers?

Protection as long as the action is not illegal and their due diligence has been performed. - As long as the action is not illegal, the business judgement rule applies. *Note*: Most courts will apply this rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.

Each director can access the corporation's books and records, facilities, and premises. Which right does this describe?

Right of *Inspection* *Note*: Looking at the company's books to make an informed decision is exercising their due diligence as directors.

When a director becomes involved in litigation by virtue of her or his position, the director must be reimbursed for work related activities such as legal costs, fees, and damages incurred. Which right does this describe?

Right to *Indemnification*

Directors are entitled to participate in all board of directors' meetings and have a right to be notified of these meetings. Which right does this describe?

Right to *Participate* - meetings must be announced in an appropriate time before.

T/F When corporate directors find themselves in a conflict of interest, their fiduciary duty requires them to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.

TRUE! *Note*: Basically, when a full disclosure is presented on the nature and facts, this gets rid of the conflict of interest.

Who elects the board of directors?

The shareholders

What must be done before a director can make a decision?

Their decision must be informed! - investigate, study, and discuss matters - evaluate alternatives before making a decision *Note*: Directors can never decide in the spur of the moment without adequate research.

Explain the business judgement rule:

This means that a corporate director or officer will not be held liable to the corporation or to its shareholders for honest mistakes of judgements and bad business decisions. *Note*: Directors and officers should use their best judgement when making business decisions, but they are not insurers of business success.

What is the duty of officers and directors of a corporation?

To act in the best interests of the corporation and its shareholder-owners as a whole.