Chapter 40 - Corporate Directors, Officers, and Shareholders

Faithfulness to one's obligations and duties

Loyalty

An agreement made before a shareholders' meeting by a group of shareholders who agree in writing to vote their shares together in a specified manner.

Shareholder voting agreement

Filed on behalf of the corporation by the shareholders if they perceive that the corporate directors are not acting in the best interest the corporation

Shareholder's derivative suit

What does the Sarbanes-Oxley Act require?

All publicly held corporations to have an audit committee

A distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation

Dividends

Who is entitled to vote at a shareholders' meeting?

Ordinarily, only persons whose names appear on the corporation's stockholder records as owners

Are corporate officers paid?

Paid salary usually

Depending on state law, dividends may be paid from one of these three sources:

1.) Retained earnings (allowed by all states; undistributed net profits) 2.) Net profits (allowed by a few states) 3.) Surplus (allowed by a number of states; the sum of a company's net profits over a period of time)

In the corporate context, what does the duty of loyalty require?

Directors and officers to subordinate their personal interests to the welfare of the corporation

What does the duty to exercise reasonable supervision include?

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

Are corporate directors paid?

Directors are often paid at least nominal sums and may receive more substantial compensation in large corporations because of the time, work, effort, and especially risk involved

If directors or officers fail to exercise due care and the corporation or its shareholders suffer harm as a result, what can happen to directors or officers?

Directors or officers can be held liable for negligence (unless the business judgement rule applies)

What can shareholders do if directors fail to declare dividends?

Shareholders can ask a court to compel the directors to meet and declare dividends; to succeed, the shareholders must show that the directors have acted so unreasonably in withholding the dividend that their conduct is an abuse of their discretion.

A suit brought by a shareholder to enforce a corporate cause of action against a third person

Shareholders' derivative suit

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation

Stock certificate

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period

Stock warrants

What does the Revised Model Business Corporate Act (RMBCA) state?

That unless the articles or bylaws provide otherwise, the board itself may set the directors' compensation

Rights held by shareholders that entitle them to purchase newly issued shares of a corporation's stock, equal in percentage to shares presently held, before the stock is offered to any outside buyers.

Preemptive Rights

What is the purpose of a quorum?

Prevents a small sub segment of the board from getting together and transacting business

In corporate law, a written agreement between a stockholder and another under which the stockholder authorizes the other to vote the stockholder's shares in a certain manner

Proxy

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

Quorum

How many corporate directors will an organization usually have?

Set forth in the corporation's articles or bylaws -Publicly traded corporations --> minimum of 3 usually -Standard board is usually around 9 (common to elect 3 directors each year for 3 year terms) -Keep an odd number to avoid ties

A voting method designed to allow minority shareholders to be represented on the board of directors.

Cumulative voting

What 3 things does the duty of care require corporate directors or officers to do?

1.) Act in good faith (honestly) 2.) Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances 3.) Do what she or he believes is in the best interest of the corporation

What are the 2 requirements for the test to determine breach of loyalty?

1.) Business opportunity must be reasonably related to the corporation's line of business - Officers and directors must not take opportunity for themselves, but must give it to the corporation 2.) Corporation must be financially able to undertake the opportunity - Officers and directors cannot take opportunity for themselves

What 3 things does the executive committee not have the power to do?

1.) Declare dividends 2.) Amend the bylaws 3.) Authorize the issuance of stock

What 3 things does the board or directors do?

1.) Selecting and removing corporate officers 2.) Determining the capital structure of the corporation 3.) Declaring dividends

In what 3 instance is shareholder approval required before action can be taken?

1.) To amend the articles of incorporation or bylaws 2.) To conduct a merger or dissolve the corporation 3.) To sell all or substantially all of the corporation's assets

What must be present for shareholders to act during a meeting?

A quorum

Notice of a special meeting must include what?

A statement of the purpose of the meeting (business transacted at the meeting is limited to that purpose)

Directors are sometimes inappropriately characterized as ________________.

Agents --> no individual director can act as an agent to bind the corporation and as a group, directors collectively control the corporation in a way that no agent is able to control a principal

The SEC requires that who distribute electronic proxy materials?

All publicly held companies *Can use the notice-and-access delivery option in which corporation posts proxy materials on a Web site and notifies shareholders that proxy materials are available online

If a shareholders' derivative suit is successful, who gets the damages?

Any damages recovered normally go into the corporation's treasury, not to the shareholders personally.

How often must shareholders' meetings occur?

At least annually in order to prevent court from piercing the corporate veil

How far in advance must a corporation notify its shareholder of the date, time, and place of an annual or special shareholders' meeting?

At least ten days, but not more than sixty days, before the meeting date

Responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records

Audit committee

Immunizes corporate management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.

Business Judgment Rule

What corporations restrict the transfer of shares?

Close corporations; usually stock transfer must be approved

What is the length of corporate directors terms?

Closely-held corporation --> directors usually serve one year terms Publicly held corporation --> directors usually serve longer

What 3 other persons' information can a corporate officer or director rely on to make informed decisions?

Competent officers or employees, professionals such as attorneys and accountants, and committees of the board of directors *Reliance must be in good faith to insulate a director from liability if the information later proves to be inaccurate or unreliable

______________ and ____________ act as agents of the corporation

Corporate and Managerial officers

___________ and ___________ are employees of the company, so their rights are defined by employment contracts.

Corporate officers and other high-level managers

What does the duty to make informed decisions entail?

Directors and officers are expected to be informed on corporate matters and to conduct a reasonable investigation of the situation before making a decision. -Includes attending meetings and presentations, asking for information from those who have it, read reports, and review other written materials

Handles interim management decisions between board meetings; limited to dealing with ordinary business matters

Executive committee

What are the two common types of committees?

Executive committee and the audit committee

What kind of decisions require a higher percentage (more than a majority) of all corporate shares entitled to vote?

Extraordinary corporate matters, such as a merger, a consolidation, or dissolution of the corporation

How can corporate directors be removed from office?

For cause - that is, for failing to perform a required duty - either as specified in the articles or bylaws or by shareholder action

What case helped establish a test to determine if corporate officers or directors have breached the duty of loyalty?

Guth v. Loft, Inc.

When does a shareholder have the right to inspect and copy corporate books and records?

If they have a proper purpose and the request to inspect is made in advance *The power of inspection is fraught with potential abuses, and the corporation is allowed to protect itself from them.

Where are the dates of regular meetings usually established?

In the articles or bylaws or by board resolution, and ordinarily no further notice is required

How many corporate officers are appointed?

It is up to the corporation to decide

What must a corporate officer or director do if their corporation enters into a contract or engages in a transaction in which the officer or director has a personal interest?

Must make a full disclosure of the nature of the conflicting interest and all facts pertinent to the transaction, and must abstain from voting on the proposed transaction

How many votes does each director present at the meeting get?

One vote

How many votes is each common shareholder entitled to?

One vote per share

Generally, in what 2 instances must shareholders return illegal dividends?

Only if they knew that the dividends were illegal when the payment was received or if the dividends were paid when the corporation was insolvent.

Breach of fiduciary duties by those who control a close corporation

Oppressive conduct

Who is eligible to submit proposals for inclusion in corporate proxy materials?

Shareholders who own stock worth at least $1,000

Who is the ultimate authority and decision maker in every corporation?

The board of directors

Unless a dissent is entered into the minutes of a board of directors meeting, what is the director presumed to have done?

The director is presumed to have assented *If the directors are later held liable for mismanagement as a result of a decision, dissenting directors are rarely held individually liable to the corporation

What are the two fiduciary duties of directors and officers?

The duty of care and the duty of loyalty

Can an owner of corporate stock transfer the stock?

The law generally recognizes the right of an owner to transfer property to another person unless there are valid restrictions on its transferability

How often do the board of directors meet?

They are required to meet annually but most large corporations meet more often; board members serve on committees that meet more frequently as well

What is the formula for cumulative voting that finds the the number of votes that each shareholder is entitled to?

The number of board members to be elected multiplied by the number of voting shares that the shareholder owns.

When a corporation is dissolved and its outstanding debts and the claims of its creditors have been satisfied, what happens to the remaining assets?

They are distributed to the shareholders in proportion to the percentage of shares owned by each shareholder.

How long do corporate officers usually serve?

They are not limited in their term because they serve at the will of the board of directors

Preemptive rights do not exist unless what?

They are provided for in the articles of incorporation

What is the purpose of preemptive rights?

They enable shareholders to maintain their proportionate ownership and voice in the corporation (most important in closely held corporations)

What must shareholders do before they bring a derivative suit?

They must submit a written demand to the corporation, asking the board of directors to take appropriate action. The directors have 90 days to act. If they refuse, the derivative suit can go forward.

How does a shareholder go about changing company policy?

They put their ideas up for a shareholder vote by submitting a shareholder proposal to the board of directors and ask the board to include the proposal in the proxy materials that are sent to all shareholders before meetings.

Shareholder's have the inherent power to do what?

To remove a director from office for cause (breach of duty or misconduct) by majority vote.

How many is a quorum normally?

Usually a majority of the board of directors constitutes a quorum; corporate bylaws specify number of quorum

An agreement under which legal title to shares of corporate stock is transferred to a trustee who is authorized by the shareholders to vote the shares on their behalf.

Voting trust

Shares of stock issued by a corporation for which the corporation receives, as payment, less than the fair market value of the shares.

Watered stock *Usually the shareholder who receives watered stock must pay the difference to the corporation (shareholder is personally liable)

When do majority shareholders have fiduciary duties to the corporation and to the minority shareholders?

When a single shareholder owns a sufficient number of shares to exercise de facto (actual) control over the corporation; majority shareholder owes a fiduciary duty to the minority shareholders

When does a quorum exist?

When shareholders holding more than 50% of the outstanding shares are present, but state laws often permit the articles of incorporation to set higher or lower quorum requirements.

When is the right of shareholders to bring a derivative action especially important?

When the wrong suffered by the corporation result from the actions of the corporate directors and officers.

Are shareholder voting agreements valid and enforceable?

Yes

Can an individual be both an officer and a director of the corporation?

Yes

In most states, are individuals allowed to hold more than one office?

Yes, individuals may hold more than one office, such as president and secretary

Are proxies revocable (able to be withdrawn)?

Yes, unless they are specifically designated as irrevocable and coupled with an interest

A director who is also an officer of the corporation

inside director

A director who does not hold a management position

outside director

Corporate business matters represented in the form of _______________, which shareholders vote to approve or disapprove.

resolutions

In which 3 rare instances can a shareholder be personally liable?

1.) Illegal dividends 2.) Watered stock 3.) Duties majority shareholders owe to minority shareholders

Cases dealing with the duty of loyalty typically involve one or more of the following 6:

1.) Competing with the corporation 2.) Usurping (taking personal advantage of) a corporate opportunity 3.) Pursing an interest that conflicts with that of the corporation 4.) Using information that is not available to the public to make a profit trading securities 5.) Authorizing a corporate transaction that is detrimental to minority shareholders 6.) Selling control over the corporation

What two other duties fall under the duty of care?

1.) Duty to make informed decisions 2.) Duty to exercise reasonable supervision

In what two instances are corporate directors and/or officers held liable?

1.) For their own negligence in certain circumstances 2.) For the crimes and torts committed by themselves or by corporate employees under their supervision

What are the three rights of the corporate directors?

1.) Right to participaction - Directors are entitled to participate in all board of directors' meeting and have a right to be notified of these meetings 2.) Right of inspection - Each director can access the corporation's books and records, facilities, and premises if there is a question about bookkeeping, profits, or accounting 3.) Right to indemnification -When a director becomes involved in litigation by virtue of her or his position or actions, the director may also have right to be reimbursed for the legal costs, fees, and damages incurred

The business judgment rule will only apply as long as the director or officer did these 3 things:

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