Corporate Directors, Officers, and Shareholders

Directors and officers are expected to

1. Act in good faith. 2. Exercise Care 3. Act in best interest of corporation. 4. Stay informed on corporate matters.

Directors are Expected to

1. Make informed/reasonable decisions. 2. Exercise reasonable supervisions over officer and employees. 3. Attend and participate in board meetings and clearly indicate yes or no for decisions.

Shareholder Litigation

1. Shareholder Derivative Suit 2. Watered Stock Liability 3. Majority Shareholders' Liability

Block Voting

A group of shareholders may enter into a voting agreement/voting trust and vote their shares together. (Ex. If Amy pools her 1,000 shares with David and Laura, each of whom own 2,500 shares, they will be entitled to cast up to 18,000 total votes- up to 6,000 votes for any one candidate in straight voting; up to 18,000 votes for a single candidate in cumulative voting.

Majority Shareholders' Liability

A shareholder who holds more than 50% of a corporation's outstanding stock may owe fiduciary duties to the corporation and to minority shareholders (Particularly when the majority shareholder sells owned shares, resulting in a change in corporate control).

Directors and Officers May NOT

A. Compete with corporation or usurp (take advantage of) a corporate opportunity, B. Have a conflicting interest, C. Engage in insider trading, D. Authorize corporate transactions detrimental to minority shareholders without their approval, E. Use corporate funds or confidential information for personal gain, F. Engage in self-dealing (vote based on personal benefit), OR G. Sell control of the corporation without shareholders' approval

Directors' Rights

A. Directors are entitled to: 1. Participate in board meetings and receive reasonable notice of board meetings, 2. Vote on corporate matters; 3. Inspect corporate books and records; 4. Indemnification from corporation for legal fees and expenses incurred defending claims and if judgment entered against them.

Shareholder Approval

A. Shareholders must approve, before the board can implement, fundamental corporate changes, such as 1. Amending articles of incorporation or by-laws, 2. Merging or dissolving the corporation, 3. Increasing number of shares corporation is authorized to issue, 4. Selling or/substantially all corporate assets. B. Shareholders' duties include voting on fundamental changes and electing directors. For votes recorded at a shareholders' meeting to be effective, must be a quorum present

Stock Warrant

Certificate granting owner option to buy stated number of shares at a stated price within a set period.

Inspection Rights

Common law and statutory law provide that shareholders are entitled to inspect corporate books and records 1. For a proper purpose, 2. In person or through an agent, attorney, accountant or authorized assistant, 3. With an advance request

Officer Duties

Compensation Oversight Agency Personal Liability

Shareholders

Corporate owners in proportion to percentage of owned corporate stock.

Business Judgement Rule

Directors and officers are immune from personal liability if their actions are reasonable when made, but prove to be detrimental to the corporation. Reasonableness means that the directors and officers engaged in due diligence, had a rational basis for their decision, did not have a conflict of interest AND the actions were within the corporation's power to act and the directors' and officers' authority.

Duty of Care

Directors and officers have a duty to exercise reasonable care in conducting corporate affairs. Failure to exercise requisite care may result in personal liability for any resulting harm the corporation suffers.

Duty of Loyalty

Directors and officers must place corporation's interest ahead of personal interests. Directors and officers must fully disclose POTENTIAL conflicts of interest regarding a particular transaction.

Directors' Responsibilities

Directors are responsible for: 1. Declaring and paying dividends 2. Authorizing major decisions 3. Hiring, promoting, supervisins, firing 4. Deciding whether to issue stocks or bonds.

Dividends

Directors decide whether a company will pay dividends. Dividends are a distribution of retained earnings, net profits or surplus, on a per share basis (Ex. Quarterly dividend of $.32/share). If directors abuse their discretion by not declaring a dividend, shareholders can petition a court to compel directors to pay dividends.

Straight Voting

Each shareholder may vote the number of his/her shares for each open seat on the board (Ex. Amy owns 1,000 shares Davis Company. At the annual meeting, shareholders are asked to fill three board seats. Amy may cast up to 3,000 votes, but no more than 1,000 votes/candidate.)

Cumulative Voting

Each shareholder may vote the number of owned shared x number of open seats on the board. No restrictions on distribution of votes. (Ex. Amy may cast up to 3,000 votes for any one candidate, but no more than 3,000 votes)

Board of Directors

Elected by shareholders who vote in proportion to #shares held. A. Directors serve for a term unless removed early for cause or voluntarily resign, B. Directors are typically neither the corporation's agents nor personally liable for corporate obligations, C. Directors are compensated based on articles/by-laws, do not share profits/losses, D. Directors may be "inside directors" (employed by company) or "outside directors" (not employed by company), E. Directors exercise their oversight collectively generally by majority vote, some actions require unanimous consent, F. Board committees focus on individual subjects (Ex. Audit committee, compensation committee, nominating committee, litigation committee, etc.),

Watered Stock Liability

Generally in exchange for services/property, a shareholder is issued shares for less than the shares' assessed value and is personally liable to the corporation (or corporation's creditors) for the difference between the price paid and the value of the stock).

Officers

Hired by board of directors to supervise daily operations.

Stock Certificate

Issued by corporation to share number of owned shares and rights resulting from ownership.

Shareholder Derivative Suit

Lawsuit filed by at least one shareholder 1. Suing the corporation's directors or others, 2. On the corporation's behalf, 3. For injury to the corporation.

Officer Agency

Officers are authorized agents of the corporation, although authority of a particular officer may be limited to certain types of transactions.

Officer Personal Liability

Officers are generally NOT personally liable for corporate obligations unless the corporate veil is pierced.

Officer Compensation

Officers recieve compensation, but do not share profits unless own stock

Preemptive Right of Stock

Right of an existing shareholder to purchase newly issued shares in proportion to percentage of corporate ownership prior to issuance of new shares, before newly issued shares offered to general public. By exercising preemptive rights, existing stockholder may avoid having owned interest diluted by newly issued shares.

Shareholders: Agency

Shareholders are NOT authorized corporate agents.

Shareholers: Limited Liability

Shareholders are not personally liable unless there is a piercing of the corporate veil.

Corporate Dissolution

Shareholders may petition a court to dissolve the corporation and appoint a receiver if A. Board of directors is deadlocked, or corporate affairs are otherwise mismanaged such that irreparable injury to the corporation is occurring or threatened. B. Directors or others controlling the corporation are acting illegally, fraudulently, or oppressively; C. Corporate assets are being misapplied or wasted, or D. The shareholders, after a specified number of ballots over a specified period of time, are unable to agree to a slate of directors.

Shareholders: Compensation

Shareholders receive a share of corporate profits and net assets upon corporate dissolution. May receive dividends.

Transfer of Shares

Stock certificates are negotiable and freely transferable by indorsement. Sometimes a right of first refusal may require that shares be offered to the holder of the right (corporation or shareholder) before they may be sold to the public.

Shareholder Voting Types

Straight Voting Cumulative Voting Block Voting

Officer Oversight

Subject to oversight by the board fo directors (indirect oversight by sharholders)

Shareholders: Separating Ownership and Management

Unless a shareholder is also a director or officer, shareholder is not responsible for corporation's daily affairs.

Quorum

enough shareholders and others holding proxies are present to represent at least 50% of corporation's voting stock