LGST4100 - Chapter 40

Inside Director

a director who is also an officer of the corporations

Shareholders' Derivative Suit

a suit brought by a shareholder to enforce a corporate cause of action against a third person when the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party shareholders can do so "derivatively" in what is known as a shareholder's derivative suit

Role of Shareholders

acquisition of a share of stock makes a person an owner and a shareholder in a corporation equitable (ownership) interest in the firm no responsibility for the daily management of the corporation, although they are ultimately responsible for choosing the board of directors, which does have such control controlling shareholders owe a fiduciary duty to minority shareholders

Shareholder Powers

approve fundamental changes affecting the corporation before the changes can be implemented inherent power, however, to remove a director from office for cause (breach of duty or misconduct) by a majority vote

Roles of Directors

board of directors is the ultimate authority in every corporation responsibility for all policymaking decisions necessary to the management of all corporate affairs selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends each director has one vote, and customarily the majority rules

Committees of the Board

boards of large, publicly held corporations typically create committees of directors and delegate certain tasks to these committees executive committee - handles interim management decisions between board meetings audit committee - responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records

Duties and Liabilities of Directors and Officers

both groups are involved in decision making and are in positions of control considered to be fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence owe ethical—and legal— duties to the corporation and to the shareholders as a group duty of care and the duty of loyalty, make informed decisions, and reasonable supervision

Board of Director Meetings

conducts business by holding formal meetings with recorded minutes majority of the board of directors constitutes a quorum each director present at the meeting has one vote

Compensation of Directors

corporate directors were rarely compensated often paid at least nominal sums may receive more substantial compensation because of the time, work, effort, and especially risk involved receive indirect benefits, such as business contacts and prestige, and other rewards, such as stock options chief corporate officers receive compensation in their managerial positions

Stock Certificate

corporations commonly issued stock certificates that evidenced ownership of a specified number of shares in the corporation stock is intangible personal property, however, and the ownership right exists independently of the certificate itself

Removal of Directors

director can be removed for cause either as specified in the articles or bylaws or by shareholder action may also have the power to remove a director for cause, subject to shareholder review director cannot be removed without cause unless the shareholders reserved the right to do so at the time of election

Dividends

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

Business Judgement Rule

expected to exercise due care and to use their best judgment in guiding corporate management, but they are not insurers of business success will not be liable to the corporation or to its shareholders for honest mistakes of judgment and bad business decisions

Liability of Directors and Officers

exposed to liability on many fronts held liable for negligence in certain circumstances, as previously discussed crimes and torts committed by themselves or by corporate employees under their supervision shareholder's derivative suit

Preemptive Rights

grant preemptive rights to shareholders receives a preference over all other purchasers to subscribe to or purchase a prorated share of a new issue of stock purchase a percentage of the new shares being issued that is equal to the percentage of shares she or he already holds in the company allows each shareholder to maintain her or his proportionate control, voting power, and financial interest in the corporation without preemptive rights, it would be possible for a shareholder to lose his or her proportionate control over the firm

Corporate Officers and Executives

hired by the board of directors most corporations have a president, one or more vice presidents, a secretary, and a treasurer can be both an officer and a director of the corporation rights are defined by employment contracts

Vacancies on the Board

if a director dies or resigns or when a new position is created through amendment of the articles or bylaws either the shareholders or the board itself can fill the vacant position, depending on state law or on the provisions of the bylaws

Stock Warrant

rights given by a company to buy stock at a stated price by a specified date when preemptive rights exist and a corporation is issuing additional shares, it gives its shareholders stock warrants publicly traded on securities exchanges

Rights of Directors

rights of participation, inspection, and indemnification

Roles of Officers

run "day-to-day" business of firm agents of corporation

Election of Directors

subject to statutory limitations, the number of directors is set forth in the corporation's articles or bylaws historically, the minimum number of directors has been three incorporators may appoint the first board of directors in the articles of incorporation common practice is to elect one-third of the board members each year for a three-year term

Dissenting Directors

votes at board of directors' meetings should be entered into the minutes unless a dissent is entered in the minutes, 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 director who is absent from a given meeting sometimes registers a dissent with the secretary of the board regarding actions taken at the meeting

Watered Stock

when a corporation issues shares for less than their fair market value shareholder who receives watered stock must pay the difference to the corporation (the shareholder is personally liable)

Outside Director

whereas a director who does not hold a management position