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The Business Judgment Rule
A corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgment and bad business decisions as long as there is no evidence of bad faith, fraud or clear breach of fiduciary duties.
Quorum Other Voting Techniques
A group of shareholders can agree in writing prior to the meeting in a shareholder voting agreement. Can also enter voting trust; an agreement under which a shareholder assigns the right to vote his/her shares to a trustee, usually for a specified period of time. Trustee is then responsible for voting the shares on behalf of all the shareholders in the trust.
Quorum Voting Lists
Alphabetical voting list of shareholders with name, address and given cutoff date (record date)
Shareholders Transfer of Shares
Corporate stock represents an ownership right in intangible personal property. Law generally recognizes right of an owner to transfer property to another person unless there are valid restrictions on the transferability.
Outside Director
Director who does not hold a management position.
Inside Director
Director who is also an officer of the corporation
Dissenting Directors
Directors are expected to attend board of director's meetings and their votes should be entered into the minutes. Unless a dissent is entered into the minutes it is presumed that the director has assented.
Disclosure of Potential Conflicts of Interest
Directors are precluded from entering into or supporting businesses that operate in direct competition with corporations on whose boards they serve. Their fiduciary duty requires them to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.
Duty of Care
Due Care; act in good faith, Duty to Make Informed Decisions, Duty to Exercise Reasonable Supervision
Shareholder Voting
Quorum, voting lists, cumulative voting, others.
Rights of Directors Include
Right to participation, inspection and indemnification
The Role of Shareholders
The acquisition of a share of stock makes a person an owner and shareholder in a corporation - equitable interest in the firm.
The Shareholder's Derivative Suit
When a corp is harmed by actions of a third party, directors can bring a lawsuit in name of corp against the party. If corporate directors fail to do this, shareholders can do so derivatively. Must: submit written demand to corporation and board has 90 days to act. Only if they refuse to do so does the derivative suit go forward. Shareholders are acting as guardians of corporate entity, not used for pursuing rights or benefits for themselves
Shareholder Proposals
When shareholders want to change a company policy they can put their ideas up for shareholder vote. The SEC has special provisions relating to proxies and shareholder proposals: all public companies must post their proxy materials on the internet and notify shareholders how to find that information.
Shareholders' Preemptive Rights
a shareholder receives a preference over all other purchases to subscribe to or purchase a prorated share of a new issue of stock. - shareholder can purchase a percentage of the new shares that is equal to his/her current percentage of ownership in the corporation.
Purpose of shareholders' preemptive rights
allows each shareholder to maintain his/her proportionate control, voting power, or financial interest in the corporation.
Removal of Directors
can be removed for cause
Board of Directors Nominating Committee
chooses candidates for board of directors that management wishes to submit to the shareholders in the next elect
When a single shareholder, or a few, owns a sufficient number of shares to exercise
de facto control over the corporation.
Directors Right of Inspection
director can access corporation's books and records, facilities and premises to make informed decisions
Duties and Liabilities of Directors and Officers
directors and officers are fiduciaries of the corporation. - legal and ethical duties. Include Duty of care, business judgment rule, duty of loyalty, disclosure of potential conflicts of interest and liability of directors and officers
Dividend
distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their shares. Can be paid in: Retained earnings, net profits, and surplus
Duty of Loyalty
faithfulness to one's obligations and duties. requires officers and directors to subordinate their personal interests to the welfare of the corporation.
Committees of the Board of Directors
focus on individual subjects and increase efficiency of the board
Board of Directors Executive Committee
handle interim management decisions between board meetings
Directors Right to participation
have right to be notified of and be able to attend board of director's meetings
Liability of Directors and Officers
held liable for torts, crimes, statutes, and not acting in business' best interest.
Election of Directors
historically three and serve as initial board until first annual shareholder's meeting where other directors are voted. Usually serves for one year.
Compensation of Directors
in the past, weren't paid but now nominal sums in addition compensation for time, work, effort, and risk involved.
Duties of Majority Shareholders
majority shareholders have a fiduciary duty to the corporation and to the minority shareholders.
Quorum Cumulative Voting
most states permit, sometimes require, shareholders to elect directors by cumulative voting. Designed to allow minority shareholders to be represented on the board of directors.
Stock Certificates
most stocks today are uncertified
Shareholder's Powers
must approve fundamental changes affecting corporation before the changes can be implemented. Power to vote/elect board of directors Inherent power to remove directors for cause by majority of vote
Shareholder's Meetings
must occur at least annually, notice of meetings, proxies, and shareholder proposals
Board of Director's Meetings
normally a majority of the board of directors must be present to constitute a quorum (minion). The affirmative vote of a majority of the directors present at a meeting binds the board of directors with regard to most decisions.
Board of Directors are in charge of
policymaking, carryout business, determines capital structure, selects and removes corporate officers and declares dividends are NOT agents
Directors Right to Indemnification
reimbursement for legal costs, fees and damages incurred during litigation by virtue of his/her position
Stock Warrants
rights to buy stock at a stated price by a specified date that are given by the company.
Board of Directors Audit Committee
selection, compensation and oversight of accountants (requirement post SOX)
Directors' failure to Declare a Dividend
shareholders can ask a court to compel the directors to meet and declare a dividend.
Shareholders Inspection Rights
shareholders in a corporation enjoy both common law and statutory inspection rights. Is limited to the inspection and copying and corporate records for a proper purpose and the request to inspect must be in advance. A shareholder who is denied inspection can seek a court to compel the inspection
Illegal dividends
shareholders must return these and board of directors can be held personally liable for the amount of payment
Vacancies on Board
shareholders or board can fill the position
When majority shareholder breaches his/her fiduciary duty to the minority shareholders, the minority can
sue for damages.
Board of directors is the ___________ authority in every corporation
ultimate
Quorum Requirements
usually exists when more than 50% of outstanding shares are present. For the most part, voting is straight majority vote. (not with extraordinary corporate maters - will ask for higher than majority)
Liability of Shareholders
usually not personally liable. Can be liable for fraud, undercapitalization, careless observance of corporate formalities, and...
Proxies
usually not practical for owners of only a few shares of stock of publically traded corps to attend shareholder's meetings. Therefore, law allows stockholders to appoint another person to act as their agent.
Shareholders Rights on dissolution
when a corp is dissolved and its outstanding debts and claims of its creditors are satisfied, the remaining assets are distributed to the shareholders proportionately.
Watered Stock
when a corporation issues shares for less than their FMV it is considered watered stock. The shareholder that receives watered stock must pay the difference to the corporation.
