Business Law Chapter 20 - Corporations

Election & Removal of Directors - Shareholder activists

- A new development in corporate democracy Advise institutional investors on how to vote their shares

Advantages in Delaware

1. Laws favor management - if the shareholders want to take a vote in writing instead of holding a meeting, many other states require the vote to be unanimous. The Delaware legislature tries to keep up to date by changing its code to reflect new developments in corporate law. 2. An efficient court system: Delaware has a special court called Chancery Court that hears nothing but business cases and has judges who are experts in corporate law. 3. An established body of precedent: Because so many businesses incorporate in the state, its courts hear a vast number of corporate cases, creating a large body of precedent. Thus lawyers feel they can more easily predict the outcome of a case in Delaware than in a state where few corporate disputes are tried

business judgement accomplishes 3 goals

1. it permits directors to do their job 2. it keeps judges out of corporate management 3. it encourages directors to serve

Three step process for termination

1. vote: directors recommend shareholders and majority agree 2. filing: corporation files articles of dissolution with secretary of state 3. winding up: officers pay its debts and distribute remaining property to shareholders when winding down is complete the corporation ceases to exist

majority voting systems

79% of the S&P 500 refuse to seat a director if fewer than half the votes are ticked off smaller companies from the Russell 300 index require 3/4 permit

Fundamental Corporate Changes

A corporation must seek shareholder approval before undergoing any of the following fundamental changes: Mergers Sales of assets Dissolution Amendments to the Charter

Pierce the corporate veil

A court holds shareholders personally liable for debt of a corporations under four circumstances: Failure to observe formalities Commingling of assets Inadequate capitalization Fraud

Annual report

A document containing financial data Securities and Exchange Commission (SEC) requires that public companies provide it to their shareholders each year

Bylaws

A document that specifies the organizational rules of a corporation or other organization

Novation

A new contract with different parties

Election & Removal of Directors

A nominating committee from the board of directors produces a slate of directors, with one name per opening Leads to a complex and expensive process Disruptive to the company

Agree to be bound by the terms of a contract.

Adopt

Adopt

Agree to be bound by the terms of a contract

A document that the SEC requires public companies to provide to their shareholders each year. It contains financial data.

Annual Report

Right to Protection from Other Shareholders

Anyone who owns enough stock to control a corporation has a fiduciary duty to the minority shareholders Minority shareholders - Those with less than a controlling interest

Some call the charter

Articles of Incorporation Articles of Organization Some say certificate instead of articles They all mean the same thing; shareholders and stockholders are also both the same

Stock that has been authorized and sold; another word for it is outstanding.

Authorized and issued

Stock that has been authorized, but not yet sold.

Authorized and unissued

Proxy Statement

Before its annual meeting, a public company provides a document to shareholders that contains information about the corporation.

A document that specifies the organizational rules of a corporation or other organization, such as the date of the annual meeting and the required number of directors

Bi Laws

Long-term secured debt.

Bonds

Classes and series

Class: Categories into which stock can be divided Series: Classes that are further divided into subcategories

Address and registered agent

Company must have an official address in the state in which it is incorporated. Registered agents are hired to serve as their official presence in the state

Rights of Shareholders - right to vote

Corporation must have at least one class of stock with voting rights Shareholder meetings - Norm for publicly traded companies

Issuing debt

Corporations need to borrow funds for start-up Bonds: Long-term secured debt Debentures: Long-term unsecured debt Notes: A short-term debt, either secured or unsecured, payable within five years

Many states use the Model Act as a guide but

Delaware does not. Delaware has a disproportionate influence on corporate law. More than half of all public companies have incorporate there including 60% of Fortune 500 companies.

Enforcing Shareholder Rights

Derivative lawsuits Brought by shareholders to remedy a wrong that the board of directors has committed against the corporation Direct lawsuits Shareholders are permitted to sue the corporation directly only if their own rights have been harmed

After Incorporation

Directors and officers - A corporation is required to have at least one director, unless: All shareholders sign an agreement that eliminates the board The corporation has 50 or fewer shareholders

Flow chart of dividends

Dividend is declared Dividends due in current year to holders of cumulative and non cumulative preferred stock are paid first Dividends due in prior years to holders of cumulative preferred stock are paid second Remainder is paid to common shareholders

Compensation for Officers and Directors - Dodd-Frank

Dodd-Frank: Requires that compensation committees for all corporations listed on a stock exchange must be composed solely of independent directors Strengthens the claw-back provisions of SOX and extends it to three years Requires 'say on pay' Requires companies to take a nonbonding shareholder vote

A corporation is a domestic corporation in the state in which it was formed.

Domestic corporation

Incorporation Process - Where to incorporate - Foreign, Domestic

Domestic corporation: a company in the state where it incorporates Foreign corporation: A corporation formed in another state

The requirement that a manager act with care and in the best interests of the corporation.

Duty of care

The obligation of a manager to act without a conflict of interest.

Duty of loyalty

Compensation for Officers and Directors - Emerging growth companies

Emerging growth companies Have annual gross revenues of less than $1 billion Stock has been publicly traded for less than five years Have issued less than $700 million publicly in traded stock Have issued less than $1 billion in convertible debt in a three-year period

A corporation formed in another state.

Foreign corporation

Corporations, which should be the carefully restrained creatures of the law and servants of the people, are fast becoming the people's masters

Grover Cleveland, United States President

Right to Dissent

If a private corporation decides to undertake a fundamental change: The Model Act and many state laws require the company to buy back the stock of any shareholders who object Referred to as dissenters' right

The Business Judgment Rule

If managers comply with the business judgment rule, a court will not: Hold them personally liable for any harm their decisions cause the company Rescind their decisions Accomplishes three goals: Permits directors to do their job Keeps judges out of corporate management Encourages directors to serve

Election & Removal of Directors - Independent Directors

Independent directors - Sarbanes-Oxley Act (SOX) stipulates that all members of a board's audit committee must be independent At least one of these members must be a financial expert

Debentures

Long-term unsecured debt.

Election & Removal of Directors - Majority

Majority voting systems - 79 percent of S&P 500 refuse to seat a director if: Fewer than half of the shares that vote tick off her name on the ballot

Duty of Loyalty - Corporate Opportunity

Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent

Preferred and common stock

Model act does not use these terms but many states do Preferred: owners of preferred stock have prrference on dividends and also typically on liquidation. If a class of preferred stock is entitled to dividends then it must receive its dividends before common stockholders are paid theirs. Cumulative preferred stock: if holders miss dividents for one year common shareholders cannot received a divident until the cumulative preferred shareholders have been paid all they are owed no matter how long it takes. Non-cumulative preferred stock - lose an annual dividend for the good of teh company if the company cannot afford it in the year it is due. When the company dissolves, preferred stockholders have the right to receive their share of assets before common stockholders.

Name

Model act imposes 2 requirements. 1 Must use the words: corporation, incorporated, company or limited 2. Under Model Act and Delaware law new corporate names must be different from all others including a corporation, LLC or limited partnership that already exists in that state. Zuckerberg chose The Facebook because that was what Harvard students called their freshman director

Issuing debt - bonds, debentures and notes

Most startups begin with equity and debt. Equity is stock. Debt is not. bonds - long term debt secured by company assets, if unable to pay debt creditors have the right to assets such as accounts receivable or inventory debentures - long term unsecured debt - if company cannot meet obligations creditors have right to assets, accounts receivable and inventory notes: short-term debt payable within 5 years, may be secured or unsecured

The charter - Defines the corporation, including:

Name of corporation Address and registered agent Incorporator - Person who signs the charter and delivers it to the Secretary of State Purpose Stock

A new contract with different parties.

Novation

Charter

Once a company decides where to incorporate the next step is to prepare anf file the charter. Download the form and mail or fax to the Secretary of State. Some jurisdictions require it be filed in a county office. Documents need to be completed with care. Charter defines the corporation and includes everything from the name to the number of shares it will issue.

The person whom a shareholder appoints to vote for her at a meeting of the corporation. Also, the document a shareholder signs appointing this substitute voter.

PROXY

The charter must provide three items of information about the company's stock

Par value Number of shares

Participating preferred stock

Participating preferred stock is preferred stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation

A court holds shareholders personally liable for the debts of the corporation.

Pierce the corporate veil

To be elected, a candidate only needs to receive more votes than her opponent, not a majority of the votes cast.

Plurality voting

The owners of preferred stock have preference on dividends and also, typically, in liquidation.

Preferred stock

Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the company misses a dividend payment. Related: Cumulative preferred stock

Promoter's Liability Before the Corporation is Formed

Promoter: Someone who organizes a corporation Personally liable on any contracts he signs before the corporation is formed. After formation, the corporation can adopt the contract in which case, both it and the promoter are liable. The promoter can get off the hook personally only if the other party agrees to a novation - that is, a new contract with the corporation alone.

Election & Removal of Directors - Proxy access

Proxy access - Required companies to include in their proxy material the names of board nominees selected by large shareholders

The percentage of stock that must be represented for a meeting to count.

Quorum

Duty of Care

Requires officers and directors to: Act in the best interests of the corporation Use the same care that an ordinarily prudent person would in the management of her own needs Rational business purpose Legality Informed decisions

Compensation for Officers and Directors - SOX

SOX Under SOX: A company Cannot make personal loans to its directors or officers Must follow through the so-called claw-back provision

Class A Common

Series A1, Series A2

Class B common

Series B1, Series B2, Series Be

Rights of Shareholders

Shareholders don't have the right or the obligation to manage the day-to-day business of the enterprise Right to information Under the Model Act, shareholders with proper purpose have the right to inspect and copy corporation's minute book, accounting records, and shareholder lists

Election flow

Shareholders elect directors who elect officers

Compensation for Officers and Directors - Shareholders

Shareholders have right to nonbinding vote in the event of merger or sale of company assets Companies must disclose the relationship between financial performance and executive compensation Must disclose the CEO's compensation and the median compensation of all other company employees

The Role of Corporate Management - Stakeholders

Stakeholders: Anyone who is affected by the activities of a corporation, such as: Shareholders Employees Customers Creditors Suppliers Neighbors Managers have a fiduciary duty to act in the best interests of the shareholder

Compensation for Officers and Directors - Problems

Stock options Termination, retirement plans, and death benefits Lavish perks Directors, not shareholders, set executive compensation Shareholders bear the risk Benchmarking games

Treasury stock

Stock that a company has sold, but later bought back

Authorized and issued

Stock that has been authorized and sold

Authorized and unissued stock

Stock that has been authorized, but not yet sold

Termination

Terminating a corporation is a three-step process: Vote Filing Winding up

To encourage similarity among state corporation statues

The American Bar Association drafted the Model Business Corporation Act (the Model Act) as a guide

Compensation for Officers and Directors - Problems - CEO

The CEO gets all the credit The busier the directors, the higher the executive pay Most executives are above average Compensation consultants have conflicts of interest

The Jumpstart Our Business Startups Act or JOBS Act

The Jumpstart Our Business Startups Act or JOBS Act, is a law intended to encourage funding of United States small businesses by easing various securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012

Election & Removal of Directors - NYSE and NASDAQ

The NYSE and NASDAQ require that, for companies listed with them: Independent directors must comprise a majority of the board They must meet regularly on their own, without inside directors Only independent directors can serve an audit, compensation, or nominating committees Audit committees must have at least three directors who are financially literate

Duty of Loyalty

The obligation of a manager to act without conflict of interest Prohibits managers from making a decision that benefits them at the expense of the corporation

Minute book

The official record of a corporation

Preferred stock

The owners have preference on dividends and in liquidation Cumulative preferred stock Non-cumulative preferred stock Participating preferred stock

Quorum

The percentage of voters who must be present for a meeting to count

Proxies

The person whom a shareholder appoints to vote for her at a meeting of the corporation The document a shareholder signs appointing this substitute voter

Compensation for Officers and Directors - Solution

The solution: Proxy rules - Amended by the SEC to require more information about executive compensation Must include a summary table setting out the full amount of compensation for the five highest-earning executives

Companies generally incorporate either in

The state where they most of their business Delaware - Offers several advantages Laws that favor management An efficient court system

Written consent

Through which shareholders elect directors

Plurality voting

To be elected, a candidate only needs to receive more votes than her opponent, not a majority of the votes cast A traditional corporate voting method

Stock that a company has sold, but later bought back.

Treasury Stock

Shareholder proposals

Under SEC rules, any shareholder who has continuously owned for one year at least 1 percent of the company or $2,000 of stock: Can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting

Purpose

Usually very broad. Facebook: the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware

Self-dealing - A manager makes a decision benefiting either himself or another company with which he has a relationship

Valid when: Disinterested members of the board of directors approve the transaction Disinterested shareholders approve it The transaction was entirely fair to the corporation

Death of a Corporation

Voluntary - Shareholders elect to terminate the corporation Forced - By court order

To avoid double set of fees

a business that will be operating primarily in one state would probably select that state for incorporation rather than Delaware. but if a company is doing businesses it might consider choosing Delaware

Domestic vs foreign

a company is called a domestic corporation in the state it incorporates in, it is called a foreign corporation everywhere else. Companies generally incorporate in the state they do business in or in Delaware. Filing fees and franchise taxes in their state of incorporation plus in any state in which they do business in.

If managers comply with business judgement rule

a court will not hold them personally liable for any harm their decision causes the company nor will the court rescind their decisions.

Piercing the corporate veil is to protect owners and shareholders from personal liability for the debts of the corporation but sometimes

a court will pierce the corporate veil - they will hold shareholders personally liable for the debs, usually in 4 circumstances. 1. failure to observe formalities - ex. failing to keep minute book, failing to act like a corporation,make required state filings, officers must sign all corporate documents with corporate titles, not as individuals, ex: Classic American Novels, Inc. By: name 2. Commingling of assets: if a shareholder uses corporate assets to pay personal debt. Commingle of assets is generally ruled in favor of the creditors 3. Inadequate Capitalization: if founders don't raise enough capital through debt or equity to give the business a fighting chance of paying its debts courts can require shareholders to pay corporate obligations. If not enough capital, it has to buy insurance to protect against tort liability. Oriental fireworks co. had hundreds of thousands in annual sales but only 13,000 in assets. The company didn't get insurance, keep a minute book or defend lawsuits. There was no need, the company had no money. The court pierced the corporate veil and found the owner personally liable. 4. Fraud: in the event of fraud, victims can make a claim against the personal assets of the shareholders who profited from the fraud.

self dealing means that

a manager makes a decision benefiting either himself or another company he has a relationship with. While working ab the blue moon zeke signs a contract on behalf of the restaurant to purchase bread from rising sun bakery - he is a part owner of rising sun. Zeke has engaged in self dealing.

Cumulative preferred stock

a preferred stock whose annual fixed-rate dividend, if it cannot be paid in any year, accrues until it can and is paid before common dividends.

_____ are long-term unsecured debt. a. Debentures b. Notes c. Treasury bills d. Bonds

a. Debentures

James and Harry together plan to start a sportswear manufacturing company. They decide to launch the company in Jersey City. They prepare and file a charter. Their lawyer, Steve, signs the charter and delivers it to the Secretary of State. Which of the following is true with regard to this scenario? a. Steve serves as an incorporator in the given scenario. b. Steve must buy stock from the sportswear manufacturing company. c. Steve must necessarily have a future relationship with the sportswear manufacturing company. d. Steve serves as a promoter in the given scenario.

a. Steve serves as an incorporator in the given scenario

Which of the following is true when a corporation adopts a contract? a. The corporation and the promoter are personally liable. b. After formation, the promoter passes on his personal liability to the corporation even for an unratified contract. c. The corporation is converted into a partnership firm. d. The corporation loses the rights to novation of the contract.

a. The corporation and the promoter are personally liable.

Which of the following is the first step in the termination process of a corporation? a. The directors recommending to the shareholders that the corporation be dissolved. b. The shareholders selling the shares they hold by passing on the stock certificates to the buyer. c. The corporation filing "Articles of Dissolution" with the Secretary of State. d. The officers of the corporation paying its debts and distributing the remaining property to shareholders.

a. The directors recommending to the shareholders that the corporation be dissolved.

Which of the following is the final step in the termination process of a corporation? a. The officers of the corporation paying its debts and distributing the remaining property to shareholders. b. The court piercing the corporate veil and holding the shareholders personally liable for the debts of the corporation. c. The directors recommending to the shareholders that the corporation be dissolved. d. The corporation filing "Articles of Dissolution" with the Secretary of State.

a. The officers of the corporation paying its debts and distributing the remaining property to shareholders.

Who raises the capital, hires the lawyers, and calls the shots in a corporation? a. The promoter b. The team lead c. The specialist d. The director

a. The promoter

The duty of _____ requires managers to act in the best interests of the corporation and to use the same concern that an ordinarily prudent person would take in a similar situation. a. care b. honor c. judgment d. loyalty

a. care

Someone who organizes a corporation is called a _____. a. promoter b. director c. team lead d. specialist

a. promoter

The person whom a shareholder appoints to vote for her at a meeting of the corporation is called a(n) _____. a. proxy b. principal c. grantee d. insider

a. proxy

Under the Jump-start Our Business Startups Act, emerging growth companies are those: a. which have annual gross revenues of less than $1 billion (indexed for inflation). b. whose stock has been publicly traded for less than three years. c. which have issued less than $1 billion in convertible debt in a five-year period. d. which have issued more than $700 million in publicly traded stock.

a. which have annual gross revenues of less than $1 billion (indexed for inflation).

After it is formed, a corporation can

adopt the contract

Common stock payouts

are last in line for any corporate payouts including dividends and liquidation payments

Disinterested members of the board of directors approve

are those who do not benefit from the transaction

only independent directors can serve on

audit, compensation or nominating committees

_____ means that a manager makes a decision benefiting either himself or another company with which he has a relationship. a. Self-regulation b. Self-dealing c. Self-concept d. Self-policing

b. Self-dealing

What does the phrase "piercing the corporate veil" mean? a. The court will elect the first set of directors for the corporation. b. The court will hold shareholders personally liable for the debts of the corporation. c. The court will assist the corporation in framing bylaws. d. The corporation will issue bonds and debentures to its shareholders.

b. The court will hold shareholders personally liable for the debts of the corporation.

_____ are long-term debt secured by company assets. a. Debentures b. Bonds c. Notes d. Treasury bills

b. bonds

The business judgment rule is a _____ law concept that has achieved national acceptance. a. statutory b. common c. constitutional d. civil

b. common

A _____ lawsuit is brought by shareholders against the corporation, only if their own rights have been harmed. a. collusive b. direct c. tort d. derivative

b. direct

The obligation of a manager to act without a conflict of interest is called his duty of _____. a. interest b. loyalty c. judgment d. care

b. loyalty

compensation for officers and directors

between 2001 and 2003 public companies spent 9.8 percent of their net income on compensation for top executives In 1975, to 100 CEOs earned 39 times as much as the average worker By 2005 that ratio was over 300 Michael Eisner head of Walt Disney - final 13 years he earned 800 million, stocks performed worse than governent bonds CEO of fannie mae earned 90 million when the company's accounting system was so flawed it overstated its earnings by 11 billion Executives who survived 2008 financial crisis because of taxpayer bailouts still received enormous bonuses. We spent 180 billion to save AIG even as they paid bonuses of 165 million to executives

Proxy access

by a 3-2 vote the commissioners, the SEC approved proxy access rules that required companies to include in their proxy material the names of board nominees selected by large shareholders (3% of the company for 3 years) sued the SEC to prevent implementation - court invalidated proxy access rule on the grounds the EC did not follow required procedure

How can shareholders protect their interests in an organization without being involved in management themselves? a. By issuing bonds b. By piercing the corporate veil c. By electing directors d. By forming bylaws

c. By electing directors

Which of the following is a special court in Delaware that hears nothing but business cases and has judges who are experts in corporate law? a. Court of Common Pleas b. Appellate Court c. Chancery Court d. Court of Faculties

c. Chancery Court

The _____ Act describes the directors' role thus: "All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors." a. Securities Exchange b. Investor Protections and Improvements to the Regulation of Securities c. Model d. Sarbanes-Oxley

c. Model

Matrix Inc., a software company, had an inadequate capital base. It had only $15,000 in assets. The founders of the company did not bother to buy insurance or keep a minute book to record their meetings. Which of the following is true in the given scenario? a. The court can declare the company a foreign corporation in the given scenario. b. The court can consider this as a case of fraud. c. The court can pierce the corporate veil in the given scenario. d. The court can prepare and file a charter in the given scenario.

c. The court can pierce the corporate veil in the given scenario.

A derivative lawsuit is brought in the name of the _____. a. cooperative b. employees c. corporation d. debtors

c. corporation

The two different mechanisms that shareholders in serious conflict with the management have for enforcing their rights are _____. a. tort lawsuit and civil action lawsuit b. tort lawsuit and derivative lawsuit c. derivative lawsuit and direct lawsuit d. direct lawsuit and collusive lawsuit

c. derivative lawsuit and direct lawsuit

Stock

charter must provide 3 items of information about the stock 1.Par value - designed to protect investors. Originally par value was supposed to be close to market price. A company could not issue stock at a price less than par. Once issued it could be traded at any price. In modern times par value does not relate to market value; it is usually some nominal figure such as 1 cent or $1 per share. Companies may issue stock with no par value. FB stock has a par value of .0001 per share. 2. Number of shares: before stock can be sold it must be authorized in the charter. The more shares the higher the filing fee. After incorporation the company can add authorized shares by amending its charter and paying additional fees. FB charter authorizes the creation of 10,000,000 shares. Stock authorized but not yet sold is called authorized and unissued. stock that has been sold is termed authorized and issued.or outstanding. Stock the company sold but later bought back is called treasury stock. 3 classes and series: Stock can be divided into categories called classes and these classes can be divided into subcategories called series. All stock in a series has the same rights and all series in a class are fundamentallty the same except that preferred stock all shareholders may be entitlted to a divident but the amount may vary by series.

rational business purpose

chicago cubs had no lights. shareholder sued on the grounds that the cubs revenues were peanuts compared with other teams who had lights. cubs argued a large night crowd would cause the neighborhood to deteriorate. Court rooted found for the cubs due to rationale purpose

business judgement rule

common law concept that has achieved national acceptance. It is a fundamental principle of corporate law, to be protected managers must act in good faith: duty of loyalty without conflict of interest, duty of care, with the care that an ordinarily prudent person would take in a similar situation and in a manner they reasonably believe to be in the best interest of the corporation

sox

company cannot make personal lonas to directors or officers, if company has to restate earnings CEO and CFO must reimburse the company for any bonus or profits they received from selling company stock within a year of the release of the flawed financials

independent directors

congress began its reform effort by passing the sarbanes-oxley act (SOX) - appleis to all publicly traded corporations in the US. stipulates all members of a boards audit committee must be independent and at least one of these members must be a financial expert. Independent directors are those who are not employee of the company and not in the pocket of the CEO. NYSE and NASDAQ require companies listed on the exchanges that independent directors must comprise a majority of the board and they must meet regularly without inside directors

legality and informed decision

courts are unsympathetic to managers who engage in illegal behavior courts will protect managers who make informed decisions even if the decision turns bad

_____ are short-term secured or unsecured debt, typically payable within five years. a. Debentures b. Bonds c. Treasury bills d. Notes

d. Notes

Which of the following is the immediate next step once a company has decided where to incorporate? a. Elect the first set of directors. b. Elect the officers of the corporation. c. Prepare the bylaws of the corporation. d. Prepare and file the charter.

d. Prepare and file the charter.

A document containing financial data that the SEZ requires public companies to provide to their shareholders each year is called the _____. a. audit report b. yardstick report c. credit report d. annual report

d. annual report

A _____ lawsuit is brought by shareholders to remedy a wrong that the board of directors has committed against the corporation. a. tort b. direct c. collusive d. derivative

d. derivative

Who among the following sets corporate policies and then appoints officers to implement corporate goals? a. Employees. b. Creditors. c. Managers. d. Directors.

d. directors

The official record of a corporation in which the written consents and any records of actual meetings are kept is called a _____. a. workshop book b. briefing book c. forum book d. minute book

d. minute book

To encourage similarity among state corporation statutes, the American Bar Association drafted the _____ Act as a guide. a. Investor Protections and Improvements to the Regulation of Securities b. Securities Exchange c. Sarbanes-Oxley d. Model

d. model

To be elected, a candidate only needs to receive more votes than her opponent, not a majority of the votes cast. This traditional corporate voting method is called _____. a. approval voting b. cumulative voting c. preference voting d. plurality voting

d. plurality voting

Leslie, a scientist, invented shoes that can detect the presence of land mines safely with the help of special sensors. She started a large-scale organization for manufacturing such shoes as these could be of use to the police department, secret agencies, and defense personnel. In the given scenario, Leslie is rightly called the _____. a. adapter b. partner c. proxy d. promoter

d. promoter

Individuals who are affected by the activities of a corporation, such as employees, customers, creditors, suppliers, and neighbors are called _____. a. chief executives b. consultants c. promoters d. stakeholders

d. stakeholders

Secretary of state may dissolve a corporation that violates state law

failing to pay annual fees courts may dissolve if the company is insolvent if directors and shareholders cannot resolve conflict

emerging growth companies

has annual gross revenue of less than 1 billion its stock has been publicly traded for less than 5 years has issued less than 700 million in publicly traded stock has issued less than 1 billion in convertible debt in 3 years

shareholders

have neither right nor obligation to manage day to day business have the right to information about the company have the right to vote can assign proxies to vote for them if shareholder opposes a policy, under SEC rules, any shareholder who has continuously owned for one year at least 1 percent of the company or 2000 of stock can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting election and removal of directors - shareholders do not have the right to use company proxy statement to propose nominees for director nominating committee of the board produces a slate of directors names are approved by ceo and sent to shareholders who can vote yes or withhold their vote

Death of the corporation

ideas are not successful, company fails. Can be voluntary (shareholders elect to terminate) or forced by court order. sometimes courts takes a step much more damaging to shareholders than just dissolving the corporation, it removes the shareholders limited liability.

transaction was entirely fair to the corporation

in determining fairness the court will consider the impact of the transaction on the corporation and whether the price was reasonable. Zeke would still not be liable if he sought permission first or if a court found that he was buying great bread at an excellent price

corporate opportunity

managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent

The official record of a corporation.

minute book

When issued by a company, short-term debt, typically payable within five years.

notes

Promoter can get off the hook if the other party agrees to a

novation

Venture capitalists

often choose stock called participating preferred stock which permits them to have their cake and eat it too. Upon liquidation they are paid first, receiving whatever they paid for the stock plus accrued dividends. They are treated as through they convered their preferred shares into common stock so they also share the rest of teh proceeds with common shareholders

attracting outside investors

people with money but no knowledge or desire to manage the enterprise - protected by electing directors to manage for them. Directors set policy and appoint officers to implement goals. Model act describes directors as "all corporate powers shall be exercised by or under the authority of and teh business and affairs of the corporation managed by or under the direction of its board of directors

shareholder activists

proxy advisors such as the Institutional shareholder services inc (ISS) advise institutional investors on how to vote their shares

dodd-frank

requires compensation committee for all companies listed on a stock exchange must be composed of solely independent directors strengthens the claw back provision of SOX and extends it to 3 years Requires "say on pay" - companies must take a nonbinding shareholder vote on executive compensation for executive officers but not for directors once eery 6 years companies must take a nonbinding sharehioder vote on how often to hold the say on pay vote, once a year, every 2 every or every 3 years in event of merger or sale, shareholders have the right to a nonbinding vote on golden parachutes - special payments to executives companies must disclose CEO compensation, median compensation of company employees as well as the ratio of these 2 numbers

Shareholders are primarily concerned with

return on investment - managers must maximize shareholder value. indiana code permits directors to consider both the short and long term best interests of the corporation taking into account the effects thereof on the corporations shareholders and other constiutent groups

bylaws list all the housekeeping details for the corporation

sets dates for annual shareholders meeting, defines a quorum, indicates how many directors there will be, gives titles to officers and establishes the fiscal tax year of the corporation

directors have responsibilities to

shareholders ad stakeholders such as employees, customers, creditors, suppliers, and neighbors. Interests often conflict among various groups. In the decade of the 21st century 2 financial crises were caused in part by corporate execs who engaged in high risk activitities that left them wealthy and shareholders with nothing Because of abuses that included fraud congress and other regulators tried to rebalance power among managers and shareholders. goal was to enhance shareholder oversight of companies they own

Voting rights

shareholders are entitled to elect directors and vote on charter amendments among other issues, but these rights can vary among different series and classes of stock. When Ford Motor Co went public in 1956, it issued Class B common stock to members of the ford family. This class of stock holds about 40% of the voting power and effectively controls the company.

directors set CEO compensation

shareholders pay for it

Incorporator

signs the charter and delivers it to the Secretary of State Incorporators are not required to buy stock nor do they have to have any future relationship with the company. Lawyers who form the corporation serves as its incorporator.

CEO gets all the credit

sometimes through luck and only for short term

Anyone who is affected by the activities of a corporation, such as a shareholder, employee, customer, creditor, supplier, or neighbor.

stakeholder

There is no federal corporation code, this means

that a company can incorporate only under state, not federal law. No matter where a company does business it can incorporate under any state. The company must abide the statues of the state it incorporates in.

Dividend rights

the charter establishes whether the shareholder is entitled to dividends and if so in what amount.

Liquidation rights

the charter specifies the order in which classes of stockholders will be paid upon dissolution of the company

disinterested shareholders approve it

the transaction is valid if the shareholders who do not benefit from it are willing to approve it

After incorporation incorporators elect the first set of directors

thereafter, shareholders elect directors. Under the Model Act a corporation is required to have at least one director unless all the shareholders sign an agreement that eliminates the board or the corporation has 50 or fewer shareholders. to elect directors the shareholders may hold a meeting or they can elect directors by written consent

duty of care requires officers and directors

to act in the best interests of the corporation and to use the same care that an ordinary prudent person would take in a similar situation