Chapter 34 Corporate Management

DUTY OF LOYALTY

Managers may not enter into an agreement on behalf of their corporation that benefits them personally unless the disinterested directors or shareholders have first approved it. If the manager does not seek the necessary approval, the business judgment rule no longer applies, and the manager will be liable unless the transaction was entirely fair to the corporation.

STATE STATUTES

Many states have passed antitakeover statutes that render hostile takeovers more difficult for the bidder.

FIDUCIARY DUTY

Officers and directors have a fiduciary duty to act in the best interests of the shareholders of the corporation

TAKEOVER DEFENSES

Under common law, shareholder welfare must be the board's primary concern when establishing takeover defenses. If it is clear that the company will ultimately be sold, the board must auction the company to the highest bidder; it cannot give preferential treatment to a lower bidder.

DUTY OF CARE

Under the duty of care, managers must make legal, informed decisions that have a rational business purpose

CORPORATE OPPORTUNITY

Under the duty of loyalty, managers may not take advantage of an opportunity that rightfully belongs to the corporation

BUSINESS JUDGMENT RULE

managers comply with the business judgment rule, a court will not hold them personally liable for any harm their decisions cause the company, nor will the court rescind the decision.

WILLIAMS ACT

regulates the activities of a bidder in a tender offer for stock in a publicly traded corporation.

What is the business judgement rule?

•Business Judgment Rule -- The manager has a duty of loyalty and a duty of care. •The manager must act without a conflict of interest, with the care of an ordinary prudent person and in the best interests of the company. •This rule allows directors to do their job without fear of excessive court intervention.

What is self dealing?

•Business Self-Dealing - decisions that benefit another company associated with the manager. •Personal Self-Dealing --decisions that benefit the manager directly. •Self-dealing transactions may be acceptable if: •The disinterested members of the board of directors approve the transaction. •The disinterested shareholders approve it. •The transaction was fair to the corporation.

What is the fundamental conflict between managers and shareholders?

•Managers - want, first to keep their jobs and second, to build a strong company. •Managers have a fiduciary duty to act in the best interests of the shareholders. •Shareholders - want the price of stock to increase. •Stakeholders - want the business to grow and continue to use the stakeholders' services.

State Anti-Takeover Statutes

•Most states have passed statutes to deter hostile takeovers: •Statutes that automatically impede hostile takeovers. •Statutes that authorize companies to fight off hostile takeovers

What is a Duty of Care?

•The duty of care requires officers and directors to act in the best interests of the corporation and to use the same care that an ordinarily prudent person would in the management of her own needs. •Decisions must have a rational business purpose. •Decisions and actions are legal. •Managers must make informed decisions.

What is the Duty of Loyalty

•The duty of loyalty prohibits managers from making a decision that benefits them at the expense of the corporation. •Self-Dealing is a violation of the duty of loyalty. •Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent.

What is a takeover?

•There are three ways to acquire control of a company: •Buy the company's assets. •Merge with the company. •Buy stock from the shareholders. •Takeovers and tender offers are regulated: •Federal Regulation of Tender Offers: The Williams Act •State Regulation of Takeovers •Common Law of Takeovers

How can takeovers be prevented?

•Transferring assets, re-distributing stock, re-structuring the board of directors, etc. •When establishing takeover defenses, shareholder welfare must be the board's primary concern. •If the company must ultimately be sold, it must go to the highest bidder; it cannot give preferential treatment to a lower bidder.