Chapter 35: Management Structure of Corporations

Delegation of Board Powers

Committees may be appointed to perform some but not all of the board's functions

Officer Rights

- President, vice presidents, treasurer, secretary, CEO, CFO, etc. - Run the day-to-day operations of the corporation - may effectively control selection of directors and control proxy votes

Function of the Board of Directors

- Selection and Removal of Officers - Capital Structures - Fundamental Changes - Dividends - Management Compensation - Vacancies in the Board

Shareholder Rights

- elect and remove directors, often by proxy - approve fundamental changes to articles and bylaws - buy and sell shares, receive dividends

Indemnification

A corporation may indemnify a director or officer for liability incurred if he acted in good faith and was not adjusted negligent or liable for misconduct

Ratification--Authority of Officers

A corporation may ratify the unauthorized acts of its officers

Shareholder's Right to Dissent

A shareholder has the right to dissent from certain corporate actions that require shareholder approval

Apparent Authority--Authority of Officers

Acts of the principal that lead to a third party to believe reasonably and in good faith that an officer has the required authority

Actual Express Authority--Authority of Officers

Arises from the incorporation statute, the charter, the bylaws, and resolutions of the directors

Actual Implied Authority--Authority of Officers

Authority to do what is reasonably necessary to perform actual authority

Proxy

Authorization to vote another's shares at a shareholder meeting

Derivative Suits

Brought by a shareholder on behalf of the corporation to enforce a right belonging to the corporation

Director Suits

Brought by a shareholder or a class of shareholders against the corporation based upon the ownership of shares

Dividends

Directors declare the amount and type of dividends

Meeting-- Exercise of Directors' functions

Directors have the power to bind the corporation only when acting as a board

Directors' Inspection Rights

Directors have the right to inspect corporate books and records

Straight Voting

Each shareholder gets one vote for each share, winner is elected by either plurality or majority. Thus, a group of shareholders who hold a majority of the voting share can always elect the entire board of directors.

Cumulative Voting

Each shareholder multiplies the number of shares he or she owns by the number of directors to be elected, for a total number of votes, then can last these votes however he wants--distributed among or or more candidates. This enables minority shareholders to obtain minority representation. X = ((ac)/(b+1))+1 a = number of shares voting b = number of directors to be elected. c = number of directors desired to be elected. X = number of shares necessary to elect the number of directors desired to be elected.

Rights to Inspect Books and Records-- Shareholders

If the demand is made in good faith and for a proper purpose

Liability Limitation Statues

Many states now authorize corporations--with shareholder approval--to limit or eliminate the liability of directors for some breaches of duty

Vacancies in the Board

May be filled by the vote a majority of the remaining directors

Quorum

Minimum number of necessary to be present at a meeting to transact business

Duty of Obedience--Duties of Officers and Directors

Must act within respective authority

Restriction on Transfer of Shares--Shareholders

Must be reasonable and conspicuously noted on stock certificate

Duty of Diligence--Duties of Officers and Directors

Must exercise ordinary care and prudence

Action Taken Without a Meeting

Permitted if consent in writing is signed by all directors

Business Judgement Rule--Duties of Officers and Directors

Precludes imposing liability on directors and officers for honest mistakes in judgement if they act with - due care (the care that an ordinarily prudent person in a similar position would exercise under a similar circumstances) - in good faith (without conflicts of interest) - in a manner reasonably believed to be in the best interests of the corporation

Duty of Loyalty--Duties of Officers and Directors

Requires undeviating loyalty to the corporation

management structure of corporations: officers

Run the day-to-day operations of the corporation; hire and fire all necessary operating personnel.

Approval of Fundamental Changes

Shareholder approval is required for charter amendments, most acquisitions, and dissolution

management structure of corporations: Board of directors

Shareholder's elected representatives; manage corporation and create vision for the corporation; declare dividends; delgate authority to officers; manage the business of the corporation; select, remove, and determine compensation of officers.

Shareholder meetings

Shareholders may exercise their voting rights at both annual and special shareholder meetings

management structure of typical publicly held corporation

Shareholders; Board of directors; officers

Typically closely held corporation

Shareholders= Directors=Officer. Some states allow closely held corporations to forgo some corporate formalities term-0without sacrificing shareholder's limited liability.

Fundamental Changes

The directors have the power to make, amend, or repeal the bylaws, unless this power is exclusively reserved to the shareholders

Removal of Directors

The shareholders may by majority vote remove directors with or without cause, subject to cumulative voting rights

Voting Trust

Transfer of corporate shares' voting rights to a trustee

Shareholder Voting Agreement

Used to provide shareholders with great control over the election and removal of directors and other matters

Annual meetings

are required and must be held at a time fixed by the corporations bylaws. -if the shareholder meeting is not held within the earlier of six months after the end of the corporation's fiscal year or 15 months after is last annual meeting, any shareholder may petition and obtain a court order requiring that a meeting be held. --close corporation supplement proides that npo annual meeting of shareholders need be held unless a shareholder of makes a written request at least 30 days in advance of the date specified for the meeting.

management structure of corporations: shareholders

elect and remove directs; approve fundamental changes; owners of the corporation.

the role of the shareholders in managing the corporation is generally restricted to the:

election of board of directors, the approval of corporate transactions that are void or voidable uness ratified, and the right to bring suits to enforce these rights.

Board of directos

members of the Board of directors are elected by the shareholders. there can be two classifications of individual directors: -inside directors: individuals who are on the board of directors, but who also have another role in the corporation, EX: an officer. -outside directors: individuals who do not have another role in the corporation. --they can be unaffiliated, with no relationship to the corporation. --they can be affiliated, with some relationship, but not an official role in the corporation.

Liability of officers and board of directors

officers and directors cannot be held personally liable. -however, a plaintiff may try to pierce the corporate veil to hold them liable. this may occur if the plaintiff can allege that the officers of dirctors impropery comingled the funds of th corporation with personal funds or that they failed to follow corporate formalities. --in these instances, the directors and officers can look to liability insurance. --additionally, the corporation can indemnify (defend) the officers and directors.

officer action:

officers must always act with a duty of loyalty toward the corporation, and act in the best interest of the corporation. this means they must avoid conflicts of interest. they must also use the business judgement rule when making decisions. that is, they must act: -with due care. -in good faith. -with a rational basis for making the decision in the best interest of the corporation.

management structure of corporations: the statutory model

officers. Board of directors. shareholders

Action by Board of Directors

the board of directors may only act in accordance with the terms of the corporation's bylaws. typically, the bylaws will proide how many members of the board of directors are required for a quorum. they will also detail the form the meeting must take, EX: in person, etc. it is very commo for the board of directors to be able to take action with unanimous consent. this allows the board of directors to take action quickly if they al agree without the need to formally call a meeting.

Duties of Board of Directors

the board of directos has the important duty of overall management of the corporation and responsibility for the corporation's performance. to meet this duty, the board of directors may: -control the state of officers for the corporation. - vote on fundamental corporate changes. - set management, including officers, compensation. - inspect the financial records of the corporation.

Bylaws

the bylaws are the most important document regarding the operational management of the corporation. they detial, among other things: - the number of directors. - the number of officers. - the requirement for officer and shareholder meetings. - the duties of officers and directors.

officers

the officers of a corporation usually consist of: -president or CEO, ultimate day to day management responsibility. -treasurer or CFO, ultimate authority for management of corporations finances. -secretary, authority for management of corporation's books and responsibility to maintain corporate compliance. Each of these categories can include assistant or vice level positions such as; vice president.

Voting Rights of Shareholders

the shareholder's right to vote is fundamental to the concept of the corporation and its management structure. -in most states, a shareholder is entitled to one vote for each stock the s/he owns, unless the articles of incorporation provide otherwise: the article may provide for more or less than one vote for any share. --in addition, the incorporation statutes generally permit the issuance of one or more classes of nonvoting stock, as long as at least one class of share has voting rights.