Chapter 40 - Corporate Directors and Officers

Block Voting

A group of shareholders may, by voting agreement or by entering into a voting trust, vote their shares together, increasing their influence on the outcome.

Board Committes

Large boards typically create committees that focus on individual subjects (e.g., audit, compensation, litigation, nominating), increasing the board's efficiency.

Shareholder Compensation

Shareholders are entitled to a share of the corporation's profits and net assets upon its dissolution. In addition, shareholders may be entitled (depending on the share agreement) to receive dividends periodically or when declared by the board of directors.

Director's Responsibilities

(1) Declaring and paying corporate dividends; (2) authorizing major corporate decisions; (3) hiring, promoting, supervising, and removing corporate officers and managerial employees, and (4) deciding whether to issue stock or bonds.

Director's Rights

(1) Reasonable notice of, and to participate in, all board meetings; (2) exercise their voting rights on corporate matters; (3) inspect all corporate books and records; and (4) in most jurisdictions, have the corporation indemnify them for any judgment entered against them, and for any legal fees and expenses incurred defending claims made, for acts taken in their directorial capacity.

Director Rights

1. right to participation 2. right of inspection 3. right to indemnification

Stock Warrant

A certificate granting the owner the option to buy a certain number of shares of stock, at a stated price, usually within a set time period.

Stock Certificate

A certificate issued by a corporation evidencing the ownership of a specified number of shares of the corporation and all rights attached thereto.

Separation of Ownership and Management

A shareholder (other than one who is also a director or officer) has no responsibility for the corporation's day-to-day affairs. Nor do the officers and directors owe a duty to any individual shareholder that is distinct from the duty they owe all shareholders as owners of the corporation.

Majority Shareholder's Liability

A shareholder who holds more than 50% of a corporation's outstanding stock may owe fiduciary duties to the corporation and to minority shareholders - particularly when the majority shareholder sells his shares, thereby effecting a change in corporate control.

Watered Stock Liability

A shareholder who, usually in return for in-kind services or for property, is issued shares for less than their assessed value, is personally liable to the corporation (or the corporation's creditors) for the difference between the price paid and the value of the stock.

Proxy

A signed appointment form or electronic transmission authorizing an agent to vote the persons shares.

How often must shareholder meetings occur?

At least annually.

Officer Rights and Responsibilities

Compensation, oversight (from the board of directors), agency, and generally not personally liable for obligations of the corporation.

Duty of Care

Directors and officers must act in good faith in performing their duties, exercise the care that an ordinarily prudent person would exercise in similar circumstances, and act in the best interest of the corporation. Failure to exercise the requisite care may result in personal liability for any harm the corporation suffered.

Duty of Care

Directors and officers must do what is necessary to become and stay informed on important corporate matters. In addition, directors are expected to; (1) make informed and reasonable decisions, (2) exercise reasonable supervision over corporate officers and employees, and (3) attend and participate in board meetings and clearly indicate their disagreement with any decision of the board. Failure to exercise the requisite care may result in personal liability for any harm the corporation suffered.

Conflicts of Interest

Directors and officers must fully disclose any potential conflict of interest regarding a particular transaction. Failure to do so can be a breach of duty of loyalty.

Fiduciary Duties of Directors and Officers

Duty of care and duty of loyalty.

Director Removal

For "cause" -for failing to perform a required duty,- either as set forth in articles or bylaws or by shareholder action. sometimes the board an remove a director for cause subject to shareholder approval. They usually cant be removed w/o cause unless shareholders reserved the right to do so at time of election

What is a director's right to inspection

Each has the right to access the corporation's books and records, facilities and premises which are essential to making informed decisions. This right cannot be restricted by articles, bylaws or any act of board

Shareholder Voting

Each shareholder may vote the number of her shares for each open seat on the board.

Cumulative Voting

Each shareholder may vote the number of her shares times the number of open seats on the board, and may distribute her votes as she chooses.

Aspects of Board of Directors

Elected by shareholders, (1) serve for a term, unless removed early for cause or they voluntarily resign; (2) are typically neither the corporation's agents nor personally liable for the corporation's obligations; (3) are compensated for their services, as provided for in the articles or by-laws, but do not share in the corporation's profits or losses (unless they own stock); (4) may be inside directors (employees) or outside directors (non-employees); and (5) exercise their oversight authority collectively, typically by majority vote, except for certain actions that require unanimous consent.

Board of Directors

Have responsibility for all policy making decisions necessary to the management of all corporate affairs and must carry out routine corporate business

Duty of Loyalty

It is a fiduciary duty that requires directors and officers to subordinate their personal interests to the welfare of the corporation. (1) compete with the corporation, or otherwise usurp (take personal advantage of) a corporate opportunity, (2) have an interest that conflicts with the corporation's, (3) engage in insider trading, (4) authorize corporate transactions detrimental to minority shareholders without their approval, (5) use corporate funds or confidential information for their own personal gain, (6) engage in self-dealing (i.e., vote on corporate action so as to maximize one's own personal benefit), or (7) sell control of the corporation without shareholder approval.

What are a directors right to participation

Means that they are all entitled to participate in all board meetings and have a right to be notified of them.

Shareholder

Owners of the corporation in proportion to the percentage of outstanding corporate stock they own.

Officers

Persons the board of directors hires or promotes to supervise the corporation's day-to-day operations.

Inspection Rights

Shareholders are entitled, both as a matter of common law and of statute, to inspect the corporation's books and records for a proper purpose, in person or through an agent, attorney, accountant, or other authorized assistant, provided that the request is made in advance.

Shareholder Limited Liability

Shareholders are generally not personally liable for the obligations of the corporation. Therefore, their liability is limited to the amount they paid for the corporation's shares.

Shareholder Agency

Shareholders are not agents simply by virtue of being shareholders.

Corporation Dissolution

Shareholders may petition a court to dissolve the corporation and appoint a receiver if (1) the board of directors is deadlocked, or corporate affairs are otherwise being mismanaged, such that irreparable injury to the corporation is occurring or threatened; (2) the directors or those in control of the corporation are acting illegally, fraudulently, or oppressively; (3) corporate assets are being misapplied or wasted; or (4) the shareholders, after a specified number of ballots over a specified period of time, are unable to agree to a slate of directors.

Shareholder Approval

Shareholders must approve, before the board can implement, any fundamental corporate change, such as amending the articles of incorporation or by-laws, merging or dissolving the corporation, increasing the number of shares of stock the corporation is authorized to issue, and selling all, or substantially all, of the corporation's assets.

Shareholder's Meeting

Shareholders vote on fundamental changes, elect directors, and attend to other corporate matters, at either a scheduled annual meeting or at one called specially. In order for votes recorded at a shareholders' meeting to be effective, there must be a quorum present - that is, there must be enough shareholders and others holding proxies present to represent at least 50 percent of the corporation's voting stock.

Preemptive Right

The right of an existing shareholder to purchase newly-issued shares in proportion to their percentage of ownership of the corporation prior to the issue of the new shares, before the newly-issued shares are offered for sale to the general public.

T/f Unless a dissent is entered in the minutes, the director is presumed to have assented

True

Business Judgement Rule

Under this rule a corporate director or officer will not be liable to the corporation or its shareholders for honest mistakes of judgment and bad business decisions- you consider the reasonableness of the decision at the time it was made and not with the benefit of hindsight.

What is a director's right to indemnificaiton

When a director is involved in litigation by viture of his position or action, he may have a right to reimbursement for the legal costs, fees and damages incurred. (Most corp. have liability insurance for directors)

Forced Dividends

When directors fail to do so and shareholders can show the directors have acted so unreasonably in withholding the dividend that their conduct is an abuse of discretion.