JD BUSINESS LAW CHAPTER 40 CORPORATE DIRECTORS, OFFICERS AND SHAREHOLDERS
How many shareholders are required at a meeting to act
quorum
when dividends are improper or illegal, who is responsible for the amount of the payment
the directors are personally liable.
Under the RMBCA how long are proxies valie
11 months unless the proxy agreement mandates a longer period
If a state statute requires specific voting rights, does the corporation's bylaws and articles have to be consistent with it
yes.
What duties apply to directors and officers
They are fiduciaries so 1. duty of care 2. duty of loyalty
What is oppressive conduct
a breach of fiduciary duties by those who control a close corporation.
what is a stock certificate
evidence of ownership of specific number of shares in corporation. while shareholders can demand them, most jdx dont require them as the ownership right exists independently of the certificate itself. (though co may have to send some other form of notice that contains info usually found on certificate)
what is a shareholders derivative suit
if shareholders perceive that the corporate directors are not acting in the best interest of the corporation they can bring this suit on behalf of the corporation.
What is the general division of power between members of board
one man one vote and normally majority rules
When are proxies irrevocable
proxies are revocable unless they are specifically designated as irrevocable and coupled with an interest (ex. person receiving the proxies from shareholders has agreed to buy their shares)
when must shareholder return dividends
shareholders must return illegal dividends only if knew that they were illegal when payment was received or if paid when corp was insolvent.
What law determines the circumstances and legal requirements regarding issuance of dividends
state laws- so varies by state
If cumulative voting is not required, what vote is needed to select a board
the entire board can be elected by majority of shareholders at shareholder meeting.
Who usually appoints the first board
the incorporators or they are names in the articles
If majority shareholder breaches fiduciary duty to minority shareholder, what are the remedies
the minority shareholder can sue for damages (eg, for freezing out minority shareholders and excluding them from benefits)
What are the rights of officers and executives
they are employees of the company so rights are usually set forth in employment contracts but usually can be removed by board at any time with or w/o cause so long as does not violate contract.
What is the disadvantage of preemptive rights
they can hinder a corporation from raising new capital from new outside investors cuz no stock to exchange.
To what stock do preemptive rights generally apply
to additional, newly issued stock sold for cash and the preemptive right must be exercised with a specific time period (usually 30 days)
what is watered stock
when a corporation issues shares for less than their fair market value, the shares are referred to as watered stock and the shareholder must pay the difference to the corporation
when can shareholders force directors to declare a dividend
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.
when are dividends illegal
when issued from unauthorized account or makes co. insolvent.
Are officers and executives agents of a corporation
yes
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
Do officers and directors owe a direct duty to individual shareholders
Not unless there is some contract or special relationship above and beyond the corporate relationship. The officers/directors duty is to act in the best interests of the shareholders as a whole
Shareholders exercise ownership through voting, but what do they vote on
Corporate matters are presented in the form of resolutions which shareholders vote to approve or disapprove.
What is a proxy
It is a signed appointment form or electronic transmission authorizing an agent to vote the persons shares
What is a director or officer's duty re: supervision
They are expected to exercise a reasonable amount of supervision when they delegate work to officers and employees
What are the normal terms of directors
They usually serve one year but to allow continuity most states allow a longer term and often they have 3 year terms with 1/3 being voted on each year.
T/f Unless a dissent is entered in the minutes, the director is presumed to have assented
True
T/F Even when an election appears to be authorized by bylaws for new director, a court can invalidate the results if the directors were attempting to manipulate the election in order to reduce the shareholders influence
True.
What type of corporations have valid share transfer limitations
close corporation
If a director dissents are they later liable for mismanagement as a result of a decision
usually not- which is why if they miss a meeting they will register a dissent with the secretary of the board of actions taken at the meeting.
When do rights transfer to the new owner
when corp. is notified and new entry is made in corp. stock book.
what is a quorum of shareholders
when shareholders holding more than 50% of the outstanding shares are present ( but state laws often permit articles to set higher/lower quorums)
what are preemptive rights
with preemptive rights, a shareholder receives a preference over all other purchasers to subscribe to or purchase a prorated share of new issue of stock- meaning that they can puchase a % of new shares that is euql to his or her current % of ownership.
Who can fill vacancies on the board
Either shareholders or board depending on state law or provisions of bylaws.
What is required for special meetings of the board
They can be called but require notice to all directors- can skype or web conference as long as all can simultaneously hear each other.
Duty of loyalty cases typically involve what actions by an officer or director
1. competing with the corporation 2. usurping (taking personal advantage) of corporate opportunity 3. pursuing an interest that conflicts with the corporation 4. using information that is not available to the public to make a profit trading securities 5. authorizing a corporate transaction that is detrimental to minority shareholders 6. selling control over the corporation
What is the role of the board of directors
1. make policymaking decisions necessary to management of corporate affairs (oversee contract negotiations and labor negotiations, initate negotiations for sale/lease of corporate assets, decide whether to pursue products or business opportunities) 2. carry out routine corporate business 3. select and remove officers and managerial employees (inc. determine compensation and benefits) 4. determine the capital structure of the corporation - (decide about issuance of authorized shares and bonds) 5. declare dividends
What are the requirements for notice of shareholder meeting
1. must notify of date, time and place of annual or special meeting (though can be set in bylaws) 2. notice must be at least 10 and not more than 60 days before the meeting 3. If special meeting must also include statement of purpose of meeting and business transacted at the meeting is limited to that purpose.
What funds are legally available for paying dividends
1. retained earnings inc. capital gains from sale of fixed asset 2. net profits 3. surplus (sum of a company's net profits over period of time)
What rights do shareholders have
1. stock certificates 2. preemptive rights 3. stock warrants 4. dividends 5. inspection rights 6 transfer of shares 7. dissolution rights 8. shareholder derivative suit
How often must shareholder meetings occur
At least annually
How must notice of a shareholder meeting be given
1. RMBCA does not say if mail, email, etc but most bylaws state acceptable methods or some states outline notice requirements.
What liability do directors and officers have
1. can be held liable for negligence in certain circumstances 2. can be liable for crimes and torts committed by themselves (subject to business judgment rule) or by corporate employees under their supervision 3. subject to shareholder's derivative suit for mismanagement 4. may have personal liability for violating statutes such as statutes to protect consumers
What is a director/officer's duty as to conflicts of interest
1. cannot enter into or support businesses that operate in direct competition with corporations on wose boards they serve 2. must make full disclosure of any potential conflicts that might arise in any corporate transaction 3. must abstain from voting on proposed transactions in which they have a personal interest even though interest is fully disclosed.
Who can solicit proxies
1. management 2. any person so as to concentrate voting power and have been used for corporate takedowns.
What is a shareholder's liability for watered stock
1. pay difference between fair market and cost 2. may be liable to creditors for unpaid corporate debts.
What rights do directors have
1. right to participation 2. right of inspection 3. right to indemnification
What powers do shareholders have
1. they must approve fundamental changes affecting the corporation before changes can be implemented (amend articles or bylaws, conduct merger, dissolve corp, sell assets) though power may be subject to board approval 2. Power to vote to elect or remove members of board by not voting them back on board at end of term or to remove for cause by majority vote (or in some states statutes or articles can allow removal w/o cause w/majority vote)
What is the role of a shareholder
1.They are an owner of a corporation though they have no legal title to corporate property. 2. They do have an equitable ownership interest in the firm. 3. Generally they have no responsibility for daily management though they do choose the board of directors that does have control
How are directors removed
A director can be removed 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 voting trust
Another voting technique where an agreement (trust contract) under which a shareholder assigns the right to vote his or her shares to a trustee usually for a specified period of time and the trustee is then responsible for voting the shares on behalf of all shareholders in the trust. The owner of the shares still retains all ownership rights other than voting.
What are the SEC rules on shareholder proposals
Anyone owning stock worth at least $1000 is eligible to submit proposals for inclusion in corporate proxy materials and the corporation is required to incude information on whatever proposals will be considered at the meeting along with proxy materials. However - NOTE only proposals relating to significant policy considerations, not ordinary business operations must be included.
what are the duties of majority shareholders
At times, majority shareholder is regarded as having a fiduciary duty to the corporation and to minority shareholders. Duty occurs when single shareholder (or a few acting in concert) own a sufficient no. of shares to exercise de facto (actual) control over the corporation-
What is a shareholder voting agreement
Before meeting, a group of shareholders can create a shareholder voting agreement by agreeing in writing to vote their shares together in a specified manner. Such agreements usually are hold to be valid and enforceable but management must be careful that such agreements do not constitute a breach of their fiduciary duties
Who is the ultimate authority in every corporation
Board of directors- they have responsibility for all policymaking decisions necessary to the management of all corporate affairs and must carry out routine corporate business
What is the formula for cumulative voting
Each shareholder is entitled to a total number of votes equal to the # of board members to be elected multiplied by the number of voting shares that the shareholder owns. The minority shareholders can cast all votes for one nominee or split it among several while the majority shareholders have to distribute their vote between the number of nominees
What rights do shareholders have to transfer shares
Generally since stock represents ownership rigt in intangible property, the owner can transfer it unless there are valid restrictions.
What are the ramifications of failing to act with duty of care
If corp/shareholders suffer harm the directors or officers can be held liable for negligence unless the business judgment rule applies.
In what type of corporation are preemptive rights most important
In close corporations because each shareholder owns a relatively small number of shares but controls a substantial interest which would otherwise be lost
What is normal compensation for directors
In past werent paid, but now most are to some extent and most states permit compensation to be authorized in articles or bylaws or if silent, allow the board to set their own compensation
When does the business judgment rule apply
It applies as long as the director or officer 1. took reasonable steps to become informed about the matter 2. had a rational basis for her or his decision 3. did not have a conflict of interest between her or his personal interest and that of the corporation.
What is an executive committee
It is a committee w/i the board that handles interim management decisions between board meetings and is limited to dealing with ordinary business matters so it cannot declare dividends, amend bylaws or authorize stock issuance.
What does the duty of loyalty require of a director/officer
It is a fiduciary duty that requires directors and officers to subordinate their personal interests to the welfare of the corporation.
What is a voting list
List of shareholders entitled to vote- shows name/address as of a cutoff or record date which can be as much as 70 days before the meeting and # of shares held. It must be kept at headquarters and available for shareholder inspection.
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.
What is cumulative voting
Most states permit/require shareholders to elect directors by cumulative voting designed to allow minority shareholders to be represented.
What is an audit committee
Required by the Sarbanes-Oxley Act- all publicly held corporations must have an audit committee responsible for the selection, compensaton, and oversight of the independent public accountants that audit the firm's financial records.
What is required of a director/officer by duty of care
Requires director or officer to 1. act in good faith 2. exercise the care that an ordinarily prudent person would exercise in similar circumstances 3. do what he/she believes is in the best interests of the corporation Inc. duty to make informed decisions and to exercise reasonable supervision
What are the rules on distribution of proxy materials
SEC requires all publicly held companies to distribute electronic proxy materials (post online) but it can still deliver it by dvd or mail.
How many directors are elected for a corporation
Subject to statutes, the number is identified in the articles or bylaws- historically 3
What is the requirement for director meetings
The board has to hold formal meetings with recorded minutes on dates or intervals established in the articles or bylaws or by board resolution with no notice required
What corporate officers and executives exist in a corporation
They are hired by the board and usually have president, 1 or more VP, secretary and treasurer though one person can be more than one and can be officer and director
Are officers and directors entitled to rely on information given to them by other people in order to make decisions?
They can rely on competent persons like officers or employees, professions like attorneys and committees of the board of directors but the reliance must be in good faith
What does it mean that directors and officers have a duty to make informed decisions
This means that they must do what is necessary to be adequately informed, attend meetings and presentations, ask for information from those who have it, read reports and review materials. They must investigate, study and discuss matters and evaluate alternatives -they cannot decide things on the spur of the moment.
What is shareholder's inspection right
Under RMBCA and common law-every shareholder can examine specified corporate records including voting lists in person or have an attorney/accountant or authorized assistant do so SO LONG AS THE SHAREHOLDER HAS A PROPER PURPOSE
What is the business judgment 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.
One share = how many votes
Unless provision to contrary, one common shareholder is entitled to one vote per share.
How many directors are required to make a quorum
Unless stated otherwise, normally is a majority but some states allow it to be less than majority but not less than 1/3 of the directors.
How broad is application of the business judgment rule
Unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties, most courts will apply the rule and protect directors and officers who make bad business decisions from liability
What rights do shareholders have upon dissolution
Upon dissolution, after outstanding debts and creditor claims have been paid, remaining assets are distributed to shareholders in proportion to ownership and subject to any provision in articles of incorporation that provides certain classes of preferred stock priority.
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)
what is a shareholder derivative suit
When corporation is harmed by the actions of 3rd party, directors can bring a lawsuit in name of the corporation against that party. Or, if directors dont bring suit, shareholders can.
When is a simple majority vote not enough to act
When required by statute or articles- extraordinary matters such as merger, consolidation or dissolution of corporation usually require higher percentage.
What is a shareholder proposal
When shareholders want to change a co. policy, they can put their ideas up for shareholder vote- they do this by submitting shareholder proposal to the board and asking the board to include the proposal in the proxy materials sent out before meetings
What is a director's dissent
When they disagree with the majority's vote which becomes an act of the board of directors.
what is a dividend
a distribution of corporate profits ro income ordered by the directors and paid to the shareholders in proportion to their shares. They can be cash, property, sock of the corporation or stock in another corporation.
Why is it wrong to characterize directors as agents
because no individual director can act as an agent to bind the corporation
why are directors not "trustees"
because they do not hold title to property for the use and benefit of others
After the first board, how are subsequent boards selected
by majority vote of shareholders
What are common types of committees w/i board of directors
executive committee and audit committee.
What is a shareholders liability
generally not personally liable for more than their investment unless fraud, undercapitalization, careless observance of corporate formalities, illegal dividends or watered stock and majority shareholders may have liability
Under what circumstances will a court dismiss a derivative suit against wrongs resulting from action of directors and officers
if a majority of the directors or an independent panel determines in good faith that the lawsuit is not in corp.'s best interest
How do vacancies on board arise
if director dies or resigns or when a new position is created by amendment of articles or bylaws.
What is the difference between an inside director and an outside director
inside director is one who is also an officer of the corporation while an outside director holds no management position in the corporation.
Under RMBCA do preemptive rights exist if not provided for in the articles of incorporation
no
How many directors are required to conduct business
quorum- (a quorum is the minimum number of members that must be present for business to be validly transacted.
What is a stock warrant
rights to buy stock at state price by a specified date given by the company- usually issued when preemptive rights exist and corporation is issuing additional shares.
What action must be taken before a shareholder derivative suit is allowed
shareholders must submit a written demand to the corporation asking board to take action and directors have 90 days in which to act. if they refuse, shareholders can proceed.
Who gets the damages awarded in a shareholder derivative action
the corporation
What is the purpose of preemptive rights
they allow each shareholder to maintain her proportionate control, voting power or financial interest in the corporation.
How long does the initial board serve
until the first annual shareholders meeting
Can the articles of incorporation exclude or limit voting rights
yes particularly for certain classes of shares like preferred stock often is denied voting rights.
If a company wishes to distribute proxy materials only via the internet can it choose the notice and access delivery option
yes- it can post the materials on a web site and notify shareholders it is available online but if shareholder requests paper proxy it must be sent w/i 3 business days and shareholders can permanently elect to receive all future proxy materials on paper or by email with links.