Chapter 40 Flashcards
Role of Directors
- All policy making decisions
- Carry out routine corporate business
- Select and remove officers
- Determine capital structure of the corporation
- Declare dividends
- Each director has 1 vote/majority vote
Are directors agents?
No, Because no one individual director can actual bind the corporation to anything
Are directors trustees?
No, Trustees hold title to property for the use/benefit of another. That’s not what directors are doing
Inside Director
A person on a corporation’s board of directors who is also an officer of the corporation
Outside Director
A person on a corporation’s board of directors who does not hold a management position in the corporation
Meetings and Voting Rights of Directors
The dates of regular meetings are usually scheduled by the articles, bylaws, or board resolution
Quorum
The number of member of a decision-making body that must be present before business may be transacted
Corporate Officers and Executives
- hired by the board
*at a minimum most corporations have a President, 1 or more VP, secretary and treasurer - carry out duties stated in the Bylaws
- corporate and managerial officers are agents
- are employees
- Board can remove an officer with or without cause
Duties and liability of directors and officers
Directors and Officers are fiduciaries of the corporation and therefore the duties are those of a fiduciary
Duty of Care
Requires directors/officers:
1. Act in good faith
2. Act as a reasonable prudent director/officer would under the circumstances
3. Act in the best interest of the corporation
So basically (under duty of care) an Officer/Director should…
be attending meetings (that’s how they are informed about decisions they need to make, what is going on in the business, etc.), reasonably supervise work given out, if you disagree with the majority vote – if I am a dissenting board member – get it on the record that you disagreed (by the secretary taking notes)
Business Judgement Rule
Defense to alleged violation by directors and officers of duty of care.
Directors and officers do NOT insure business success (the defense argues that they made sound business decisions even if it didn’t work out the way it was intended)
Business Judgement Rule applies if: Director/Officer….
- took reasonable steps to be informed on the matter
- had a rational basis for the decision AND
- no conflict of interest existed between personal interest and interest of the corporation
If the defense is successful, then the director or officer has not breached the duty of care.
BJR is usually successful unless:
there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.
Duty of Loyalty
“Duty of faithfulness to one’s obligations and duties”
* think of the company before own personal interests
* refrain from self-dealings
* not use corporate funds or information for personal gain
6 examples of failure in duty of loyalty:
- Competing with the corporation
- Usurping (taking personal advantage of) a corporate opportunity
- Pursuing an interest that conflicts with that of the corporation
- Using information that is not available to the public to make a profit trading securities (insider trading)
- Authorizing a corporate transaction that is detrimental to minority shareholders
- Selling control over the corporation
Conflicts of Interests
- many can exist with directors
- make full disclosure
- abstain from voting on matters with a conflict
I own an office building, I am an external director. We as a corporation are looking for new office space. What should I do?
I need to tell the board that I own the building we are considering. And then when it is time to vote, I should not vote.
Liability of Directors/Officers
- can be liable for negligence
- can be criminally responsible for their own crimes and crimes committed by employees under their supervision
- can be sued by SH in a shareholders derivative suit (Sugarman is an example of this)
- can be held personally liable under many statutes
Role of Shareholders
- Are owners of the corporation
- Do not own personal title to corporate property (the corporation owns everything)
- Do appoint the board of directors
- Do not, as SH, have daily management responsibilities (if it is a close corporation, you may have management responsibilities)
- Majority SH owe a fiduciary duty to minority SH
Powers of Shareholders (Shareholder approval is normally required to…)
- Amend the articles of incorporation or bylaws
- Sell all or substantially all of the corporation’s assets
- Conduct a merger/dissolve the corporation
Power to: vote/elect/remove members of the BOD
What do you have to do if you want to hold a special meeting?
10-60 days notice (no more, no less)
Resolutions
corporate resolution that says what the decision what on the corporate business matter. If I have one stock, I have one vote
Quorum
more than 50% are present
Voting Lists
created prior to any meeting. Created on the day the notice is sent.
Cumulative Voting to Elect Directors
Formula: each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the shareholder owns.
Designed to protect minority shareholders.
Rights of Shareholders
- Certificates
- Preemptive rights
- Dividends
- Inspection rights
- Shareholder’s derivative suit
Certificates
few states require physical certificates to be issued; stock is an intangible property right that the SH has regardless of whether they have a physical certificate
Preemptive Rights
rights of a SH to preference over other SHs in buying a prorated share of a new issue of stock; allows a majority SH to maintain his/her proportionate control, voting power and financial interest
John, a shareholder of ABC, Cor., owns 10% of the company. The articles of incorporation for ABC give John preemptive rights upon a new issue of stock by the company, if exercised within 30 days of issuance. What does this mean?
This means he can by 10% of any new issuance so he maintains his 10% ownership. ABC issues 1000 new shares of the stock. Jown can buy 100 shares of the new shares, if he acts within thrity days.
Illegal Dividends
either paid out of an unauthorized account, or paying the dividends causes the corporation to become insolvent.
Inspection Rights
Every shareholder is entitled to examine specified corporate records including voting lists
Derivative Suit
When the board fails to act in the way the shareholders are wanting, the shareholders can take action with a derivative suit. When Board fails to file a lawsuit based on harm to the corporation, the SHs may file the lawsuit “derivatively”.
* written demand to the board is required
* board has 90 days to file lawsuit requested by SH
* courts dismiss derivative suits if a majority of the directors or an independent panel says (based on good faith) it’s not in the best interest of the corporation
* damages awarded go to the corporation (SH may be reimbursed for reasonable expenses including attorneys’ fees) shareholders filed the suit on behalf of the corporation
When are shareholders held personally liable?
- Court agrees to pierce the corporate veil
- Illegal dividends are issued
- Watered Stock is issued
Watered Stock
when the corporation issues stock for less than fair market value. SH receiving watered stock is liable to the corporation for the difference between their price and fair market value.
