CHAPTER 40: CORPORATE DIRECTORS,OFFICERS, AND SHAREHOLDERS Flashcards
Board of Directors
The ultimate authority in every corporations
Directors’ Management Responsibilities
- Authorize Major Corporate Policy Decisions.
Example: decide whether to pursue new product lines or business opportunities. - Select and remove corporate officers and other managerial employees, and determine their compensation.
- Make financial decisions. Example: make decisions regarding the issuance of authorized shares and bonds
Election of Directors
+ The incorporators usually appoint the first board of directors. Thereafter, shareholders elect the directors. + Directors usually serve a one-year term, although the term can be longer.
+ Removal of directors: Shareholder action can remove a director for a cause - that is for failing to perform required duties.
Compensation of Directors
+ are often paid at least nominal sums.
+ set by (1) the corporate articles, (2) bylaws, or (3) the board itself.
Directors + also Chief Corporate Officers (such as President or CEO) + shareholders
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Outside Director
Does not hold a management position
Quorum of Directors
+ the minimum number of members to be present for business to be validly transacted.
+ Usually, a quorum is a majority of the corporate directors. Once a quorum is present, each director has one vote, and the majority normally rules in ordinary matters
Board of Directors’ Committees
+ Directors may appoint committees and delegate some of their responsibilities to the committees. 2 common types of committees:
- Executive committee - Audit committee
Executive committee
+ handles ordinary, interim management decisions between board of directors’ meetings
+ limit to dealing with ordinary business matters
+ no power to declare divident
Executive committee
+ handles ordinary, interim management decisions between board of directors’ meetings
+ limit to dealing with ordinary business matters
+ no power to declare dividend, amends the bylaw or authorize the issuance of stock
Audit committee
+ hire and supervise the independent public accountants who audit the corporation’s financial records.
Rights of Directors
(1) right to participation
(2) right to inspection
(3) right of compensation
(4) right of indemnification
(1) right to participation
Directors are entitled to participate in all BoDs’ meetings and be notified of these meetings.
(2) right of inspection
means access to all corporate books, records and facilities to make decisions. (this right is absolute and cannot be restricted by the article, bylaws, or any board of director act)
(4) right to indemnification
When a director becomes involved in litigation by virtue of her or his position, the director may have a right to indemnification (reimbursement) for the legal costs, fees, and damages incurred. Most states allow corporations to indemnify and purchase liability insurance for corporate directors
Role of Corporate Officers and Executives
+ Corporate Officers and Executives are hired by the BoDs.
Duties of Directors and Officers
- Duty of Care
- Duty of loyalty
- Conflicts of interest
Duties of Directors and Officers - (1) duty of cares
Requires the directors and officers to:
a. Act in good faith (honesty) b. Use prudent business judgment in the conduct of corporate affairs. c. Act in the best interests of the corporation and its shareholder-owners as a whole.
If a director or officer fails to exercise a duty of care, he may be answerable to the corporation and shareholders for breaching the duty.
Business judgement rule
immunizes a director from liability for a corporate decision as long as it was within the power of the corporation and the authority of the director to make and was an informed, reasonable, and loyal decision.
Duties of Directors and Officers - (2) duty of loyalty
+ Directors and officers have a fiduciary duty to subordinate their own interests to the welfares of the corporation in matters relating to the corporation.
+ Directors and officers, cannot use corporate funds or confidential information for personal advantage. Specifically, they cannot:
a. Compete with the corporation.
b. Take personal advantage of a corporate opportunity.
c. Have interest that conflicts with the interest of the corporation.
d. Engage in insider trading (use info that is not available to the public).
e. Authorize a corporate transaction that is detrimental to minority shareholders.
f. sell control over the corporation.
Duties of Directors and Officers - (3) conflicts of interest
To fulfill their duty of loyalty, directors and officers must make a full disclosure of any potential conflicts between their personal interests and those of the corporation.
Liability of Directors and Officers
Directors and officers are personally liable
a. For their own torts and crimes (when not protected under the business judgment rule).
b. For torts and crimes committed by corporate personnel under their direct supervision.
c. For violating certain statues, such as environment and consumer protection law
Shareholders’ Power (the role of shareholders)
Shareholders own the corporation, approve fundamental corporate changes, and elect and remove directors, with or without cause.
Shareholders’ Meetings
+ must occur at least annually.
+ special meetings can be called when necessary.
+ Notice of meetings must occur at least 10 days in advance but not more than 60 days before the meeting date.
