CHAPTER 40: CORPORATE DIRECTORS,OFFICERS, AND SHAREHOLDERS

Question 1

Board of Directors

Answer 1

The ultimate authority in every corporations

Question 2

Directors’ Management Responsibilities

Answer 2

1. Authorize Major Corporate Policy Decisions.
   Example: decide whether to pursue new product lines or business opportunities.
2. Select and remove corporate officers and other managerial employees, and determine their compensation.
3. Make financial decisions. Example: make decisions regarding the issuance of authorized shares and bonds

Question 3

Election of Directors

Answer 3

+ 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.

Question 4

Compensation of Directors

Answer 4

+ are often paid at least nominal sums.

+ set by (1) the corporate articles, (2) bylaws, or (3) the board itself.

Question 5

Directors + also Chief Corporate Officers (such as President or CEO) + shareholders

Answer 5

ok

Question 6

Outside Director

Answer 6

Does not hold a management position

Question 7

Quorum of Directors

Answer 7

+ 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

Question 8

Board of Directors’ Committees

Answer 8

+ Directors may appoint committees and delegate some of their responsibilities to the committees. 2 common types of committees:

- Executive committee
- Audit committee

Question 9

Executive committee

Answer 9

+ handles ordinary, interim management decisions between board of directors’ meetings
+ limit to dealing with ordinary business matters
+ no power to declare divident

Question 10

Executive committee

Answer 10

+ 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

Question 11

Audit committee

Answer 11

+ hire and supervise the independent public accountants who audit the corporation’s financial records.

Question 12

Rights of Directors

Answer 12

(1) right to participation
(2) right to inspection
(3) right of compensation
(4) right of indemnification

Question 13

(1) right to participation

Answer 13

Directors are entitled to participate in all BoDs’ meetings and be notified of these meetings.

Question 14

(2) right of inspection

Answer 14

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)

Question 15

(4) right to indemnification

Answer 15

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

Question 16

Role of Corporate Officers and Executives

Answer 16

+ Corporate Officers and Executives are hired by the BoDs.

Question 17

Duties of Directors and Officers

Answer 17

1. Duty of Care
2. Duty of loyalty
3. Conflicts of interest

Question 18

Duties of Directors and Officers - (1) duty of cares

Answer 18

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.

Question 19

Business judgement rule

Answer 19

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.

Question 20

Duties of Directors and Officers - (2) duty of loyalty

Answer 20

+ 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.

Question 21

Duties of Directors and Officers - (3) conflicts of interest

Answer 21

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.

Question 22

Liability of Directors and Officers

Answer 22

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

Question 23

Shareholders’ Power (the role of shareholders)

Answer 23

Shareholders own the corporation, approve fundamental corporate changes, and elect and remove directors, with or without cause.

Question 24

Shareholders’ Meetings

Answer 24

+ 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.

Question 25

Proxy

Answer 25

+ The signed appointment form or electronic transmission authorizing an agent to vote the shares is called a Proxy. (directors cannot use proxies)
+ Proxies (rather than attend a meeting, shareholders normally authorize third parties to vote their shares on their behalf). One specific meeting, on time shot
+ Proxies are valid for 11 months, unless the proxy agreement mandates a longer period

Question 26

Cumulative voting

Answer 26

+ a voting method designed to allow minority shareholders to be represented on the board of directors
+ Ex: 40.5 / page 774

Question 27

Shareholders’ rights

Answer 27

+ Voting rights.
+ Preemptive rights
+ The right to receive dividends (at the discretion of the directors).
+ The right to inspect the corporate records.
+ The right to transfer shares (this right may be restricted in close corporations).
+ The right to receive a share of corporate assets when the corporation is dissolved.
+ The right to sue on behalf of the corporation (bring a shareholder’s derivative suit) when the directors fail to do so

Question 28

Stock Certificates

Answer 28

+ in the past, not required today.

+ evidenced ownership of shares in the corporation

Question 29

Preemptive rights

Answer 29

+ A shareholder who is given preemptive rights can purchase a percentage of the new shares being issued that is equal to the percentage of shares she or he already holds in the company.
+ allows shareholders to maintain proportionate control, voting power and financial interest in the corporation.

Question 30

Stock warrants

Answer 30

are rights given by a company to buy stock at a stated price by a specified date. Usually, when preemptive rights exist and a corporation is issuing additional shares, it gives its shareholders stock warrants. Warrants are often publicly traded on securities exchanges

Question 31

Dividends

Answer 31

+ ordered by the directors

+ paid in cash, property, stock

Question 32

Shareholders’ Derivative Suit

Answer 32

is a lawsuit brought by a shareholder on behalf of a corporation against a third party when the corporate directors fail to do so after giving them 90 days’ notice.

Question 33

Watered stock

Answer 33

During the formation of a corporation, Gomez, one of the incorporators, transfers his property, Sunset Beach, to the corporation for 10,000 shares of stock at a par value of $100 per share for a total price of $1 million. After the property is transferred and the shares are issued, Sunset Beach is carried on the corporate books at a value of $1 million. On appraisal, it is discovered that the market value of the property at the time of transfer was only $500,000. The shares issued to Gomez are therefore watered stock, and he is liable to the corporation for the difference between the value of the shares and the value of the property.