Chapter 40: Corporate governance

Question 1

Types of directors

Answer 1

1. Inside director
2. Independent director

Question 2

Inside director

Answer 2

on the board, also an employee of the company

Question 3

Independent director

Answer 3

on the board, doesn’t hold a management position

Question 4

Election of directors

Answer 4

1. elected by shareholders
2. usually serve for one year

Question 5

staggered board

Answer 5

electing a portion of the board each year

Question 6

Board meetings

Answer 6

1. presided over by chairman of the board
2. decisions made by majority rule
3. relies on materials from management
4. sometimes outside directors meetings

Question 7

Required committees of the board

Answer 7

1. Audit committee
2. compensation committee
3. nomination and governance committee
   Must be made up solely of independent directors.

Question 8

rights of directors

Answer 8

1. inspection
2. participation
3. indemnification (right to compensation following loss)

Question 9

Corporate officers

Answer 9

CEO, CFO, etc. Are agents of the corp. Rights are defined in an employment contract

Question 10

Duties and liabilities of directors and officers

Answer 10

1. Duty of care
2. Duty of Loyalty

Question 11

Duty of care

Answer 11

1. act in good faith
2. exercise care that an ordinary person would
3. act in the best interest of the corporation
4. if fail to do so, held liable to corp. If someone disagrees with a decision, should be noted to prevent liability.

Question 12

Duty of loyalty

Answer 12

1. requires directors and officers to subordinate their personal interests for the welfare of the corporation

Question 13

Conflicts of Interest

Answer 13

Entering a contract where an officer/director have a personal interest they must;
1. make full disclosure of the conflicting interest
2. Disclose all facts pertinent to the transaction
3. Abstain from voting on the transaction

Question 14

shareholder approval required for

Answer 14

1. amending articles of incorporation or bylaws
2. conduct a merger/dissolve
3. sell all corporate assets

Question 15

shareholder meetings

Answer 15

One required every year, shareholders can have an agent vote for them (proxy)

Question 16

Shareholder proposal

Answer 16

submitted when shareholders want to change a policy

Question 17

Shareholder voting

Answer 17

Must own a certain dollar amount, and own stock for a certain period of time, as per SEC rules.

Question 18

Plurality, Majority and cumulative voting

Answer 18

Shareholders vote on board one vote per share
Plurality: winner by most votes
Majority: Must have over 50% of total votes
Cumulative: shareholder can use all votes on a single position, instead of voting for multiple positions.

Question 19

Business judgment rule

Answer 19

Protects board and execs from lawsuits for making bad decisions

Question 20

Business judgment rule exception

Answer 20

If it can be proven that they acted in fraud, illegal activities, or were grossly negligent.

Question 21

Shareholder lawsuits

Answer 21

1. Direct lawsuits
2. Derivative lawsuits

Question 22

Direct lawsuit

Answer 22

shareholder is appointed to represent the shareholders who have been harmed by the directors/officers, winnings are split among shareholders

Question 23

Derivative lawsuit

Answer 23

1. Shareholder brings suit on behalf of the corporation, rather than as an individual
2. Usually done against insiders that have harmed the corporation
3. winnings go to the company
4. shareholder who files is required to prove that they took the problem to the directors but chose the lawsuit.