Corporations (Governance) Flashcards
Corporations (Governance)
Shareholder Rights
Shareholders do not have management or control rights
Shareholders participate indirectly in corporate governance through voting
Corporations (Governance)
Shareholder Protections
Unhappy shareholders may sell their shares or try to turn out the board
Corporations (Governance)
Shareholder Meetings:
Who can call a Special Meeting
- Board of Directors
- Shareholders with more than 10% ownership
- Any person authorized in the Articles of Incorporation or Bylaws
Corporations (Governance)
Shareholder Meetings:
Location
The bylaws either designate a location or provide that the directors will determine the location
Corporations (Governance)
Shareholder Meetings:
Notice of Meetings
Shareholders are entitled to notice of all meetings in which they can vote
Failure to provide notice can cause a meeting to be declared invalid
Corporations (Governance)
Shareholder Meetings:
Shareholders Entitled to Notice
Unless the state corporations code or the articles of incorporation require otherwise, the corporate is generally only required to give notice to shareholders entitled to vote at a meeting. MBCA § 7.05(a)
Voting shareholders of record as of the record date are entitled to notice.
Corporations (Governance)
Shareholder Meetings:
Substantive & Procedural Notice Requirements
Substantive:
Notice must specify the purpose, date, time, and place
Procedural:
Notice must be given no fewer than 10 days, nor more than 60 days before the meeting date
Corporations (Governance)
Shareholder Meeting:
Effect of Defective or Improper Notice
Shareholder who have not recieve proper notice may attack the meeting, unless*
- The shareholders attend the meeting
- The shareholders provide written waivers or ratification/consent in writing
Corporations (Governance)
Shareholder Meeting:
Quorum
Potential Modifications & Outcomes
No action can be taken at any shareholder meeting unless a certain minimum number of shares is present (quorum)
If no quorum –> meeting cannot be held
If quorum –> meeting may be held and quorum cannot be destroyed by shareholders leaving the meeting
Modifications: Unless the articles of incorporation specify otherwise, a quorum is a majority of votes entitled to be cast on a given matter
Corporations (Governance)
Proxy Voting:
Proxy Battles
A fight for control of the company that is reflected in competing proxy statements or competing proposals in the company’s proxy statement.
Often occurs in connection with hostile takeovers
Corporations (Governance)
Proxy Voting:
Proxy Revocation
Proxies can be revoked by:
- Written revocation
- Showing up to vote in person
- Signing a subsequently-dated proxy
- Dying or becoming incapacitated
Corporations (Governance)
Proxy Voting:
Proxy Expiration
If the proxy does not state a duration, it automatically expires 11 months after it is received by the corporation, unless the proxy is irrevocable under applicable state law
Corporations (Governance)
Proxy Voting:
Irrevocable Proxies
A proxy is irrevocable if:
- It states it is irrevocable
- It is coupled with interest (aka the proxy is the loan interest)
Corporations (Governance)
Shareholder Voting:
Shareholder Voting Rights
Shareholder voting rights are limited and generally include:
- Charter Amendment
- Shareholder-initiated Bylaw Amendments
- Certain Mergers
- Sales of all or substantially all Corporate Assets not in the ordinary course of business
- Dissolution
Shareholder voting rights may be expanded by the charter or bylaws
The board may choose to put an issue to a shareholder vote
Corporations (Governance)
Shareholder Voting:
Voting for Directors
Straight Voting vs. Cumulative Voting
Majority vs. Plurality Requirement
NOTE: Plurality is generally default
“separate vote on each seat” = “seat-by-seat” voting
Corporations (Governance)
Shareholder Voting:
Class Voting
Classes or series of stock may vote as separate units
At least one class of share must have full voting rights
Corporations (Governance)
Shareholder Voting:
Disproportionate Voting (Dual-Class Voting)
Exists when one class has disproportionate voting power compared to another class
Generally criticized for allowing founders and insiders to exercise unchecked control
Corporations (Governance)
Shareholder Voting:
Voting Agreements
Shareholders can make private agreements to pool their votes by agreeing to vote in a certain manner
Relatively little regulation
Corporations (Governance)
Shareholder Voting:
Voting Trusts
Trustee Authority & Liability and Voter Rights Relinquished & Retained
Shareholders transfer their voting rights to a trustee via a written agreement
Voter Rights Relinquished: Voting & Notice
Voter Rights Retained: Dividends & other Ownership Rights
Trustee Authority:
1. Exercise independent judgment
2. Obtain a consensus, or
3. Vote as specified in the agreement
Trustee Liability:
Trustee has fiduciary duties to the trust, but is generally not liable for acts of gross negilgence or recklessness
Corporations (Governance)
Shareholder Voting:
Voting Agreements vs. Trusts
Corporations (Governance)
Board of Directors:
General Responsibilities
- Managing the business and affairs of the company
- Making key decisions and delegating the day-to-day functions to Management
- May have committee functions
Corporations (Governance)
Board of Directors:
Common Functions & Responsibilities
- Select, evaluate, and replace corporate officers (or management)
- Determine officer and senior management compensation
- Review and approve financial objectives, strategies and plans, and when to seek loans
- Provide advice and counsel to management on important policies, strategies, business plans, etc
- Select and recommend directors for shareholder approval
- Initiate extraordinary matters, such as mergers or the purchase/sale of corporate assets
- Exercise responsibility for corporate operations, including entering into contracts and buying/selling real and personal property
- Review adequacy of internal controls
Corporations (Governance)
Board of Directors:
Board Composition
- Number: One or more, usually an odd number, and determined in the bylaws
- Insider & Outside Directors
- Listing Standards (for Public Companies–qualifications & independence)
Corporations (Governance)
Board of Directors:
Insider Directors
Directors who are also officers, employees, and/or significant shareholders of the corporation
Corporations (Governance)
Board of Directors:
Outside Directors
Directors who have no other relationship with the corporation other than their directorship
Corporations (Governance)
Board of Directors:
Committee Functions
Limited Authority
Committees have limited authority, especially regarding actions that substantially effect shareholders
Nondelegable Committee Actions
1. Authorizing distributions
2. Amending the bylaws
3. Filing board vacancies
4. Approving matters requiring shareholder approval
Corporations (Governance)
Board of Directors:
Committee Functions
Common Committees
- Audit Committee
- Compensation Committee
- Special Litigation Committee
- Executive Committees
- Nominating and Governance Committees
Corporations (Governance)
Board of Directors:
Committee Functions
Audit Committee Functions
- Reviews financial matters
- Selects corporate auditors
- Supervises audits
Corporations (Governance)
Board of Directors:
Director Removal
Director removal may be for cause or without cause
Generally, directors cannot remove other directors
Corporations (Governance)
Board of Directors:
Shareholder Removal of Directors
A director may be removed by shareholders:
- At a special meeting called for the purpose of removing the director
OR - By court order (business judgment rule)
Corporations (Governance)
Board of Directors:
Vacancies
Vacancies are filed either by shareholder vote or remaining directors
If numerous vacancies exist and the remaining directors do not constitute a quorum, they still may fill vacancies by a majority vote of all remaining directors. MBCA § 8.10(a)(3)
Corporations (Governance)
Board of Directors:
Resignation
Directors may resign at any time by providing written notice to the corporation
Corporations (Governance)
Board of Directors:
Staggered vs. Non-Staggered Boards
Benefits & Negatives
Under default rules, directors typically stand for election each year, unless terms are staggered.
Benefits
Because the board is not completely replaced at one time, it:
- Provides continuity of expertise
- Allows directors to focus on long-term goals rather than fearing ouster
- Makes hostile takeover more difficult
Negatives
- Serves to entrench directors
- **Deters acquisition bids **that may enhance shareholder value
- Annually elected directors may be more accountable to shareholders
Corporations (Governance)
Board of Directors:
How Directors Act on Behalf of the Company
aka how decisions are made
-
Voting at meetings (regular & special) where quorum is present,
OR - Unanimous written consent
Corporations (Governance)
Board of Directors:
Purpose of Regular Meetings
Most Boards meet at regularly scheduled intervals in order to:
- Conduct regular business
- Manage the corporation, and
- Appoint new officers
Corporations (Governance)
Board of Directors:
Purpose of Special Meetings
Typically called to discuss matters that cannot wait until the next regular meeting, such as time-sensitive and significant potential corporate transactions
Corporations (Governance)
Board of Directors:
Director Notice of Meetings
Directors are not entitled to notice of regular meetings
Directors are entitled to notice of special meetings at least 2 days prior to the meeting, unless otherwise specified in the articles of incorporation or bylaws
Corporations (Governance)
Board of Directors:
Waiver of Notice of Meeting
A director can waive notice:
- Before or after the meeting
- In writing
- Signed
- Filed
A director’s attendance constitutes a waiver, unless objection made at beginning of meeting
Corporations (Governance)
Board of Directors:
Quorum
Directors cannot validly take action at any meeting unless a quorum is present
Generally consists of a majority of the number of directors as determed in the articles or bylaws, regardless of vacancies
The articles or bylaws may vary the quorum requirements to:
1. More than a majority
2. Not Less than one-third
Bylaws: 9directors; Reality: 5directors -> need 5directors for majority
Corporations (Governance)
Board of Directors:
Quorum for Director Vacancies
Quorum requirements are typically relaxedwith regard to filling vacancies (affirmative vote of remaining directors)
Corporations (Governance)
Board of Directors:
Director Vote by Proxy
Generally, directors cannot act or vote by proxy because it would violate their fiduciary duties to make fully informed decisions
Corporations (Governance)
Board of Directors:
Compensation
Most statutes allow for director compensation:
- Pursuant to the articles or bylaws, **or **
- By shareholder or board action
Generally, directors may** fix their own compensation** unless otherwise provided in the articles or bylaws
Corporations (Governance)
Officers (Management):
Functions & Responsibilities
Responsible for implementing board policies and decisions
Carry out day-to-day functions delegated by the board or set forth in the bylaws
Officers are agents of the corporation
Corporations (Governance)
Officers:
Selection & Removal
Officers are selected, supervised, and removed by the board
Details regarding officer selection are generally included in the bylaws
Directors select replacements to fill vacancies, but some senior officers amy be allowed by the board to appoint other inferior or assistant officers
Corporations (Governance)
Officers:
Agent Authority
Actual, Apparent, & Inherent
Actual Authority - Set forth in Bylaws; explicitly delegated by the board
Apparent Authority - Based on job title or other board manifestations
Inherent Authority - Based on job title or other delegated authority
Corporations (Governance)
Officers:
Duties, Obligations, & Liability
- Duty of Care
- Duty of Loyalty
- Obligations of Good Faith and Fair Dealing
Officers are generally protected by the business judgment rule
