By Richard A. Mann & Barry S. Roberts Business Law and the Regulation of Business Chapter 36: Management Structure of Corporations By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Corporate Governance II. Role of Shareholders A. Voting Rights of Shareholders B. Enforcement Rights of Shareholders III. Role of the Directors and Officers A. Function of the Board of Directors B. Election and Tenure of Directors C. Exercise of Directors' Functions D. Officers E. Duties of Directors and Officers

Voting Rights of Shareholders Shareholder Meetings – shareholders may exercise their voting rights at both annual and special shareholder meetings. Quorum – minimum number necessary to be present at a meeting in order to transact business. Election of Directors – the shareholders elect the board at the annual meeting of the corporation.

Voting Rights of Shareholders Removal of Directors – the shareholders may by majority vote remove directors with or without cause, subject to cumulative voting rights. Approval of Fundamental Changes – shareholder approval is required for charter amendments, most acquisitions, and dissolution.

Concentrations of Voting Power Proxy – authorization to vote another's shares at a shareholder meeting. Voting Trust – transfer of corporate shares' voting rights to a trustee. Shareholder Voting Agreement – used to provide shareholders with greater control over the election and removal of directors and other matters.

Concentrations of Voting Power

Enforcement Rights of Shareholders Right to Inspect Books and Records – if the demand is made in good faith and for a proper purpose. Shareholder Suits Direct Suits – brought by a shareholder or a class of shareholders against the corporation based upon the ownership of shares. Derivative Suits – brought by a shareholder on behalf of the corporation to enforce a right belonging to the corporation.

Shareholder Suits: Direct Suit Corporation Recovery Direct Suit 1. Compel payment of properly declared dividends 2. Enforce right into inspect corporate records 3. Protect preemptive rights 4. Compel dissolution 5. Enjoin an ultra vires act

Shareholder Suits: Derivative Suit Third Party Recovery Corporation Derivative Suit 1. Recover damages from management for breach of duty 2. Recover improper dividend 3. Enjoin wrongful issuance of shares 4. Recover damages from third party 5. Recover damages from management for ultra vires act.

Enforcement Rights of Shareholders Shareholder's Right to Dissent – a shareholder has the right to dissent from certain corporate actions that require shareholder approval.

Function of the Board of Directors Capital Structure Fundamental Changes – the directors have the power to make, amend, or repeal the bylaws, unless this power is exclusively reserved to the shareholders. Dividends – directors declare the amount and type of dividends. Management Compensation Vacancies in the Board – may be filled by the vote of a majority of the remaining directors.

Exercise of Directors' Functions Meeting – directors have the power to bind the corporation only when acting as a board. Action Taken without a Meeting – permitted if a consent in writing is signed by all of the directors. Delegation of Board Powers – committees may be appointed to perform some but not all of the board's functions. Directors' Inspection Rights – directors have the right to inspect corporate books and records.

Role of Officers Authority of Officers Officers are agents of the corporation. Authority of Officers Actual Express Authority – arises from the incorporation statute, the charter, the bylaws, and resolutions of the directors. Actual Implied Authority – authority to do what is reasonably necessary to perform actual authority. Apparent Authority – acts of the principal that lead a third party to believe reasonably and in good faith that an officer has the required authority. Ratification – a corporation may ratify the unauthorized acts of its officers.

Management Structure of Corporations: The Statutory Model Officers Run the day-to-day operations of the corporation Board of Directors Declare dividends Delegate authority to officers Manage the business of the corporation Select, remove, and determine compensation of officers Shareholders Elect and remove directors Approve fundamental changes

Management Structure of Typical Closely Held Corporation Shareholders = Directors = Officers

Management Structure of Typical Publicly Held Corporation Shareholders Sign and return proxies Sell Shares Board of Directors Delegate authority to officers Ratify actions of officers Officers Control selection of directors Run day-to day business Control proxy votes

Duties of Directors and Officers Duty of Obedience – must act within respective authority. Duty of Diligence – must exercise ordinary care and prudence. Duty of Loyalty – requires undeviating loyalty to the corporation.

Liability of Directors and Officers Business Judgment Rule – precludes imposing liability on directors and officers for honest mistakes in judgment if they act with due care, in good faith, and in a manner reasonably believed to be in the best interests of the corporation.

Liability of Directors and Officers Indemnification – a corporation may indemnify a director or officer for liability incurred if he acted in good faith and was not adjudged negligent or liable for misconduct. Liability Limitation Statutes – many States now authorize corporations—with shareholder approval—to limit or eliminate the liability of directors for some breaches of duty.