© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 37 Corporate Directors, Officers and Shareholders

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Rights of Shareholders A corporation’s shareholders own the corporation. Shareholders are not agents of the corporation. They cannot bind the corporation to contracts. Shareholders have the right to vote on matters such as: –the election of directors, and –the approval of fundamental changes in the corporation.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Annual Shareholders’ Meeting Meeting of the shareholders that must be held annually by the corporation to elect directors and vote on other matters. –Shareholders do not have to attend the shareholders’ meeting to vote. –Shareholders may vote by proxy. Special shareholders’ meeting called by board, holders of at least ten percent of stock, others authorized. –Emergency or important issues

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Proxies Shareholders may vote by proxy –Appoint someone as their agent to vote –Written document is proxy card –Valid for 11 months

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Voting Requirements At least one class of shares of the corporation must have voting rights. Shareholders of record as a set date allowed to vote –Record date not more than 70 days before the shareholders’ meeting Corporation must prepare and maintain shareholders’ list –Must be available for inspection

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Quorum The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting. Once quorum is present, withdrawal of shares has no effect. The affirmative vote of the majority of the voting shares represented at a shareholders’ meeting constitutes an act of the shareholders for actions other than for the election of directors.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Voting Straight Voting- Each shareholder votes the number of shares he or she owns on candidates for each of the positions open. Cumulative Voting- A shareholder can accumulate all of his or her votes and vote them all for one candidate of split them among several candidates. Supramajority Voting Requirement- A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Voting Agreements Sometimes share-holders agree in advance as to how their shares will be voted. –Voting Trusts –Shareholder Voting Agreements

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Right to Receive Information Corporation must furnish shareholders with annual financial statement. Shareholders have absolute right to inspect shareholders’ list, articles, bylaws, minutes of shareholders’ meetings for past three years Must demonstrate proper purpose to inspect accounting and tax records, minutes from board and committee meetings, shareholders’ meetings beyond three years.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Dividends Distribution of profits of the corporation to shareholders. Paid at discretion of board. Shareholders on record date will receive dividends. May use additional shares of stock as a dividend. –Not a distribution of corporate assets

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Derivative Lawsuits Shareholders may bring derivative lawsuits against the corporation to enforce their rights. –Corporation is harmed by someone, and directors fail to bring an action against them. –Shareholder must have owned shares when action occurred. –Shareholder must fairly and adequately represent interests of corporations. –Must make written demand upon directors, and is either rejected or 90 days have expired since demand made. –If successful, award goes to treasury, but plaintiff-shareholder may recover reasonable expenses and attorneys’ fees.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Piercing the Corporate Veil A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can: –Disregard the corporate entity, and –Hold the shareholder personally liable for the corporation’s debts and obligations

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Board of Directors Elected by the shareholders. Responsible for formulating the policy decisions affecting the corporation. The board may initiate certain actions that require shareholders’ approval by passing resolution. Have an absolute right of inspection.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Selecting Directors Inside Director –A member of the board of directors who is also an officer of the corporation Outside Director –A member of the board of directors who is not an officer of the corporation

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Term of Office The term of a director’s office expires at the next annual shareholders’ meeting following his or her election. Terms may be staggered to two or three years. Specifics must be in articles.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Meetings of the Board of Directors The directors can only act as a board. They cannot act individually on the corporation’s behalf. Every director has the right to participate in any meeting of the board of directors. Each director has one vote. Directors cannot vote by proxy. Regular and special meetings are established by bylaws.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Quorum and Voting Requirement Simple majority usually constitutes quorum. Articles and bylaws may increase this number. If quorum is present, simple majority of quorum approves or disapproves actions.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Committees of the Board of Directors Boards can create committees to handle specific duties. Members with special expertise appointed to committees Cannot delegate dividend declaration, initiate actions that require shareholders’ approval, appoint members to fill vacancies, amend the bylaws, approve plan of merger, or authorize issuance of shares.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Preemptive Rights Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests. Prevents dilution of shares.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfer of Shares Subject to certain restrictions, shareholders have the right to transfer their shares. Shareholders may enter into agreements with one another to prevent unwanted persons from becoming owners of the corporation. –Right of First Refusal –Buy-and-Sell Agreement

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Corporate Officers Board of directors appoint officers. Directors delegate management authority to officers. Most corporations have president, vice president, secretary, and treasurer. Officer can be removed by board.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Agency Authority of Officers Officers and agents of the corporation have such authority as may be provided in the bylaws or as determined by resolution of the board of directors. Corporation may ratify unauthorized act. –Officers liable for unauthorized actions.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Liability of Corporate Directors and Officers Duty of Obedience Duty of Care Duty of Loyalty

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Liability of Directors and Officers Fiduciary Duties- The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders. –Duty of Obedience –Duty of Care –Duty of Loyalty

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Obedience Duty to act within the authority conferred upon them by: –The state corporation statute –The articles of incorporation –The corporate bylaws –The resolutions adopted by the board of directors Directors and officers who either intentionally or negligently act outside their authority are personally liable for any resultant damages caused to the corporation or its shareholders.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Care A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation. A director or officer who breaches this duty of care is personally liable to the corporation and its shareholders for any damages caused by this breach.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Care (continued) This duty is discharged if an officer or director acts: 1. In good faith. 2. With the care that an ordinary prudent person in a like position would use use under similar circumstances. 3. In a manner he or she reasonably believes to be in the best interests of the corporation.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Care (continued) Violations of this duty of care include acts of negligence and mismanagement, including failure to: –Make a reasonable investigation of a corporate matter. –Attend board meetings on a regular basis. –Properly supervise a subordinate who causes a loss to the corporation. –Keep adequately informed about corporate matters. –Take other actions necessary to discharge duties.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Business Judgment Rule Determination of whether duty was met measured at time decision made. –Hindsight not applied Not liable for honest mistakes of judgment.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Reliance on Others Corporate directors and officers may rely on information and reports prepared by competent and reliable officers and employees, lawyers, accountants, other professionals, and committees of the board of directors. A director is not liable if such information is false, misleading, or otherwise unreliable unless he or she has knowledge that would cause such reliance to be unwarranted.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Loyalty A duty that directors and officers have: –Not to act adversely to the interests of the corporation, and –To subordinate their personal interests to those of the corporation and its shareholders Breach of the duty of loyalty usually occurs because of intentional conduct.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Duty of Loyalty (continued) Breaches of the duty of loyalty include unauthorized: 1. Self-dealing with the corporation 2. Usurping of a corporate opportunity 3. Competing with the corporation 4. Making a secret profit that belongs to the corporation

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Criminal Liability Directors, officers, and agents are personally liable for the crimes that they commit while acting on behalf of the corporation. –Sanctions include fines and imprisonment for individuals –Fines and loss of privileges for corporation