P A R T P A R T Corporations History & Nature of Corporations Organizational and Financial Structure of Corporations Management of Corporations 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

P A R T P A R T Corporations Shareholders’ Rights & Liabilities Securities Regulation Legal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals 10 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Management of Corporations PA E TR HC 43 “Managers should work for their people…and not the reverse.” Kenneth Blanchard, Leadership and The One Minute Manager (2000)

Learning Objectives  Corporate objectives  Corporate powers  The Board of Directors  Officers of the corporation  Directors’ and officers’ duties to the corporation  Corporate and management liability

 Shareholders own the corporation, but elect a board of directors to manage the firm  For board to act, a quorum must be present and each director has one vote  Board committees: executive, nominating, compensation, shareholder litigation  Audit committee required by Sarbanes- Oxley Act  Directors are elected by shareholders at the annual shareholder meeting Board of Directors

 Straight voting : shareholder may cast as many votes for each nominee as s/he has shares; top votegetters elected as directors  Class voting : certain shareholder classes have right to elect a specified number of directors  Cumulative voting : shareholders multiply their shares by number of directors to elect; cast resulting total for one or more directors Electing Directors

 Board delegates management duties to officers, who hire managers and employees  Officers of a corporation include the president, one or more vice presidents, a secretary, and a treasurer The Officers

 MBCA permits close corporation owners to either dispense with the board and manage the firm or restrict the board’s discretion  A nonprofit corporation must have at least three directors on the board, members elect directors, and only one officer performing duties of a corporate secretary is required  Directors often volunteer (no compensation) Close & Nonprofit Corporations

 Directors and officers owe a fiduciary duty to corporation, including duty to act within the scope of corporate powers and within their express or implied authority  Directors and officers are liable for corporate losses caused by the lack of care or diligence  Business judgment rule : absent bad faith, fraud, breach of fiduciary duty, judgment of directors and officers is conclusive Director & Officer Duties

 As agents, directors and officers owe duties of loyalty, including duty not to self-deal (a conflict of interest) or usurp an opportunity the corporation could have exploited  Court may void an unfair transaction  Intrinsic fairness standard : transaction fair if reasonable persons in arm’s-length bargain would have bound the corporation Breach of Fiduciary Duty

 Generally, corporate purposes are broadly stated to avoid the claim that corporation acted beyond its powers ( ultra vires ) by:  Shareholder seeking to enjoin a corporation from executing a proposed ultra vires action;  In re The Walt Disney Company Derivative Litigation  Corporation suing its management for damages from exceeding corporate powers;  State’s attorney general The Ultra Vires Doctrine

 Shareholders isolated by another group of shareholders may complain of oppression  Freeze-out : corporation merges with newly formed corporation under oppressive terms by which minority shareholders receive cash instead of shares of new corporation  Going private is a freeze-out of shareholders of publicly owned corporations Minority Shareholders

 Corporate officer ordinarily has no liability on contracts made for corporation if officer signs on behalf of corporation rather than in personal capacity  A person is always liable for his own torts, even if committed on behalf of a principal, but under respondeat superior, corporation is liable for employee’s tort reasonably connected to employee’s authorized conduct Management Liability

 A person is always liable for his own crimes  Corporations also may be liable for crimes when criminal act is requested, authorized, or performed by:  Director, officer, manager with responsibility for company policy, or high-level manager with supervisory responsibility over subject matter of the offense and acting within scope of employment Management Liability: Crimes

 Since officers and directors risk liability, corporations typically agree to indemnify those who serve as a director or an officer  In addition, D & O insurance is available as a risk management tool Indemnification & Insurance

 When an outsider attempts to gain control of a publicly held corporation (target), outsider (raider) makes a tender offer for the shares  Tender offer is an offer to shareholders to buy their shares at a price above current market price  Raiders hope to acquire a majority of shares, giving control of the target corporation  Corporate management generally opposes tender offers using a variety of defenses The Tender Offer

Test Your Knowledge  True=A, False = B  The board of directors own a corporation.  Corporations have legal power to do anything that an individual may do.  Sarbanes–Oxley Act requires all publicly held firms to have audit committees comprised of independent directors.  Class voting permits shareholders to multiply shares by number of directors to be elected and cast total for one or more directors

Test Your Knowledge  True=A, False = B  Officers are agents of the corporation.  A hostile takeover occurs when there is an offer to shareholders to buy their shares at a price above current market price.  Under the intrinsic fairness test, directors and officers are protected from liability to their corporation for usurping corporate opportunities

Test Your Knowledge  Multiple Choice  Absent bad faith, fraud, or breach of fiduciary duty, the rule that the judgment of directors and officers is conclusive is known as:  (a) The fiduciary duty rule  (b) The D&O rule  (c) The business judgment rule  (d) The business purpose test  (e) none of the above

Test Your Knowledge  Multiple Choice  Which of the following statements is false?  (a) Each person is liable for his/her own torts  (b) A corporation may be criminally liable if an officer or director authorized an employee to do a criminal act  (c) An officer or director cannot be personally liable for a crime  (d) Corporations may protect or insure their officers and directors from the risk of liability

Thought Question  Roberto Goizueta, former CEO of Coca- Cola, said in 1992: “Business now shares in much of the responsibility for our global quality of life.”  Do you agree or disagree with Goizueta? Support your opinion