Corporate Management Structure Chapter 36

Shareholders Collectively own the corporation Indirect methods of control –Elect Directors –Approve amendments to articles –Approve fundamental changes –Amend by-laws Annual shareholder meeting Special Meetings – may be called by the Board or holders of at least 1/10 outstanding voting shares Record date for eligibility to vote may not be more than 70 days prior to a meeting Voting list must be compiled at least 10 days before the shareholders’ meeting

Proxy Authorization by a shareholder for someone else to vote on his/her behalf. Must be in writing Effective up to 11 months Proxy may be revoked unless coupled with an interest and states its irrevocable General or limited proxies Proxy Solicitations

Quorum A majority of the outstanding shares entitled to vote (i.e, no treasury shares) represented either in person or by proxy Articles may provide for no less than 1/3 quorum, or provide for a super-majority quorum, when permitted by state law.

Voting Rights STRAIGHT VOTING - One share, one vote; majority wins. EX shareholders, 60 votes for A, 40 votes for B, A wins. A majority shareholder can elect an entire Board. CUMULATIVE VOTING Allows minority shareholders to accumulate his votes and cast them all on one candidate. # of voting shares X # of D’s to be elected, equals Total # of votes that can be cast EX 100 shares owned X 3 D’s to be elected, shareholder may cast 300 votes for any one director, or divide in any proportion.

Voting Example At the annual shareholder meeting, 3 Directors will be elected from a choice of 6 candidates (U,V,W,X,Y, and Z). A, the minority shareholder, owns 100 shares; B owns 150 shares. A likes U, V, and W; B likes X, Y, and Z. Under straight voting, A may cast 100 votes towards any one Director, but will always lose by 50 votes to B’s candidates. If cumulative, A has 300 votes; B has 450. To defeat A’s candidates, B will need 301 votes, leaving only 149 left. Therefore, B might cast his votes as follows: 301 for X, 148 for Y and 1 for Z OR 250 for X and 200 for Y, 0 for Z, etc. A might cast all 300 votes for U, which would enable at least one of the minority shareholder’s candidates to be elected.

Formula to Determine How Many Votes are Necessary to Elect a D, or a Given # of D’s X = TS X ND___ + 1 TD + 1 X is the “desired quotient”, the minimum number of shares needed to elect 1 Director TS (total shares voting at the meeting) ND (number of directors desired by shareholder to be elected) TD (total # of Directors to be elected)

How Many Shares are Needed to Elect a Director? B owns 600 shares, C owns 400 shares. There are a total of 1000 shares. There are 6 Board vacancies and 12 candidates. C has a possible 2400 votes; B has How many shares does C need to elect a director? How many directors may she elect with her 400 votes? C needs 144 votes to elect each Director. At most, C can elect 2 of her favorite Director candidates, using 288 votes. 1000(1) + 1 = = =

Voting Trusts - Concentrates voting control in a trustee. Irrevocable; a writing is required. A copy must be available for inspection Shareholder gets a voting trust certificate from the trustee. Trustee becomes the record holder and pays dividends over to holders of trust certificate. Limited in duration, up to a maximum of 10 years. Shareholder Agreements - A contract by shareholders as to how they will not only vote their shares, but manage the business. May be perpetual. Used in close corporations. Agreements may relate to: –Eliminating or restricting the powers of the directors –Governing the making of distributions –Establishing who shall be directors or officers of the corporation –Governing the exercise or division of voting power. –Establishing terms for the transfer or use of any property or services Subject to specific performance

Shareholder’s Right to Inspect Corporate Records Shareholders have a right to inspect and copy corporate records in good faith and for any proper purpose. –To determine corp’s financial condition, value of stock, names of shareholders, propriety of dividends –NOT to harass management, discover trade secrets, gain a competitive edge or develop and sell a mailing list of shareholders Must give notice of demand

Shareholder Suits An individual shareholder may sue a corporation to preclude ultra vires acts and enforce shareholder rights. Direct Suit - Shareholders may sue directly either individually or as members of a class. In a class action, the plaintiffs represent not only themselves but “all others similarly situated.” Shareholder Derivative Suit - To recover for a wrong done to the corporation. The action is for the benefit of the corporation and any recovery belongs to the corporation, not the shareholders. The corporation is the real plaintiff. –Demand must be made on Board of Directors –Directors refuse to sue –Shareholder must own shares at time of wrongdoing. –Shareholder can recover reasonable litigation expenses but no compensation for his time.

Board of Directors Duty to act socially responsible May rely on others (accountants, committees) for information Fiduciary duties –To be informed, loyalty, obedience, diligence & due care, Board can’t usurp a corporate opportunity –Business Judgment rule –Avoid conflicts of interest May be removed with or without cause Inside and Outside Directors Determine capital structure Elected by shareholders Need at least 1, over the age of 18 If corporation has less than 35 shareholders, don’t need a Board of Directors Terms may be staggered Initial Board named in Articles Main objective is to maximize profits & manage business A Director is not an agent

Business Judgment Rule Directors should be protected if they –Act in good faith –Are not motivated by fraud and illegality –Are not grossly negligent Indemnification for liability Liability limitation statutes

Shareholder Approval of Board Actions Shareholder Approval Needed: –Fundamental corporate changes,i.e., mergers, consolidations –Amending the articles –Dissolution –Sale of all or of substantially all assets No Shareholder Approval Needed : –General power to manage –Declare dividends –Issue stock –Set share prices –Some mergers (if they don’t fundamentally alter business character, i.e, short form merger)

Board Approval of Actions Full Board Approval Needed: –Declaring dividends –Filing Board vacancies –Adopting/amending by-laws –Approving share issuance –Repurchase of corporate shares Approval Needed by only some Board Members/Committee Work : –Choosing management slate –audit committee –shareholder litigation committee – compensation committee

Officers Officers are agents of the corporation –express, implied, apparent authority –May bind the corporation in the ordinary course of business, not extraordinary actions Fiduciaries May be removed with or without cause Held to a reasonably prudent person standard, which may be higher if they possess special skills Run the day to day operations Elected or appointed by the Board