Business Organizations MT311 – Business Law I Seminar Presentation UNIT 9 Business Organizations I Chapter 26, Corporate Directors, Officer, and Shareholders II. Chapter 27, Investor Protection, Insider Trading, and Corporate Governance

Role of Directors and Officers Every corporation is governed by a board of directors. Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation. A director can also be a shareholder, especially in closely-held corporations.

Election and Compensation of Directors The number of directors is set forth in the articles of incorporation: Directors are appointed at the first organizational meeting In closely held companies, directors are generally the incorporators and/or the shareholders Term of office is generally for one year Director can be removed for cause In very large companies, directors can be compensated, and may be officers as well.

Board of Directors’ Meetings Directors hold meetings pursuant to bylaws with recorded minutes Special meetings may be called with sufficient notice Meetings require QUORUM (minimum number of directors to conduct official corporate business, usually majority) Each director generally has one vote

Rights of Directors Directors have the right to: Participate in corporate decisions and inspect corporate books and records Compensation (usually a nominal sum) and indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability

Corporate Officers and Executives Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well Their employment relationships are generally governed by contract law and employment law Officers may be terminated for cause

Duties and Liabilities of Directors and Officers Fiduciaries of corporation - ethical & legal duties Duty of Care Act in good faith and in best interests of the corp.; Make informed and reasonable decisions; and Exercise reasonable supervision Duty of Loyalty No conflict of interest No insider trading A dissenting director is rarely held liable

Business Judgment Rule Immunizes a director or officer from liability from consequences of a business decision that turned sour Court will not require directors or officers to manage “in hindsight” As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply

Role of Shareholders Ownership of shares grants a shareholder an equitable ownership interest in a corporation. Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors. Shareholders are generally protected from personally liability by the corporate veil of limited liability.

Shareholder Voting Common shareholder - one vote per share Articles and bylaws can exclude or limit voting rights of certain classes of stock Quorum must be present Cumulative Voting allows minority shareholders to get a board member elected

Rights of Shareholders To vote To have a stock certificate To purchase newly issued stock To dividends, when declared by board To inspect corporate records To transfer shares, with some exceptions To a proportionate share of corporate assets on dissolution To file suit on behalf of corporation

Shareholder’s Derivative Suit Shareholders can sue a 3rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury. Directors may refuse to take action because they might personally be liable. Any damages recovered go to corporation’s treasury.

Liabilities of Shareholders Shareholders are generally not liable for the contracts or torts of the corporation. If the corporation fails, shareholders cannot lose more than their investment, except when: A shareholder hasn’t paid for stock pursuant to the stock subscription agreement. Shareholder buys “watered stock” which is below the stock’s par value.

The Securities Acts In response to the stock market crash of 1929 and the Great Depression, Congress enacted two acts: Securities Act of 1933 Securities Exchange Act of 1934 Apply to public companies To structure and oversee the offering, selling, and trading of securities in ways that would protect investors

Securities Act of 1933 Requires that investors receive information about securities offered for public sale Prohibits fraud in the sale of securities by requiring that securities be registered Registration includes information including a description of properties and business, a description of the security to be offered for sale, information about management of the company, & financial statements certified by independent accountants

Registration Process Registration statement does not become effective until approval by SEC. Pre-Filing Period: issuer cannot offer or sell securities. Waiting Period: securities can be offered by not sold. 2005: Free-writing prospectus. Post-Effective Period: registration effective 20 days after approval.

Violations of the 1933 Act Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus. Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true. Penalties: Criminal: up to 5 years in prison and $10,000 fine. Civil: damages, refund of investment, injunction.

Securities Exchange Act of 1934 Created the Securities and Exchange Commission (SEC) Power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities self-regulatory organizations To give the investor confidence and prevent another collapse in the system

Section 10(b) and Rule 10b(5) Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC. Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.

Insider Trading Advance information available to corporate officers and directors that can affect future value of stock. Insider information must be material Must be a fiduciary relationship for liability officers, directors, majority shareholders, any persons having access to or receiving information of a non-public nature AND THOSE SHARING RESPONSIBILITY, INCLUDING ACCOUNTANTS, ATTORNEYS, AND CORPORATIONS

Insider Reporting and Trading—Section 16(b) Recapture by corporation of profits during previous six months gained by insider trading. Applies to stocks, warrants, options and convertible securities. Proxy Statements, Section 14(a) Whoever solicits a proxy must fully disclose all of the facts and which shareholders must vote.

Comparison of 10b-5 and 16(b)

Sarbanes-Oxley Act of 2002 In response to the Enron fall in 2001, Congress enacted the Sarbanes-Oxley Act of 2002 (SOX). To protect investors by improving the accuracy and reliability of corporate disclosures, To enhance corporate responsibility, To end corporate and accounting fraud, and To restore the image of stock purchases as investments worth the risk. Requires documented internal controls Requires CEO and CFO certifications

Key Provisions: Sarb-Ox

Questions & Reminders Questions on Unit 9 material? Unit 8 Grades Available by Monday Remember to complete Final Assignments Final Exam (Graded Automatically) 100 true/false and/or multiple choice questions unlimited amount of time to take the exam worth 200 points for course Discussion (See Discussion Board Posting Requirements) Ethics Post-Test (Automatic 30 points for taking it!) Writing Assignment Good luck on the final!