1. Chapter 37 Corporate Governance and the Sarbanes-Oxley Act

2. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Shareholders
Own the corporation
Not agents of the corporation
Cannot bind the corporation to contracts
Have right to vote on fundamental changes in the corporation
Page 618
37-2
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

3. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Shareholder Meetings
Annual shareholders’ meeting: Held by the corporation to elect directors and to vote on other matters
Special shareholders’ meetings: May be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation
Page 619
37-3
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

4. Notice of a Shareholders’ Meeting
Corporation is required to give the shareholders written notice of the place, day, and time of annual and special meetings
A proxy
May be authorized to vote on a shareholder’s behalf
May be directed exactly how to vote the shares
May be authorized to vote the shares at his or her discretion
Page 619
37-4
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

5. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Voting Requirements
Shareholders who own stock as of a set date are allowed to vote at a shareholders’ meeting
Shareholders’ list—contains the names and addresses of the shareholders as of the record date and the class and number of shares owned by each shareholder
Quorum to hold a meeting of the shareholders: The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting
Page 619
37-5
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

6. Voting for Election of Directors
Straight (Noncumulative) Voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open
Cumulative Voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates
Page 620
37-6
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

7. Supramajority Voting Requirement
Articles of incorporation or bylaws may require more than a majority of shares
To constitute a quorum
For votes for mergers
For consolidation, or other important matter
Page 620
37-7
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

8. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Voting Agreements
Shareholders agree in advance as to how their shares will be voted
Voting trusts: An arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares
Shareholder voting agreements: An agreement between two or more shareholders that stipulates how they will vote their shares
Page
37-8
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

9. Restrictions on the Sale of Shares
Right of first refusal: An agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else
Buy-and-sell agreement: An agreement that requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement
Page 621
37-9
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

10. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Preemptive Rights
Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests
Granted by the articles of incorporation
Failure to exercise preemptive right—shares can be sold to anyone
Page 621
37-10
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

11. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Dividends
Distribution of profits of the corporation to shareholders
Paid at the discretion of the board of directors
Stock dividend: Additional shares of stock distributed as a dividend
Distributed in proportion to the existing ownership interests of shareholders
A shareholder’s proportionate ownership interest is not increased
Page 622
37-11
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

12. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Derivative Lawsuits
A lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit
Court may dismiss if the lawsuit is not in best interests of corporation
Any award goes to corporate treasury
Corporation pays shareholder’s expenses
Page 622
37-12
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

13. Piercing the Corporate Veil
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
Occurs when
There is thin capitalization
No separateness is maintained between the corporation and its shareholders
Page 623
37-13
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

14. Case 37.1: Piercing the Corporate Veil
Northeast Iowa Ethanol, LLC v. Drizin
Web 2006 U.S. Dist. Lexis 4828 (2006)
United States District Court for the Northern District of Iowa
Issue
Does the doctrine of piercing the corporate veil apply in this case, thus allowing the plaintiffs to pierce the corporate veil of GSI and reach shareholder Drizin for liability for civil fraud?
Page
37-14
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

15. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Board of Directors
A panel of decision makers who are elected by the shareholders
Generally compensated for service
Resolutions of the Board of Directors
They specify the decisions that were made by the board during their meetings
Certain actions may require the shareholders’ approval
The board has absolute right of inspection
Page
37-15
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

16. Exhibit 37.2: Board of Directors
Page 625
37-16
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

17. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
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
Term of office—expires at the annual shareholders’ meeting following a boards member’s election
Staggered terms—Terms lasting two or three years
Page
37-17
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

18. Meetings of the Board of Directors
Regular meetings are held at the times and places established in the bylaws
The board can call special meetings as provided in the bylaws
Quorum of the board of directors: The number of directors necessary to hold a board meeting or transact business of the board
Page
37-18
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

19. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Corporate Officers
Employees of a corporation who are appointed by the board of directors
They manage the day-to-day operations of the corporation
Agency authority of officers
Possess authority that may be provided in the bylaws, or as determined by resolution of the board of directors
Page
37-19
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

20. Exhibit 37.3: Corporate Officers
Page 628
37-20
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

21. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Fiduciary Duty
Fiduciary duties: The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders
Duty of obidience
Duty of care
Duty of loyalty
Page 629
37-21
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

22. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Duty of Obedience
A duty that directors and officers of a corporation have to act within the authority conferred upon them by
State corporation codes
The articles of incorporation
The corporate bylaws
The resolutions adopted by the board of directors
Breach of duty—Personal liability for resultant damages
Page
37-22
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

23. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Duty of Care
A duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation
Requires corporate directors and officers to use care and diligence when acting on behalf of the corporation
Breach of duty—Personal liability to the corporation and its shareholders for any damages caused
Page 629
37-23
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

24. Business Judgment Rule
A rule that says directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment
Determination of whether duty was met is measured at the time the decision was made
Hindsight not applied
Not liable for honest mistakes of judgment
Page 629
37-24
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

25. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Duty of Loyalty
A duty that directors and officers have not to act adversely to the interests of the corporation
To subordinate their personal interests to those of the corporation and its shareholders
Breach of duty—Corporation can sue the director or officer to recover the secret profit made from a transaction
Page 630
37-25
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

26. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Duty of Loyalty
Usurping a corporate opportunity—If proven the corporation can
Acquire the opportunity from the director/officer
Recover any profits made
Self-dealing
Contracts or transactions with a corporate director or officer is voidable by the corporation if it is unfair to the corporation
Page
37-26
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

27. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Duty of Loyalty
Competing with the corporation
Any profits made by nonapproved competition and any other damages caused to the corporation can be recovered
Making a secret profit
The corporation can sue the director or officer to recover the secret profit
Page 631
37-27
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

28. Case 37.2: Fiduciary Duties of Corporate Directors and Officers
McPadden v. Sidhu
964 A.2d 1262 (2008)
Court of Chancery of Delaware
Issue
Did the plaintiff plead sufficient facts of i2’s board of directors bad faith and Dubreville’s breach of the duty of loyalty to withstand the defendants’ motions to dismiss?
Page
37-28
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

29. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Sarbanes-Oxley Act
Enacted by Congress in 2002
Goals
To improve corporate governance
Eliminate conflicts of interest
Instill confidence in public companies
Page 633
37-29
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

30. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Sarbanes-Oxley Act
Foreign Corrupt Practices Act: A federal statute that makes it a crime for U.S. companies, or their officers, directors, agents, or employees, to bribe
A foreign official
A foreign political party official
A candidate for foreign political office, where the bribe is paid to influence the awarding of new business or the retention of a continuing business activity
Page 633
37-30
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

31. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
37-31
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.