1. Chapter 39 Corporations: Directors, Officers, and Shareholders Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 39-2 Summary of Roles of Directors, Officers, and Shareholders Directors-- Directors-- Officers-- Officers-- Shareholders-- Shareholders-- Vote on important corporate decisions Appoint and supervise officers Declare and pay corporate dividends Manage corporation Run “day-to-day” business of firm Agents of corporation Elect board of directors Approve major board decisions

3. 39-3 Fiduciary Duties Definition: Duties to corporation that individuals within corporation have Primary fiduciary duties include: Duty of Care Duty of Care Duty of Loyalty Duty of Loyalty Duty to Disclose Conflict of Interest Duty to Disclose Conflict of Interest

4. 39-4 Exhibit 39-2: Liability of Directors and Officers Can be held personally liability for their own torts and crimes Can be held personally liability for their own torts and crimes Can be held personally liable for torts and crimes of other employees they supervise Can be held personally liable for torts and crimes of other employees they supervise Can be held liable for wrongful transactions involving company stock Can be held liable for wrongful transactions involving company stock Cannot be held liable for decisions that harm company if they were acting in good faith at time of decision Cannot be held liable for decisions that harm company if they were acting in good faith at time of decision

5. 39-5 Exhibit 39-3: Liability of Shareholders Shareholders liable (to extent of their investment) for debts of corporation Shareholders liable (to extent of their investment) for debts of corporation Shareholders liable for breach of contract if stock subscription agreement signed and no stock purchased Shareholders liable for breach of contract if stock subscription agreement signed and no stock purchased Shareholders liable for watered stock Shareholders liable for watered stock Shareholders personally liable for receiving illegal dividends Shareholders personally liable for receiving illegal dividends

6. 39-6 Summary of Rights of Directors, Officers, and Shareholders Directors-- Directors-- Officers-- Officers-- Shareholders-- Shareholders-- Right to Compensation Right to Participation Right to Inspection Right to Indemnification Rights determined in employment contract Stock certificates Preemptive rights Right to Dividends Right to Transfer Shares Inspection Rights Right to Corporate Dissolution Right to File Derivative Suit Right to File Direct Suit

7. Corporations: Directors, Officers, and Shareholders—Terminology Quorum (Definition): Minimum number of directors necessary to validate corporate directors’ meeting 39-7

8. Corporations: Directors, Officers, and Shareholders—Terminology Proxy (Definition): Provides authorization for third party to vote in place of shareholder at shareholders’ meeting 39-8

9. Corporations: Directors, Officers, and Shareholders—Terminology Voting Trust (Definition): Agreement between stockholder and trustee in which stockholder transfers his/her legal share titles to trustee; trustee is then responsible for voting for those shares 39-9

10. Corporations: Directors, Officers, and Shareholders—Terminology Business Judgment Rule (Definition): Provides that directors and officers are not liable for decisions that harmed corporation if they were acting in good faith at time of decision 39-10

11. 39-11 Corporations: Directors, Officers, and Shareholders-- Other Relevant Terminology Stock Subscription Agreement: Contractually obliges individual to buy shares in corporation Stock Subscription Agreement: Contractually obliges individual to buy shares in corporation Par-Value Shares: Fixed face value noted on stock certificate Par-Value Shares: Fixed face value noted on stock certificate No-Par Shares: Stock shares without a par value No-Par Shares: Stock shares without a par value Watered Stock: Stock issued below its fair market value Watered Stock: Stock issued below its fair market value Pre-emptive Rights: Preferential rights given to existing shareholders to purchase shares of new stock issue; preference given in proportion to percentage of stock shareholder already owns Pre-emptive Rights: Preferential rights given to existing shareholders to purchase shares of new stock issue; preference given in proportion to percentage of stock shareholder already owns Stock Warrants: Vouchers issued to shareholders, entitling them to given number of shares at specified price Stock Warrants: Vouchers issued to shareholders, entitling them to given number of shares at specified price

12. 39-12 Corporations: Directors, Officers, and Shareholders--Other Relevant Terminology (Continued): Dividend: Distribution of corporate profits/income ordered by directors and paid to shareholders in proportion to their respective shares in corporation Dividend: Distribution of corporate profits/income ordered by directors and paid to shareholders in proportion to their respective shares in corporation Inspection Rights: Protect shareholder interest by giving them right to inspect corporation’s books and records after asking in advance to inspect and having proper purpose Inspection Rights: Protect shareholder interest by giving them right to inspect corporation’s books and records after asking in advance to inspect and having proper purpose Right of First Refusal: Given to existing shareholders to purchase any shares of stock offered for resale by shareholder within specified period of time Right of First Refusal: Given to existing shareholders to purchase any shares of stock offered for resale by shareholder within specified period of time Shareholder’s Derivative Suit: Filed by corporate shareholder when corporate directors fail to sue in situation where corporation has been harmed by individual/another corporation Shareholder’s Derivative Suit: Filed by corporate shareholder when corporate directors fail to sue in situation where corporation has been harmed by individual/another corporation