Chapter 37 Corporate Directors, Officers and Shareholders

Rights of Shareholders • A corporation’s shareholders own the corporation. • Shareholders are not agents of the corporation. • They cannot bind the corporation to contracts. • Shareholders have the right to vote on matters such as: • the election of directors, and • the approval of fundamental changes in the corporation. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Annual Shareholders’ Meeting • Meeting of the shareholders that must be held annually by the corporation to elect directors and vote on other matters. • Shareholders do not have to attend the shareholders’ meeting to vote. • Shareholders may vote by proxy. • Special shareholders’ meeting called by board, holders of at least ten percent of stock, others authorized. • Emergency or important issues © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Proxies • Shareholders may vote by proxy • Appoint someone as their agent to vote • Written document is proxy card • Valid for 11 months © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Voting Requirements • At least one class of shares of the corporation must have voting rights. • Shareholders of record as a set date allowed to vote • Record date not more than 70 days before the shareholders’ meeting • Corporation must prepare and maintain shareholders’ list • Must be available for inspection © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Quorum • The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting. • Once quorum is present, withdrawal of shares has no effect. • The affirmative vote of the majority of the voting shares represented at a shareholders’ meeting constitutes an act of the shareholders for actions other than for the election of directors. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Voting • Straight Voting- Each shareholder votes the number of shares he or she owns on candidates for each of the positions open. • Cumulative Voting- A shareholder can accumulate all of his or her votes and vote them all for one candidate of split them among several candidates. • Supramajority Voting Requirement- A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Voting Agreements • Sometimes share-holders agree in advance as to how their shares will be voted. • Voting Trusts • Shareholder Voting Agreements © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Right to Receive Information • Corporation must furnish shareholders with annual financial statement. • Shareholders have absolute right to inspect shareholders’ list, articles, bylaws, minutes of shareholders’ meetings for past three years • Must demonstrate proper purpose to inspect accounting and tax records, minutes from board and committee meetings, shareholders’ meetings beyond three years. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Dividends • Distribution of profits of the corporation to shareholders. • Paid at discretion of board. • Shareholders on record date will receive dividends. • May use additional shares of stock as a dividend. • Not a distribution of corporate assets © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Derivative Lawsuits • Shareholders may bring derivative lawsuits against the corporation to enforce their rights. • Corporation is harmed by someone, and directors fail to bring an action against them. • Shareholder must have owned shares when action occurred. • Shareholder must fairly and adequately represent interests of corporations. • Must make written demand upon directors, and is either rejected or 90 days have expired since demand made. • If successful, award goes to treasury, but plaintiff-shareholder may recover reasonable expenses and attorneys’ fees. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Piercing the Corporate Veil • A doctrine that says 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 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Board of Directors • Elected by the shareholders. • Responsible for formulating the policy decisions affecting the corporation. • The board may initiate certain actions that require shareholders’ approval by passing resolution. • Have an absolute right of inspection. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Term of Office • The term of a director’s office expires at the next annual shareholders’ meeting following his or her election. • Terms may be staggered to two or three years. • Specifics must be in articles. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Meetings of the Board of Directors • The directors can only act as a board. • They cannot act individually on the corporation’s behalf. • Every director has the right to participate in any meeting of the board of directors. • Each director has one vote. • Directors cannot vote by proxy. • Regular and special meetings are established by bylaws. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Quorum and Voting Requirement • Simple majority usually constitutes quorum. • Articles and bylaws may increase this number. • If quorum is present, simple majority of quorum approves or disapproves actions. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Committees of the Board of Directors • Boards can create committees to handle specific duties. • Members with special expertise appointed to committees • Cannot delegate dividend declaration, initiate actions that require shareholders’ approval, appoint members to fill vacancies, amend the bylaws, approve plan of merger, or authorize issuance of shares. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Preemptive Rights • Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests. • Prevents dilution of shares. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Transfer of Shares • Subject to certain restrictions, shareholders have the right to transfer their shares. • Shareholders may enter into agreements with one another to prevent unwanted persons from becoming owners of the corporation. • Right of First Refusal • Buy-and-Sell Agreement © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Corporate Officers • Board of directors appoint officers. • Directors delegate management authority to officers. • Most corporations have president, vice president, secretary, and treasurer. • Officer can be removed by board. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Agency Authority of Officers • Officers and agents of the corporation have such authority as may be provided in the bylaws or as determined by resolution of the board of directors. • Corporation may ratify unauthorized act. • Officers liable for unauthorized actions. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Liability of Directors and Officers • Fiduciary Duties- The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders. • Duty of Obedience • Duty of Care • Duty of Loyalty © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Obedience • Duty to act within the authority conferred upon them by: • The state corporation statute • The articles of incorporation • The corporate bylaws • The resolutions adopted by the board of directors • Directors and officers who either intentionally or negligently act outside their authority are personally liable for any resultant damages caused to the corporation or its shareholders. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Care • A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation. • A director or officer who breaches this duty of care is personally liable to the corporation and its shareholders for any damages caused by this breach. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Care (continued) • This duty is discharged if an officer or director acts: 1. In good faith. 2. With the care that an ordinary prudent person in a like position would use use under similar circumstances. 3. In a manner he or she reasonably believes to be in the best interests of the corporation. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Care (continued) • Violations of this duty of care include acts of negligence and mismanagement,including failure to: • Make a reasonable investigation of a corporate matter. • Attend board meetings on a regular basis. • Properly supervise a subordinate who causes a loss to the corporation. • Keep adequately informed about corporate matters. • Take other actions necessary to discharge duties. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Business Judgment Rule • Determination of whether duty was met measured at time decision made. • Hindsight not applied • Not liable for honest mistakes of judgment. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Reliance on Others • Corporate directors and officers may rely on information and reports prepared by competent and reliable officers and employees, lawyers, accountants, other professionals, and committees of the board of directors. • A director is not liable if such information is false, misleading, or otherwise unreliable unless he or she has knowledge that would cause such reliance to be unwarranted. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Loyalty • A duty that directors and officers have: • Not to act adversely to the interests of the corporation, and • To subordinate their personal interests to those of the corporation and its shareholders • Breach of the duty of loyalty usually occurs because of intentional conduct. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duty of Loyalty (continued) • Breaches of the duty of loyalty include unauthorized: 1. Self-dealing with the corporation 2. Usurping of a corporate opportunity 3. Competing with the corporation 4. Making a secret profit that belongs to the corporation © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Criminal Liability • Directors, officers, and agents are personally liable for the crimes that they commit while acting on behalf of the corporation. • Sanctions include fines and imprisonment for individuals • Fines and loss of privileges for corporation © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Chapter 37 Corporate Directors, Officers and Shareholders