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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:

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Chapter 37 corporate directors officers and shareholders l.jpg

Chapter 37Corporate Directors, Officers and Shareholders

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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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Liability of Corporate Directors and Officers

Duty of Obedience

Duty of Care

Duty of Loyalty

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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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