CHAPTER 9 THE CORPORATE ORGANIZATION © 2013 Delmar Cengage Learning

Authority and Duties of Directors THE BOARD OF DIRECTORS The corporation acts through its board of directors. The board of directors may range from one to several directors. Directors may also be shareholders, officers, and/or employees of the corporation.   © 2013 Delmar Cengage Learning

Authority and Duties of Directors DIRECTORS’ AUTHORITY DIRECTORS’ DUTIES Directors have the authority to act for the corporation. Directors may delegate authority to officers of the corporation, but they must continue to exercise general supervision over their activities. The board of directors may also delegate authority to committees comprising directors. Directors owe fiduciary duties to the corporation and its shareholders: The duty of care The duty of loyalty The duty of good faith Directors may rely on reliable information presented to them by officers, legal counsel, and accountants when making decisions on behalf of the corporation. © 2013 Delmar Cengage Learning

Personal Liability of Directors BUSINESS JUDGMENT RULE Officers and directors are not personally liable for bad outcomes of honest, careful decisions within their corporate powers when those decisions are made: In good faith; Where the director or officer is not personally interested in the subject of the decision; Where the director or officer is informed and reasonably believes the decision to be appropriate; and Where the director or officer rationally believes the decision is in the best interests of the corporation. © 2013 Delmar Cengage Learning

Personal Liability and Compensation of Directors DIRECTOR COMPENSATION Breach of fiduciary duty, duty of care, or duty of loyalty Unauthorized acts Negligence Fraud or other illegal acts Directors may or may not receive compensation for their roles as directors. Director compensation is usually set by a committee of the board of directors. Outside directors are customarily compensated for their time and meeting attendance. © 2013 Delmar Cengage Learning

Compensation and Indemnification of Directors MANDATORY INDEMNIFICATION Expenses incurred for successfully defending themselves in a lawsuit brought because of their position with the corporation. PROHIBITED INDEMNIFICATION Expenses incurred for defending themselves in a suit due to their own wrongdoing. © 2013 Delmar Cengage Learning

Election and Terms of Directors The directors are elected by the shareholders. The term of each director expires at the next annual meeting of the shareholders following their election; terms may be staggered. Directors may resign with notice to the chairman. Directors may be removed by vote of the shareholders or by a court of law. © 2013 Delmar Cengage Learning

Meetings of Board of Directors and Resolutions Corporate directors have no individual power to act on behalf of the corporation. They act through the collective action of the board. Meetings of the board of directors are held to take corporate action pursuant to state statutes and the corporation’s bylaws. Actions by the board of directors may be taken through resolutions passed by unanimous written consent signed by all directors. © 2013 Delmar Cengage Learning

Meetings of Board of Directors and Resolutions ANNUAL MEETINGS OF THE BOARD OF DIRECTORS Approve the minutes from the last meeting of the directors Approve shareholder dividends to be paid Approve annual reports Review financial reports of the corporation Elect corporate officers and set their compensation Approve officer and director bonuses Ratify the acts of the officers and directors for the past year © 2013 Delmar Cengage Learning

Meetings of Board of Directors and Resolutions QUORUM AND MINUTES A quorum is the minimum number of directors who must be present at a meeting to take action on behalf of the corporation. Minutes of each meeting of the board of directors must be taken, usually by the corporation’s secretary, and filed in the corporation’s corporate minute book. © 2013 Delmar Cengage Learning

Corporate Officers TITLES AND DUTIES OF CORPORATE OFFICERS Set by state statutes, corporate bylaws, or articles of incorporation: Chief Executive Officer President Chairman of the Board Vice President Chief Financial Officer Treasurer Secretary Assistant Secretary © 2013 Delmar Cengage Learning

Corporate Officers PERSONAL LIABILITY AND TERMS OF OFFICERS Officers are usually held to the same standards of conduct as directors of the corporation.   Officers not acting in good faith or who breach their fiduciary duty, duty of care, or duty of loyalty may be subject to personal liability for damages caused by them. Officers are generally elected for one-year terms by a majority of the board of directors at the annual meeting of the board of directors. © 2013 Delmar Cengage Learning

CORPORATE COMPLIANCE PROGRAMS White-Collar Crime WHITE-COLLAR CRIME includes various nonviolent crimes such as theft, fraud, insider trading, embezzlement, bribery, racketeering, and other forms of theft that involve the violation of trust. CORPORATE COMPLIANCE PROGRAMS are often enacted by corporations taking a proactive stance to prevent white-collar crime and criminal liability. © 2013 Delmar Cengage Learning

Shareholders’ Rights and Responsibilities Preemptive rights Right to inspect corporate records Right to be shielded from personal liability for the debts and obligations of the corporation © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Shareholder Meetings The most important decisions about the future of a corporation are made at shareholder meetings. Details concerning the dates, times, and places are generally set forth in the corporate bylaws. Shareholder meetings are typically held at the corporation’s principal office. Shareholders are entitled to proper notice of meetings. Informal for smaller corporations Formal for larger, publicly held corporations © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Shareholder Meetings PROXIES AND QUORUM Shareholders who are unable to attend meetings may vote through the use of a proxy. For an action to be taken at a meeting of the shareholders: A quorum must be present, and A sufficient number of shareholders present must vote in favor of the proposed action. © 2013 Delmar Cengage Learning

OTHER ACTS REQUIRING SHAREHOLDER APPROVAL Shareholder Meetings OTHER ACTS REQUIRING SHAREHOLDER APPROVAL Election of directors Amendment of bylaws Amendment of articles of incorporation Issuance of corporate stock Mergers and acquisitions Sale of corporate assets outside the normal course of business Dissolution of the corporation © 2013 Delmar Cengage Learning

Restrictions on Transfer of Shares of Corporate Stock SHAREHOLDER AGREEMENTS RESTRICTING STOCK TRANSFERS Corporate stock may be transferred freely, without restrictions. Shareholders may enter into agreements to restrict transfer of stock. Shareholder agreements may provide for the mandatory purchase of a shareholder’s stock upon the happening of a specified event. The purchase price pursuant to buy-sell agreements is often established pursuant to a formula set forth in the agreement. The purchase of a shareholder’s stock on the death of the shareholder is often funded by proceeds of life insurance purchased by the corporation on the life of each shareholder. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Shareholder Actions Direct Shareholder Actions—brought on behalf of individual shareholder against the corporation for damages Representative Actions—brought on behalf of a class or group of shareholders who have a direct claim against the corporation Derivative Actions—brought on behalf of corporation by one or more shareholders to enforce a right or remedy of the corporation © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning The Paralegal’s Role Research statutes and corporate bylaws to determine requirements for annual meeting Prepare notices and proxy statements Arrange for the mailing of notices of the meeting and proxy materials Make physical arrangements for the meeting Arrange for press coverage Coordinate travel arrangements for the directors © 2013 Delmar Cengage Learning