1. Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 27 Corporate Directors, Officers, and Shareholders

2. 27 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Shareholders (1 of 2) A corporation’s shareholders own the corporation Shareholders are not agents of the corporation They cannot bind the corporation to contracts

3. 27 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Shareholders (2 of 2) Shareholders have the right to vote on matters such as: the election of directors, and the approval of fundamental changes in the corporation

4. 27 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Shareholders’ Meetings Annual Shareholders’ Meeting Annual Shareholders’ Meeting – Meeting of the shareholders of a corporation 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 proxy Shareholders may vote by proxy Special Shareholders’ Meetings Special Shareholders’ Meetings

5. 27 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Voting Requirements At least one class of shares of the corporation must have voting rights Record date Quorum Straight voting Cumulative voting Supramajority voting requirement

6. 27 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Voting Agreements Voting Trusts The shareholders transfer their stock certificates to a trustee who is empowered to vote the shares Agreement must be in writing and cannot exceed 10 years Agreement must be filed with the corporation Voting Trusts The shareholders transfer their stock certificates to a trustee who is empowered to vote the shares Agreement must be in writing and cannot exceed 10 years Agreement must be filed with the corporation Shareholder Voting Agreements Agreement between two or more shareholders agreeing on how they will vote their shares These agreements are not limited in duration and do not have to be filed with the corporation Shareholder Voting Agreements Agreement between two or more shareholders agreeing on how they will vote their shares These agreements are not limited in duration and do not have to be filed with the corporation

7. 27 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Transfer of Shares Generally, shareholders have the right to transfer their shares Article 8 of the UCC governs transfer of securities Usually, shares are transferred by indorsement and delivery of the shares to the new owner

8. 27 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Transfer Restrictions on Securities Shareholders may enter into agreements with one another to prevent unwanted persons from becoming owners of the corporation: Right of First Refusal Right of First Refusal Buy-and-Sell Agreement Buy-and-Sell Agreement

9. 27 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Preemptive Rights Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests diluted Such a purchase can prevent a shareholder’s interest in the corporation from being diluted

10. 27 - 10Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Right to Receive Information and Inspect Books and Records Shareholders have the right to be informed about the affairs of the corporation annual financial statement A corporation must furnish its shareholders with an annual financial statement Right of Inspection Right of Inspection – A right that share- holders have to inspect the books and records of the corporation

11. 27 - 11Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Dividends Dividends are not automatically paid to shareholders Dividends are paid at the discretion of the board of directors Record date Record date – a date that determines whether a shareholder receives payment of a declared dividend Stock dividend Stock dividend – additional shares of stock paid as a dividend

12. 27 - 12Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Derivative Lawsuit A lawsuit a shareholder brings against an offending party when the corporation fails to bring the lawsuit derivative lawsuit A derivative lawsuit will be dismissed by the court if either a majority of independent directors or a panel of independent persons appointed by the court determines that the lawsuit is not in the best interests of the corporation

13. 27 - 13Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Liability of Shareholders limited liability Shareholders of a corporation generally have limited liability Liability that shareholders have only to the extent of their capital contribution Shareholders are generally not personally liable for the debts and obligations of the corporation

14. 27 - 14Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

15. 27 - 15Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Close Corporations (1 of 2) Election Election statutory close corporation A corporation with 50 or fewer shareholders may elect to be a statutory close corporation Dispensing with Corporate Formalities Dispensing with Corporate Formalities A close corporation may dispense with some of the formalities of operating a corporation In effect, the shareholders can treat the corporation as a partnership for governance purposes

16. 27 - 16Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Close Corporations (2 of 2) Limited Liability Limited Liability Selecting close corporation status does not affect the limited liability of shareholders Dissolution Dissolution The articles of incorporation of a close corporation may authorize one or more shareholders to dissolve the corporation at will or upon the occurrence of a specified event or contingency

17. 27 - 17Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Board of Directors A panel of decision makers elected by the shareholders policy decisions The directors of a corporation are responsible for formulating the policy decisions affecting the corporation The board may initiate certain actions that require shareholders’ approval

18. 27 - 18Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Selecting Directors Inside Director Inside Director – a member of the board of directors who is also an officer of the corporation Outside Director Outside Director – A member of the board of directors who is not an officer of the corporation Term of Office Term of Office – The term of a director’s office expires at the next annual shareholders’ meeting following his or her election unless terms are staggered

19. 27 - 19Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Meetings of the Board of Directors (1 of 2) 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

20. 27 - 20Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Meetings of the Board of Directors (2 of 2) Regular Meeting Regular Meeting A meeting held by the board of directors at the time and place established by the bylaws Special Meeting Special Meeting A meeting convened by the board of directors to discuss new shares, merger proposals, etc. Quorum Quorum The number of directors necessary to hold a board of directors’ meeting or transact business of the board

21. 27 - 21Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Committees of the Board of Directors The board of directors may create committees of the board and delegate certain powers to those committees All members of these committees must be directors An act of a committee pursuant to delegated authority is the act of the board of directors

22. 27 - 22Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Corporate Officers Officers Officers – Employees of the corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation Agency Authority of Officers Agency Authority of Officers – Officers and agents of the corporation have such authority as may be provided in the bylaws of the corporation or as determined by resolution of the board of directors Express authority Implied authority Apparent authority Officers Officers – Employees of the corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation Agency Authority of Officers Agency Authority of Officers – Officers and agents of the corporation have such authority as may be provided in the bylaws of the corporation or as determined by resolution of the board of directors Express authority Implied authority Apparent authority

23. 27 - 23Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Obedience (1 of 2) A duty that directors and officers of a corporation have 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

24. 27 - 24Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Obedience (2 of 2) act outside their authority 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

25. 27 - 25Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Care (1 of 2) Duty of Care Duty of Care A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation Negligence Negligence Failure of a corporate director or officer to exercise the duty of care while conducting the corporation’s business

26. 27 - 26Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Care (2 of 2) Business Judgment Rule Business Judgment Rule Directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment Reliance on Others 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

27. 27 - 27Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Loyalty (1 of 2) 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 duty of loyalty Breach of the duty of loyalty usually occurs because of intentional conduct

28. 27 - 28Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Loyalty (2 of 2) 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

29. 27 - 29Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Liability for Crimes Liability of Directors and Officers personally liable Corporate directors and officers are personally liable for the crimes they commit while acting on behalf of the corporation Criminal sanctions include fines and imprisonment Liability of Directors and Officers personally liable Corporate directors and officers are personally liable for the crimes they commit while acting on behalf of the corporation Criminal sanctions include fines and imprisonment Liability of the Corporation law of agency Under the law of agency, corporations are liable for the crimes committed by its directors and officers while acting within the scope of their authority Criminal sanctions include monetary fines and loss of legal privileges Liability of the Corporation law of agency Under the law of agency, corporations are liable for the crimes committed by its directors and officers while acting within the scope of their authority Criminal sanctions include monetary fines and loss of legal privileges

30. 27 - 30Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sarbanes-Oxley Act (2002) Federal statute enacted by Congress to: Improve corporate governance rules Establish independence between public accounting firms and the public companies they audit Eliminate conflicts of interest Auditing and accounting rules Corporate governance rules