1. COPYRIGHT © 2010 South-Western/Cengage Learning.

2. Managers vs. Shareholders: The Inherent Conflict Managers – want, first to keep their jobs and second, to build a strong company. – Managers have a fiduciary duty to act in the best interests of the shareholders. Shareholders – want the price of stock to increase. Stakeholders – want the business to grow and continue to use the stakeholders’ services.

3. COPYRIGHT © 2010 South-Western/Cengage Learning. Resolving the Conflict: The Business Judgment Rule Business Judgment Rule -- The manager has a duty of loyalty and a duty of care. – The manager must act without a conflict of interest, with the care of an ordinary prudent person and in the best interests of the company. This rule allows directors to do their job without fear of excessive court intervention.

4. COPYRIGHT © 2010 South-Western/Cengage Learning. Duty of Loyalty The duty of loyalty prohibits managers from making a decision that benefits them at the expense of the corporation. Self-Dealing is a violation of the duty of loyalty. – See next slide for more on self-dealing. Corporate Opportunity – Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent.

5. COPYRIGHT © 2010 South-Western/Cengage Learning. Self-Dealing Business Self-Dealing – decisions that benefit another company associated with the manager. Personal Self-Dealing --decisions that benefit the manager directly. Self-dealing transactions may be acceptable if: – The disinterested members of the board of directors approve the transaction. – The disinterested shareholders approve it. – The transaction was fair to the corporation.

6. COPYRIGHT © 2010 South-Western/Cengage Learning. Duty of Care The duty of care requires officers and directors to act in the best interests of the corporation and to use the same care that an ordinarily prudent person would in the management of her own needs. – Decisions must have a rational business purpose. – Decisions and actions are legal. – Managers must make informed decisions.

7. COPYRIGHT © 2010 South-Western/Cengage Learning. More Conflict: Takeovers There are three ways to acquire control of a company: – Buy the company’s assets. – Merge with the company. – Buy stock from the shareholders. Takeovers and tender offers are regulated: – Federal Regulation of Tender Offers: The Williams Act – State Regulation of Takeovers – Common Law of Takeovers

8. COPYRIGHT © 2010 South-Western/Cengage Learning. Prevention of Takeovers Companies may try to prevent takeovers in many ways: – Transferring assets, re-distributing stock, re- structuring the board of directors, etc. – When establishing takeover defenses, shareholder welfare must be the board’s primary concern. If the company must ultimately be sold, it must go to the highest bidder; it cannot give preferential treatment to a lower bidder.

9. COPYRIGHT © 2010 South-Western/Cengage Learning. State Anti-Takeover Statutes Most states have passed statutes to deter hostile takeovers: – Statutes that automatically impede hostile takeovers. – Statutes that authorize companies to fight off hostile takeovers.

10. COPYRIGHT © 2010 South-Western/Cengage Learning. “Directors have the authority to manage the corporate business, but they also have important responsibilities to shareholders and other stakeholders (such as employees, customers, creditors, suppliers and neighbors).”