Chapter 40: Corporate Directors, Officers and Shareholders

Vocabulary flashcards covering the roles, responsibilities, fiduciary duties, and legal rights of corporate directors, officers, and shareholders.

Inside Director

A person on a corporation’s board of directors who is also an officer of the corporation.

Outside Director

A person on a corporation’s board of directors who does not hold a management position in the corporation.

Staggered Terms

A practice permitted by most state statutes where a portion of the board members (commonly one-third) are elected each year for a multi-year term (such as three years) to allow for greater management continuity.

Removal for Cause

The removal of a director for failing to perform a required duty, which can be enacted as specified in the articles or bylaws or by shareholder action.

Fiduciaries

Directors and officers whose relationship with the corporation and its shareholders is one of trust and confidence, owing ethical and legal duties to the group.

Duty of Care

A fiduciary duty requiring directors and officers to act in good faith, exercise the care of an ordinarily prudent person in similar circumstances, and act in what they believe is the best interests of the corporation.

Business Judgment Rule

A rule under which courts will not hold corporate officers and directors liable for honest mistakes of judgment and bad business decisions that were made in good faith.

Duty of Loyalty

A fiduciary duty requiring directors and officers to subordinate their personal interests to the welfare of the corporation, avoiding competition with the firm or usurping corporate opportunities.

Conflict of Interest

A situation requiring a director or officer to make a full disclosure of any personal interest in a corporate transaction and typically abstain from voting on the proposed transaction.

Equitable Interest

The type of ownership interest shareholders have in a firm, representing a claim of ownership despite having no legal title to specific corporate property like buildings or equipment.

Shareholder's Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third person when the directors have failed to bring a lawsuit in the name of the corporation.

Preemptive Rights

One of the specific rights possessed by shareholders in addition to stock certificates, dividends, and inspection rights.