Corporations - management (outline four)

Do shareholders have the right to participate in management?

No, they have no right to manage corporation but they can vote for the board of directors of the the corporation which is managed by directors

How corporations are managed by Shareholders (As Envisioned by State Statutes)

Elect and remove directors; amend bylaws; approve fundamental changes.

How corporations are managed by Directors (As Envisioned by State Statutes)

Supervise management; elect and remove officers; determine compensation of officers and directors; amend bylaws; propose fundamental changes for shareholder approval; declare dividends; issue shares.

How Corporations are Managed by Officers (As Envisioned by State Statutes)

Officers are employees and agents of the corporation, with authority from the bylaws, resolutions of the board of directors, and custom. They carry out the broad directions of the board and select and direct the other employees.

How are close Corporations managed (companies are rarely managed this way?)

Shareholders often act directly without pay attention to what hat they are wearing. Acting kind of like a partner in a partnership without realizing how they are acting.

How are public companies managed (companies are rarely managed this way?)

Shareholders who are the owners rarely go to shareholders meetings. They value their shares to directors by proxy.

Proxy

When you give somebody else to vote in your place. It gives them written authority to vote on your behalf. Typically they give proxy to management or CEO.

What approval is required before acting → Corporate Actions?

These are actions are approved and taken by officers and other employees who have authority from the board of directors, bylaws, or custom to bind the corporation to contracts in the ordinary course of business.

What approval is required before acting → Other important actions?

These actions require approval by a resolution of the board of directors, for example, any significant borrowing or loan or other major contract; opening a new office; or engaging in a new business.

What approval is required before acting → Certain extraordinary actions?

These actions require special procedures for obtaining approval by both the board of directors and the shareholders, for example, merger; sale of substantially all the company's assets outside the ordinary course of business; or amendments to the articles of incorporation.

What do shareholders do if they are unhappy with management?

They just sell their shares

Do directors have to be a shareholder?

No, they do not need to be a shareholder, they just need to be elected

What must the majority of directors at public companies be?

They must be independent

What does independent mean for directors at public companies?

being independent means you have to be financial independent from the company despite being paid as a director

Are directors agents of their corporation?

No, just because they are a director doesn’t give them the power to act upon for the company → directors only adopt resolutions in meetings.

Do directors have fiduciary duties?

Yes, they are fiduciaries because they act upon by highest amount of duty

The Case of the Figurehead Director

Pritchard is invited to be a corporate director and told she wouldn’t need to do anything. They explain she will be a “figurehead director” and receive $10,000 per month for serving. She agrees. Later, after the other directors screw up, Pritchard is sued along with the rest of them.

A. What “substance over form” argument could Pritchard make?

B. Is that a valid argument in this case?

A. She had the title of director but she never did anything that a director does

B. No, substance over form doesn’t always win. Her failure to act as a director is not a valid excuse. If you are named a director she has a fiduciary duty and no such thing as a figure head.

Business Judgment Rule

A court will not substitute its judgment for that of the board

Directors are not liable if their decision is

1. That it was rational → decision is rational if it was in the best interest of the corporation

2. It was informed

3. and without a conflict of interest

Directors are liable for what

Their process of making decisions but not their decisions

Rational test

Whether the directors held a reasonable belief the decision was "in the best interests” of the corporation.

In the best interests?

reasonably related to a “legitimate objective” of the corporation

What are the “legitimate objectives” of a corporation?

Traditionally, it was to be profitable and maximize shareholder value → any decision that a board of director did not make in being profitable is irrational

The Case of the Dominican Opportunity

Experts all agree it would be more profitable to move a plant to the Dominican Republic rather than keep it in the US. Must the board move it?

No they do not have to move the plant to Dominican republic because maximizing profit today is not the only objective of a corporation

CONSTITUENCY STATUTES

Requires directors to keep other interests of shareholders besides maximizing profit. Allows the board of directors to consider more than maximizing profit and consider other stakeholders. (Most states, including delaware have adopted this.)

What does it mean to be informed?

Before making your decision you must have all the necessary information. Must listen from all experts.

The Case of the Interlocking Boards

Parent & Subsidiary have interlocking boards of directors. Three-fourths of the directors of the sub are also directors of the parent. Both boards approve a transaction between the two companies, even though the sub’s minority shareholders opposed the transaction. The sub loses money in the transaction, and the sub’s minority shareholders sue the sub’s interlocking directors who had a conflict of interest.

They have to act in best interest of a parent and directors because they are on both sides of the transaction and there is a conflict of interest. Just because you have a conflict of interest doesn’t mean you are personally liable. Whether the transaction was fair to the subdiuary determines if you are liable.

In a suit against directors who had a conflict of interest, the issue will be whether the transaction was what to the corporation?

whether the transaction was fair to the corporation

The case of inter locking boards → The subsidiary lost money as a result of the transaction, so was this transaction unfair?

Just because they lose money doesn’t mean its unfair

Intrinsic fairness test?

Would a reasonable person in an ARMS LENGTH TRANSACTION have made the contract

Arm lengths transaction?

When a Transaction between two people who are independent with equal bargaining position and full information of the transaction and freely agree on it.

The Case of the Director Thief

Thief, an officer/director of Corp, stole $50,000 from Corp, but when discovered, he paid it back. The board met to decide whether to remove Thief from the board and voted unanimously not to remove him. Shareholders sued the board for failure to vote Thief off the board.

A. Applying the Business Judgment Rule, what is the issue in this case?

B. How could the board’s decision in this case have been rational?

A. Not rational because thief did not act in the best interest of the corporation.

B. Historically he’s a key person and the company is better off with him than without him. If they have new internal controls to keep him from stealing than its rational.

The Case of the Excluded Shareholder

A, B, and C are the shareholders, directors, and officers of a close corporation that buys breweries. A & B formed an LLC to buy a brewery without C, and C complains.

Is there any problem with what A and B did?

C wins because they stole a business opportunity from C and because they stole the opportunity for itself. A&B were irrational because it was a conflict of interest and they did not act in best interest, A&B will be liable.

Usurping a corporate opportunity?

when an officer, director, or employee of a company takes a business opportunity for themselves that should rightfully belong to the corporation → breach of fiduciary duty.

Are Shareholders fiduciaries?

A shareholder is not a fiduciary

Are Controlling Shareholders fiduciaries?

Controlling shareholders have fiduciary like duties not to abuse their control to the detriment of the minority → and will be liable

Controlling shareholders must do what

They must treat the minority shareholders fairly or they will be liable for oppression → If you take actions that treat them unfair

Freeze out?

No salary, no dividends, and no buyer for their shares→ shareholder no longer has opportunity to receive any money

Larry, Robin, and Keith, Part 2

Larry, Robin, and Keith's close corporation employed them as officers, but without a specific term of employment. When they learned Robin was thinking about retiring, Larry and Keith voted to remove her as an officer.

A. Is Robin an employee at will?

Yes, because she is an officer and she has an open ended contract.

Larry, Robin, and Keith, Part 2

Larry, Robin, and Keith's close corporation employed them as officers, but without a specific term of employment. When they learned Robin was thinking about retiring, Larry and Keith voted to remove her as an officer.

B. Are Larry and Keith liable to Robin for oppression?

Yes, employment at will does not apply in close corporation. Employers must be treated fairly even in their capacity and will be liable if not treated well.

Because close corporation shareholders have expectations, To freeze out a close corporation shareholder requires what?

A proper business reason

What are close corporation share holders expectations?

That they will be making money.