Chapter 40. BUSI Law Corporate Directors, Officers, and Shareholders

Board of Directors

Highest decision-making authority in a corporation.

Board Responsibilities

Makes major policies, selects officers, decides capital structure, and declares dividends.

Director Voting

Each director usually gets one vote, and the majority controls the decision.

Directors Act Collectively

Directors normally must act together as a board rather than individually.

Director Qualifications

Usually no residency, age, or shareholder requirement unless the corporation's documents say otherwise.

Director as Agent

An individual director generally cannot independently bind the corporation.

Election of Directors

Shareholders normally elect directors by majority vote.

Staggered Board

Only part of the board is elected each year.

Purpose of Staggered Board

Provides continuity because the entire board does not change at once.

Removal for Cause

Removing a director for failing to perform required duties.

Director Vacancies

May occur because of death, resignation, or creation of a new position.

Filling Director Vacancies

Usually done by shareholders or remaining directors, depending on state law and bylaws.

Director Compensation

Directors may receive money, stock options, business contacts, or prestige.

Inside Director

Director who is also an officer or employee of the corporation.

Outside Director

Director who is not part of corporate management.

Board Meeting

Formal meeting where directors conduct corporate business.

Meeting Minutes

Official record of what happened at a board meeting.

Remote Board Meeting

Directors may often participate in meetings remotely.

Quorum

Minimum number of directors needed to legally conduct business.

Board Quorum

Usually a majority of directors.

Board Voting

Ordinary decisions usually require a simple majority after a quorum is present.

Board Committee

Smaller group of directors created to handle specific areas of business.

Executive Committee

Handles ordinary management decisions between full board meetings.

Executive Committee Limits

Usually cannot declare dividends, amend bylaws, or authorize stock issuance.

Audit Committee

Oversees the corporation's financial auditing process.

Audit Committee Responsibilities

Selects independent accountants, determines compensation, and supervises their work.

Right of Inspection

Director's right to examine corporate books, records, property, and facilities.

Right of Participation

Director's right to attend meetings, receive notice, and participate in decisions.

Indemnification

Reimbursement for certain legal expenses, costs, or damages related to a corporate position.

Director Liability Insurance

Insurance that can protect directors from certain legal claims.

Corporate Officers

People selected by the board to manage daily corporate operations.

Common Corporate Officers

President, vice president, secretary, and treasurer.

Officers as Agents

Officers can act on behalf of the corporation.

Officer as Employee

Officers are also employees and may have employment contracts.

Officer Removal

Board normally can remove an officer with or without cause.

Breach of Employment Contract

Corporation may be liable if it removes an officer in violation of an employment contract.

Fiduciary

Person legally required to act in the interests of another person or organization.

Fiduciary Duties

Duty of care and duty of loyalty.

Duty of Care

Directors and officers must act carefully and responsibly for the corporation.

Good Faith

Acting honestly and sincerely.

Duty of Care Requirements

Act honestly, use reasonable care, and act in the corporation's best interests.

Informed Decision

Decision made after investigating facts, discussing the issue, and considering alternatives.

Reasonable Supervision

Directors must reasonably supervise officers and employees.

Dissenting Director

Director who disagrees with the board's decision.

Dissenting Director Protection

Disagreement should be recorded in the meeting minutes.

Business Judgment Rule

Protects directors and officers from liability for honest business decisions made in good faith.

Business Judgment Rule Focus

Courts generally judge the decision based on what was known when it was made, not only the final result.

Business Judgment Rule Requirements

Reasonably informed, rational decision, and no personal conflict.

Business Judgment Rule Exceptions

Bad faith, fraud, or serious breach of fiduciary duty.

Duty of Loyalty

Directors and officers must put the corporation's interests ahead of personal interests.

Corporate Opportunity

Business opportunity that properly belongs to the corporation rather than an individual director or officer.

Insider Trading

Using important nonpublic information to profit from securities trading.

Conflict of Interest

Personal interests could interfere with the corporation's interests.

Conflict of Interest Requirements

Disclose the conflict and important facts and avoid voting on the transaction.

Director/Officer Personal Liability

May be liable for their own negligence, crimes, or torts.

Shareholder

Owner of a corporation who owns shares of stock.

Shareholder Ownership

Shareholders own an interest in the corporation, not specific corporate property.

Shareholder Management

Shareholders normally do not manage daily operations.

Shareholder Main Power

Electing the board and voting on major corporate decisions.

Major Shareholder Approvals

Amendments, mergers, dissolution, major asset sales, and election/removal of directors.

Annual Meeting

Regular yearly meeting of shareholders.

Special Meeting

Meeting called to handle a specific or urgent issue.

Shareholder Meeting Notice

Usually includes the date, time, and location.

Special Meeting Purpose

Notice must state the purpose, and business is generally limited to that purpose.

Proxy

Authorization allowing another person to vote a shareholder's shares.

Proxy Materials

Information given to shareholders about matters being voted on.

Proxy Revocation

Shareholder can usually cancel a proxy unless it is properly made irrevocable.

Shareholder Proposal

Recommendation submitted by a shareholder for shareholders to vote on.

SEC Proxy Rules

SEC regulates proxy materials and certain shareholder proposals for public companies.

Resolution

Formal proposal that shareholders vote to approve or reject.

Shareholder Quorum

Usually more than 50% of outstanding voting shares.

Shareholder Voting

Common shareholders usually receive one vote per share.

Preferred Shareholder Voting

Preferred shareholders often have limited or no voting rights.

Ordinary Shareholder Vote

Usually requires a majority of shares represented at the meeting.

Extraordinary Matters

Major actions such as mergers or dissolution may require a larger vote.

Voting List

List showing shareholders, addresses, and number of voting shares.

Record Date

Date used to determine which shareholders have voting rights.

Cumulative Voting

Voting system that helps minority shareholders elect a director.

Cumulative Voting Formula

Shares owned × Number of directors being elected.

Cumulative Voting Strategy

Shareholder can put all votes toward one candidate or divide them.

Shareholder Voting Agreement

Written agreement where shareholders agree how to vote their shares.

Voting Trust

Arrangement where shares are transferred to a trustee who controls the voting rights.

Voting Trust Ownership

Original shareholder usually keeps other ownership rights, such as dividends.

Stock Certificate

Document showing ownership of a certain number of shares.

Uncertificated Shares

Shares recorded electronically without a physical certificate.

Preemptive Right

Shareholder's right to buy newly issued shares in proportion to current ownership.

Purpose of Preemptive Rights

Prevent ownership and voting power from being diluted.

Stock Warrant

Right to purchase a certain number of shares at a specific price or during a specific period.

Dividend

Distribution of corporate profits or income to shareholders.

Dividend Decision

Board of directors decides whether to declare dividends.

Dividend Payment Forms

Cash, property, additional corporate stock, or stock of another corporation.

Illegal Dividend

Dividend that violates legal requirements, such as making the corporation insolvent.

Insolvent

Unable to pay debts when they become due.

Illegal Dividend Liability

Shareholders may have to return illegal dividends if they knew they were illegal; directors may also be liable.

Failure to Declare Dividends

Courts usually defer to directors unless refusing dividends is an unreasonable abuse of discretion.

Shareholder Inspection Rights

Right to inspect certain corporate records.

Proper Purpose

Legitimate reason for requesting corporate records.

Inspection Request

Usually must be made in writing.

Inspection Restrictions

Access may be denied for harassment, improper confidential information, or trade secrets.

Transfer of Shares

Shareholders generally can sell or transfer stock unless valid restrictions apply.