Chapter 37 - Corporatae Governance and the Sarbanes-Oxley Act

shareholders

• Own the corporation​

• Not agents of the corporation​

• Cannot bind the corporation to contracts​

• Have right to vote on fundamental changes in the corporation

annual shareholders’ meeting

Held by the corporation to elect directors and to vote on other matters

special shareholders’ meetings

Called usually to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation

notice of a shareholders’ meeting

Corporation is required to give the shareholders written notice of the place, day, and time of annual and special meetings

proxy

• May be authorized to vote on a shareholder’s behalf​

• May be directed exactly how to vote the shares​

• May be authorized to vote the shares at his or her discretion​

record date

Date specified in corporate bylaws that determines whether a shareholder may vote at a shareholders’ meeting

shareholders’ list

Contains the names and addresses of the shareholders as of the record date and the class and number of shares owned by each shareholder

quorum to hold a meeting of the shareholders

Required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting

straight (noncumulative) voting

System in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open​

cumulative voting

System in which a shareholder can accumulate all of his or her votes​

• Vote them all for one candidate or split them among several candidates​

supramajority voting requirement

Articles of incorporation or bylaws may require more than a majority of shares:​

• To constitute a quorum​

• For votes for mergers​

• For consolidation, or other important matters​

voting agreements

Shareholders agree in advance as to how their

shares will be voted​

voting trusts

Arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares

shareholder voting agreements

Agreement between two or more shareholders that stipulates how they will vote their shares

restrictions on the sale of shares

• right of first refusal

• buy-and-sell agreement

right of first refusal

An agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else​

buy-and-sell agreement

An agreement that requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement​

preemptive rights

Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests​

• Granted by the articles of incorporation​

• Failure to exercise preemptive right – Shares can be sold to anyone​

dividends

Distribution of profits of the corporation to shareholders​

• Paid at the discretion of the board of directors​

stock dividend

Additional shares of stock distributed as a dividend​

• Distributed in proportion to the existing ownership interests of shareholders​

• A shareholder’s proportionate ownership interest is not increased​

derivative lawsuits

• Lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit​

• Court may dismiss if the lawsuit is not in best interests of corporation​

• Any award goes to corporate treasury​

  • Corporation pays shareholder’s expenses​

piercing the corporate veil

If a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity​

• Hold the shareholder personally liable for the corporation’s debts and obligations​

piercing the corporate veil occurs when

• There is thin capitalization​

• No separateness is maintained between the corporation and its shareholders

board of directors

• Panel of decision makers who are elected by the shareholders​

• Generally compensated for service​

resolutions of the board of directors

• They specify the decisions that were made by the board during their meetings​

• Certain actions may require the shareholders’ approval ​

• The board has absolute right of inspection

elect

Shareholders _____ the board of directors of the corporation

corporate electronic communications

Modern method by which corporations communicate with shareholders, among directors, with regulatory agencies, and others

inside director

A member of the board of directors who is also an officer of the corporation

outside director

A member of the board of directors who is not an officer of the corporation

term of office

Expires at the annual shareholders’ meeting following a board of member’s election

meeting of the board of directors

• Term of Office

• Regular meetings are held at the times and places established in the by laws​

• The board can call special meetings as provided in the bylaws​

quorum of the board of directors

The number of directors necessary to hold a board meeting or transact business of the board​

corporate officers

Employees of a corporation who are appointed by the board of directors​

• They manage the day-to-day operations of the corporation

audit committee

Committee composed of outside directors responsible for the oversight of the outside and internal audits of the corporation​

agency authority of officers

Possess authority that may be provided in the bylaws, or as determined by resolution of the board of directors

fiduciary duty

The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders​

• Duty of obedience​

• Duty of care​

• Duty of loyalty​

duty of obedience

Duty that directors and officers of a corporation have to act within the authority conferred upon them by​

• State corporation codes​

• The articles of incorporation​

• The corporate bylaws​

• The resolutions adopted by the board of directors​

duty of care

• Duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation​

• Requires corporate directors and officers to use care and diligence when acting on behalf of the corporation​

negligence

Failure of a corporate director orofficer to exercise the duty of care whileconducting the corporation’s business​

business judgement rule

• Rule that says directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment​

• Determination of whether duty was met is measured at the time the decision was made​

  • Hindsight not applied​

• Not liable for honest mistakes of judgment​

duty of loyalty

A duty that directors and officers have not to act adversely to the interests of the corporation​

• To subordinate their personal interests to those of the corporation and its shareholders

duty of loyalty breach

• usurping a corporate opportunity

• self dealing

• competing w/ the corporation

• making a secret profit

usurping a corporate opportunity

if proven, the corporation can

• Acquire the opportunity from the director/officer​

• Recover any profits made​

self dealing

Contracts or transactions with a corporate director or officer is voidable by the corporation if it is unfair to the corporation

competing with the corporation

Any profits made by non-approved competition and any other damages caused to the corporation can be recovered

making a secret profit

The corporation can sue the director or officer to recover the secret profit

Sarbanes-Oxley Act

• Enacted by Congress in 2002​

• Goals​

  • To improve corporate governance​

  • Eliminate conflicts of interest​

  • Instill confidence in public companies​