Business Law CH40 S2025 LEW

Chapter 40 Corporate Directors, Officers, and Shareholders

Outline of the Chapter

• Role of Directors and Officers

• Duties & Liabilities of Directors and Officers

• Role of Shareholders

• Rights of Shareholders

• Duties & Liabilities of Shareholders

Role of Directors and Officers

• Board of Directors: ultimate authority in a corporation, responsible for:

  • Policymaking for managing corporate affairs

  • Selecting and removing corporate officers

  • Determining capital structure

  • Declaring dividends

• Voting: Each director has one vote; majority usually rules.

• Independence:

  • Directors are not agents of the corporation; they cannot bind it individually.

  • They do not hold title to property for others; they collectively control as a group.

  • Few qualifications are needed to become a director.

Election of Directors

• Setting the Number of Directors: Defined in articles or bylaws, subject to statutory limits.

• Initial Board: Serves until the first annual shareholders' meeting.

• Election Process: Majority vote of shareholders; typical term is one year, longer staggered terms possible.

• Removal of Directors:

  • With Cause: As specified in articles or through shareholder action.

  • Without Cause: Generally not allowed unless reserved at election time.

• Filling Vacancies: Can be done by shareholders or the board itself depending on laws/bylaws.

Compensation of Directors

• Common for directors to receive at least nominal compensation; larger corporations may offer substantial pay.

• Authority for Compensation: Usually determined by corporate articles or bylaws.

• Directors often receive benefits and rewards beyond cash compensation.

Board of Directors’ Meetings

• Conduct formal business meetings with recorded minutes; quorum typically a majority of directors. Dates established in bylaws.

• Decisions require at least a simple majority, with extraordinary issues possibly needing a higher percentage.

Committees of the Board of Directors

• Large corporations often form committees for delegated tasks:

  • Executive Committee: Handles interim management decisions.

  • Audit Committee: Manages the oversight of independent public accountants.

Rights of Directors

• Essential rights include:

  • Inspection: Access to books, records, and corporation facilities.

  • Participation: Right to engage in board meetings and be informed of them.

  • Indemnification: Rights to legal cost coverage during litigation related to their role.

Corporate Officers and Executives

• Hired by the board and typically include a president, vice presidents, secretary, and treasurer.

• Corporate officers act as agents and carry out bylaws' duties; rights defined by employment contracts.

• Directors can remove officers at any time, but can't violate contract terms without liability.

Duties and Liabilities of Directors and Officers

• Directors and officers are fiduciaries and owe ethical and legal duties to the corporation and its shareholders.

• Key Fiduciary Duties:

  • Duty of Care:

    • Act in good faith and exercise ordinary care.

    • Make informed decisions after reasonable investigation relying on competent sources. Entitled to rely in good faith on other people

    • Responsible for supervising delegated work.

    • Dessenting directors: ensure your dessent (disagreement with vote) is recorded in minutes for liability reasons

• Business Judgment Rule:

  • Shields directors and officers from liability for honest mistakes made in good faith

  • Courts assess the reasonableness of decisions made without hindsight.

  • Applies so long as reasonable steps to become informed, rational basis, no confict of interest

Hinman v. Accohonnack Indian Tribe Case

• Wulf Plan was adopted into Indian tribe. Himan replaced clairence as chief. Let go 20 people. Went beyond legal powers. The court ruled that the actions taken by Hinman were invalid as they exceeded the authority granted to him by the tribe's governing documents and acted in bad faith.

Duty of Loyalty

• Requires directors and officers to place the corporation's interests before their own.

• Relevant scenarios include:

  • Competing with the corporation.

  • Usurping corporate opportunities.

  • Utilizing confidential information for personal trading profit.

Guth v. Loft

• Charles Guth was the director of software drink company. Became invested in coke and decided to take control of pepsi trademark and formula. Promoted it as a competitor to his drink company all as secret. The court held that he breached his fiduciary duty to the corporation.

Conflicts of Interest

• Directors and officers must disclose potential conflicts in transactions and abstain from voting if a conflict exists.

Liability of Directors and Officers

• Liable for negligence, their own crimes/torts, and those committed by supervised corporate employees.

• Shareholder Derivative Suit: Shareholders can sue directors on behalf of the corporation if it appears they are not acting in the corporation's best interest.

The Role of Shareholders

• Shareholders acquire ownership through stock and have no daily management responsibilities.

• They choose the board of directors and can influence corporate changes.

Shareholders’ Powers

• Must approve fundamental corporate changes: amendments, mergers, dissolution, asset sales.

• Shareholders have the authority to vote on board elections and removals.

Shareholders’ Meetings

• Must be held annually; special meetings for urgent matters.

• Notice Requirement: Shareholders must be notified 10-60 days in advance, with details on meeting purpose.

Voting and Proxies

• Shareholders control through voting, with quorum defined as over 50% of outstanding shares present.

• Proxies allow shareholders to assign their voting rights to another person.

  • Most institutional investors rely on institutional investor Proxy Advisory Firms

• Proposals for changes can be submitted and must be included in proxy materials under SEC regulations.

Rights of Shareholders

• Shareholders have various rights including stock certificates, preemptive rights, dividends, and inspection rights.

  • Preemptive rights prevent dilution. You get first choice to purchase new issue of the stock in proportion to the amount of stock already owned by the shareholder

• Stock Warrants: certificate that grants owner the option to buy a number of stocks within a period of time. You can trade and sell this right

• Inspection Rights: Allow examination of corporate records with a proper purpose; requests must be written.

Dividends

• If shareholders receive an illegal dividend (as in the received dividend before the prioritized debt holders) they must give it back. The board of directors personally liable for this

Transfer of Shares

• Shareholders can generally transfer their stock unless there are restrictions.

• Ownership rights remain until the corporation is notified of the transfer.

Shareholder’s Derivative Suit

• A legal action initiated by a shareholder to protect corporate interests, with any recovered damages going to the corporation.

• Must provide written demand for action, with directors given 90 days to respond.

Duties and Liabilities of Shareholders

• Generally not liable for the corporation's debts, limited to their investments.

• Potential liabilities can arise from illegal dividends, piercing the corporate veil, or watered stock concerns.

• Majority shareholders may have fiduciary duties towards minority shareholders and can be liable for oppressive actions.