Chapter 40

Question 1

Role of Directors

Answer 1

• All policy making decisions
• Carry out routine corporate business
• Select and remove officers
• Determine capital structure of the corporation
• Declare dividends
• Each director has 1 vote/majority vote

Question 2

Are directors agents?

Answer 2

No, Because no one individual director can actual bind the corporation to anything

Question 3

Are directors trustees?

Answer 3

No, Trustees hold title to property for the use/benefit of another. That’s not what directors are doing

Question 4

Inside Director

Answer 4

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

Question 5

Outside Director

Answer 5

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

Question 6

Meetings and Voting Rights of Directors

Answer 6

The dates of regular meetings are usually scheduled by the articles, bylaws, or board resolution

Question 7

Quorum

Answer 7

The number of member of a decision-making body that must be present before business may be transacted

Question 8

Corporate Officers and Executives

Answer 8

• hired by the board
  *at a minimum most corporations have a President, 1 or more VP, secretary and treasurer
• carry out duties stated in the Bylaws
• corporate and managerial officers are agents
• are employees
• Board can remove an officer with or without cause

Question 9

Duties and liability of directors and officers

Answer 9

Directors and Officers are fiduciaries of the corporation and therefore the duties are those of a fiduciary

Question 10

Duty of Care

Answer 10

Requires directors/officers:
1. Act in good faith
2. Act as a reasonable prudent director/officer would under the circumstances
3. Act in the best interest of the corporation

Question 11

So basically (under duty of care) an Officer/Director should…

Answer 11

be attending meetings (that’s how they are informed about decisions they need to make, what is going on in the business, etc.), reasonably supervise work given out, if you disagree with the majority vote – if I am a dissenting board member – get it on the record that you disagreed (by the secretary taking notes)

Question 12

Business Judgement Rule

Answer 12

Defense to alleged violation by directors and officers of duty of care.
Directors and officers do NOT insure business success (the defense argues that they made sound business decisions even if it didn’t work out the way it was intended)

Question 13

Business Judgement Rule applies if: Director/Officer….

Answer 13

1. took reasonable steps to be informed on the matter
2. had a rational basis for the decision AND
3. no conflict of interest existed between personal interest and interest of the corporation
   If the defense is successful, then the director or officer has not breached the duty of care.

Question 14

BJR is usually successful unless:

Answer 14

there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.

Question 15

Duty of Loyalty

Answer 15

“Duty of faithfulness to one’s obligations and duties”
* think of the company before own personal interests
* refrain from self-dealings
* not use corporate funds or information for personal gain

Question 16

6 examples of failure in duty of loyalty:

Answer 16

1. Competing with the corporation
2. Usurping (taking personal advantage of) a corporate opportunity
3. Pursuing an interest that conflicts with that of the corporation
4. Using information that is not available to the public to make a profit trading securities (insider trading)
5. Authorizing a corporate transaction that is detrimental to minority shareholders
6. Selling control over the corporation

Question 17

Conflicts of Interests

Answer 17

• many can exist with directors
• make full disclosure
• abstain from voting on matters with a conflict

Question 18

I own an office building, I am an external director. We as a corporation are looking for new office space. What should I do?

Answer 18

I need to tell the board that I own the building we are considering. And then when it is time to vote, I should not vote.

Question 19

Liability of Directors/Officers

Answer 19

• can be liable for negligence
• can be criminally responsible for their own crimes and crimes committed by employees under their supervision
• can be sued by SH in a shareholders derivative suit (Sugarman is an example of this)
• can be held personally liable under many statutes

Question 20

Role of Shareholders

Answer 20

• Are owners of the corporation
• Do not own personal title to corporate property (the corporation owns everything)
• Do appoint the board of directors
• Do not, as SH, have daily management responsibilities (if it is a close corporation, you may have management responsibilities)
• Majority SH owe a fiduciary duty to minority SH

Question 21

Powers of Shareholders (Shareholder approval is normally required to…)

Answer 21

1. Amend the articles of incorporation or bylaws
2. Sell all or substantially all of the corporation’s assets
3. Conduct a merger/dissolve the corporation

Power to: vote/elect/remove members of the BOD

Question 22

What do you have to do if you want to hold a special meeting?

Answer 22

10-60 days notice (no more, no less)

Question 23

Resolutions

Answer 23

corporate resolution that says what the decision what on the corporate business matter. If I have one stock, I have one vote

Question 24

Quorum

Answer 24

more than 50% are present

Question 25

Voting Lists

Answer 25

created prior to any meeting. Created on the day the notice is sent.

Question 26

Cumulative Voting to Elect Directors

Answer 26

Formula: each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the shareholder owns. Designed to protect minority shareholders.

Question 27

Rights of Shareholders

Answer 27

- Certificates - Preemptive rights - Dividends - Inspection rights - Shareholder's derivative suit

Question 28

Certificates

Answer 28

few states require physical certificates to be issued; stock is an intangible property right that the SH has regardless of whether they have a physical certificate

Question 29

Preemptive Rights

Answer 29

rights of a SH to preference over other SHs in buying a prorated share of a new issue of stock; allows a majority SH to maintain his/her proportionate control, voting power and financial interest

Question 30

John, a shareholder of ABC, Cor., owns 10% of the company. The articles of incorporation for ABC give John preemptive rights upon a new issue of stock by the company, if exercised within 30 days of issuance. What does this mean?

Answer 30

This means he can by 10% of any new issuance so he maintains his 10% ownership. ABC issues 1000 new shares of the stock. Jown can buy 100 shares of the new shares, if he acts within thrity days.

Question 31

Illegal Dividends

Answer 31

either paid out of an unauthorized account, or paying the dividends causes the corporation to become insolvent.

Question 32

Inspection Rights

Answer 32

Every shareholder is entitled to examine specified corporate records including voting lists

Question 33

Derivative Suit

Answer 33

When the board fails to act in the way the shareholders are wanting, the shareholders can take action with a derivative suit. When Board fails to file a lawsuit based on harm to the corporation, the SHs may file the lawsuit “derivatively”. * written demand to the board is required * board has 90 days to file lawsuit requested by SH * courts dismiss derivative suits if a majority of the directors or an independent panel says (based on good faith) it’s not in the best interest of the corporation * damages awarded go to the corporation (SH may be reimbursed for reasonable expenses including attorneys’ fees) shareholders filed the suit on behalf of the corporation

Question 34

When are shareholders held personally liable?

Answer 34

* Court agrees to pierce the corporate veil * Illegal dividends are issued * Watered Stock is issued

Question 35

Watered Stock

Answer 35

when the corporation issues stock for less than fair market value. SH receiving watered stock is liable to the corporation for the difference between their price and fair market value.