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Chapter 37
Corporate Directors, Officers and
Shareholders
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Rights of Shareholders
• A corporation’s shareholders own
the corporation.
• Shareholders are not agents of the
corporation.
• They cannot bind the corporation
to contracts.
• Shareholders have the right to vote on
matters such as:
– the election of directors, and
– the approval of fundamental
changes in the corporation.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Annual Shareholders’ Meeting
• Meeting of the shareholders that
must be held annually by the
corporation to elect directors and
vote on other matters.
– Shareholders do not have to
attend the shareholders’
meeting to vote.
– Shareholders may vote by
proxy.
• Special shareholders’ meeting
called by board, holders of at
least ten percent of stock, others
authorized.
– Emergency or important issues
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Proxies
• Shareholders may vote by
proxy
– Appoint someone as their
agent to vote
– Written document is proxy card
– Valid for 11 months
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Voting Requirements
• At least one class of shares of the
corporation must have voting
rights.
• Shareholders of record as a set
date allowed to vote
– Record date not more than 70 days
before the shareholders’ meeting
• Corporation must prepare and
maintain shareholders’ list
– Must be available for inspection
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Quorum
• The required number of shares
that must be represented in
person or by proxy to hold a
shareholders’ meeting.
• Once quorum is present,
withdrawal of shares has no
effect.
• The affirmative vote of the
majority of the voting shares
represented at a shareholders’
meeting constitutes an act of the
shareholders for actions other
than for the election of directors.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Voting
• Straight Voting- Each shareholder
votes the number of shares he or she
owns on candidates for each of the
positions open.
• Cumulative Voting- A shareholder
can accumulate all of his or her votes
and vote them all for one candidate
of split them among several
candidates.
• Supramajority Voting Requirement- A
requirement that a greater than
majority of shares constitutes a
quorum of the vote of the
shareholders.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Voting Agreements
• Sometimes share-holders
agree in advance as to how
their shares will be voted.
– Voting Trusts
– Shareholder Voting
Agreements
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Right to Receive Information
• Corporation must furnish
shareholders with annual financial
statement.
• Shareholders have absolute right
to inspect shareholders’ list,
articles, bylaws, minutes of
shareholders’ meetings for past
three years
• Must demonstrate proper purpose
to inspect accounting and tax
records, minutes from board and
committee meetings,
shareholders’ meetings beyond
three years.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Dividends
• Distribution of profits of the
corporation to shareholders.
• Paid at discretion of board.
• Shareholders on record date
will receive dividends.
• May use additional shares of
stock as a dividend.
– Not a distribution of corporate
assets
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Derivative Lawsuits
• Shareholders may bring derivative lawsuits
against the corporation to enforce their
rights.
– Corporation is harmed by someone, and
directors fail to bring an action against
them.
– Shareholder must have owned shares when
action occurred.
– Shareholder must fairly and adequately
represent interests of corporations.
– Must make written demand upon directors,
and is either rejected or 90 days have
expired since demand made.
– If successful, award goes to treasury, but
plaintiff-shareholder may recover
reasonable expenses and attorneys’ fees.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Piercing the Corporate Veil
• A doctrine that says if a
shareholder dominates a
corporation and uses it for
improper purposes, a court of
equity can:
– Disregard the corporate entity,
and
– Hold the shareholder personally
liable for the corporation’s
debts and obligations
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Board of Directors
• Elected by the shareholders.
• Responsible for formulating the
policy decisions affecting the
corporation.
• The board may initiate certain
actions that require shareholders’
approval by passing resolution.
• Have an absolute right of
inspection.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Selecting Directors
• 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Term of Office
• The term of a director’s office
expires at the next annual
shareholders’ meeting following
his or her election.
• Terms may be staggered to two or
three years.
• Specifics must be in articles.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Meetings of the Board of
Directors
• The directors can only act as a
board.
• They cannot act individually on
the corporation’s behalf.
• Every director has the right to
participate in any meeting of the
board of directors.
• Each director has one vote.
• Directors cannot vote by proxy.
• Regular and special meetings are
established by bylaws.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Quorum and Voting Requirement
• Simple majority usually
constitutes quorum.
• Articles and bylaws may
increase this number.
• If quorum is present, simple
majority of quorum approves
or disapproves actions.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Committees of the Board of
Directors
• Boards can create committees to
handle specific duties.
• Members with special expertise
appointed to committees
• Cannot delegate dividend
declaration, initiate actions that
require shareholders’ approval,
appoint members to fill vacancies,
amend the bylaws, approve plan
of merger, or authorize issuance of
shares.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Preemptive Rights
• Rights that give existing
shareholders the option of
subscribing to new shares
being issued in proportion to
their current ownership
interests.
• Prevents dilution of shares.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Transfer of Shares
• Subject to certain restrictions,
shareholders have the right
to transfer their shares.
• Shareholders may enter into
agreements with one
another to prevent
unwanted persons from
becoming owners of the
corporation.
– Right of First Refusal
– Buy-and-Sell Agreement
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Corporate Officers
• Board of directors appoint
officers.
• Directors delegate
management authority to
officers.
• Most corporations have
president, vice president,
secretary, and treasurer.
• Officer can be removed by
board.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Agency Authority of Officers
• Officers and agents of the
corporation have such
authority as may be provided
in the bylaws or as
determined by resolution of
the board of directors.
• Corporation may ratify
unauthorized act.
– Officers liable for unauthorized
actions.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Liability of Corporate Directors
and Officers
Duty of Obedience
Duty of Care
Duty of Loyalty
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Liability of Directors and
Officers
• Fiduciary Duties- 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Obedience
• Duty to act within the authority
conferred upon them by:
–
–
–
–
The state corporation statute
The articles of incorporation
The corporate bylaws
The resolutions adopted by the board of
directors
• Directors and officers who either
intentionally or negligently act
outside their authority are personally
liable for any resultant damages
caused to the corporation or its
shareholders.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Care
• A duty that corporate directors
and officers have to use care and
diligence when acting on behalf
of the corporation.
• A director or officer who breaches
this duty of care is personally liable
to the corporation and its
shareholders for any damages
caused by this breach.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Care (continued)
• This duty is discharged if an officer
or director acts:
1. In good faith.
2. With the care that an ordinary
prudent person in a like position
would use use under similar
circumstances.
3. In a manner he or she reasonably
believes to be in the best interests of
the corporation.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Care (continued)
• Violations of this duty of care
include acts of negligence and
mismanagement, including failure
to:
– Make a reasonable investigation of a
corporate matter.
– Attend board meetings on a regular
basis.
– Properly supervise a subordinate who
causes a loss to the corporation.
– Keep adequately informed about
corporate matters.
– Take other actions necessary to
discharge duties.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Business Judgment Rule
• Determination of whether
duty was met measured at
time decision made.
– Hindsight not applied
• Not liable for honest mistakes
of judgment.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Reliance on Others
• Corporate directors and officers
may rely on information and
reports prepared by competent
and reliable officers and
employees, lawyers, accountants,
other professionals, and
committees of the board of
directors.
• A director is not liable if such
information is false, misleading, or
otherwise unreliable unless he or
she has knowledge that would
cause such reliance to be
unwarranted.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Loyalty
• A duty that directors and officers
have:
– Not to act adversely to the
interests of the corporation,
and
– To subordinate their personal
interests to those of the
corporation and its
shareholders
• Breach of the duty of loyalty
usually occurs because of
intentional conduct.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Duty of Loyalty (continued)
• Breaches of the duty of loyalty
include unauthorized:
1. Self-dealing with the corporation
2. Usurping of a corporate opportunity
3. Competing with the corporation
4. Making a secret profit that belongs to
the corporation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Criminal Liability
• Directors, officers, and agents are
personally liable for the crimes
that they commit while acting on
behalf of the corporation.
– Sanctions include fines and
imprisonment for individuals
– Fines and loss of privileges for
corporation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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