BUSINESS LAW TodaySTANDARD EDITION TEXT & SUMMARIZED CASES, 12e

Roger LeRoy Miller

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Directors, Officers, and Shareholders

Chapter 34

Chapter Outline

34-1 Directors and Officers

34-2 Duties and Liabilities of Directors and Officers

34-3 Shareholders

34-4 Rights and Duties of Shareholders

Learning Objectives

What three rights do corporate directors possess?

What must directors do to avoid liability for honest mistakes of judgment and poor business decisions?

What is a voting proxy?

If a group of shareholders perceives that the corporation has suffered a wrong and the directors refuse to take action, can the shareholders compel the directors to act? If so, how?

34-1 Directors and Officers (slide 1 of 2)

34-1a Directors

Election of Directors: Number of directors is set forth in the corporation’s articles or bylaws.

34-1b Compensation of Directors

34-1c Board of Directors’ Meetings

34-1d Committees of the Board of Directors

The audit committee oversees the corporation’s accounting and financial reporting processes.

The compensation committee monitors and determines the compensation of the officers.

34-1 Directors and Officers (slide 2 of 2)

34-1e Rights of Directors

Right to participation

Right of inspection

Right to indemnification

34-1f Corporate Officers and Executives

The board of directors hires corporate officers and other executive employees. It can normally remove corporate officers at any time with or without cause.

34-2 Duties and Liabilities of Directors and Officers (slide 1 of 2)

34-2a Duty of Care

Duty to Make Informed and Reasonable Decisions

Duty to Exercise Reasonable Supervision

34-2b The Business Judgment Rule

A corporate director or officer is not liable to the corporation or to its shareholders for honest mistakes of judgment or bad business decisions made in good faith.

34-2b The Business Judgment Rule (slide 1 of 2)

When the Rule Applies

The director or officer took reasonable steps to become informed about the matter.

He or she had a rational basis for his or her decision.

He or she did not have a conflict of interest between his or her personal interest and that of the corporation.

Case 34.1 Oliveira v. Sugarman (2016)

34-2b The Business Judgment Rule (slide 2 of 2)

The Rule Provides Broad Protections

Most courts will apply the rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.

34-2c Duty of Loyalty

The duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation.

34-2c Duty of Loyalty

Cases dealing with the duty of loyalty typically involve at least one of the following:

Competing with the corporation.

Usurping a corporate opportunity.

Having an interest that conflicts with the interest of the corporation.

Engaging in insider trading.

Authorizing a corporate transaction that is detrimental to minority shareholders.

Selling control over the corporation.

34-2 Duties and Liabilities of Directors and Officers (slide 2 of 2)

34-2d Disclosure of Conflicts of Interest

A director’s fiduciary duty requires him or her to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.

34-2e Liability of Directors and Officers

Directors and officers are liable for their own crimes and torts. They may also be held liable for the crimes and torts committed by employees under their supervision.

Classic Case 34.2

Guth v. Loft, Inc. (1939)

One of the first to set forth a test for determining when a corporate officer or director has breached the duty of loyalty

34-3 Shareholders

34-3a Shareholders’ Powers

Approve fundamental changes affecting the corporation before the changes can be implemented

Elect or remove members of the board of directors.

34-3b Shareholders’ Meetings

Proxies

Shareholder Proposals

Rules for Proxies and Shareholder Proposals

34-3c Shareholder Voting

Quorum Requirements

A quorum must be present for shareholders to act (vote) during a meeting.

Case Example 34.9 Case v. Sink & Rise, Inc. (2013)

Voting Requirements

If a state statute requires specific voting procedures, the corporation’s articles or bylaws must be consistent with the statute.

Cumulative Voting

Other Voting Techniques

34-4 Rights and Duties of Shareholders (slide 1 of 3)

34-4a Stock Certificates

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation.

34-4b Preemptive Rights

The right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation’s stock in proportion to the amount of stock already owned by the shareholder.

34-4 Rights and Duties of Shareholders (slide 2 of 3)

34-4c Dividends

Illegal Dividends: Payouts that are improperly paid from an unauthorized account or that cause the corporation to become insolvent

Directors’ Failure to Declare a Dividend

34-4d Inspection Rights

The RMBCA provides that every shareholder is entitled to examine specified corporate records for a proper purpose, provided the request is made in advance.

34-4 Rights and Duties of Shareholders (slide 3 of 3)

34-4e Transfer of Shares

Generally, stock can be transferred to another person unless there are valid restrictions on its transferability.

34-3f The Shareholder’s Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third person.

Written Demand Required

Damages Recovered Go into Corporate Funds

34-4g Duties of Majority Shareholders

In some instances, a majority shareholder may have a fiduciary duty to the corporation and to the minority shareholders. In these situations, majority shareholders owe a fiduciary duty to the minority shareholders.

When a majority shareholder breaches her or his fiduciary duty to a minority shareholder, the minority shareholder can sue for damages.

Miller_BLTC12E_PPT_ch34.pptx

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