Download - Cheeseman blaw8e ch37
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
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Shareholder Meetings
Annual shareholders’ meeting: Held by the corporation to elect directors and to vote on other matters
Special shareholders’ meetings: May be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation
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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
A 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
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Voting Requirements
Shareholders who own stock as of a set date are allowed to 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: The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting
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Voting for Election of Directors
Straight (Noncumulative) Voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open
Cumulative Voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates
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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 matter
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Voting Agreements
Shareholders agree in advance as to how their shares will be voted
Voting trusts: An arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares
Shareholder voting agreements: An agreement between two or more shareholders that stipulates how they will vote their shares
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Restrictions on the Sale of Shares
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
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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 Granted by the articles of incorporation Failure to exercise preemptive right—shares can
be sold to anyone
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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
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Derivative Lawsuits
A 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
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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 and hold the shareholder personally liable for the corporation’s debts and obligations
Occurs when There is thin capitalization No separateness is maintained between the
corporation and its shareholders
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Case 37.1: Piercing the Corporate Veil
Case Northeast Iowa Ethanol, LLC v. Drizin Web 2006 U.S. Dist. Lexis 4828 (2006) United States District Court for the Northern District of Iowa
Issue Does the doctrine of piercing the corporate veil
apply in this case, thus allowing the plaintiffs to pierce the corporate veil of GSI and reach shareholder Drizin for liability for civil fraud?
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Board of Directors
A 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
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Exhibit 37.2: Board of Directors
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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
Term of office—expires at the annual shareholders’ meeting following a boards member’s election Staggered terms—Terms lasting two or three years
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Meetings of the Board of Directors
Regular meetings are held at the times and places established in the bylaws
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
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Corporate Officers
Employees of a corporation who are appointed by the board of directors They manage the day-to-day operations 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
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Exhibit 37.3: Corporate Officers
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Fiduciary Duty
Fiduciary duties: The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders Duty of obidience Duty of care Duty of loyalty
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Duty of Obedience
A 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
Breach of duty—Personal liability for resultant damages
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Duty of Care
A 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
Breach of duty—Personal liability to the corporation and its shareholders for any damages caused
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Business Judgment Rule
A 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
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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 Breach of duty—Corporation can sue the director or
officer to recover the secret profit made from a transaction
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Duty of Loyalty
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
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Duty of Loyalty
Competing with the corporation Any profits made by nonapproved 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
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Case 37.2: Fiduciary Duties of Corporate Directors and Officers
Case McPadden v. Sidhu 964 A.2d 1262 (2008) Court of Chancery of Delaware
Issue Did the plaintiff plead sufficient facts of i2’s board
of directors bad faith and Dubreville’s breach of the duty of loyalty to withstand the defendants’ motions to dismiss?
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Sarbanes-Oxley Act
Enacted by Congress in 2002 Goals
To improve corporate governance Eliminate conflicts of interest Instill confidence in public companies
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Sarbanes-Oxley Act
Foreign Corrupt Practices Act: A federal statute that makes it a crime for U.S. companies, or their officers, directors, agents, or employees, to bribe A foreign official A foreign political party official A candidate for foreign political office, where the
bribe is paid to influence the awarding of new business or the retention of a continuing business activity
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