38: Corporate Governance and The Sarbanes-Oxley Act

Question 1

special shareholders’ meeting

Answer 1

meetings of shareholders that may be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation

Question 2

record date

Answer 2

a date specified in corporate bylaws that determines whether a shareholder may vote at a shareholders’ meeting

Question 3

quorum to hold the meeting of the shareholders

Answer 3

the number of directors necessary to hold a board meeting or committee meeting in order to transact business of the board

Question 4

supramajority/supermajority voting requirement

Answer 4

a rule established by a corporation that stipulates that more than a majority of shares (the percentage as set by corporation code or corporate document) are needed to constitute a quorum for a vote of the shareholders

Question 5

straight voting / noncumulative voting

Answer 5

a system of shareholder voting for the board of directors of a corporation whereby each shareholder votes the number of shares he or she owns for his or her choices from the candidates running for the board of director positions that must be filed

Question 6

cumulative voting

Answer 6

a system of shareholder voting for the board of directors for a corporation whereby each shareholder can accumulate all of his or her votes (determined b the number of directors to be elected multiplied by the number of shares the shareholder owns) and vote them all for a single candidate or split them among several candidates

Question 7

shareholder agreement

Answer 7

an agreement that shareholders may enter into for the corporation regarding the board of directors, management of the corporation, allocating voting rights, and such

Question 8

voting trust

Answer 8

an arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares. legal title to these shares is held in the name of the trustee

Question 9

voting trust certificate

Answer 9

documents that are issued to shareholders that evidence their ownership interests in a voting trust

Question 10

shareholder voting agreement

Answer 10

an agreement between two or more shareholders of a corporation that stipulates how they will vote their shares for the election of directors or other matters that require a shareholder vote

Question 11

right of first refusal

Answer 11

an agreement among shareholders of a corporation that requires a selling shareholder who is a signatory to the agreement to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else

Question 12

buy-and-sell agreement

Answer 12

an agreement among shareholders of a corporation that requires a selling shareholder who is a signatory to the agreement to sell his or her shares to the other shareholders or to the corporation at the price specified in the agreement

Question 13

preemptive rights

Answer 13

rights that give existing shareholders of a corporation the option to purchase new shares issued by the corporation in proportion to their current ownership interests

Question 14

stock dividend

Answer 14

additional shares of stock distributed as a dividend

Question 15

derivative lawsuit / derivative action

Answer 15

a lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit

Question 16

universal demand rule

Answer 16

a rule that requires a shareholder to make a demand on the directors of a corporation to bring a legal action against a party for allegedly injuring the corporation before the shareholder can bring a derivative lawsuit (derivative action) on behalf of the corporation

Question 17

futility exception

Answer 17

a rule that excuses a shareholder from making a demand on the board of directors to sue a third party prior to the shareholder bringing a derivative lawsuit on behalf of the corporation if such demand would be futile to make

Question 18

piercing the corporate veil / alter ego doctrine

Answer 18

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 obigations

Question 19

inside director

Answer 19

a member of the board of directors of a corporation who is also an officer of the corporation

Question 20

outside director / independent director

Answer 20

a member of a board of directors of a corporation who is not an officer of the corporation

Question 21

staggered terms

Answer 21

a situation in which a board of directors of a corporation is divided into classes that are elected to serve two or three years on the board of directors

Question 22

resolution

Answer 22

actions taken by the board of directors of a corporation, usually at a board meeting (e.g., authorizing the corporation to enter into contracts or mergers, or to employ corporate officers). corporate resolutions are recorded in minutes of the board of directors’ meetings and specify the decisions that were made by the board during their meetings

Question 23

committees of the board of directors

Answer 23

committees created by a corporation’s board of directors composed of board members who are granted special powers as authorized by the board

Question 24

audit committee

Answer 24

a committee of the board of directors of a corporation that oversees the integrity of financial statements, public audits of the company by certified public accountants, internal audits of the company, and compliance with legal and regulatory requirements. the audit committee must be composed of independent members of the board of directors

Question 25

compensation committee

Answer 25

a committee of the board of directors of a corporation that is responsible for human resource policies and procedures, employee benefit plans, and eecutive and employee compensation

Question 26

corporate governance and nominating committee

Answer 26

a committee of the board of directors of a corporation that examines the eligibility of nominees for the board of directors, reviews corporate governance principles and practices, and recommends board members' compensation

Question 27

executive committee

Answer 27

a committee of the board of directors of a corporation, usually consisting of the chairman of the board, chief executive officer, and other key directors and officers, that has the power to act as the full board in case of emergencies

Question 28

social responsibility committee

Answer 28

a committee of the board of directors of a corporation that oversees corporate efforts to address social and environmental concerns

Question 29

corporate officers

Answer 29

employees of a corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation

Question 30

duty of obedience

Answer 30

a duty that directors and officers owe to their corporation to act within the authority conferred upon them by state corporation codes, the articles of incorporation, the corporate bylaws, and the resolutions adopted by the board of directors

Question 31

duty of care of individuals

Answer 31

the obligation people awe each other not to cause any unreasonable harm or risk of harm

Question 32

negligence (unintentional tort or ordinary negligence)

Answer 32

the failure to do something that a reasonable person would do or doing something that a reasonable person would not do, in like or similar circumstances

Question 33

business judgment rule

Answer 33

a rule that protects the decisions of a board of directors of a corporation where the board has acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation and its shareholders

Question 34

duty of loyalty

Answer 34

a duty that directors and officers of a corporation owe not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders

Question 35

usurping an opportunity

Answer 35

a situation that occurs when an agent, a general partner, a director or an officer of a corporation, a partner in a LLP, certain members of a LLC, and anyone else who owes fiduciary duty to a principal personally takes (usurps) an opportunity that belongs to their principal

Question 36

self-dealing

Answer 36

anyone who owes a fiduciary duty to a principal engages in undisclosed self-dealing with their principal, such as undisclosed purchasing, selling, or leasing of property with their principal

Question 37

competing with the corporation

Answer 37

a situation that occurs when a director or officer of a corporation engages in undisclosed and unauthorized competition with the corporation that has employed him or her

Question 38

secret profit

Answer 38

anyone who owes a fiduciary duty to a principal makes a secret profit during the course of their employment by their principal

Question 39

misuse of property

Answer 39

a duty of agents, general partners, officers, directors and employees of corporations, employees of businesses, and others not to misuse the property of their principal for their own personal use

Question 40

sarbanes-oxley act (SOX)

Answer 40

a federal statute enacted by congress to improve corporate governance, bring more transparency to securities markets, eliminate conflicts of interest that previously existed in the securities industry, promote business ethics, and impose civil and criminal penalties for violations of the act

Question 41

CEO and CFO certification

Answer 41

a certification that the SOX requires, which the CEO and CFO of a public company file with each annual and quarterly report of the company