Ch. 40 Corporations - Directors, Officers, and Shareholders

Question 1

Who is the ultimate authority in every corporation?

Answer 1

BODs

Question 2

What are the three key responsibilities of the BODs?

Answer 2

1) Select and remove corporate officers
2) Det. capital structure of corporation
3) Declare dividends

Question 3

Are directors agents of the corporation?

Answer 3

NO (b/c they cannot act as an agent to bind the corporation)

Question 4

Are directors trustees of the corporation?

Answer 4

NO (b/c they do not hold title to property for the use and benefit of others)

Question 5

What document sets forth the number of directors in a corporation?

Answer 5

• Corporation’s articles OR bylaws

Question 6

The initial board serves until the first annual shareholders’ meeting. How are the subsequent directors elected?

Answer 6

By majority vote of S/Hs

Question 7

What can a director be removed for?

Answer 7

• For cause (for failing to perform a required duty, either as specified in the articles or bylaws or by S/H action)

Question 8

Even when a director election appears to be authorized by the bylaws, may a court invalidate the results if the directors were attempting to manipulate the election in order to reduce the shareholder’s influence?

Answer 8

YES

Question 9

What would you call a director who is also an officer of the corporation?

Answer 9

Inside director

Question 10

What would you call a director who does not hold a management position?

Answer 10

Outside director

Question 11

Define quorum

Answer 11

Minimum # of members of a body of officials or other group that must be present for business to be validly transacted

Question 12

At BOD meetings, a majority of the board constitutes a what?

Answer 12

Quorum

Question 13

At BOD meetings, once a quorum is present, what can the directors do?

Answer 13

Transact business and vote on issues affecting the corporation

Question 14

For large corporations with a large # of members on the BOD, what can be done to deal with the myriad of complex business issues to make meetings less unwieldy?

Answer 14

• Create committees of directors and delegate certain tasks to these committees

Question 15

What are two common types of committees?

Answer 15

• Executive committee

- Audit committee

Question 16

What does an executive committee under the BOD handle?

Answer 16

• Handles interim management decisions b/w board meetings

- Limited to dealing with ordinary business matters

Question 17

What does an executive committee under the BOD not have the power to do?

Answer 17

Does not have the power to:

• declare dividends
• amend bylaws, or
• authorize issuance of stock

Question 18

What does an audit committee under the BOD handle?

Answer 18

• Responsible for selection, compensation, and oversight of the independent public accountants that audit the firm’s financial records

Question 19

What three rights do corporate directors have to allow them to function properly in that position?

Answer 19

1) Right to participation
2) Right of inspection
3) Right to indemnification

Question 20

What does the right to participation mean?

Answer 20

Directors:

• are entitled to participate in all BODs meeting
• have right to be notified of these meetings

Question 21

What does right of inspection mean?

Answer 21

Each director:

-can access the corporation’s books and records, facilities, and premises

Question 22

Why is the right of inspection essential for directors?

Answer 22

• Essential for directors to make informed decisions and to exercise the necessary supervision over corporate officers and employees

Question 23

When a director becomes involved in litigation by virtue of his position or actions, the director may also have a right to ________.

Answer 23

Indemnification

Question 24

What is the right to indemnification?

Answer 24

Directors right to reimbursement for legal costs, fees and damages incurred

Question 25

The directors and officers owe a fiduciary duty to the corporation. In general, what do these fiduciary duties include?

Answer 25

- Duty of care | - Duty of loyalty

Question 26

What does the standard of due care generally require a director or officer to do?

Answer 26

1) Act in good faith (honestly) 2) Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances 3) Do what she or he believes is in the best interests of the corporation

Question 27

If directors or officers fail to exercise due care and the corporation or its S/Hs suffer harm as a result, the directors or officers can be held liable for negligence unless what rule applies?

Answer 27

- Business judgement rule

Question 28

What does the business management rule state?

Answer 28

- A corporate director or officer will not be liable to the corporation or to its S/Hs for honest mistakes of judgement and bad business decisions

Question 29

When does the business judgement rule apply?

Answer 29

Applies as long as director or officer: 1) Took reasonable steps to become informed about matter 2) Had a rational basis for his decision 3) Did not have a conflict of interest b/w his personal interest and that of the corporation

Question 30

Define loyalty.

Answer 30

Faithfulness to one's obligations and duties

Question 31

What does the duty of loyalty require of directors and officers?

Answer 31

To subordinate their personal interests to the welfare of the corporation

Question 32

What does the Guth v. Loft case illustrate?

Answer 32

Illustrates the conflict that can arise b/w a corporate official's personal interest and his or her duty of loyalty

Question 33

A director's fiduciary duty would require him to make a full disclosure of what?

Answer 33

Any potential conflicts of interest that might arise in any corporate transaction

Question 34

If S/Hs perceive that corporate directors are not acting in the best interest of the corporation, they may sue the directors in what type of suit on behalf of the corporation?

Answer 34

Shareholder's derivative suit

Question 35

What constitutes a lie under Section 1001?

Answer 35

- Any false statement made to a federal official, whether it be oral or in writing - Person need not be under oath, and the government need not have warned the person that any falsehood could have very serious consequences

Question 36

To fulfill their duty of loyalty, directors and officers must make a full disclosure of what?

Answer 36

Any potential conflicts b/w their personal interests and those of the corporation

Question 37

Do S/Hs have responsibility for the daily management of a corporation?

Answer 37

NO

Question 38

The duty of officers and directors is to act in the best interests of whom?

Answer 38

Corporation and its S/Hs as a whole

Question 39

Controlling S/Hs owe a fiduciary duty to whom?

Answer 39

Minority S/Hs

Question 40

Is S/H approval required to approve an independent auditor?

Answer 40

No, though it may be requested

Question 41

After the first BODs serve their first year, who is in charge of selecting and retaining directors?

Answer 41

Shareholders

Question 42

Shareholders have the inherent power to remove a director from office for what by majority vote?

Answer 42

For cause (breach of duty or misconduct)

Question 43

S/Hs' meetings must occur at least how often?

Answer 43

Annually

Question 44

What kind of meetings can S/Hs call to deal with urgent matters?

Answer 44

Special meetings

Question 45

A corporation must notify its S/Hs of the date, time, and place of an annual or special S/Hs meeting at least how many days beforehand, but not more than how many days before the meeting?

Answer 45

- At least 10 days before meeting date | - But not more than 60 days before meeting

Question 46

Notice of a special meeting must include a statement of what?

Answer 46

- Statement of purpose of meeting (and business transacted at the meeting is limited to that purpose )

Question 47

Define proxy.

Answer 47

Signed appoint form or e-transmission authorizing an agent to vote the shares

Question 48

Under RMBCA 7.22(c), proxies are valid for how many months unless the proxy agreement mandates a longer period?

Answer 48

11 months

Question 49

If a S/H wants to change a company policy, they can put their ideas up for a S/H vote by submitting what to the BODs?

Answer 49

Shareholder proposal

Question 50

The corporation prepares what sort of list before each S/Hs meeting that details the name and address of each S/H as shown on the corporate records on a record date?

Answer 50

Voting list

Question 51

To whom does cumulative voting give a voice to?

Answer 51

Minority shareholders

Question 52

What is a voting trust?

Answer 52

An agreement (a trust contract) under which a S/H assigns the right to vote his shares to a trustee, usually for a specified period of time

Question 53

Under RMBCA 6.30, preemptive rights do not exist unless provided for in what?

Answer 53

Articles of incorporation

Question 54

Generally, preemptive rights apply only to what?

Answer 54

Additional newly issued stock sold for cash (and the preemptive rights must be exercised usually w/i 30 days)

Question 55

What do preemptive rights allow each S/H to maintain?

Answer 55

His proportionate control, voting power, or financial interest in the corporation

Question 56

Preemptive rights are most important in what type of corporations? Why?

Answer 56

Close corporations (b/c each S/H owns a relatively small # of shares but controls a substantial interest in the corporation)

Question 57

What are stock warrants?

Answer 57

Rights to buy stock at a stated price by a specified date that are given by the company

Question 58

What is a dividend?

Answer 58

Distribution of corporate profits or income ordered by the BODs and paid to the S/Hs in proportion to their respective shares in the corporation

Question 59

In what ways can dividends by paid?

Answer 59

- Cash - Property - Stock of corporation paying dividend - Stock of other corporation

Question 60

Whenever dividends are illegal or improper, who can be held personally liable for the amount of the payment?

Answer 60

BODs

Question 61

Do S/Hs have inspection rights?

Answer 61

YES

Question 62

A S/H only has a right to inspect and copy corporate books and records for what sort of purpose?

Answer 62

Proper purpose (and request to inspect must be made in advance)

Question 63

Unless the corporation is notified of a stock transfer and the entry is complete, all rights remain with whom?

Answer 63

Current record owner

Question 64

When S/Hs bring a derivative suit, to whom are any damages awarded?

Answer 64

To the corporation

Question 65

What was the key question in the McCann v. McCann case?

Answer 65

Whether the minority S/H could bring an individual claim rather than a derivative suit (Yes)

Question 66

In what types of cases can the court pierce the corporate veil and hold the S/H personally liable?

Answer 66

- Illegal dividends - Watered stock - Duties majority S/Hs owe to minority S/Hs

Question 67

What is watered stock?

Answer 67

When a corporation issues shares for less than their FMV

Question 68

A breach of fiduciary duties by those who control a close corporation normally constitutes what?

Answer 68

Oppressive conduct

Question 69

Give an example of oppressive conduct.

Answer 69

Majority S/Hs freeze out the minority S/Hs and exclude them from certain benefits of participating in the firm