Ch. 40 Corporations - Directors, Officers, and Shareholders Flashcards Preview

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Flashcards in Ch. 40 Corporations - Directors, Officers, and Shareholders Deck (69)
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1
Q

Who is the ultimate authority in every corporation?

A

BODs

2
Q

What are the three key responsibilities of the BODs?

A

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

3
Q

Are directors agents of the corporation?

A

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

4
Q

Are directors trustees of the corporation?

A

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

5
Q

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

A
  • Corporation’s articles OR bylaws
6
Q

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

A

By majority vote of S/Hs

7
Q

What can a director be removed for?

A
  • For cause (for failing to perform a required duty, either as specified in the articles or bylaws or by S/H action)
8
Q

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?

A

YES

9
Q

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

A

Inside director

10
Q

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

A

Outside director

11
Q

Define quorum

A

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

12
Q

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

A

Quorum

13
Q

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

A

Transact business and vote on issues affecting the corporation

14
Q

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?

A
  • Create committees of directors and delegate certain tasks to these committees
15
Q

What are two common types of committees?

A
  • Executive committee

- Audit committee

16
Q

What does an executive committee under the BOD handle?

A
  • Handles interim management decisions b/w board meetings

- Limited to dealing with ordinary business matters

17
Q

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

A

Does not have the power to:

  • declare dividends
  • amend bylaws, or
  • authorize issuance of stock
18
Q

What does an audit committee under the BOD handle?

A
  • Responsible for selection, compensation, and oversight of the independent public accountants that audit the firm’s financial records
19
Q

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

A

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

20
Q

What does the right to participation mean?

A

Directors:

  • are entitled to participate in all BODs meeting
  • have right to be notified of these meetings
21
Q

What does right of inspection mean?

A

Each director:

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

22
Q

Why is the right of inspection essential for directors?

A
  • Essential for directors to make informed decisions and to exercise the necessary supervision over corporate officers and employees
23
Q

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

A

Indemnification

24
Q

What is the right to indemnification?

A

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

25
Q

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

A
  • Duty of care

- Duty of loyalty

26
Q

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

A

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

27
Q

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?

A
  • Business judgement rule
28
Q

What does the business management rule state?

A
  • 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
29
Q

When does the business judgement rule apply?

A

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

30
Q

Define loyalty.

A

Faithfulness to one’s obligations and duties

31
Q

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

A

To subordinate their personal interests to the welfare of the corporation

32
Q

What does the Guth v. Loft case illustrate?

A

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

33
Q

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

A

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

34
Q

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?

A

Shareholder’s derivative suit

35
Q

What constitutes a lie under Section 1001?

A
  • 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
36
Q

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

A

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

37
Q

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

A

NO

38
Q

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

A

Corporation and its S/Hs as a whole

39
Q

Controlling S/Hs owe a fiduciary duty to whom?

A

Minority S/Hs

40
Q

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

A

No, though it may be requested

41
Q

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

A

Shareholders

42
Q

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

A

For cause (breach of duty or misconduct)

43
Q

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

A

Annually

44
Q

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

A

Special meetings

45
Q

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?

A
  • At least 10 days before meeting date

- But not more than 60 days before meeting

46
Q

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

A
  • Statement of purpose of meeting (and business transacted at the meeting is limited to that purpose )
47
Q

Define proxy.

A

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

48
Q

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

A

11 months

49
Q

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?

A

Shareholder proposal

50
Q

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?

A

Voting list

51
Q

To whom does cumulative voting give a voice to?

A

Minority shareholders

52
Q

What is a voting trust?

A

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

53
Q

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

A

Articles of incorporation

54
Q

Generally, preemptive rights apply only to what?

A

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

55
Q

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

A

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

56
Q

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

A

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

57
Q

What are stock warrants?

A

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

58
Q

What is a dividend?

A

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

59
Q

In what ways can dividends by paid?

A
  • Cash
  • Property
  • Stock of corporation paying dividend
  • Stock of other corporation
60
Q

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

A

BODs

61
Q

Do S/Hs have inspection rights?

A

YES

62
Q

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

A

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

63
Q

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

A

Current record owner

64
Q

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

A

To the corporation

65
Q

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

A

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

66
Q

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

A
  • Illegal dividends
  • Watered stock
  • Duties majority S/Hs owe to minority S/Hs
67
Q

What is watered stock?

A

When a corporation issues shares for less than their FMV

68
Q

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

A

Oppressive conduct

69
Q

Give an example of oppressive conduct.

A

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