Corporation Management and Control

Question 1

Powers of Directors - Board of Directors

Answer 1

Subject to any limitations in the art., the management of the corps business & exercise of corp power must be by or under the direction of the corp’s board of directors
- Individual directors do not have the power to set corp policy or even act as agents
Generally has discretion to decide whether & when to declare a dividend
- May legitimately decide to retain corp earnings to expand business
- Shareholders must prove refusal to declare amounted to fraud, bad faith, or an abuse of discretion

Question 2

Powers of Directors - Act of the Board

Answer 2

Board acts in its collective capacity, and requires a quorum
- Quorum: minimal portion of authorized number of directors required to be present for board action to occur
- Majority constitutes a forum
Act of board occurs upon affirmative vote of majority of directors present
Board can transact business in absence of meeting w/ written consent to an action that is signed by all members of the board

Question 3

Powers of Directors - Board Meeting

Answer 3

Regular meetings may be held w/out notice of date, time, place, or purpose
Special meetings require at least 2 days notice of date, time, and place
Any meeting where removal of a director is to be considered, notice must include purpose
- Waiver of notice can occur before or after time stated in notice by means of a signed writing or attendance/participation in a meeting
- Even if objects, a vote and assent to action waives

Question 4

Authority of Corporate Officers

Answer 4

Powers of an agent
- Enter into transaction for which expressly or implicitly authorized
- Have implied authority to enter into transactions that are reasonably related to performing duties for which they are responsible

Question 5

Limits on Corporate Power

Answer 5

Statement of corp purpose authorizes board’s power while also limiting authority of representatives
Ultra Vires Doctrine: corp cannot be obliged to undertake a contract or activity that is beyond the scope of its powers, as described
Under MBCA, limits can be challenged when:
- proceeding by shareholder to enjoin act
- proceeding by corp against a current/former director, officer, employee, or agent
- proceeding by attorney general based on obtaining art. by fraud or exceeding/abusing the authority conferred upon it by law

Question 6

Fiduciary Duties of Officers & Directors - Duty of Care

Answer 6

Must discharge duties in good faith, w/ care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the corp
- Entitled to rely on information, reports, records, & financial data prepared under authority delegated by board by those deemed reliable and competent in the matter
- Cannot act in good faith when committing/allowing illegal acts

Question 7

Fiduciary Duties of Officers & Directors - Business Judgment Rule

Answer 7

Rebuttable presumption that, when making a business decision, directors & officers have acted on an informed basis, in good faith, & w/ honest belief that their decision was in the corp’s best interest

Question 8

Fiduciary Duties of Officers & Directors - Duty of Loyalty

Answer 8

Fiduciary duty of officers, directors, & employees to be loyal to the corporation & not promote own interests in a manner injurious to it
- Conflicts of interests arise when transact business w/ the corp
- Conflicting Interest Transaction: between D/O and corp, of which D/O had knowledge, & a material financial interest
- Must notify other D/O/S of all material facts regarding conflict
- Transaction is voidable by corp unless interested person can prove:
- material facts of conflict were disclosed & majority of disinterested D’s validly approved it
- material facts of conflict were disclosed & majority of disinterest shareholders approved it, or
- court determines transaction was fair & reasonable to the corp
- Corporate Opportunity: D/O cannot usurp for their own benefit any business opportunity that properly belongs to the corp, considering:
- whether business constituting opportunity is closely related to that of corp
- whether board had expressed an interest in acquiring that type of business
- whether the individual became aware of the opportunity while acting in their capacity as D/O
- whether they used any corporate funds/facilities to discover/develop the opportunity
- No usurpation if after full disclosure the corp was given full opportunity pursue it and declined or corp was otherwise unable to take advantage
- Competition with corp: not a breach if they acted in good faith
- May engage in independent business, but if competes, equitable limitations will apply
- O not precluded absent agreement to compete or use intangibles upon termination
- Covenant not to compete will be enforced if reasonable as to time and area of application
- Business judgment rule is inapplicable

Question 9

Director & Officer Liability

Answer 9

Generally, D/O are not personally liable for debts/obligations of corp, but liable to corp for:
- violation of fiduciary duties or unauthorized actions
- usurpation: court may award damages or order D/O to convey profit/property/income
- Art of Inc may place significant limits on personal liability, but most states don’t all complete elimination

Question 10

Shareholder Collective Power - Participating in Management

Answer 10

Shareholders in collective capacity have power to elect directors, remove directors w/ or w/out cause, amend bylaws, & approve fundamental changes in the corp
- Board & shareholders have power to amend bylaws, but belongs exclusively to shareholders if:
- arts reserve power to shareholders, or
- shareholders in amending, repealing, or adopting a bylaw expressly provide that the board may not amend, repeal, or reinstate that bylaw
Fundamental Changes: things like amendments to arts, merger, dissolution, & sale of all/substantially al corp assets

Question 11

Shareholder Collective Power - Shareholder Meetings

Answer 11

To ensure that the collective power of shareholders is not interfered with, watered down or otherwise manipulated, each shareholder of record must be provided with timely written notice of each annual and special shareholder meeting 10 to 60 days prior to the meeting date.
• For annual meetings, proper notice will state the place, date, and hour of the shareholder meeting.
• For special meetings, proper notice will state the place, date, hour, and purpose of the shareholder meeting.
Quorum rules apply to shareholder meetings.
• A majority of the shares entitled to vote constitutes a quorum, unless the articles provide otherwise.
• Assuming a quorum, shareholder action requires the affirmative vote of a majority of shares present at the meeting unless the articles provide for a greater proportion.

Question 12

Shareholder Collective Power - Shareholder Resolutions

Answer 12

The MBCA does not specifically permit the submission of shareholder resolutions for shareholder action at shareholders’ meetings. Nonetheless, the practice is widespread and generally accepted under common law principles as a fundamental right. Generally, a shareholder resolution is acceptable if the proposal is a recommendation or request that the corporation or board of directors take a specified action; conversely, resolutions seeking to mandate or bind the corporation or the board are not considered proper.

Question 13

Shareholder Collective Power - Cumulative Voting

Answer 13

In “straight” or “statutory” voting, shareholders may not give more than one vote per share to any single nominee.
- In cumulative voting, shareholders may allocate all of their votes to any candidate when there are multiple openings on the board
- By doing so, cumulative voting is a type of voting process that helps strengthen the ability of minority shareholders to elect a director.
Removal:
- If a corp has straight voting, entire board of directors, or any individual directors, can be removed, w/ or w/out cause, by majority of the shares entitled to vote in the election of such directors
- If the corp has cumulative voting & less than entire board is to be removed, no director can be removed if the votes against removal would be sufficient to elect them under cumulative voting rules

Question 14

Shareholder Cumulative Power - Proposal for Amendment

Answer 14

In general, amendments to the articles are proposed by the board and submitted to the shareholders for approval
- Notice must include copy of the amendment and indicate that one of the purposes of the meeting is to consider the amendment
- Quorum: at least a majority of the votes entitled to vote on the amendment.

Question 15

Shareholder Cumulative Power - Proposal for Merger/Share Exchange

Answer 15

In general, a plan for merger or share exchange must be adopted by the board and then submitted to the shareholders for approval
- Notice must indicate that one of the purposes of the meeting is to consider the plan and, if the corp is not planned to be a surviving entity, a copy or summary of the articles of the surviving or new entity
- Quorum: must be at least a majority of the votes entitled to vote on the merger
- Approval Requirement exceptions:
- corp will survive or be the acquiring corp
- art of inc won’t change
- merger/exchange will not affect a change in the # of outstanding shards held by shareholders or affect change to preferences, limitations, or relative rights of shareholders, and
- issuance of shares as a result does not otherwise affect required shareholder approval
Approval of a merger involving parent and subsidiary does not require approval if parent owns at least 90% of voting power

Question 16

Shareholder Cumulative Power - Proposals for Disposition of Substantially All Assets

Answer 16

Requires shareholder approval if would leave the corp without a significant continuing business activity
- Retained if activity represents at least 25% of its assets at the end of the most recent fiscal year & 25% of either income/revenue that year

Question 17

Shareholder Rights - Voting

Answer 17

• Each share is entitled to one vote
• Only shareholders of record on the ‘record date’ are eligible to vote
  Proxy Voting
• for a proxy agreement to be valid, the shareholder must provide the proxy holder with either a written, signed authorization or an electronically transmitted authorization.
• No proxy shall be valid after the expiration of 11 months unless otherwise provided in the proxy agreement itself.
• In general, proxies are freely revocable.
  
  • Revocation may be effected by:
    
    • a writing delivered to the corporation;
    • a subsequently executed proxy presented at the shareholder meeting; or
    • an in-person appearance and vote at the shareholder meeting by the party who had executed or given the proxy.
• To be irrevocable during its term, the proxy agreement must explicitly provide that it is “irrevocable” and the proxy must be coupled with an interest
  Consolidating Voting Power
• Shareholders can arrange to vote their shares in concert with another by means of a voting agreement or voting trust.
• Voting trusts involve a transfer of legal title and are more strictly regulated than voting agreements.
• Voting agreements are contracts whereby shareholders bind each other to vote a certain way on particular issues.
  
  • Absent fraud or other illegal objective, voting agreements are valid among shareholders even if they run counter to the discretion of the board

Question 18

Shareholder Rights - Information & Inspection

Answer 18

Shareholders have a right to information, such as annual financial statements, that are important to a shareholder’s voting and investing decisions.
Shareholders have an unqualified right to examine the articles, bylaws, minutes of a shareholders’ meeting, and list of shareholders of record.
Shareholders also have a qualified right to inspect (and make copies of) accounting books and the records and minutes of director meetings.
- This right is exercisable upon a good faith demand made for a proper purpose and with specificity as to that purpose and the items sought to be inspected.
- Good Faith:
- When a shareholder is investigating corp wrongdoing, courts have required the shareholder present evidence establishing a “credible basis” for the belief of possible wrongdoing; mere suspicion is not enough
- When a shareholder demands inspection based on the shareholder’s financial investment and other interests, courts have generally permitted inspection if the shareholder is able to identify “shareholder interests” (such as permitting inspection of shareholders’ lists by a shareholder seeking voting support for a proposal to the corporation).
- A proper purpose is any purpose reasonably relevant to a shareholder’s interest as a shareholder.
- Includes a desire to investigate potentially illegal transactions or any other activities posing an economic risk to the corporation, where there is some credible evidence of a potential issue

Question 19

Shareholder Rights - Appraisal

Answer 19

Where a fundamental change has been put to a vote of the shareholders, dissenting shareholders have the right to obtain payment of the fair value of that shareholder’s shares
- In a merger, right belongs to any shareholder of a corp that is party to the merger except for shareholders of a subsidiary whose parent owns shares representing at least 90% of the voting power of each class and series of outstanding shares
- In a share exchange, this right belongs only to those shareholders who own shares of a class or series of shares that are to be acquired or exchanged

Question 20

Shareholder Rights - Bring Suit (Direct)

Answer 20

Direct suits are brought when the wrong or harm is direct to the shareholder
- While shareholders have a right to share in the net profits of the corporation, the power to declare dividends resides with the board
- To compel payment of dividends, a shareholder needs to prove that the directors’ refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion.
- In making a determination on whether a board acted in bad faith when refusing to declare a dividend, a court will look to see if any of the following were the motivating causes of its decision:
- intense hostility of the controlling faction against the minority;
- exclusion of the minority from employment by the corp;
- high salaries, bonuses, or corporate loans made to the officers in control;
- the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; and
- the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible

Question 21

Shareholder Rights - Bring Suit (Derivative)

Answer 21

A derivative suit is an equitable action brought by a shareholder on behalf of the corporation and for the corporation’s benefit.
Typically, it involves an alleged breach of fiduciary duty by officers and/or directors, and a request that the court enforce this duty owed to the corporation or redress the injury suffered by the corporation
Shareholder must have been a shareholder when the transaction complained of occurred
Prerequisite to bringing a derivative action: The shareholder must make a written demand of the directors to enforce the rights of a corp
- Before a derivative action can be brought, a shareholder must:
- make written demand upon the corporation; and
- allow at least 90 days to pass, unless irreparable injury would result by waiting 90 days.
Dismissal: A board can seek dismissal of a derivative suit when a majority of directors, who do not have a material interest in the derivative action determine, in good faith, and after conducting a reasonable inquiry, that continuance of the suit would not be in the best interests of the corporation

Question 22

Shareholder Duties

Answer 22

Duty of good faith: must refrain from exercising control so as to obtain a benefit from the corp not shared proportionately with minority shareholders
- Improper conduct includes:
- causing the board to guarantee, or enter into, a loan made by or with a majority shareholder;
- causing the board to issue additional stock to a controlling shareholder at less than fair market value for the purpose of diluting the minority’s interest;
- causing the board of to enter into a contract with a majority shareholder, or an entity affiliated with a majority shareholder, on unfair terms; and
- causing the board of directors to dissolve the corp, merge it with a company owned by the controlling shareholders, or sell its assets, for the purpose of excluding the minority shareholders from participation in a profitable business

Question 23

Shareholder Liability

Answer 23

A corporate entity is distinct from its shareholders. In general, shareholders are not personally liable for the debts of the corporation in which they hold stock.
- Exception: Piercing the Corporate Veil
- Courts may hold shareholders liable on corp obligations when it is necessary to prevent or avoid a grave injustice considering:
- the extent to which the corporation is undercapitalized;
- the extent to which corporate formalities have not been observed;
- the extent to which corporate and personal funds have been commingled; and
- the extent to which the corporate entity is no more than the alter ego of its shareholders.
- A plaintiff seeking to pierce the corporate veil must prove:
- shareholder “control” that effectively renders the corp form a façade;
- use of the corp form to obtain an improper or fraudulent purpose; and
- injury or unjust loss resulting from this wrongful use of the corp form
Common when corp formalities not observed, funds commingled, and subsidiary with insufficient segregation of business