Corporations (Governance)

Question 1

Corporations (Governance)

Shareholder Rights

Answer 1

Shareholders do not have management or control rights

Shareholders participate indirectly in corporate governance through voting

Question 2

Corporations (Governance)

Shareholder Protections

Answer 2

Unhappy shareholders may sell their shares or try to turn out the board

Question 3

Corporations (Governance)

Shareholder Meetings:
Who can call a Special Meeting

Answer 3

1. Board of Directors
2. Shareholders with more than 10% ownership
3. Any person authorized in the Articles of Incorporation or Bylaws

Question 4

Corporations (Governance)

Shareholder Meetings:
Location

Answer 4

The bylaws either designate a location or provide that the directors will determine the location

Question 5

Corporations (Governance)

Shareholder Meetings:
Notice of Meetings

Answer 5

Shareholders are entitled to notice of all meetings in which they can vote

Failure to provide notice can cause a meeting to be declared invalid

Question 6

Corporations (Governance)

Shareholder Meetings:
Shareholders Entitled to Notice

Answer 6

Unless the state corporations code or the articles of incorporation require otherwise, the corporate is generally only required to give notice to shareholders entitled to vote at a meeting. MBCA § 7.05(a)

Voting shareholders of record as of the record date are entitled to notice.

Question 7

Corporations (Governance)

Shareholder Meetings:
Substantive & Procedural Notice Requirements

Answer 7

Substantive:
Notice must specify the purpose, date, time, and place

Procedural:
Notice must be given no fewer than 10 days, nor more than 60 days before the meeting date

Question 8

Corporations (Governance)

Shareholder Meeting:
Effect of Defective or Improper Notice

Answer 8

Shareholder who have not recieve proper notice may attack the meeting, unless*

1. The shareholders attend the meeting
2. The shareholders provide written waivers or ratification/consent in writing

Question 9

Corporations (Governance)

Shareholder Meeting:
Quorum

Potential Modifications & Outcomes

Answer 9

No action can be taken at any shareholder meeting unless a certain minimum number of shares is present (quorum)

If no quorum –> meeting cannot be held

If quorum –> meeting may be held and quorum cannot be destroyed by shareholders leaving the meeting

Modifications: Unless the articles of incorporation specify otherwise, a quorum is a majority of votes entitled to be cast on a given matter

Question 10

Corporations (Governance)

Proxy Voting:
Proxy Battles

Answer 10

A fight for control of the company that is reflected in competing proxy statements or competing proposals in the company’s proxy statement.

Often occurs in connection with hostile takeovers

Question 11

Corporations (Governance)

Proxy Voting:
Proxy Revocation

Answer 11

Proxies can be revoked by:

1. Written revocation
2. Showing up to vote in person
3. Signing a subsequently-dated proxy
4. Dying or becoming incapacitated

Question 12

Corporations (Governance)

Proxy Voting:
Proxy Expiration

Answer 12

If the proxy does not state a duration, it automatically expires 11 months after it is received by the corporation, unless the proxy is irrevocable under applicable state law

Question 13

Corporations (Governance)

Proxy Voting:
Irrevocable Proxies

Answer 13

A proxy is irrevocable if:

1. It states it is irrevocable
2. It is coupled with interest (aka the proxy is the loan interest)

Question 14

Corporations (Governance)

Shareholder Voting:
Shareholder Voting Rights

Answer 14

Shareholder voting rights are limited and generally include:

1. Charter Amendment
2. Shareholder-initiated Bylaw Amendments
3. Certain Mergers
4. Sales of all or substantially all Corporate Assets not in the ordinary course of business
5. Dissolution

Shareholder voting rights may be expanded by the charter or bylaws

The board may choose to put an issue to a shareholder vote

Question 15

Corporations (Governance)

Shareholder Voting:
Voting for Directors

Answer 15

Straight Voting vs. Cumulative Voting

Majority vs. Plurality Requirement

NOTE: Plurality is generally default

“separate vote on each seat” = “seat-by-seat” voting

Question 16

Corporations (Governance)

Shareholder Voting:
Class Voting

Answer 16

Classes or series of stock may vote as separate units

At least one class of share must have full voting rights

Question 17

Corporations (Governance)

Shareholder Voting:
Disproportionate Voting (Dual-Class Voting)

Answer 17

Exists when one class has disproportionate voting power compared to another class

Generally criticized for allowing founders and insiders to exercise unchecked control

Question 18

Corporations (Governance)

Shareholder Voting:
Voting Agreements

Answer 18

Shareholders can make private agreements to pool their votes by agreeing to vote in a certain manner

Relatively little regulation

Question 19

Corporations (Governance)

Shareholder Voting:
Voting Trusts

Trustee Authority & Liability and Voter Rights Relinquished & Retained

Answer 19

Shareholders transfer their voting rights to a trustee via a written agreement

Voter Rights Relinquished: Voting & Notice

Voter Rights Retained: Dividends & other Ownership Rights

Trustee Authority:
1. Exercise independent judgment
2. Obtain a consensus, or
3. Vote as specified in the agreement

Trustee Liability:
Trustee has fiduciary duties to the trust, but is generally not liable for acts of gross negilgence or recklessness

Question 20

Corporations (Governance)

Shareholder Voting:
Voting Agreements vs. Trusts

Answer 20

...

Question 21

Corporations (Governance)

Board of Directors:
General Responsibilities

Answer 21

1. Managing the business and affairs of the company
2. Making key decisions and delegating the day-to-day functions to Management
3. May have committee functions

Question 22

Corporations (Governance)

Board of Directors:
Common Functions & Responsibilities

Answer 22

1. Select, evaluate, and replace corporate officers (or management)
2. Determine officer and senior management compensation
3. Review and approve financial objectives, strategies and plans, and when to seek loans
4. Provide advice and counsel to management on important policies, strategies, business plans, etc
5. Select and recommend directors for shareholder approval
6. Initiate extraordinary matters, such as mergers or the purchase/sale of corporate assets
7. Exercise responsibility for corporate operations, including entering into contracts and buying/selling real and personal property
8. Review adequacy of internal controls

Question 23

Corporations (Governance)

Board of Directors:
Board Composition

Answer 23

1. Number: One or more, usually an odd number, and determined in the bylaws
2. Insider & Outside Directors
3. Listing Standards (for Public Companies–qualifications & independence)

Question 24

Corporations (Governance)

Board of Directors:
Insider Directors

Answer 24

Directors who are also officers, employees, and/or significant shareholders of the corporation

Question 25

# Corporations (Governance) **Board of Directors:** Outside Directors

Answer 25

Directors who have **no other relationship** with the corporation other than their directorship

Question 26

# Corporations (Governance) **Board of Directors:** Committee Functions *Limited Authority*

Answer 26

Committees have **limited authority**, *especially* regarding actions that **substantially effect shareholders** **Nondelegable Committee Actions** 1. Authorizing **distributions** 2. Amending the **bylaws** 3. Filing **board vacancies** 4. Approving **matters requiring shareholder approval**

Question 27

# Corporations (Governance) **Board of Directors:** Committee Functions *Common Committees*

Answer 27

1. Audit Committee 2. Compensation Committee 3. Special Litigation Committee 4. Executive Committees 5. Nominating and Governance Committees

Question 28

# Corporations (Governance) **Board of Directors:** Committee Functions *Audit Committee Functions*

Answer 28

1. **Reviews** financial matters 2. **Selects** corporate auditors 3. **Supervises** audits

Question 29

# Corporations (Governance) **Board of Directors:** Director Removal

Answer 29

Director removal may be **for cause** or **without cause** Generally, directors **cannot** remove other directors

Question 30

# Corporations (Governance) **Board of Directors:** Shareholder Removal of Directors

Answer 30

A director may be removed by shareholders: 1. At a **special meeting** called for the **purpose** of removing the director ***OR*** 2. By **court order** (business judgment rule)

Question 31

# Corporations (Governance) **Board of Directors:** Vacancies

Answer 31

Vacancies are filed *either* by **shareholder vote** or **remaining directors** If **numerous vacancies** exist and the remaining directors do not constitute a quorum, they still **may fill vacancies** by a majority vote of all remaining directors. MBCA § 8.10(a)(3)

Question 32

# Corporations (Governance) **Board of Directors:** Resignation

Answer 32

Directors may resign *at any time* by providing **written notice** to the corporation

Question 33

# Corporations (Governance) **Board of Directors:** Staggered vs. Non-Staggered Boards | Benefits & Negatives

Answer 33

Under **default rules**, directors typically stand for election each year, unless terms are **staggered**. **Benefits** Because the board is not completely replaced at one time, it: 1. Provides **continuity of expertise** 2. Allows directors to focus on **long-term goals** rather than fearing ouster 3. Makes **hostile takeover** more difficult **Negatives** 1. Serves to **entrench directors** 2. **Deters acquisition bids **that may enhance shareholder value 3. Annually elected directors may be **more accountable** to shareholders

Question 34

# Corporations (Governance) **Board of Directors:** How Directors Act on Behalf of the Company | aka how decisions are made

Answer 34

1. **Voting at meetings** (regular & special) where *quorum* is present, ***OR*** 2. **Unanimous written consent**

Question 35

# Corporations (Governance) **Board of Directors:** Purpose of Regular Meetings

Answer 35

Most Boards meet at **regularly scheduled intervals** in order to: 1. **Conduct** regular business 2. **Manage** the corporation, and 3. **Appoint** new officers

Question 36

# Corporations (Governance) **Board of Directors:** Purpose of Special Meetings

Answer 36

Typically called to discuss matters that **cannot wait** until the next regular meeting, such as **time-sensitive** and **significant potential corporate transactions**

Question 37

# Corporations (Governance) **Board of Directors:** Director Notice of Meetings

Answer 37

Directors are **not entitled** to notice of **regular meetings** Directors **are entitled** to notice of **special meetings** *at least* 2 days prior to the meeting, *unless* otherwise specified in the **articles of incorporation** or **bylaws**

Question 38

# Corporations (Governance) **Board of Directors:** Waiver of Notice of Meeting

Answer 38

A director can **waive notice**: 1. **Before or after** the meeting 2. In **writing** 3. **Signed** 4. **Filed** A director's **attendance constitutes a waiver**, *unless* objection made at beginning of meeting

Question 39

# Corporations (Governance) **Board of Directors:** Quorum

Answer 39

Directors **cannot** validly take action at any meeting *unless* a **quorum is present** Generally consists of a **majority** of the **number of directors** *as determed in the articles or bylaws*, ***regardless*** of vacancies The **articles** or **bylaws** may *vary* the **quorum requirements** to: 1. **More than** a majority 2. **Not Less than** one-third | Bylaws: 9directors; Reality: 5directors -> need 5directors for majority

Question 40

# Corporations (Governance) **Board of Directors:** Quorum for Director Vacancies

Answer 40

Quorum requirements are **typically relaxed**with regard to filling vacancies (affirmative vote of **remaining directors**)

Question 41

# Corporations (Governance) **Board of Directors:** Director Vote by Proxy

Answer 41

Generally, directors **cannot** act or vote by proxy because it would **violate their fiduciary duties** to make fully informed decisions

Question 42

# Corporations (Governance) **Board of Directors:** Compensation

Answer 42

Most statutes allow for director compensation: 1. Pursuant to the **articles** or **bylaws**, ***or *** 1. By **shareholder** or **board action** Generally, directors may** fix their own compensation** *unless* otherwise provided in the **articles** or **bylaws**

Question 43

# Corporations (Governance) **Officers (Management):** Functions & Responsibilities

Answer 43

Responsible for **implementing** board policies and decisions Carry out **day-to-day functions** delegated by the board or set forth in the **bylaws** Officers are **agents** of the corporation

Question 44

# Corporations (Governance) **Officers:** Selection & Removal

Answer 44

Officers are **selected**, **supervised**, and **removed** *by the board* Details regarding **officer selection** are generally included in the **bylaws** Directors **select replacements** to fill vacancies, *but* some senior officers amy be allowed by the board to appoint other inferior or assistant officers

Question 45

# Corporations (Governance) **Officers:** Agent Authority | Actual, Apparent, & Inherent

Answer 45

**Actual Authority** - Set forth in Bylaws; explicitly delegated by the board **Apparent Authority** - Based on job title or other board manifestations **Inherent Authority** - Based on job title or other delegated authority

Question 46

# Corporations (Governance) **Officers:** Duties, Obligations, & Liability

Answer 46

1. Duty of Care 2. Duty of Loyalty 3. Obligations of Good Faith and Fair Dealing Officers are generally protected by the **business judgment rule**