Roles, Rights, and Responsibilities of Corporate Directors, Officers, and Shareholders, Study notes of Finance

Download Roles, Rights, and Responsibilities of Corporate Directors, Officers, and Shareholders and more Study notes Finance in PDF only on Docsity! CH. 40: Corporate Directors, Officers, and Shareholders Roles of Directors and Officers Ultimate authority, policymaking decisions, selects and removes corporate officers, determines capital structure, and declares dividends. Majority rules, each has one vote. Directors cannot act as agents. Election of Directors Preselected number of directors. Historically required 3, now fewer. Initial board elected by incorporators and serve until first annual shareholder meeting where majority vote elects new ones. Removal of Directors Removed for cause, failing to perform required duty Vacancies on the Board Resignation, death, or creation of new position through amendment. Compensation of Directors Board itself may set directors’ compensation (RMBCA 8.11), unless stated otherwise. Inside director also serves as manager, others are outside directors. Board of Directors’ Meetings Time and dates established in articles or bylaws, formal meetings with recorded minutes, can be done over telecommuting (RMBCA 8.20) majority must be present to constitute a quorum(minimum number of members for business to be validly transacted(RMBCA 8.24) Rights of Directors Right to participation- entitled to participate in all meetings and right to be notified. Special meetings require notice unless waived (RMBCA 8.23) Right to inspection: access corporations books and records, facilities, premises. Cannot be restricted by bylaws, articles, or votes) Right to indemnification: reimbursement if involved in litigation, purchase liability insurance (RMBCA 8.51) Committees of the Board of Directors Typically created to avoid too many people at once. Focus on individual subjects to increase efficiency Executive Committee: interim management decisions between board meetings, cannot declare dividends, authorize new shares, or initiate any actions requiring shareholder approval Audit Committee: selection, compensation, and oversight of the independent public accountants who audit the corporations financial records. Required by Sarbanes-Oxley Act of 2002 Nominating Committee: chooses candidates for board of directors. Only nominate (RMBCA 8.25) Compensation Committee: decides salaries, bonuses, stock options, and other benefits for top executives. Litigation Committee: decides whether corp. should pursue requests by shareholders to file a lawsuit Corporate Officers and Executives Officers carry out duties in bylaws, articles, etc, but also are agents of the corporation. Board of directors can remove officers with or without cause. Same fiduciary duties of care and loyalty. Duties and Liabilities of Directors and Officers Duty of Care: act in good faith to exercise the care that an ordinarily prudent person would exercise (RMBCA 8.30(a), 8.42(a)) Duty to make informed decisions: educate themselves and can make decisions based on reliable people (RMBCA 8.30(b)) Duty to Exercise Reasonable Supervision: can be held liable for acts of subordinates if not supervising Dissenting Directors: if a director disagrees with a board decision it must be put into the minutes of the meeting to show dissent. If missed meeting, registers dissent with secretary The Business Judgment Rule corporate officers and directors are not liable for honest mistakes of judgment and bad business decisions. Applies if director took reasonable steps to be informed, had rational basis for decision, no conflict of interest between director and corporation Duty of Loyalty Subordinate personal interests for the welfare of the corporation, comes up when, competing with the corp., usurping corporate opportunity, having conflicting interest, using information not available to the public, authorizing a corporate transaction detrimental to minority shareholders, selling control of corp. Disclosure of Potential Conflicts of Interest Required by (RMBCA 8.60), full disclosure, abstain from voting, Liability of Directors and Officers Can be held liable for negligence, crimes and torts committed by employees, themselves The Role of Shareholders Shareholders’ Powers Approval to amend articles of incorporation or bylaws, conduct a merger, dissolve, sell all or substantially all corporations assets, also vote to elect or remove directors. Inherent power to remove director for cause (breach of duty or misconduct) Shareholders’ Meetings Must occur at least annually Notice of Meetings: between 10-60 days (RMBCA 7.05) special meeting notice must include purpose Proxies: stockholders appoint another person as their agent to vote their shares at the meeting, valid for 11 months (RMBCA 7.22(c)) Shareholder Proposals: submit to board, SEC rule 14a-8: shareholders worth 1000 ormore may submit Shareholder Voting Preferred stock can’t vote (RMBCA 7.21) Quorum Requirements: at least 50 percent of outstanding shares present Voting Lists: keep alphabetical voting list of shareholders and addresses and number of votes, must be available for inspection (RMBCA 7.20) Cumulative Voting: allowed number of voting shares times number of members to be elected, can be casted towards one or spread among all, Other Voting Techniques: vote by shareholder voting agreement, or proxy, voting trust (right to vote assigned to trustee), ownership is not transferred (RMBCA 7.30) Rights of Shareholders Stock Certificates Evidence of ownership specifying number of shares, now most are uncertificated (RMBCA 6.26) Preemptive Rights Purchase percentage issuance of new stock equal to current ownership. RMBCA 6.30, do not exist unless outlined in articles, do not apply to treasury shares Preemptive Rights in Closely Held Corporations: particularly important, but could limit new capital Stock Warrants: right to buy stock at a stated specified price and date Dividends: paid from retained earnings, net profits(few states), surplus(more states). Illegal Dividends: shareholders must return only if they knew they were illegal, board of directors personally liable The Directors’ Failure to Declare a Dividend: shareholders can ask a court to compel directors to declare dividend if the lack of dividend is an abuse of their discretion