© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• A corporation’s shareholders own the corporation.
• Shareholders are not agents of the corporation.
• They cannot bind the corporation to contracts.
• Shareholders have the right to vote on matters such as:
– the election of directors, and
– the approval of fundamental changes in the corporation.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Meeting of the shareholders that must be held annually by the corporation to elect directors and vote on other matters.
– Shareholders do not have to attend the shareholders’ meeting to vote.
– Shareholders may vote by proxy .
• Special shareholders’ meeting called by board, holders of at least ten percent of stock, others authorized.
– Emergency or important issues
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Shareholders may vote by proxy
– Appoint someone as their agent to vote
– Written document is proxy card
– Valid for 11 months
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• At least one class of shares of the corporation must have voting rights.
• Shareholders of record as a set date allowed to vote
– Record date not more than 70 days before the shareholders’ meeting
• Corporation must prepare and maintain shareholders’ list
– Must be available for inspection
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting.
• Once quorum is present, withdrawal of shares has no effect.
• The affirmative vote of the majority of the voting shares represented at a shareholders’ meeting constitutes an act of the shareholders for actions other than for the election of directors.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Straight VotingEach shareholder votes the number of shares he or she owns on candidates for each of the positions open.
• Cumulative VotingA shareholder can accumulate all of his or her votes and vote them all for one candidate of split them among several candidates.
• Supramajority Voting RequirementA requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Sometimes share-holders agree in advance as to how their shares will be voted.
– Voting Trusts
– Shareholder Voting
Agreements
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Corporation must furnish shareholders with annual financial statement.
• Shareholders have absolute right to inspect shareholders’ list, articles, bylaws, minutes of shareholders’ meetings for past three years
• Must demonstrate proper purpose to inspect accounting and tax records, minutes from board and committee meetings, shareholders’ meetings beyond three years.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Distribution of profits of the corporation to shareholders.
• Paid at discretion of board.
• Shareholders on record date will receive dividends.
• May use additional shares of stock as a dividend.
– Not a distribution of corporate assets
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Shareholders may bring derivative lawsuits against the corporation to enforce their rights.
– Corporation is harmed by someone, and directors fail to bring an action against them.
– Shareholder must have owned shares when action occurred.
– Shareholder must fairly and adequately represent interests of corporations.
– Must make written demand upon directors, and is either rejected or 90 days have expired since demand made.
– If successful, award goes to treasury, but plaintiff-shareholder may recover reasonable expenses and attorneys’ fees.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can:
– Disregard the corporate entity, and
– Hold the shareholder personally liable for the corporation’s debts and obligations
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Elected by the shareholders.
• Responsible for formulating the policy decisions affecting the corporation.
• The board may initiate certain actions that require shareholders’ approval by passing resolution.
• Have an absolute right of inspection.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Inside Director
– A member of the board of directors who is also an officer of the corporation
• Outside Director
– A member of the board of directors who is not an officer of the corporation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• The term of a director’s office expires at the next annual shareholders’ meeting following his or her election.
• Terms may be staggered to two or three years.
• Specifics must be in articles.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• The directors can only act as a board.
• They cannot act individually on the corporation’s behalf.
• Every director has the right to participate in any meeting of the board of directors.
• Each director has one vote.
• Directors cannot vote by proxy.
• Regular and special meetings are established by bylaws.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Simple majority usually constitutes quorum.
• Articles and bylaws may increase this number.
• If quorum is present, simple majority of quorum approves or disapproves actions.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Boards can create committees to handle specific duties.
• Members with special expertise appointed to committees
• Cannot delegate dividend declaration, initiate actions that require shareholders’ approval, appoint members to fill vacancies, amend the bylaws, approve plan of merger, or authorize issuance of shares.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests.
• Prevents dilution of shares.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Subject to certain restrictions, shareholders have the right to transfer their shares.
• Shareholders may enter into agreements with one another to prevent unwanted persons from becoming owners of the corporation.
– Right of First Refusal
– Buy-and-Sell Agreement
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Board of directors appoint officers.
• Directors delegate management authority to officers.
• Most corporations have president, vice president, secretary, and treasurer.
• Officer can be removed by board.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Officers and agents of the corporation have such authority as may be provided in the bylaws or as determined by resolution of the board of directors.
• Corporation may ratify unauthorized act.
– Officers liable for unauthorized actions.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Fiduciary DutiesThe duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders.
– Duty of Obedience
– Duty of Care
– Duty of Loyalty
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Duty to act within the authority conferred upon them by:
– The state corporation statute
– The articles of incorporation
– The corporate bylaws
– The resolutions adopted by the board of directors
• Directors and officers who either intentionally or negligently act outside their authority are personally liable for any resultant damages caused to the corporation or its shareholders.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation.
• A director or officer who breaches this duty of care is personally liable to the corporation and its shareholders for any damages caused by this breach.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

(continued)
• This duty is discharged if an officer or director acts:
1. In good faith.
2. With the care that an ordinary prudent person in a like position would use use under similar circumstances.
3. In a manner he or she reasonably believes to be in the best interests of the corporation.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

(continued)
• Violations of this duty of care include acts of negligence and mismanagement, including failure to:
– Make a reasonable investigation of a corporate matter.
– Attend board meetings on a regular basis.
– Properly supervise a subordinate who causes a loss to the corporation.
– Keep adequately informed about corporate matters.
– Take other actions necessary to discharge duties.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Determination of whether duty was met measured at time decision made.
– Hindsight not applied
• Not liable for honest mistakes of judgment.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Corporate directors and officers may rely on information and reports prepared by competent and reliable officers and employees, lawyers, accountants, other professionals, and committees of the board of directors.
• A director is not liable if such information is false, misleading, or otherwise unreliable unless he or she has knowledge that would cause such reliance to be unwarranted.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• A duty that directors and officers have:
– Not to act adversely to the interests of the corporation, and
– To subordinate their personal interests to those of the corporation and its shareholders
• Breach of the duty of loyalty usually occurs because of intentional conduct.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

(continued)
• Breaches of the duty of loyalty include unauthorized:
1. Self-dealing with the corporation
2. Usurping of a corporate opportunity
3. Competing with the corporation
4. Making a secret profit that belongs to the corporation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

• Directors, officers, and agents are personally liable for the crimes that they commit while acting on behalf of the corporation.
– Sanctions include fines and imprisonment for individuals
– Fines and loss of privileges for corporation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman