The Participants in the
Corporation
Chapter 9

A corporation is composed of three different
classes of individuals: shareholders, directors,
and officers. They all have their own rights and
duties.

Statutes authorize the creation of corporations
and define the roles of the various participants.
Shareholders

A shareholder is someone who owns a
percentage of a corporation and is
protected by limited liability.

A “share” is literally the physical
representation of a predetermined amount
of the business.

One of the first requirements of a new
corporation is to determine how many
shares to issue.

If the company decides to issue 1,000
shares and distribute these shares among
four people, each would own 25% of the
business.
Ownership of shares in a corporation
brings with it two fundamental rights:

The right to participate in the control of
the corporation by voting

The right to share in the profits of the
business

Shareholders do not have all of the rights
we often associate with ownership.

Shareholders are not authorized to sell
corporate property, negotiate contracts on
behalf of the corporation, or take individual
action to hire and fire employees.

A person must have the right to possess
stock and to exercise the rights normally
associated with share ownership.

A shareholder can be a natural person or
another corporation.
The Nature of a Shareholder

A person must consent to becoming a
shareholder in a corporation.

Stock ownership is a contract: The person
agrees to assume the duties of being a
shareholder in exchange for a vote on
corporate matters and a share of the
profits in the business.
Qualifications for
Becoming a Shareholder

One can become a shareholder by receiving
shares as one of the founding members of a
corporation or by purchasing it from others.

Shareholders have the right to refuse to sell their
stock to particular individuals.

Shareholders do not have the right to control
what current shareholders do with their stock.

Individuals who normally cannot enter into
contracts are permitted to own shares.

Minors, for example, who are barred from
entering into most types of contracts, are
permitted to own shares in a corporation
and to receive the same benefits of this
ownership as any other shareholder
(Wuller v. Chuse Grocery Co., 241 Ill. 398,
89 N.E. 796 (1909)).
Registered Ownership

Ownership of stock does not necessarily mean
physical possession of the actual stock
certificates.

The certificates are only the symbols of
ownership.

Shareholder rights are determined in the articles
of incorporation, the bylaws, and any
shareholder agreements.
Stock Certificates

Printed documents that indicate share
ownership.

Stockholder status comes from the legal
rights a person has acquired in the
corporation, not the mere possession of a
stock certificate.
Shareholder Rights
Among the rights granted to shareholders are:

The right to vote on management issues

The right to a percentage of corporate earnings

The right to corporate assets if the company
should be dissolved

The right to elect directors

The right to vote on corporate issues is
considered to be one of the most
important.
Voting Trusts

An agreement between shareholders to
vote in a certain way.

The shareholders cannot enter into an
agreement that ignores the applicable law.
Proxy Voting

Shareholders can temporarily transfer their
voting rights to one individual and allow
that individual to vote all the shares in one
way.

It allows corporate members a method to
exercise greater control over the
corporation.
Shareholder Meetings

A shareholder meeting is where the
shareholders are permitted to make their
voices heard by voting on corporate
policies, profit sharing, management
issues, and perhaps the most important
right: the election of the individuals that
comprise the board of directors.
Directors
Directors have many duties that include, but are
not limited to:

Election of the directors

Management of the business of the corporation
(Olson Bros. v. Englehart, 42 Del. Ch. 348, 211
A.2d 610 (1965), aff'd, 245 A.2d 166 (Del. 1968)).

Control of the business and delegation of duties
to officers to put policy into practice (Cahall v.
Lofland, 12 Del. Ch. 299, 114 A. 224 (1921), aff'd,
13 Del. Ch. 384, 118 A. 1 (1922)).
Duties

Directors owe a fiduciary duty to their
shareholders and the corporation.

A fiduciary is someone who has ethical,
moral, and financial duties to act in the
best interests of another.
Conflicts of Interest

The fiduciary duty imposed on directors is
straightforward: They owe the corporation
an undivided loyalty that prohibits them
from self-dealing and conflicts of interest
(Talo-Petro. Corp. of Am. v. Hannigan, 40
Del. 534, 14 A.2d 401 (1940)).

Directors have a duty to refrain from doing
anything in their capacity as director of a
corporation that would injure corporate
interests, deprive it of profit, or take
personal advantage of corporate
information (Guth v. Loft, Inc., 23 Del. Ch.
255, 5 A.2d 503 (1939), aff'd, 25 Del. Ch.
363, 19 A.2d 721 (1941)).
Limitations on Directors

The corporation might impose a limitation that
only someone who owns shares in the
corporation can qualify as a director.

A director may be removed by vote of the
shareholders.
Shareholder Control of Directors

Shareholders elect the directors, and they
have the power to remove them.

They have the right to remove a director
for “good cause,” such as a proven
allegation of fraud or embezzlement.
Officers

An officer is an individual hired or selected
by a board of directors who has specific
authority, such as the ability to bind the
corporation to contracts and other
agreements.
Most corporations have the following
classifications of officers:

President

Vice President

Treasurer

Secretary
President

The corporate president is the person
empowered to act as the agent for the
corporation (Joseph Greenspon's Sons Iron &
Steel Co. v. Pecos Valley Gas Co., 34 Del. 567,
156 A. 350 (1931)).
Most corporate presidents act as chief
executive officer, which gives them the
power to:
Decide whom to hire and fire
 Manage the business
 Oversee other employees
 Sign contracts
 Enter into negotiations on behalf of the
corporation

Vice President

Corporate vice presidents have very little
to do with the day-to-day function of a
corporation.

Usually, they are only authorized to take
action in specific situations, such as when
the corporate president is unavailable.
Treasurer

The treasurer is the person responsible for
maintaining records of the corporation’s
finances by ensuring that all corporate
checking accounts, revenues, and
accounts receivable are accurate and
up-to-date.
Secretary

The corporate secretary is responsible for
maintaining nonmonetary records for the
corporation.

The corporate secretary keeps the corporate
seal and the records of all shareholder and
directors’ meetings and also ensures that proper
documentation is filed with the state secretary of
state’s office.
Difference between
Officer and Agent

Officers are employees of the corporation
who have general duties.

Agent is a broad term encompassing any
individual who works, even temporarily, for
another’s interest.
“Insider Trading”

Insider trading is a term that is often used
to describe unethical, or illegal, activity by
a corporate officer.

Not all insider trading is illegal.
Summary

There are three different classes of
members in a corporation.

Shareholders: the corporation and their
shareholder rights include the right to vote
on management issues in the corporation
itself and to share any of the profits.
Summary

The officers carry out the business of the
corporation.

They are responsible for paying bills, insuring
that the product is manufactured, and doublechecking to make sure that payments have been
received.

They are also responsible for marketing and
advertising the business.
Summary

Directors consist of individuals who are
responsible for the management of the
business.

Directors hire and fire employees, including
corporate officers.
Summary

Directors have a fiduciary responsibility to
shareholders, and that responsibility is reflected
on the various duties imposed upon them.

Corporate directors must always act in the best
interests of the shareholders and avoid conflicts
of interest and other ethical dilemmas that might
put their own personal interests ahead of those
of shareholders.