Corporate Management Structure
Chapter 36
Shareholders
• Collectively own the corporation
• Indirect methods of control
– Elect Directors
– Approve amendments to articles
– Approve fundamental changes
– Amend by-laws
• Annual shareholder meeting
• Special Meetings
– may be called by the Board or holders of at least 1/10 outstanding
voting shares
• Record date for eligibility to vote may not be more than 70
days prior to a meeting
• Voting list must be compiled at least 10 days before the
shareholders’ meeting
Proxy
• Authorization by a shareholder for someone
else to vote on his/her behalf.
• Must be in writing
• Effective up to 11 months
• Proxy may be revoked unless coupled with
an interest and states its irrevocable
• General or limited proxies
• Proxy Solicitations
Quorum
• A majority of the
outstanding shares
entitled to vote (i.e, no
treasury shares)
represented either in
person or by proxy
• Articles may provide
for no less than 1/3
quorum, or provide for
a super-majority
quorum, when
permitted by state law.
Voting
Rights
• STRAIGHT
VOTING - One share,
one vote; majority
wins.
• EX - 100 shareholders,
60 votes for A, 40
votes for B, A wins.
• A majority shareholder
can elect an entire
Board.
• CUMULATIVE
VOTING
• Allows minority
shareholders to
accumulate his votes and
cast them all on one
candidate.
• # of voting shares X #
of D’s to be elected,
equals Total # of votes that
can be cast
• EX 100 shares owned X
3 D’s to be elected,
shareholder may cast 300
votes for any one director,
or divide in any
proportion.
Voting Example
• At the annual shareholder meeting, 3 Directors will be
elected from a choice of 6 candidates (U,V,W,X,Y, and Z).
A, the minority shareholder, owns 100 shares; B owns 150
shares. A likes U, V, and W; B likes X, Y, and Z.
• Under straight voting, A may cast 100 votes towards any
one Director, but will always lose by 50 votes to B’s
candidates.
• If cumulative, A has 300 votes; B has 450. To defeat A’s
candidates, B will need 301 votes, leaving only 149 left.
Therefore, B might cast his votes as follows: 301 for X,
148 for Y and 1 for Z OR 250 for X and 200 for Y, 0 for
Z, etc. A might cast all 300 votes for U, which would
enable at least one of the minority shareholder’s candidates
to be elected.
Formula to Determine How
Many Votes are Necessary to
Elect a D, or a Given # of D’s
• X = TS
X
ND___ + 1
•
TD + 1
• X is the “desired quotient”, the minimum
number of shares needed to elect 1 Director
• TS (total shares voting at the meeting)
• ND (number of directors desired by
shareholder to be elected)
• TD (total # of Directors to be elected)
How Many Shares are Needed to
Elect a Director?
• B owns 600 shares, C owns 400 shares. There are
a total of 1000 shares. There are 6 Board
vacancies and 12 candidates.
• C has a possible 2400 votes; B has 3600.
• How many shares does C need to elect a director?
How many directors may she elect with her 400
votes?
• C needs 144 votes to elect each Director. At most,
C can elect 2 of her favorite Director candidates,
using 288 votes.
• 1000(1) + 1 = 1000 + 1 = 143 + 1 = 144
• 6+1
7
• Voting Trusts Concentrates voting
control in a trustee.
• Irrevocable; a writing is
required.
• A copy must be available
for inspection
• Shareholder gets a voting
trust certificate from the
trustee. Trustee becomes
the record holder and pays
dividends over to holders
of trust certificate.
• Limited in duration, up to
a maximum of 10 years.
• Shareholder Agreements - A
contract by shareholders as to
how they will not only vote
their shares, but manage the
business. May be perpetual.
• Used in close corporations.
• Agreements may relate to:
– Eliminating or restricting
the powers of the directors
– Governing the making of
distributions
– Establishing who shall be
directors or officers of the
corporation
– Governing the exercise or
division of voting power.
– Establishing terms for the
transfer or use of any
property or services
• Subject to specific performance
Shareholder’s Right to Inspect
Corporate Records
• Shareholders have a right to
inspect and copy corporate
records in good faith and for
any proper purpose.
– To determine corp’s
financial condition, value of
stock, names of
shareholders, propriety of
dividends
– NOT to harass
management, discover trade
secrets, gain a competitive
edge or develop and sell a
mailing list of shareholders
• Must give notice of
demand
Shareholder Suits
• An individual shareholder may sue a corporation to
preclude ultra vires acts and enforce shareholder rights.
• Direct Suit - Shareholders may sue directly either
individually or as members of a class. In a class action, the
plaintiffs represent not only themselves but “all others
similarly situated.”
• Shareholder Derivative Suit - To recover for a wrong done
to the corporation. The action is for the benefit of the
corporation and any recovery belongs to the corporation,
not the shareholders. The corporation is the real plaintiff.
– Demand must be made on Board of Directors
– Directors refuse to sue
– Shareholder must own shares at time of wrongdoing.
– Shareholder can recover reasonable litigation expenses
but no compensation for his time.
Board of
Directors
• Duty to act socially
responsible
• May rely on others
(accountants, committees)
for information
• Fiduciary duties
Elected by shareholders
Need at least 1, over the age of 18
If corporation has less than 35
shareholders, don’t need a Board
•
of Directors
Terms may be staggered
Initial Board named in Articles •
Main objective is to maximize
profits & manage business
•
A Director is not an agent
– To be informed, loyalty,
obedience, diligence & due
care, Board can’t usurp a
corporate opportunity
– Business Judgment rule
– Avoid conflicts of interest
May be removed with or
without cause
Inside and Outside
Directors
Determine capital
structure
Business Judgment Rule
• Directors should be
protected if they
– Act in good faith
– Are not motivated
by fraud and
illegality
– Are not grossly
negligent
• Indemnification for
liability
• Liability limitation
statutes
Shareholder Approval of Board
Actions
• Shareholder
Approval Needed:
– Fundamental corporate
changes,i.e., mergers,
consolidations
– Amending the articles
– Dissolution
– Sale of all or of
substantially all assets
• No Shareholder
Approval Needed :
– General power to
manage
– Declare dividends
– Issue stock
– Set share prices
– Some mergers (if they
don’t fundamentally
alter business
character, i.e, short
form merger)
Board Approval of Actions
• Full Board Approval
Needed:
– Declaring dividends
– Filing Board vacancies
– Adopting/amending
by-laws
– Approving share
issuance
– Repurchase of
corporate shares
• Approval Needed by
only some Board
Members/Committee
Work :
– Choosing management
slate
– audit committee
– shareholder litigation
committee
– compensation
committee
Officers
Run the day to day operations
Elected or appointed by the
Board
• Officers are agents of the
corporation
– express, implied,
apparent authority
– May bind the
corporation in the
ordinary course of
business, not
extraordinary actions
• Fiduciaries
• May be removed with or
without cause
• Held to a reasonably
prudent person standard,
which may be higher if
they possess special skills