Directors, officers and shareholders

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Chapter 29

• Directors, officers and shareholders

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Directors

• Inside/Outside Directors
• Anyone can be a director
• One year term unless
• 9 or more directors (most states)
• Staggered in 2 or 3 groups
• One group replaced each year
• Gives continuity
• Overall guidance of corporation
• Many states allow elimination if under 50 s/h

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Director Rights

• Compensation OK
• Indemnification OK
• Absolute right to inspect books and records
• Determine dividend payment need
• Cash
• Assets
• Continued debt-paying ability
• Unrestricted retained earnings

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Directors Management

• Dividends (Must be proper to declare)
• Absolute discretion
• Major policy decisions
• Hiring officers
• Major financing decisions

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Duty of Loyalty

• Many breaches, same as with partnership
• Self-dealing, usurping corp. opportunity, etc.
• Can a director serve on competing boards
• Yes, with consent, but risky

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Duties of Officers and Directors

• Duty of Care
• Make reasonable investigation
• Attend meetings
• Properly supervise subordinates
• Business judgment rule Not liable for honest
  errors of business judgment
• Registering dissent (strongly disagree or is
  absent from meeting)

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Can a director.

• Rely on other directors?
• Rely on officers?
• Rely on outsiders (e.g. experts)?
• .and still be protected by the business judgment
  rule?

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Shareholders Meetings

• Annual
• Must be held
• Fixed by bylaws
• Special
• Notice required agenda limited
• Notice must be given by10 (or other amount) of
  shares
• Notice reasonable time in advance
• Actions void if notice is defective
• Unanimous written consent is ok

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Proxies

• In Writing (can now be done electronically)
• Sets up proxy holder as agent
• Can instruct to
• Vote in one way
• Vote as proxy holder sees fit
• Latest proxy counts
• Good for 11 months

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Electronic Proxy Solicitation

• Companies can (voluntary) use a notice and
  access model to solicit proxies
• S/h can submit proxy electronically
• Many detailed timeline reqs.
• Must allow any shareholder option to obtain hard
  copies
• Costs and benefits???

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Voting Issues

• Record Date
• Determines who votes a share
• Quorum
• Default Majority of eligible shares
• Once met, holds for meeting
• Majority of those present is effective in votes

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Shareholder Voting to elect Directors

• Straight
• Each seat on board is a separate election
• Run and vote for seat 1, etc.
• 1 vote for each share for each seat
• Cumulative
• S/H Can put all votes on one person
• Helps minority s/h have voice on board

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Voting Agreements

• Voting agreement
• Unlimited duration
• Enforceable, but hard to prove damages
• Voting trust
• Legal ownership transferred to trustee
• Trustee votes all the shares
• As directed or
• As sees fit

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Other Shareholder Rights

• Preemptive Rights
• Preserves ownership
• Inspection/Right to information
• Limited
• Unlimited to review s/h list, articles, minutes,
  bylaws
• Otherwise, must have proper purpose
• Watered stock/no par stock

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Derivative Lawsuits

• Shareholder suing on behalf of the corporation
• Must first demand corp. to take action
• If successful, s/h recovers costs
• If not, depends on suits legitimacy

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Shareholder duties

• Generally none
• Thus usually no duty of loyalty solely from being
  a shareholder
• Closely held corporation issues
• ButControlling shareholder sometimes held to
  have fiduciary duty to minority shareholders