Basic Business Law (BPP432/80) 2006 Fall Quarter

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Basic Business Law (BPP432/80) 2006 Fall Quarter

• Instructor David Oliveiri
• Week 11 Facilitating Exchange Through Business
  Association Corporations Governance,
  Sarbanes-Oxley, Fundamental Changes

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Agenda

• Role of Shareholders
• Role of Directors
• Role of Officers
• Duties of Directors and Officers
• Sarbanes-Oxley Impacts
• Fundamental Changes of Corporations

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Learning Objectives

• Understand Shareholder, Director, and Officer
  Relationships, and How Corporate Risk/Control
  Bargaining Orders These Relationships
• Understand the Elements of the Shareholders Role
• Understand the Elements of the Directors and
  Officers Roles and Pertinent Distinctions
  Between These Roles
• Understand the Legal Standards of Director and
  Officer Performance
• Understand What Sarbanes-Oxley Act Provides and
  How the Act Affects Director and Officer Roles
• Understand What are Fundamental Corporate
  Changes, Requiring Special Approval

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Corporate Governance, Generally

• New Participants Shareholders, Directors,
  Officers
• Primary Theme
• Separation of Ownership and Control
• Broad Delegation (Shareholders Directors
  Officers) of Day-to-Day Operations
• Agency Principles Interwoven
• Deal Point of Risk vs. Control Foremost in
  Defining Relationships Among Participants

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Shareholders

• Owners of Corporation
• Residual or Equity Interest
• Similar to Sole Proprietors, Partners?
• Role of Shareholders f (VD, VFC, P)

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Shareholders Voting Rights One Share/One
Vote

• Primary Forum Annual (By-Laws) and Special
  Shareholder Meetings
• Meeting Requirements -- Quorum (Majority
  Outstanding Stock Represented) Majority Vote
  -- Exception Articles
• Election of Directors Annual (Unless 9 or
  More), Straight Voting v. Cumulative Voting
• Approval of Fundamental Changes
• Concentrations of Voting Power Proxies, Voting
  Trusts, Shareholder Voting Agreements
• Restrictions on Transfers of Shares Note on
  Stock Certificate

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Concentrations of Voting Power
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Shareholders Policing Rights

• Right to Inspect Books and Records f (Good
  Faith, Proper Purpose)
• Right to Sue to Enforce Shareholder Rights
• Direct Suits
• Derivative Suits
• Right to Dissent to Fundamental Changes
  Appraisal and Cash Out

Compaq Case (SR p. 707) v. Honeywell Case
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Shareholder Suits Direct Suit
Direct Suit 1. Compel payment of properly
declared dividends 2. Enforce right to inspect
corporate records 3. Protect preemptive
rights 4. Compel dissolution 5. Enjoin an ultra
vires act
Personal Rights of Shareholder
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Shareholder Suits Derivative Suit
Derivative Suit 1. Recover damages from
management for breach of duty 2. Recover
improper dividend 3. Enjoin wrongful issuance of
shares 4. Recover damages from third party 5.
Recover damages from management for ultra vires
act.
On Behalf Of Corp. All SH Benefit
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Directors

• Basic Function Delegated Power and Duty to
  Manage the Corporation
• Not Strictly Agents of Shareholders or
  Corporation
• But Trustee-Like (Agent-Like) Fiduciary Duties
• Basic Directors Duties
• Determine By-Laws
• Select and Remove Officers
• Determine Capital Structure
• Initiate Fundamental Changes
• Declare Dividends
• Determine Management Compensation
• SOX Enhancements

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Directors 101

• Who Are They?
• Insiders
• Friends/Associates
• Outsiders
• How Do People Become Directors?
• Number (NY -- 3 or More Unless)
• Election (Articles 1st SH Meeting Annually
  Unless Staggered)
• How Do Directors Do Their Job?
• Collectively In Meetings!!
• Quorum and Voting
• Action Taken Without Meeting
• Delegation of Powers
• Directors Inspection Rights
• Compensation

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Officers

• Selection and Removal (Exception Employment
  Contract)
• Role /Agents of the Corporation
• Authority Set and Delegated by Directors (Via
  By-Law or Board Resolution)
• Authority Impacts f (Actual Express Authority
  Articles, By-Laws, Board Resolution, Implied
  Authority, Apparent Authority, Ratification)

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Fiduciary Duties of Directors and Officers ?
Standards of Performance!!

• Obedience
• Diligence -- Review Quality of Decision Process
  Ordinary Care
• Reliance Upon Others Permitted
• Business Judgment Rule Immunizes Good Faith
  Decisions in Face of Uncertainty
• Loyalty Review Fairness and Reasonableness of
  Specific Activities
• Conflict of Interest
• Loans to Directors
• Corporate Opportunity Broz
• Transactions in Shares
• Duty Not to Compete

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Management Structure of Corporations The
Statutory Model
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Management Structure of Typical Closely Held
Corporation
Shareholders Directors Officers
Relative Problems Boards of Family Businesses
Grapple With How to Sack Executives Who Are Kin
WSJ 7/24/06
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Management Structure of Widely-Held Public
Corporation
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Sarbanes-Oxley Act
An Act to protect investors by improving the
accuracy and reliability of corporate disclosures
made pursuant to the securities laws, and for
other purposes 1/23/02
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Sarbanes-Oxley Act (a.k.a. Public Company
Accounting Reform and Investor Protection Act of
2002, SOX, SarbOx)

• Legislative Reaction to Corporate and Accounting
  Scandals (Enron, Tyco, WorldCom, )
• New and Enhanced Standards for U.S. Public
  Companies, Boards, Management, and Public
  Accounting Firms
• Requires the SEC to Implement Regulations
• Specific Provisions
• Public Company Accounting Oversight Board
• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Enhanced White Collar Crime Penalties

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Fundamental Changes of Corporations

• Economic Good Sense to Facilitate Fundamental
  Changes
• But Fundamental Changes Materially Impact
  Interests of Shareholders, Officers, and
  Directors
• So, Legal Rules for Approval Balance Economic
  Good Sense and Interests of Stakeholders
• What Are Fundamental Changes?
• Charter Amendments
• Combinations
• Dissolution/Going Private
• Rights of Dissenting Shareholders

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Fundamental Changes
Under pre-1999 RMBCA
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Bottom Lines QA

• Separation Of Ownership And Management
  Characterizes Corporations And Minimizes
  Shareholder Transactions Costs
• Shareholders Have No Duties, Generally!
• Broad Director and Officer Authority Is Bounded
  By Shareholder ( Regulatory) Oversight/Legal
  Standards Of Performance
• The Business Judgment Rule Immunizes Good Faith
  Decisions Application Is Fact-Based (i.e. Local)
• Sarbanes-Oxley Enhances Legal Standards Of
  Performance For Public Company Officers,
  Directors, Auditors, Lawyers