DIRECTORS AND OFFICERS: OVERVIEW [4275/6]

· A corporation is typically governed by a board of directors - persons who are:

(1) elected by the corporation's shareholders

(2) to serve for a period of time;

(3) subject to removal prior to the expiration of their term only for cause;

(4) compensated as provided for in the articles or by-laws;

(5) entitled to (a) reasonable notice of and participation in all board meetings and (b) inspect all corporate books and records; and

(6) responsible for such matters as

(a) declaring and paying corporate dividends;

(b) appointing, supervising, and removing corporate officers and managerial employees;

DUTY OF CARE (recall agency law)

· Duty of Care: Directors and officers are expected to:

(1) act in good faith in performing their duties,

(2) exercise the care that an ordinarily prudent person would exercise in similar circumstances, and

(3) act in the best interest of the corporation.

Failure to exercise the requisite care may result in personal liability for any harm suffered by the corporation. 4275.06

· Directors and officers must do what is necessary to become and stay informed on important corporate matters. In addition, directors are expected to:

(1) make reasonable decisions;

(2) exercise reasonable supervision over corporate officers and employees; and

(3) attend and participate in board meetings and clearly indicate their disagreement with any decision of the board.

DUTY OF LOYALTY (agency law revisited and amplified!)

· Duty of Loyalty: Directors and officers are required to place the corporation's best interest ahead of their personal interests when the two do not coincide. As a general rule, directors and officers may not:

(1) use corporate funds or confidential information for their own personal gain;

(2) engage in self dealing -- voting for or against corporate action in an effort to maximize one's own personal benefit;

(3) compete with the corporation, or otherwise usurp (take personal advantage of) a corporate opportunity;

(4) have an interest that conflicts with the interest of the corporation;

(5) engage in insider trading;

(6) authorize corporate transactions detrimental to minority shareholders without prior shareholder approval; or

(7) sell control of the corporation without prior shareholder approval.

BUSINESS JUDGMENT RULE [4275.07]

· Business Judgment Rule: Directors and officers are immune from liability for actions that result in harm to the corporation as long as

(1) the directors and officers acted

(a) in good faith,

(b) in the best interest of the corporation, and

AND

(2) the actions taken were within

(a) the corporation's power to act and

(b) the directors' and officers' authority.

LIABILITY FOR TORTS AND CRIMES [4275.06]

· Personal Liability of Directors & Officers: Corporate directors and officers (as well as employees) are personally liable for their own torts and crimes, even if committed in the course and scope of their employment.

· Vicarious Liability of Directors & Officers: Corporate directors and officers may also be held personally liable for the torts and crimes committed by corporate employees under the directors' or officers' direct supervision= (vicarious).

· "Reasonable Corporate Officer" Doctrine: A director or officer may be personally liable, regardless of whether he or she actually participated in, directed, or even knew about the tort or crime, as long as the director or officer (i) was in a "responsible" position in the corporation and (ii) had the power to prevent the tort or crime.

· Pervasiveness of Control: A director or officer may be personally liable, regardless of whether he or she actually participated in, directed, or even knew about the tort or crime as long as the director's or officer's control over corporate operations is so pervasive that, in effect, the director or officer is the corporation.

SHAREHOLDER APPROVAL [4278/4282]

· Shareholders must approve fundamental corporate changes, such as

· amendments to the articles of incorporation or by-laws, a merger or dissolution of the corporation,

· an increase in the number of shares of stock that the corporation is authorized to issue, and

· a sale of all or substantially all of the corporation's assets,

before the changes can be implemented. Why? What they have (i.e., the underlying company) is changing dramatically and they have a right to decide whether they want those changes. In other words, it possibly changes the underlying economic decision in the purchase of the shares in the first place.

· Shareholders vote on such fundamental changes, elect directors, and attend to other corporate matters, at an annual or called shareholders' meeting. They must receive notice of the meetings.

· In order for votes recorded at a shareholders' meeting to be effective, there must be a quorum present -- that is, there must be enough shareholders and others holding proxies present to represent at least 50 percent of the corporation's voting stock. Proxies allow other shareholders to vote the shares, usually as the holder sees fit.

· Cumulative voting: allows minority shareholders to elect a director. See the detailed analysis on page 669 and 670 of the text to understand the mechanism. In general, each director is entitled to a vote by a shareholder. How the votes are cast is how the key.

SHARES, WARRANTS & DIVIDENDS [4274]

· Stock Certificate: A certificate issued by a corporation evidencing the ownership of a specified number of shares of the corporation and all rights attached thereto.

· Stock Warrant: A certificate issued by a corporation granting the owner the option to buy a certain number of shares of stock, usually within a set time period.

· Preemptive Right: The right of an existing shareholder to purchase newly-issued shares in proportion to their percentage of ownership of the corporation prior to the issue of the new shares, before the newly-issued shares are offered for sale to the general public.

· The key to preemptive rights is a shareholder's desire to avoid having his or her interest in the corporation diluted by newly-issued shares.

· Dividend: A distribution of corporate profits or income, ordered by the directors, and paid to shareholders in proportion to their respective shares in the corporation. For example, if it a $1/share, and I own 47 shares, I get $47.00 cash.

è Dividends may be paid in cash, stock, and/or property. ç

INSPECTION AND TRANSFER RIGHTS [4278.10]

· Inspection Rights: Shareholders are entitled, both as a matter of common law and of statute, to inspect the corporation's books and records

(1) for a proper purpose,

(2) in person or through an agent, attorney, accountant, or other authorized assistant, and

(3) provided that the request is made in advance.

· Transfer of Shares: Stock certificates are negotiable and are freely transferable by indorsement.

· In some cases, a right of first refusal may require that any shares be offered to the holder of the right (the corporation or some or all of its shareholders) before they may be sold to the public.

DISSOLUTION [4286]

· Shareholders may petition a court to dissolve the corporation and appoint a receiver if

(1) corporate affairs are being mismanaged,

(2) corporate assets are being misapplied or wasted,

(3) management is acting illegally, fraudulently, or oppressively, or

(4) the shareholders, after a specified number of ballots over a specified period of time, are unable to agree to a slate of directors.

SHAREHOLDER LITIGATION [4278.09]

Shareholder Derivative Suit: A suit brought by shareholders’, suing on behalf of the corporation, against the corporation’s directors, officers or others for injury to the company.

· Stock Subscription Liability: A shareholder who fails to pay for shares she purchased or promised to purchase from a corporation is liable for the promised price.

· Watered Stock Liability: A shareholder who, usually in return for in-kind services or for property, is issued shares for less than their assessed value is personally liable to the corporation (or the corporation's creditors) for the difference between the price paid and the value of the stock.

· Liability of Majority Shareholders: A shareholder who holds more than 50% of a corporation's outstanding stock may owe fiduciary duties to the corporation and to minority shareholders -- particularly when the majority shareholder sells his shares, thereby effecting a change in corporate control.