Cheeseman blaw8e ch37

Chapter 37Corporate Governance and the Sarbanes-Oxley Act

Shareholders

Own the corporation Not agents of the corporation

Cannot bind the corporation to contracts Have right to vote on fundamental changes in the

corporation

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Shareholder Meetings

Annual shareholders’ meeting: Held by the corporation to elect directors and to vote on other matters

Special shareholders’ meetings: May be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation


Notice of a Shareholders’ Meeting

Corporation is required to give the shareholders written notice of the place, day, and time of annual and special meetings

A proxy May be authorized to vote on a shareholder’s

behalf May be directed exactly how to vote the shares May be authorized to vote the shares at his or her

discretion


Voting Requirements

Shareholders who own stock as of a set date are allowed to vote at a shareholders’ meeting

Shareholders’ list—contains the names and addresses of the shareholders as of the record date and the class and number of shares owned by each shareholder

Quorum to hold a meeting of the shareholders: The required number of shares that must be represented in person or by proxy to hold a shareholders’ meeting


Voting for Election of Directors

Straight (Noncumulative) Voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open

Cumulative Voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates


Supramajority Voting Requirement

Articles of incorporation or bylaws may require more than a majority of shares To constitute a quorum For votes for mergers For consolidation, or other important matter


Voting Agreements

Shareholders agree in advance as to how their shares will be voted

Voting trusts: An arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares

Shareholder voting agreements: An agreement between two or more shareholders that stipulates how they will vote their shares


Restrictions on the Sale of Shares

Right of first refusal: An agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else

Buy-and-sell agreement: An agreement that requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement


Preemptive Rights

Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests Granted by the articles of incorporation Failure to exercise preemptive right—shares can

be sold to anyone


Dividends

Distribution of profits of the corporation to shareholders Paid at the discretion of the board of directors

Stock dividend: Additional shares of stock distributed as a dividend Distributed in proportion to the existing ownership

interests of shareholders A shareholder’s proportionate ownership interest is

not increased


Derivative Lawsuits

A lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit

Court may dismiss if the lawsuit is not in best interests of corporation

Any award goes to corporate treasury Corporation pays shareholder’s expenses


Piercing the Corporate Veil

If a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations

Occurs when There is thin capitalization No separateness is maintained between the

corporation and its shareholders


Case 37.1: Piercing the Corporate Veil

Case Northeast Iowa Ethanol, LLC v. Drizin Web 2006 U.S. Dist. Lexis 4828 (2006) United States District Court for the Northern District of Iowa

Issue Does the doctrine of piercing the corporate veil

apply in this case, thus allowing the plaintiffs to pierce the corporate veil of GSI and reach shareholder Drizin for liability for civil fraud?


Board of Directors

A panel of decision makers who are elected by the shareholders

Generally compensated for service Resolutions of the Board of Directors

They specify the decisions that were made by the board during their meetings

Certain actions may require the shareholders’ approval

The board has absolute right of inspection


Exhibit 37.2: Board of Directors


Selecting Directors

Inside director: A member of the board of directors who is also an officer of the corporation

Outside director: A member of the board of directors who is not an officer of the corporation

Term of office—expires at the annual shareholders’ meeting following a boards member’s election Staggered terms—Terms lasting two or three years


Meetings of the Board of Directors

Regular meetings are held at the times and places established in the bylaws

The board can call special meetings as provided in the bylaws

Quorum of the board of directors: The number of directors necessary to hold a board meeting or transact business of the board


Corporate Officers

Employees of a corporation who are appointed by the board of directors They manage the day-to-day operations of the

corporation Agency authority of officers

Possess authority that may be provided in the bylaws, or as determined by resolution of the board of directors


Exhibit 37.3: Corporate Officers


Fiduciary Duty

Fiduciary duties: The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders Duty of obidience Duty of care Duty of loyalty


Duty of Obedience

A duty that directors and officers of a corporation have to act within the authority conferred upon them by State corporation codes The articles of incorporation The corporate bylaws The resolutions adopted by the board of directors

Breach of duty—Personal liability for resultant damages


Duty of Care

A duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation

Requires corporate directors and officers to use care and diligence when acting on behalf of the corporation

Breach of duty—Personal liability to the corporation and its shareholders for any damages caused


Business Judgment Rule

A rule that says directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment

Determination of whether duty was met is measured at the time the decision was made Hindsight not applied

Not liable for honest mistakes of judgment


Duty of Loyalty

A duty that directors and officers have not to act adversely to the interests of the corporation To subordinate their personal interests to those of

the corporation and its shareholders Breach of duty—Corporation can sue the director or

officer to recover the secret profit made from a transaction


Duty of Loyalty

Usurping a corporate opportunity—If proven the corporation can Acquire the opportunity from the director/officer Recover any profits made

Self-dealing Contracts or transactions with a corporate director

or officer is voidable by the corporation if it is unfair to the corporation


Duty of Loyalty

Competing with the corporation Any profits made by nonapproved competition and

any other damages caused to the corporation can be recovered

Making a secret profit The corporation can sue the director or officer to

recover the secret profit


Case 37.2: Fiduciary Duties of Corporate Directors and Officers

Case McPadden v. Sidhu 964 A.2d 1262 (2008) Court of Chancery of Delaware

Issue Did the plaintiff plead sufficient facts of i2’s board

of directors bad faith and Dubreville’s breach of the duty of loyalty to withstand the defendants’ motions to dismiss?


Sarbanes-Oxley Act

Enacted by Congress in 2002 Goals

To improve corporate governance Eliminate conflicts of interest Instill confidence in public companies


Sarbanes-Oxley Act

Foreign Corrupt Practices Act: A federal statute that makes it a crime for U.S. companies, or their officers, directors, agents, or employees, to bribe A foreign official A foreign political party official A candidate for foreign political office, where the

bribe is paid to influence the awarding of new business or the retention of a continuing business activity


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