Business Law Chapter 37

Front 1

Shareholders

Back 1

owners of a corporation. They are not agents they cannot bind the corp into contracts. The only management duty they have is right to vote on matters such as the elections of directors and approval of fundamental changes in the corp.

Front 2

Annual shareholder's meetings

Back 2

A meeting of the shareholders of a corporation that must be held by the cororation to elect directors, an independent auditor, and to vote on other matters. These must be held at times fixed by bylaws.

Front 3

Special shareholders meetings

Back 3

Meetings of shareholders that may be called to consider and vote on important emergency issues, such as a proposed merger or amending the articles of incorporation. May be called by BOD, holders of at least 10% of the corp, or anyone authorized to call them by bylaws

Front 4

Shareholder's meeting

Back 4

Any act that can be taken at a shareholder's meeting can be taken without a meeting if all the corporate shareholders sign a written consent approving the action.

Front 5

Proxy

Back 5

A written document that a shareholder signs, authorizing another person to vote his or her shares at the shaerholder's meeting in the event of the shareholder's absence.

Front 6

Voting requirements

Back 6

At least one class of shares of stock of a corporation must have voting rights.

Front 7

Can a corporation grant more than one vote per share to some classes of stock and less than one vote to others?

Back 7

YES

Front 8

Record date

Back 8

A date specified in corporate bylaws that determines whether a shareholder may vote at a shareholder meeting. Cannot be more than 70 days before meeting

Front 9

Shareholder's list

Back 9

List containing the names and addresses of shareholders as of the record date and the class and number of shares owned by each shareholder.

Front 10

Straight voting

Back 10

A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open. Also called non-cumulative voting. Thus, a majority shareholder can elect the entire BOD.

Front 11

Cumulative voting

Back 11

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. Assume lisa owns 1000 shares and they are electing 4 directors. Lisa can multiply and cast resulting 4000 votes all for one candidate or split them as she desires.

Front 12

Supramajority voting requirement

Back 12

A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders.

Front 13

What must be done to add supramajority voting requirement?

Back 13

To add a supramajority voting requirement, the amendment must be adopted by the number of shares of the proposed increase. For example, increasing a majority voting requirement to 80% would require an 80% majority vote

Front 14

Shareholder voting agreement

Back 14

An agreement between 2 or more shareholders that stipulates how they will vote their shares. These are not limited in duration and don't have to be filed with the corporation.

Front 15

Right of first refusal

Back 15

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. If they don't exercise their right, then selling shareholder is free to sell his shares to another party.

Front 16

Preemptive rights

Back 16

Rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests. Such a purchase can prevent a shareholder's interest in the company from being diluted. Shareholders have a reasonable period of time i.e. 30 days to respond.

Front 17

Annual report

Back 17

A report provided to shareholders that contains a balance sheet, an income statement, and a statement of changes in shareholder's equity.

Front 18

Right to inspect

Back 18

Shareholders have right to be informed of affairs of the corp. This includes right to annual report, shareholder's list, articles of incorp, bylaws, minutes of shareholder meeting for last three years.

Front 19

Dividend

Back 19

A distribution of profits of the corporation to a shareholder. Paid at discretion of BOD they choose when, where, how, and how much will be paid in dividends.

Front 20

Record date

Back 20

When a corporation declares a dividend, it sets a date, usually a few weeks prior to the record date called the payment date. Persons who are shaerholders on that date are entitled to receive the DVD even if sold before paydate

Front 21

Derivative lawsuit

Back 21

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

Front 22

When can a shareholder bring derivative lawsuit

Back 22

1. IF they were a shareholder at the time of the act complained of
2. Fairly and adequate represents the interest of the corp
3. Made written demand of the corp to take action and either corp rejected or 90 days have passed with no action.

Front 23

What must the shareholder do before they can act on behalf of the corp?

Back 23

They must make a written demand of the corporate directors and if they fail to bring the suit then they can pursue lawsuit on behlaf of the corp.

Front 24

When can a lawsuit be dismissed by the court?

Back 24

A lawsuit can be dismissed by the court if either a majority of independent directors or a panel of independent persons appointed by the court determines that the lawsuit is not in the best interests of the corporation.

Front 25

Piercing the corporate veil

Back 25

A doctrine that says 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.

Front 26

What conditions must exist for a court to pierce the corporate veil?

Back 26

1. The corporation has been formed without sufficient capital
2. Comingling of personal and coporate assets, failure to hold shareholders' meetings, ect

Front 27

Board of directors

Back 27

A panel of decision makers who are elected by shareholders

Front 28

What does the BOD do?

Back 28

Responsible for formulating policy decisions that affect management supervision, control, and operation of the corp. Such policy decisions include deciding the business, selecting and removing company officials, declaring dividends.

Front 29

Directors compensation

Back 29

Originally considered an honor and involved no payment. Today directors are paid an annual retainer and an attendance fee for each meeting attended. Unless otherwise provided in the articles of incorporation, the directors are permitted to fix their own compensation.

Front 30

Inside director

Back 30

A memeber of the BOD who is also an officer of the corporation. For example, the president of the corporation often sits as a director of the corporation.

Front 31

Outside director

Back 31

A member on a board of directors who is not an officer of the corporation. Often include bankers, lawyers, professors, and others. Outside directors are included because of their business knowledge and expertise.

Front 32

Corporate officer election

Back 32

Corporate officers are elected by the board of directors at such tiem and by such manner prescribed in the corporation's bylaws.

Front 33

Corporate officers

Back 33

Employees of a corporation who are appointed by the BOD to manage the day-to-day operations of the corporation.

Front 34

Duty of obedience

Back 34

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, and the resolutions adopted by the board of directors.

Front 35

Fiduciary duties

Back 35

duties of obedience, care, and loyalty owed by directors and officers to their corporation and their shareholders.

Front 36

LIability for duty of obedience

Back 36

Directors and officers who either intentionally or negligently act outside their authority are personally liable for damages caused to corp or shareholders. Example: If articles of a corp specify it is only allowed to invest in real estate. If a corporate officer invests in corp funds in commodities market, they are personally liable for losses suffered.

Front 37

Duty of care

Back 37

A duty of corporate officers and directors to use care and dilligence when acting on behalf of a company.

Front 38

What are the 3 qulifications to see if individuals are upholding their duty of care

Back 38

1. In good faith
2. With the care that an ordinary prudent person in like position would make under similar circumstances
3. In a manner they reasonably believe to be in the best interest of the corporation

Front 39

What happens if a director breaches his duty of care?

Back 39

They are personally liable to the corp and shareholders for damages caused by the breach.

Front 40

What usually causes a breach of duty of care

Back 40

negligence

Front 41

Negligence

Back 41

Failure of a corporate director or officer to exercise the duty of care while conducithing corporation's business.

Front 42

Some examples of breach of duty of care.

Back 42

1. failure to make reasonable investigation of a corporate matter
2. Failure to attend board meetings on a regular basis
3. FAilyre to properly supervise a subordinate who causes corporate loss due to embezzlement
4. Failure to keep adequately informed about corporate affairs.

Front 43

Business judgment rule

Back 43

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

Front 44

Why is the business judgment rule important?

Back 44

Were it not for the protection offered by this rule, many high risk but socially desirable endeavors may not be undertaken.

Front 45

Duty of loyalty

Back 45

A duty that directors and officers have not to act adversly to the interest of the corporation and to subordinate their personal interests to those of the corporation and its shareholders.

Front 46

If it is proven that a director or officer has usurped a corporate opportunity...

Back 46

1. The corp can acquire the opportunity from the director of officer
2. Recover any profits made by the director or officer

Front 47

What elements must be shown to prove usurping?

Back 47

1. Opportunity was presented to director or officer in their corporate capacity
2. Oportunity is related to or connected with corp's current or proposed business
3. Corporation has the financial ability to take advantage of the opportunity
4. Corporate officer or director took the corporate opportunity for him or herself

Front 48

Self dealing

Back 48

A contract or transaction with a corporate director or officer is voidable by the corp if it is unfair to the corp.

Front 49

If an employee is found to be self dealing what can the corp do?

Back 49

Corp can affirm the contract and recover any profits. COntracts are enforceable if their interest have been disclosed in thec orp.

Front 50

Compete with corporation

Back 50

Directors and officers cannot engage in activities that compete with the corporation unless full disclosure is made and a majority of the disinterested directors or shareholders approve the activity. The corporation can recover any profits made by nonapproved competition and any other damages caused to the corporation.

Front 51

Making a secret profit

Back 51

If director or officer breaches his/her duty of loyalty and makes secret profit on a transaction the corporation can sue the director or officer to recover secret profit

Front 52

CEO and CFO certification

Back 52

The CEO and CFO of a public company must file a statement accompanying each annual and quarterly report, certifying that the signing officer has reviewed the report, based on the officer's knowledge that the report does not contain any untrue statement of a material fact or omit to state a material fact that would make the statement misleading and that financial statements and disclosures present fairly, in all material respects, the operation and financial conditions of the company.

Front 53

Reimbursement of bonuses and incentive pay

Back 53

If a public company is required to restate its financial statements because of material noncompliance with financial reporting requirements, the CEO and CFO must reimburse the company for any bonuses, incentive pay, or securities trading profits made because of the noncompliance.

Front 54

Prohibition on personal loans

Back 54

The act prohibits public companies from making personal loans to their directors or executive officers.

Front 55

Tampering with evidence

Back 55

The act makes it a crime for any person to knowingly destroy, mutilate, conceal or inmpeade, influence, or obstruct federal investigation.

Front 56

Bar from acting as an officer or director

Back 56

SEC a fed govt. agency may issue an order prohibiting any person who has committed securities fraud from acting as an officer or a director of a public company.