Bl Chapter 39

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Chapter 39 corporations: directors, officers, and shareholders

After reading this chapter, you will be able to answer the following questions:

1. Why is it important to regulate the interactions among directors, officers, and shareholders withincorporation?

2. What is the role of a director, an officer, and a shareholder?3. What are the duties of directors, officers, and shareholders?4. In what ways can a director, officer, and shareholder be held liable?5. What are the rights of directors, officers, and shareholders?

CASE OPENER Roles of Directors, Officers, and Shareholders of Hi-Way and Ken Corp.

In 1994, James and Thomas Marcuccilli, the dominant and controlling shareholders, officers, anddirectors of Hi-Way Drive-In Theatre, Inc., et al. (Hi-Way) and Ken Corporation (Ken Corp.) sold 18.73acres of land to Lowes and Kite Development for $200,000. James and Thomas Marcuccilli thenproceeded to tell Elizabeth Marcuccilli et al. (the minority shareholders) about the $200,000. The two m

did, however, withhold information) ii the minority shareholders about the overall transaction terms, whiwould have resulted in an additional compensation to all shareholders.

Since 1994, the minority shareholders filed complaints against Hi-Way and Ken for what the suitalleged to be failures to disclose [that] amounted to a breach of fiduciary in duty. The shareholderssought both declaratory relief and damages by attempting to Inuit both derivative and direct suits againsHi-Way and Ken Corp. The Wrap-up at the end of the chapter will answer these questions.

As the opening scenario demonstrates, there are many groups of individuals with various prioritiand agendas within a corporation. Not surprisingly, these priorities and agenda often come into conflict.ensure that individuals, corporations, and the public achieve equitable outcomes to conflicts within

corporations, statutory laws have been designed that delegate particular roles, duties, and rights to eacgroup of individuals within corporations.

The statutory law governing corporations has a lengthy and dynamic history. In 1946, the AmericBar Association (ABA) drafted the first version of the Model Business Corporation Act (MBCA). As withalmost all new laws, MBCA met with varying degrees o success. Hence, over time, legislatures havemolded and remolded the act in attempts t achieve certain objectives. The ABA amended the actnumerous times since 1946; more than 25 states adopted at least part of MBCA.

When the law changes, however, it often changes at an uneven pace. A sudden reformationsometimes interrupts a trend of incremental change. Thus, for example, after nearly 40 years of smallrevisions, the ABA discontinued its process of revising MBCA and drafted the Revised Model Business

Corporation Act (RMBCA) in 1984. More than half of the states have adopted all or part of RMBCA. Thuin most states, RMBCA governs corporations today. This chapter explains the duties and rights set forthRMBCA and by common law.

Importance of Regulating Interactions among Directors, Officers, and Shareholders within aCorporation

The three major groups of individuals within a corporation are directors, officers and shareholderAll three groups have different interests, and in many situations the interests of one group conflict with tinterests of another. Statutory law provides rules to ensure that the directors, officers, and shareholderswithin a corporation work together to benefit of all involved.


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Although directors and officers play different roles within the corporation, they share the same goBoth directors and officers attempt to ensure that their institution survives and that they keep their jobs.Shareholders, on the other hand, have a different agenda. Their goal is to raise the value of thecompanys stock.

These different agendas can lead to conflict within corporations. If a corporation has an opportunto make a decision that will raise the value of its stock quickly, shareholders will push the directors andofficers to make this decision. But if the directors and off believe that the decision might jeopardize their

jobs, they will resist the pressure shareholders. To resolve these conflicts, the law gives legal duties and

rights to different groups within the corporation.

Roles of Directors, Officers, and Shareholders

Before discussing the duties and rights of each position within the corporation, it is important tounderstand the specific roles that directors, officers, and shareholders play. The rights and duties of eagroup of individuals are dependent on these roles.

DIRECTORS ROLES

Directors play a vital role within every corporation. When a corporation faces an imp decision, theboard of directors meets to decide what course of action the corporation will take. Although directors en

considerable power within the organization, no one wields a large amount of power by himself or herselone director wants the company to move in a certain direction, he or she must solicit the approval of othdirectors on the board before the company will begin to move in that direction.

Elections. Typically, shareholders use a majority vote to elect directors. The only exception isduring incorporation. Because there are no shareholders in the beginning, either the incorporators appoboard members or the corporate articles name the board members. This first board then serves until thefirst shareholder meeting, at which the shareholders elect a new board. The corporate articles or bylawsspecify the number of corporate directors. In the past, the minimum number of directors required wasthree, but today many states allow fewer. In fact, if a corporation has fewer than 50 shareholders,Section 7.32 of RMBCA allows companies to eliminate the board of directors altogether. This change in

the minimum number of directors illustrates how practicality interests can stimulate change in the law. Tbenefits of the corporate form of business organization have drawn an enormous number of businessesand especially small businesses, to incorporate in recent years. The requirement of at least threedirectors, however, burdened small corporations that did not generate sufficient business to warrant thrdirectors. Hence, legislatures in many states eased or removed the three-director requirement.

Interestingly, almost anyone can become a director. The legal requirements for director qualificatare incredibly lax. In most states, directors are not even required to own stock the corporation. In somecases, however, statutory law and corporate bylaws require not y ownership but also a minimum age.

Directors typically serve for one year, but most state statutes allow for longer terms the terms of various directors are staggered. These terms can be terminated and the directors can be removed fromtheir positions for causefor failing to perform a required duty. Directors who are removed for cause,however, can ask the courts to review the legal- of the removal. Although removal is typically a result ofshareholder action, in some cases directors are given the power to remove other directors for cause. Oa few states allow removal of directors without cause, and only if shareholders reserve that right at the othe election.

Meetings and voting. A minimum number of directors, or a quorum, must be present at eachdirectors meeting for decisions made at the meeting to be valid. Quorum requirements are different ineach state, but most states leave the decision up to the corporation itself. Because a quorum is requireat each meeting, directors are notified whenever special meetings are called. Directors vote in person, a


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each director has one vote. While ordinary decisions require a majority vote, more important decisionssometimes require a 2/3 vote.

Although directors meetings are usually held in a central location, Section 8.20 of CA permitsdirectors meetings to be held via telephone conferences.

Directors as managers. Although directors meet to vote on major decisions about corporation, thare also responsible for many day-to-day managerial activities of the company. The directors appoint,supervise, and remove corporate officers as they see fit, and they declare and pay corporate dividendsshareholders. They are also responsible for making financial decisions and authorizing corporate policydecisions. Some directors are also officers or employees of the corporation; these directors are known inside directors. Directors who are not officers or employees of the corporation are called outsidedirectors. Outside directors are further divided into two groups: affiliated directors and unaffiliateddirectors. Affiliated directors have business contacts with the corporation, while unaffiliated directors donot.

Because the day-to-day tasks of a corporation can be overwhelming for a small board of directorthat has larger issues to address, directors often appoint an executive committee to handle day-to-dayresponsibilities.

OFFICERS ROLES

Officers are executive managers that the board of directors hires to run the organization. Whiledirectors are in charge of major policy decisions, officers run the day-to-day business of the corporation

Accordingly, their decisions influence the corporation immensely. Officers act as agents of the corporatiand thus the rules of agency apply to their work (Refer to Chapter 32 for the rules of agency.)

Qualifications required of officers are set forth in the corporate articles and bylaws of eachcorporation, but in most cases an individual may serve as both a director and an officer. Manycorporations find it beneficial to include an officer on their board of directors that the board can stay intouch with the day-to-day operations of the company.

SHAREHOLDERS ROLES

Shareholders own the firm. As soon as an individual purchases the stock of a particular corporatshe becomes an owner of the corporation. While she is not legally recognized as an owner of corporateproperty, she has an equitable, or ownership, interest in the company. Shareholders are not directlyresponsible for the daily management of the corporation, but they elect the directors who are responsibfor that management.

Power of shareholders. The articles of incorporation established within each ration and generalincorporation law in each state grant shareholders certain powers within the institution. Becauseshareholders must approve major corporate decisions, they some sense empowered to make majordecisions for the corporation.

Their most influential power, however, is the power to elect and remove the b directors. The boarof directors is responsible for making crucial policy decisions i corporation, and the shareholders have tpower to decide who these directors will be. Shareholders also have the power to propose ideas for thcorporation. If a shareholder feels that he has a worthwhile idea for the company, he can include hisproposal proxy materials sent out to the shareholders before their annual meeting. The Security andExchange Commission (SEC) has established that any shareholder who owns than $1,000 worth of stoin the corporation can submit proposals to be included in materials.

Meetings. Typically, shareholders meet once a year, but in emergencies they can meet more oftThe board of directors, shareholders who own at least 10 percent of the corporations outstanding share

and others authorized in the articles of incorporation n a special shareholder meeting. Before each


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meeting, each shareholder receives notices of the time and place of the meeting. If the meeting is aspecial meeting, the purpose of the meeting is also included in the notice.

Like directors meetings, shareholder meetings require a quorum. Generally, a group ofshareholders exists when shareholders holding more than 50 percent of the outs shares are present.Once a quorum is present, a majority vote of the shares represents the meeting is required to passresolutions. Occasionally, however, articles of incorporation include supermajority provisions, which stathat more than a majority is needed to pass major corporate proposals, such as corporate merger ordissolution.

Because shareholders cannot always attend shareholder meetings, they can authorize a third pato attend the meeting and vote in their place. This authorization is called a proxy. Under Section 7.22(c)RMBCA, proxies last for 11 months and can be withdrawn at any time unless specifically designed to beirrevocable.

An individual shareholder can also enter a voting trust in which she transfers her share titles to atrustee in exchange for a voting trust certificate. The trustee is then responsible for voting for those sharThese trusts can prescribe how the trustee should vote, or can allow the trustee to use his discretion. Tshareholder, however, retains all other shareholder rights (discussed below).

Alternatively, before a shareholder meeting, shareholders can sign a shareholder voting agreem

in which they agree to vote together in a certain manner. These agreements are usually legallyenforceable.

Voting. Like directors, each shareholder is entitled to one vote per share in most instances.Corporations practice unique voting processes, however, that alter the influence of each shareholdersvotes. These voting processes are especially important for minority shareholders within a corporation. Ovoting process required in most states, called cumulative voting, ensures that minority shareholders hava voice in electing the board of rectors. The cumulative voting process divides shareholders into majoritand minority shareholders, and each group has a certain number of votes to cast in the election. Thenumber of votes is determined by multiplying the number of shares the group owns by the number of opdirector positions. If a company is electing eight directors and the minority shareholders own 2,000 sha

the minority shareholders get 16,000 votes to cast in the election. If the majority shareholders in the samcorporation own 8,000 shares, they get 64,000 votes.

Although in the example above it may seem that the minority shareholders have little influence inthe election, the cumulative voting process permits them to vote at least one director onto the boardbecause they can cast all of their votes for one candidate. If the majority shareholders wish to elect alleight directors from their nominees, each nominee must receive more than 16,000 votes in order to beathe 16,000 votes of the minority Exhibit 39-1 nominee. But because the majority shareholders have only64,000 votes to cast in the election, they cannot cast more than 16,000 votes for eight candidates (16,0X 8 = 128,000). Thus, if the minority shareholders cast all 16,000 votes for one candidate, they guarantethat candidates election.

Cumulative voting is more egalitarian than simple majority voting because it ensures that everyvoice within the corporation is heard. Without cumulative voting, Shareholders the majority shareholdercould monopolize control of the company and disregard the interests of the minority shareholders. Thecumulative voting process, however, forces the corporation to listen to and consider the needs of everyowithin the corporation -not just those with the most power. Cumulative voting, however, is not guaranteein RMBCA; rather, it occurs only if the corporations articles of incorporation provide for it. Exhibit 39-1provides an overview of the respective roles of directors, officers, and shareholders.

Exhibit 39-1 summary of the roles of directors, officers, and shareholders


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Position Roles

Directors Vote on important corporate decisions

Appoint and supervise officers

Declare and pay corporate dividends

Manage the corporation

Officers Run the day to day business of the firm

Are agents of the corporation

Shareholders Elect a Board of Directors

Approve major decisions of the board

Global Context Board of Directors in Canada

Individuals who sit on the board of directors for Canadian corporations are classified as eitherinside or outside directors. Though definitions vary, inside directors are generally persons currentlyemployed by the corporation. Thus, in addition to their other corporate duties, inside directors must alsoperform the duties of a board member.

Outside directors are typically defined as former or retired employees or employees of parent,controlling, or subsidiary companies. These individuals often have other jobs as lawyers, financialexecutives, or bank managers. According to the Canada Business Corporation Act, outside directors mbe Canadian citizens.

Generally, both inside and outside directors serve on the board for fewer than five years.Occasionally, inside directors remain on the board after retirement and become outside directors. Manycorporations have mandatory retirement ages for directors. Additionally, corporations reserve the right t

demand early retirement at any time if a board member violates corporate policies.

Duties of Directors, Officers, and Shareholders

Because all individuals within a corporation depend on one another, the law requires that directoofficers, and shareholders perform certain duties within the business. In other words, individuals within tcorporation have legal responsibilities to the corporation. Within legal discourse, these duties to thecorporation are called fiduciary duties. Because individuals play different roles within the corporation, thfiduciary duties of individuals depend on whether they are directors, officers, or shareholders.

DUTIES OF DIRECTORS AND OFFICERS

Because the owners of the corporation, the shareholders, have little input in the day-to- operationof the corporation, they trust the directors and officers to run the company the best of their ability. Thus,directors and officers have duties to the shareholders and to the corporation. The two primary fiduciaryduties of directors and officers are the duty care and the duty of loyalty.

Duty of care. Directors and officers have a fiduciary duty of care, meaning that they must exercisdue care when making decisions for the corporation. The phrase due care is ambiguous and variouscourts have interpreted it differently over time. In general, however, acting with due care requires that oexercise the care that an ordinary prudent person would exercise in the management of her own assetsother words, if a person is acting with due care, she is acting in good faith and in a manner that she feeis in the interest of the company.


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Because directors and officers have a duty to act in the best interest of the con they must supervemployees who work for the corporation to a reasonable extent. They also have a duty to attend directand corporate business meetings. Most importantly, however, directors and officers have a fiduciary duto make informed and reasonable business decisions.

The directors and officers of Enron failed in their duty of care with regard to the shareholders by acting in the best interest of the company. The directors and officers continued to advocate thatemployees invest in the employee stock-sharing options; even though it appears the directors and officknew the stock was drastically overpriced.

When a B2B Company Cooks the Books

When a business student thinks about companies that cook the books, it is not surprising thatcompanies such as Enron, Tyco, and Adelphia come to mind. Issues to duty of care for officers anddirectors are expressed in questions such as, Why did the officers directors of the company fail to realaccountants cooking company books? Were any officers or directors involved in the fraud?

Students may have to revise their images of corrupt companies by adding business-to-business(B2B) ecommerce companies to their Enron-Tyco-Adelphia list. They may have to ask, Why did theofficers and directors of an e-commerce business fail to realize accountants were cooking companybooks? Were any officers or directors involved in the fraud?

PurchasePro is one example of an e-commerce company that allegedly engaged in overstatingrevenues, engaging in aggressive accounting practices and mismanaging corporate assets. Basically, company manipulated its financial records to make it look far more successful than it really was.PurchasePro, which provided a business-to-business software company that gave companies access tan online marketplace, went bankrupt in September 2002.

Federal prosecutors charged company officers and directors with conspiracy, securities fraud, anobstruct ion of justice. Two senior officers, Jeffrey R. Anderson and Scott H. Miller, pleaded guilty tofederal crimes in 2003. Their behavior was similar to that of officers of other, more well-known companithat have cooked the booksthey had secret side deals with purchasers that gave the appearance of

sales that did not really exist; they misrepresented the companys financial health so that investors coulnot make informed decisions; and, when news of alleged fraud surfaced, the officers used their energy shred incriminating documents.

Furthermore, the directors and officers failed in their duty of care regarding oversight. The directoand officers either did not pay enough attention to see the collapse of their stock coming or purposely kthe information secret. Either way, the directors and officers at n breached their fiduciary duty of care antherefore are liable to their shareholders, many of whom were employees of Enron.

Directors and officers are expected to stay abreast of all important corporate matters. In otherwords, they must obtain information about business transactions, review contracts, read reports, andattend presentations. After all, if directors and officers are uninformed, they cannot make decisions thatare in the best interest of the company. Because ne directors are too busy to stay informed on everysubject, RMBCA allows directors to make decisions based on information gathered by other employeesInterestingly, however, most corporations do not allow directors decisions to be based on secondhandinformation.

The decisions that corporate directors and officers make must not only be informed, however, bualso be reasonable. If a director or officer is taken to court for breaching his duty of care by making anunreasonable decision, the court typically inquires whether the decision had any rational businesspurpose. In other words, the courts ask whether there was good reason to think that the decision couldhave helped the company.


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Part of the duty of care a director or officer owes a corporation, as was previously dated, is to actthe corporations best interest. Therefore, when the corporation is doing something the director or officedoes not think is in its best interest, it is up to her to voice her dissent. It is unusual for a dissenting directo be held personally liable for decisions made by the corporation that entail mismanagement. Accordinwhen a director or officer disagrees with a proposed action, it is part of her duty to voice this disagreemeto the other directors or officers.

Case Nugget, Duty of Care

In re Caremark Intl698 A.2d 959 (1996)

Caremark, a corporation headquartered in Illinois, provided patient care and managed health caservices. The corporation was indicted by a grand jury for paying a doctor to distribute a drug producedthe corporation and for making inappropriate referral payments to a doctor. Several Caremarkshareholders filed a derivative suit (discussed later in this chapter in the section entitled ShareholdersDerivative Suit) alleging that Caremarks directors breached their fiduciary duty of care to the corporatiby allowing situations to develop that exposed the corporation to enormous legal liability.

The Court of Chancery of Delaware ruled:

[C]ompliance with a directors duty of care can never appropriately be judicially determined by referencthe content of the board decision that leads to a corporate loss, apart from consideration of the good faior rationality of the process employed. That is, whether a judge or jury considering the matter after thefact, believes a decision substantively wrong, or degrees of wrong extending through stupid toegregious or irrational, provides no ground for director liability, so long as the court determines that tprocess employed was either rational or employed in a good faith effort to advance corporate interests.employ a different ruleone that permitted an objective evaluation of the decisionwould exposedirectors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, binjurious to investor interests.

Duty of loyalty. Because directors and officers have great decision-making freedom they have thpower to make business decisions that will benefit themselves while harming the company. Thus, toprotect shareholders, directors and officers have a fiduciary duty of loyalty. In other words, they have afiduciary duty to put the corporations interest above their own when making business decisions.When directors or officers violate their duty of loyalty, they are self-dealing. There are two types of self-dealing in which a director or officer can engage. The first form of self-dealing, called business self-dealing, occurs when a director or officer makes decisions that benefit other companies with which he ha relationship. The second form of self-dealing, called personal self-dealing, occurs when a director orofficer makes business decisions that benefit her personally. When Enron directors and officers advocathat employees buy more Enron stock so that the directors and officers would make more money, they

engaged in self-dealing in breach of their fiduciary duty of loyalty.

In many situations, when a director or officer is self-dealing, he forces the corporation into unfairbusiness deals. Directors and officers can also breach their fiduciary duty of loyalty, however, bypreventing corporate opportunity. This breach usually happens when directors or officers own othercompanies that compete with their corporation without the consent of the board of directors or theshareholders. If a director or officer uses corporate assets to start another business, goes into the sameline of business, or uses her position in the company to develop a new business that the company mighhave pursued, she is preventing corporate opportunity and can be held liable for violating her fiduciaryduty of loyalty.


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A director or officer convicted of breaching her duty of loyalty is required to cede to the corporatiall the profits she earned as a result of the breach. The corporation need not have been able to earn thprofits in the absence of the breach. The goal of the rule is to incentives to discourage breaches of theduty of loyalty by taking from the director or officer all the profits that she made.

The fiduciary duties of care and loyalty are rooted in ethics. Without these legal duties, directorsand officers could pursue their own interests at the expense of others. Through these fiduciary duties,however, the law requires that directors and officers consider the interests of others. Think back toChapter 2 and the different ethical guidelines used to make ethical decisions. Which ethical guideline is

the legal system using when it delegates fiduciary duties?

Duty to disclose conflict of interest. Because there are many times when individual directors andofficers may personally benefit from decisions made by the board of directors, the directors and officershave a fiduciary duty to fully disclose conflicts of interest that arise in corporate transactions. Moreover,the board of directors addresses an issue that might personally benefit a particular director, the directornot only required disclose the self-interest but also to abstain from voting on that issue. Note that decisican be made that will personally benefit one director or officer as long as (I) there is full disclosure of theinterest and (2) the disinterested board members and/or disinterested shareholders approve it.

Case Nugget Duty of Loyalty

Patrick v. Allen355 F. Supp. 2d 704 (2005)

RPO, a privately traded corporation, rented land to a private golf course, of which several of RPOdirectors were members. The directors charged the golf course enough rent to cover only the propertytaxes on the land. Patrick, a shareholder of RPO, brought a suit against the directors of RPO, alleging tRPOs directors breached their fiduciary duty of loyalty to the corporation by failing to maximize the valuof the corporation for shareholders. The directors argued that they were exempt from liability under thebusiness judgment rule. (The business judgment rule is covered in the section entitled Liabilities ofDirectors, Officers, and Shareholders.)

The U.S. District Court for the Southern District of New York ruled against the RPOs directors,holding:

The business judgment rule will not protect a decision that was the product of fraud, self-dealing,bad faith. Directors may benefit from the rule only if they possess a disinterested independence and do stand in a dual relation which prevents an unprejudicial exercise of judgement. It is black-letter, settled that when a corporate director or officer has an interest in a decision, the business judgment rule does apply. . . . A director is considered interested in a transaction if the director stands to receive a directfinancial benefit from the transaction which is different from the benefit to shareholders generally. . . . Thduty of loyalty requires a director to subordinate his own personal interests to the interest of thecorporation.

DUTIES OF SHAREHOLDERS

Although shareholders typically have few legal duties, in rare instances majority shareholders hafiduciary duties to the corporation and to minority shareholders. In some corporations, the majorityshareholder owns such a significant portion of the corporations stock that essentially controls the firm.When that individual sells his shares, the control of the company shifts another individual. Thus, themajority shareholder in this situation has a fiduciary duty to act with care and loyalty when selling hisshares. In closely held corporations, a breach of this fiduciary duty is known as oppressive conduct.More than half of U.S. publicly traded corporations are incorporated in Delaware. Thus, when Delawarecourts rule on the duties of majority shareholders to minority shareholders, for example the courts rulinghave a far-reaching impact. Case 39-1, brought before the supreme court of Delaware, minority


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shareholders sued the majority shareholder within their corporation violating its fiduciary duties.The respective duties of directors, officers, and shareholders are summarized in Exhibit 39-2.

Exhibit 39-2 Summary of the Duties of Directors, Officers,and Shareholders

POSITION DUTIES

Directors Duty of care

Duty of loyalty

Duty to disclose a conflict of interest

Duty to apply best judgment

Officers Duty of care

Duty of loyalty

Duty to disclose a conflict of interest

Shareholders Duty to minority shareholders

CASE 39-1

FRIEDA H. RABKIN v. PHILIP A. HUNTCHEMICAL CORP.SUPREME COURT OF DELAWARE498 A. 2D 1099 (1985)

On March 1, 1983, Olin Corporation bought 63.4 percent of the outstanding shares of HuntChemical Corporation from Turner and Newall Industries, Inc., at $25 per share, which moved Olin into position of majority shareholder Before Turner and Newall Industries sold the shares to Olin, they insistethat Olin agree to pay $25 per share f Olin acquired the remaining Hunt stock within one year. On July 51984, Hunt merged into Olin by buying out the remaining stock for $20 a share. The minority shareholdeof Hunt then filed a suit against Olin that challenged the Olin- Hunt merger on the grounds that the priceoffered was grossly inadequate because Olin unfairly manipulated the timing of the merger to avoid theone year commitment, and that specific language in Olins Schedule 13D, filed when it purchased the Hstock, constituted a price commitment by which Olin failed to abide, contrary to its fiduciary obligations tthe minority shareholders. The trial judge dismissed the complaint on grounds that the only remedy legaavailable to the minority shareholders was an appraisal. The plaintiffs then sought and were denied leav

to amend their complaints. They appealed.

JUDGE MOORE: The plaintiffs have charged that the merger does not meet the entire fairnessstandard required. They offer specific acts of unfair dealing constituting breaches of fiduciary duties whiif true, may have substantially affected the offering price. These allegations, unrelated to judgmentalfactors of valuation, should survive a motion to dismiss.

Olins alleged attitude toward the minority, at least as it appears on the face of the complaints theproposed amendments, coupled with the apparent absence of any meaningful negotiations as to all raisunanswered questions about the undiminished duty of loyalty to Hunt.


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In our opinion, the facts alleged by the plaintiffs regarding Olins avoidance of the one-yearcommitment support a claim of unfair dealing sufficient to defeat dismissal at this stage of theproceedings. At the very least, the facts alleged import a form of overreaching, and in the context of entfairness they deserve more considered analysis than can be accorded them on a motion to dismiss.REVERSED.

Liabilities of Directors, Officers, and Shareholders

Because almost all individuals within a corporation have legal fiduciary duties to the corporation,almost all individuals within the firm can be held liable for harming the business by violating these dutiesThere are, however, certain instances where directors, officers, and shareholders cannot be held liableharming the business.

LIABILITY OF DIRECTORS AND OFFICERS

Directors and officers are held liable for many of the same actions because they have nearlyidentical fiduciary duties to the corporation. A shareholder can sue them if the shareholder feels that thehave caused harm to the business by violating their fiduciary duties. In fact, directors and officers can bheld liable for the torts and crimes of their employees. There are some situations, however, in which theare not liable for the harm they have caused the business.

Liability for torts and crimes. Although the corporations themselves are liable for the torts andcrimes of their directors and officers, directors and officers can also be held personally responsible fortheir own torts and crimes. They can even be held personally responsible for the torts and crimes of othemployees within the organization when they have failed to adequately supervise the employeesbehavior.

According to the responsible person doctrine, a court may find a corporate officer criminally liablregardless of the extent to which the officer took part in the criminal activity. Even if the officer knewnothing about the criminal activity, the officer can still be held criminally liable if the court determines tharesponsible person would have known about and could have prevented the illegal activity.

Corporate directors and officers may also be held liable for wrongful personal transactions involvcompany stock. Directors and officers who use inside information to trade the corporations stock for aprofit can be held liable for breaching their fiduciary duty to the shareholders from whom they purchase to whom they sell the stock.

Case Nugget The Responsible Person Doctrine

United States v. Park

421 U.S. 658 (1975)

Defendant Park was the president of Acme Markets, a national food chain corporation. After seve

inspections of Acmes Philadelphia warehouse, FDA officials sent Park a memo indicating the unsanitarconditions at the warehouse. Park knew that the corporate officials in charge of the Philadelphiawarehouse also ran Acmes Baltimore warehouse. After an FDA inspection of the Baltimore warehousefound similar unsanitary conditions, the FDA brought suit against Acme and against Park personally.Park argued that he was not personally involved with the violations and therefore should not be heldresponsible for the violations. The U.S. Supreme Court, however, concluded that the offense wascommitted by everyone who had a responsible share in the furtherance of the transaction which the [FDstatute outlaws... . [T]hose corporate agents vested with the responsibility, and power commensurate wthat responsibility, to devise whatever measures are necessary to ensure compliance with the [law] bearesponsible relationship to, or have a responsible share in, violations.

Case Nugget The Business Judgment Rule


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Auerbach v. Bennett

393 N.E.2d 994 (1979)

An internal audit of the GTE Corporation suggested that the corporations management had paidmore than $11 million in bribes and kickbacks both in the United States and abroad over a four-yearperiod. Auerbach, a GTE shareholder, immediately initiated a shareholder derivative action (discussed the section entitled Shareholders Derivative Suit) against GTES directors.

The Court of Appeals of New York, however, held that the business judgment rule exempted theGTE directors from liability for their poor business decisions. The court held:

[The business judgment doctrine] bars judicial inquiry into actions of corporation directors taken igood faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporatepurposes. Questions of policy of management, expediency of contracts or action, adequacy ofconsideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to thhonest and unselfish decision, for their powers therein are without limitation and free from restraint, andthe exercise of them for the common and general interests of the corporation may not be questioned,although the results show that what they did was unwise or inexpedient.

Business judgment rule. Although directors and officers are expected to make decisions that are

the best interest of the corporation, they are not expected to make perfect decisions all the time. Manydirectors and officers make decisions that inadvertently hr the corporation. Although shareholders maywant to hold their directors and officers liable for these decisions, the business judgment rule does notallow them to do so. This rule claims that directors and officers are not liable for decisions that harm thecorporation if they were acting in good faith at the time of the decision. In other words, if there was reasto believe that the decision was a good decision at the time, the directors and officers are not liable for tresulting harm.

Although the business judgment rule is not a statute, it is common law recognized by almost evecourt in the country. The rule is practical because it grants directors the freedom to work without constafear of personal liability. The business judgment rule also encourages individuals to serve as directors b

removing the threat of personal liability for inadvertent mistakes. Case 39-2 illustrates how the courtsinterpret and apply the business judgment rule.

STATE OF WISCONSIN INVESTMENT BOARD CASE 39-2 v. WILLIAM BARTLETTCOURT OF CHANCERY OF DELAWARE, NEW CASTLE C.A. NO. 17727 (2000)

The State of Wisconsin Investment Board (SWIB) owned 11.5 percent of the outstanding sharescommon stock in the pharmaceutical company Medco Research, Inc. In 1996, Medco began searchinga merger partner. In a proxy statement on January 5, 2000, Medco recommended that shareholders vofor a merger between Medco and King Pharmaceuticals, Inc. On January 11, 2000, SWIB filed a requesfor injunctive relief on the grounds that the board of direct ors breached their fiduciary duties of care,loyalty, and disclosure in negotiating the merger SWIB argued that the majority of Medco s directors weself-interested, and that no reasonably prudent businessperson of sound judgment would have negotiathe merger as Medco had negotiated. SWIB alleged that Medco failed to disclose all information materito the shareholders, did not adequately inform themselves of all information available about the mergerand failed to adequately supervise a self-interested director Medco refutes all claims.

JUDGE STEELE: Unless this presumption [that a board of directors acted with care, loyalty, andgood faith] is sufficiently rebutted, raising a reasonable doubt about self-interest or independence, theCourt must defer to the discretion of the board and acknowledge that their decisions are entitled to theprotection of the business judgment rule.

In order to require application of the entire fairness standard, the plaintiff has to show that a majo

of directors has a financial interest in the transaction or a motive to entrench themselves in office throug


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the merger. Plaintiffs allegations of self-interest do not meet the threshold necessary to rebut thepresumption of the business judgment rule.

The plaintiffs allegations do not demonstrate that the Medco board failed to inform itself of allmaterial facts concerning the proposed merger with King. I conclude that Medcos board met its duty ofcare in proceeding with the King merger. Despite the material disputes of fact, I am confident that Medcboard adequately informed themselves of all material information necessary to execute the mergeragreement.

I cannot, on the basis of these allegations, find that the board either willfully left itself uninformedorder to serve its self-interest or failed to act in good faith and in the honest belief that the merger wasthe best interests of the company. It is equally apparent to me that the board sufficiently complied with good- faith standard set forth by this Court in Aronson. I have also been led to conclude that the direcwere acting to benefit the economic interest of the shareholders.

Plaintiffs request for preliminary injunction is hereby denied with respect to the shareholder voteand denied with respect to the merger.Judgment for defendant

LIABILITY OF SHAREHOLDERSThe main liability that shareholders face is liability for the debts of the corpora - Because shareholders

the owners of the corporation, they are liable to the extent their investment when the company losesmoney. There are rare instances, however, in which shareholders are personally liable.

For instance, in some cases, individuals sign stock subscription agreements be incorporation. Oan individual signs a stock subscription agreement, she is contractually obligated to purchase shares inthe corporation. For par-value shares, or shares d have a fixed face value noted on the stock certificatethe shareholder must pay the corporation at least the par value of the stock. For no-par shares, or sharwithout a par value, the shareholder must pay the corporation the fair market value of the shares. Theshareholder is personally liable for breach of contract if she does not buy shares.

Alternatively, a shareholder can be held personally responsible if he receives watered stock.

Watered stock is stock issued to individuals below its fair market value. When watered stock is issued toshareholders, the shareholder is individually liable for paying the difference between the price he paid fthe shares and the stated corporate value of the shares.

A shareholder can also be held personally liable for receiving illegal dividend& A dividend is adistribution of corporate profits or income ordered by the directors and to the shareholders in proportiontheir respective shares in the corporation. State statutes mandate that corporations pay dividends fromonly certain funds. Additionally, dividends are always illegal if they are paid when the corporation isinsolvent or if they cause the corporation to become insolvent. If a shareholder knew that a dividend waillegal when she received it, she is personally liable and must return the funds to the corporation.

Rights of Directors, Officers, and Shareholders

Along with their specific roles and duties, directors, officers, and shareholders have specific rightwithin the corporation. Because shareholders are in a position of limited decision-making power, they harights that allow them to participate within the corporate Directors and officers also have specific rights tallow them to perform their duties within the corporation to the best of their abilities.

DIRECTORS RIGHTS

The unique responsibilities of corporate directors call for unique rights. Directors have four majorrights within a corporation: rights of compensation, participation, inspection and indemnification.


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All corporate directors have a right to compensation for their work, and different corporations gracompensation in different ways. Most directors hold other managerial positions within their companies areceive their compensation through those positions. Another common avenue for compensating directois paying them nominal sums as honorariums for their contributions to the company. In some corporatiodirectors can determine their own compensation.

Because directors are required to make informed business decisions, they have the rights ofparticipation and inspection. In other words, they have the right to get involved in and understand everyaspect of the business. A corporate director has the right to be notified of all meetings and has access t

all books and records.

Finally, because directors are in positions of great legal vulnerability, they have the right toindemnification. In other words, they have the right to reimbursement for any legal fees incurred in lawsagainst them.

OFFICERS RIGHTS

Because corporate officers are technically employees of the corporation, their rights are defined employment contracts drawn up by the board of directors or the incorporators. They are in a contractuarelationship with the corporation, and if they are removed from their positions in violation of the terms of

the contract, the corporation may be liable for breach of contract.

SHAREHOLDERS RIGHTS

Although shareholders most powerful right is the right to vote at shareholders meetings, they alspossess many other rights.

Stock certificates. Some corporations issue stock certificates to shareholders as proof of ownersin the corporation. Each certificate includes the corporations name and the number of shares represenby the certificate. A sample stock certificate is shown in Figure 39-1. A shareholders ownership in thecorporation, however, does not depend on his possession of the physical stock certificate. For example

the certificate is destroyed in a fire, the shareholders ownership in the corporation is not destroyed. Theshareholder can request a reissued certificate from the corporation, although he may be required toguarantee payment to the corporation if the original certificate should reappear at a later date.

In most states, however, shares may be uncertificated, meaning that the corporation will not issuphysical stock certificates. In these states, shareholders usually have a right to receive a letter from thecorporation including the information typically included on the face of a stock certificate.

Preemptive rights. Under common law, shareholders have preemptive rights. Preemptive rightsgive preference to shareholders to purchase shares of a new issue of stock. Each shareholder receivepreference in proportion to the percentage of stock she already own.

For example, suppose that a shareholder owns 1,500 shares in a corporation with 5000outstanding shares. She owns 30 percent of the corporations outstanding stock. But suppose that thecorporation decides to issue an additional 10,000 shares. If the corporation does not grant preemptiverights, her relative control of the corporation will fail because she now owns 1,500 of the corporations15,000 outstanding shares, or 10 percent of its stock. But if the corporation does reserve preemptiverights, and the shareholder elects to purchase 3,000 shares of the newly issued stock, then she owns4,500 shares of the corporations 15,000 outstanding shares (30 percent). Thus, with preemptive rightsshe can maintain her proportionate control of the corporation. This example is illustrated in Figure 39-2.

In most states, a corporations bylaws can negate preemptive rights, so the corporation determinwhether to grant preemptive rights. Preemptive rights are especially important for individuals who own

stock in close corporations due to the relatively small number o issued shares. If a close corporation


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issues additional shares, an individual shareholder may lose proportional control over the firm if he doesnot buy newly issued shares. But preemptive rights exist within the corporation, all shareholders receivestock warrants, which they can redeem for a certain number of shares at a specified price within a giventime period. Like shares of stock, stock warrants are often traded publicly on securities exchanges.

Figure 39-1 Example of a Stock Certificate

Figure 39-2 Preemptive Rights

GlobaI context Assigned Directors in Japan

A common corporate practice in Japan is for multiple corporations, banks, and companies to formhierarchical conglomerates known as keiretsus. There are two types of keiretsus. The first is a horizontakeiretsu, in which a powerful bank acts as the unifying agent under which several large corporations comtogether. With the exception of the bank, power is shared equally among the members. The second typis a vertical keiretsu. In contrast to horizontal keiretsus, vertical keiretsus are hierarchically ordered withunequal distribution of power. Large corporations often control several hundred subordinate companies

Power distribution within keiretsus plays a key role in determining the board of directors. Usually main bank or parent corporation assigns its own executives to serve on the boards of the less powerfulcompanies. The prosperity of these companies is important to the main banks and parent corporations.

The assigned directors act as overseers, consultants, and mentors. They want to promote simultaneouthe interests of the parent corporation and the growth of the subordinate ones. Thus, the subordinatecompanies do not view the assignment of directors as a sign of mistrust. To the Japanese the logic ispatent: If the success of the keiretsu and the success of each company are reciprocal, all parties shouldwork together to achieve the collective goal.

connecting to the core

Financial Accounting

Remember from your accounting class that there are two primary reasons for declaration of stoc

dividends. First, directors are said to use stock dividends to keep the market price of the stock affordablIf a corporation is making profits and fails to pay out cash dividends, the price of the stock could rise sohigh that investors might be discouraged from purchasing the stock. Not every successful company, ofcourse, sees a high stock price as a problem. In 2005, Berkshire Hathaway, for example, had not declaa dividend since 1967, and its price was roughly $75,000 per share.

Second, declaring stock dividends provides evidence of managements confidence that thecompany is doing well and will continue to do so.

Dividends. If directors fail to declare and distribute dividends, shareholders have the right to take legalaction to force the directors to declare the dividends. In many cases, however, directors have good reas

to hold dividends for a limited amount of time to finance major undertakings such as research orexpansion. Thus, shareholders must show that the directors are acting unreasonably and abusing theirdiscretion in withholding the dividend.

Inspection rights. All shareholders have the right to inspection in both statutory and common lawshareholder can, moreover, appoint an agent to conduct the inspection on her behalf. To prevent abusehowever, this right has many limitations. Shareholders can inspect records and books only if they ask inadvance and have a proper purpose. Many states have other statutory limitations to this right. Forexample, some states allow only shareholders with a minimum number of shares to inspect. Other staterequire that the shareholder own stock for a minimum amount of time before inspection. Additionally,corporations can deny shareholders right to inspect confidential corporate information, as trade secrets


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a shareholder feels his right of inspection has been wrongly denied, he can take the issue to court, asillustrated in Case 39-3.

PHILLIP PARKER v. CLARY LAKES RECREATION CASE ASSOCIATION, INC.COURT OF APPEALS OF GEORGIA, THIRD DIVISION534 S.E.2D 154 (2000)

Phillip Parker was a member of Clary Lakes Recreation Association (CLRA), a nonprofithomeowners association. In 1997, he filed a suit against CLRA alleging mismanagement and violation ocorporate bylaws. During the lawsuit proceedings, Parker sent a written request to CLRA to inspect allaccounting and/or corporate records of CLRA for the purpose of determining the performance ofmanagement and the condition of the corporation. These documents included records of all assetaccounts, invoices and billing statements, profit and loss statements, tax returns, corporate meetingminutes, and membership lists. CLRA refused the request. Parker then applied to the Superior Courtunder OCGA 14-3-1604 for an order directing CLRA to produce the documents. The judge deniedParker s request for all documents except the minutes from certain meetings. Parker appealed.

JUDGE RUFFIN: OCGA 14-3-1602 divides corporate records into two categories. The firstincludes articles of incorporation, by-laws, minutes of meetings, and corporate resolutions. These recorare accessible to any member who makes a written request at least five business days in advance. Thesecond category includes excerpts of minutes of certain special corporate meetings, accounting record

the corporation, and the membership list. Members may inspect these documents only if:

1. The demand is made in good faith and for a proper purpose.

2. The member describes the purpose.

3. The records are directly connected with this purpose.

4. The records are to be used only for that purpose

Because virtually all of the documents Pa sought fell into the second category, he had to show th

he wanted them for a proper purpose. The trial judge found that Parker did not sufficiently demonstratproper purpose. We have held that a trial courts findings with respect to whether an applicant has showa proper purpose to compel production of corpora documents must stand unless it is clearly erroneou

After reviewing the record, including the transcript d the hearing, we cannot say that the trial judgesfindings are clearly erroneous. AFFIRMED

Share transfer. The law generally permits property owners to transfer their property to anotherperson, and, in most cases, stock is considered transferable property. In closely held corporations,however, transfer of stock is usually restricted so that shareholders can choose the corporations othershareholders. Thus, shareholders in close corporations enjoy the corporate equivalent of the right ofdelectus personae. (Recall from Chapter 35 that the right of delectus personae allows partners to choothe individuals with whom they will go into business.) Restrictions on stock transferability must be includon the face of the stock certificate.

One method of restricting stock transferability is called the right of first refusal. If a corporationestablishes this right in its bylaws, the corporation or its shareholders have the right to purchase anyshares of stock offered for resale by a shareholder within a specified period of time.

Corporate dissolution. Shareholders have the right to petition the court to dissolve their corporatiif they feel the company cannot continue to operate profitably. According to Section 14.30 of RMBCA, ifcorporation engages in any of the following behaviors, shareholders have a legal right to initiatedissolution.

1. Directors are deadlocked in managerial decisions and harming the corporation.


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2. Directors are acting in illegal, oppressive, or fraudulent ways.3. Assets are being wasted or used improperly.4. Shareholders are deadlocked and cannot elect directors.

Once dissolution has taken place and the corporation has settled its debts with its creditors,shareholders have a right to receive the remaining assets of the company in proportion to the number oshares they own.

Shareholders derivative suit. One of the shareholders most important rights is the right to aderivative suit. If corporate directors fail to sue when the corporation has been harmed by an individual,another corporation, or a director, individual shareholders can file a shareholders derivative suit on behof the corporation. To be able to file a shareholders derivative suit in most jurisdictions, a shareholdermust have held stock at the time the alleged wrongdoing. Before filing the suit, the shareholder must filecomplaint with the board of directors. If nothing is done in response to the complaint, the shareholder mfile a complaint can proceed with the suit. Enron shareholders have brought shareholders derivative suinst various directors and officers from Enron. Case 39-4 concerns a derivative suit filed by a plaintiff whdid not go to the board of directors before filing.

Derivative suits are important when shareholders believe that directors of the corporation areharming the corporation. It seems highly unlikely that directors will sue themselves for damages theycaused in these cases. Thus, the shareholders derivative suit is important to hold the directors

accountable for their behavior. Because the shareholder files this suit on behalf of the corporation, alldamages recovered are given to the corporation and not the individual shareholder.

Shareholders direct suit. In addition to their right to bring suit on behalf of the corporation,shareholders can also bring a direct suit against the corporation. In a shareholders direct suit, theshareholder alleges that she has suffered damages caused by the corporation. Several examples ofshareholders direct suits have already been discussed. For example, shareholders can bring a direct sif the board of directors is improperly withholding dividends or if a shareholder is wrongly denied his righto inspect corporate records. If a court awards damages as a result of a shareholders direct suit, thedamages go to theshareholder personally.

If more than one shareholder has suffered damages caused by the same act of the corporation, tshareholders may bring a class action suit against the corporation. A class action suit is a suit that isbrought by one shareholder on behalf of a group of shareholders and is aimed at recovering damages fthe entire group. Exhibit 39-3 lists the respective rights of directors, officer, and shareholders.

MARQUIT v. DOBSON

CASE 39-4 U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

U.S. DIST. FED. SEC. L. REP. (CCH) P90, 734 (1999)

Marquit filed a complaint that the management of three closed-end mutual funds in which sheowned stock (The Central European Equity Fund, The Spain Fund, and The New Germany Fund)breached their fiduciary duties to their shareholders by trading stock at discounted rates. By trading atthese reduced rates, Marquit alleged that they were able to ensure large numbers of outstanding sharewhich led to large managerial fees. The defend ants moved to dismiss these complaints on the groundsthat the plaintiffs complaints were derivative and she failed to seek action from the board of directorsbefore filing her complaint.JUDGE MARTIN: Because plaintiffs claims are derivative, they must be pled in accordance with FRCP23.1. Rule 23.1 requires plaintiff to first seek action from the board of directors or to show that such arequest would be futile. In this case, plaintiff did not seek action from the funds boards before institutingthese actions, and she has not pled that such a request would be futile.


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Nor does it appear from the face of any of the complaints that a demand would be futile. UnderMaryland law, a shareholder demand would not be futile if the fund had at least two disinterested directThe New Germany Fund and The Spain Fund both have more than two disinterested directors who havno association with any other fund managed by Deutsche Bank. While the Central European Equity Funhas no director who does not serve on the board of at least one other fund managed by Deutsche Bankmore than two of these serve only on one other board and there is n allegation that their compensation so substantial that it would have an impact on their independence. It is doubtful that the mere fact that adirector serves on the board of two funds would be sufficient to compel the conclusion that he was notdisinterested. DISMISSED

Exhibit 39-3 Summary of the Directors Right to compensation Rights of Directors, Right toparticipation Officers, and Right to inspection Shareholders

Right to indemnification

Officers Rights determined in employment contract

Shareholders Stock certificates

Preemptive rights

Right to dividends

Right to transfer shares

Inspection rights

Right to corporate dissolution

Right to file a derivative suit

Right to file a direct suit

CASE OPENER WRAP UP

Hi-Way and Ken Corp.As shareholders in Ken Corp., the plaintiffs did have a right to bring suit against the two corporations forpotential losses. To prove that James and Thomas Marcuccilli had breached their fiduciary duty, ElizabMarcuccilli et al. had to prove that the two men had failed to act in good faith in accordance with thestatute. Although there is a great deal of ambiguity in determining what it means to act in good faith, theappellate court determined that the burden to prove that the men did not act in good faith fell to theplaintiffs. Thus, unless the plaintiffs could prove that the directors had acted in bad faith, it did not matteto the court whether they brought a direct or derivative action against the corporations. According to

the court, the plaintiffs failed to meet their burden.

The plaintiffs may have been able to demonstrate that James and Thomas did not act in good fahad they shown that the two men were engaging in personal self-dealing. To do so, the plaintiffs wouldhave had to show that the financial losses they incurred were the result of intentional actions taken by thdirectors for personal gain.

Chapter Summary

Quorum

A corporate directors meeting is valid only when a minimum number of directors is present at the

meeting; that minimum number is called a quorum.


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Proxy materials

Proxy materials are often sent out to the shareholders before their annual meeting; these proxymaterials detail shareholders' ideas for the company.

Proxy

A proxy provides authorization for a third party to vote in place of a shareholder at the shareholdmeeting.

Voting trust

A voting trust is an agreement between a stockholder and a trustee in which the stockholdertransfers his or her legal share titles to the trustee, who is then responsible for voting for those shares.

Fiduciary duties

Fiduciary duties are those legal duties to a corporation that individuals within the corporation havThe following are the primary fiduciary duties:

Duty of care: Directors and officers must act in good faith and in a manner that they feel is in

accordance with the best interests of the company.

Duty of loyalty: Directors and officers must put the corporation's interest above their own inbusiness decisions. When a director or officer acts in a manner that violates this duty of loyalty, it is callself-dealing.

Duty to disclose conflict of interest: Directors and officers must fully disclose conflicts of interest tarise in corporate transactions.

Business judgment rule

The business judgment rule provides that directors and officers are not liable for decisions that

harmed the corporation if they were acting in good faith at the time of the decision.

Watered stock

When stock is issued to individuals at a value below the fair market value, that stock is termedwatered stock.

Par-value shares

Par-value shares have a fixed face value noted on the stock certificate.

No-par shares

Those stock shares without a par value are called no-par shares.

Stock subscription agreement

A stock subscription agreement contractually obliges an individual to buy shares in a corporation

Preemptive rights

On occasion preferential or preemptive rights are given to shareholders to purchase shares of anew issue of stock. This preference is given in proportion to the percentage of stock that the shareholde

already owns.


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Dividend

Dividends are distributions of corporate profits or income ordered by the directors and paid to theshareholders in proportion to their respective shares in the corporation.

Right of first refusal

The right of first refusal given to existing shareholders to purchase any shares of stock offered foresale by a shareholder within a specified period of time.

Inspection rights

Inspection rights protect shareholder interests by giving them the right to inspect the corporationbooks and records after asking in advance to inspect and having a proper purpose.

Stock warrants

Stock warrants are vouchers issued to shareholders entitling them to a given number of shares aspecified price.

Shareholder's derivative suit

A shareholder's derivative suit is filed by a shareholder of a corporation when corporate directorsfail to sue in a situation where the corporation has been harmed by an individual or another corporationBefore the suit can be filed, the shareholder must file a complaint with the board of directors; theshareholder can proceed with the suit only if nothing is done in response to the complaint.

Question 1 1 of 1 pointsA common corporate practice in Japan is for multiple corporations, banks, and companies to form hierarchicalconglomerates known as ______.

Selected Answer: Keiretsus

Question 2 1 of 1 points

Decisions of courts in ______ have a significant impact because more than half of U.S. public traded corporations arincorporated there.

Selected Answer: Delaware


How is the number of corporate directors determined?

Selected Answer: According to the corporate articles or bylaws


Which of the following gives preference to shareholders to purchase shares of a new issue of stock?

Selected Answer: Preemptive rights


While ordinary decisions made by directors require a ______ vote, more important decisions sometimes require a __vote.


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Selected Answer: Majority, two-thirds

Bl Chapter 39

Documents

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