The Participants in the Corporation

Chapter 9

A corporation is composed of three different classes of individuals: shareholders, directors, and officers. They all have their own rights and duties.

Statutes authorize the creation of corporations and define the roles of the various participants.

Shareholders A shareholder is someone who owns a

percentage of a corporation and is protected by limited liability.

A “share” is literally the physical representation of a predetermined amount of the business.

One of the first requirements of a new corporation is to determine how many shares to issue.

If the company decides to issue 1,000 shares and distribute these shares among four people, each would own 25% of the business.

Ownership of shares in a corporation brings with it two fundamental rights:

The right to participate in the control of the corporation by voting

The right to share in the profits of the business

Shareholders do not have all of the rights we often associate with ownership.

Shareholders are not authorized to sell corporate property, negotiate contracts on behalf of the corporation, or take individual action to hire and fire employees.

A person must have the right to possess stock and to exercise the rights normally associated with share ownership.

A shareholder can be a natural person or another corporation.

The Nature of a Shareholder A person must consent to becoming a

shareholder in a corporation.

Stock ownership is a contract: The person agrees to assume the duties of being a shareholder in exchange for a vote on corporate matters and a share of the profits in the business.

Qualifications forBecoming a Shareholder

One can become a shareholder by receiving shares as one of the founding members of a corporation or by purchasing it from others.

Shareholders have the right to refuse to sell their stock to particular individuals.

Shareholders do not have the right to control what current shareholders do with their stock.

Individuals who normally cannot enter into contracts are permitted to own shares.

Minors, for example, who are barred from entering into most types of contracts, are permitted to own shares in a corporation and to receive the same benefits of this ownership as any other shareholder (Wuller v. Chuse Grocery Co., 241 Ill. 398, 89 N.E. 796 (1909)).

Registered Ownership Ownership of stock does not necessarily mean

physical possession of the actual stock certificates.

The certificates are only the symbols of ownership.

Shareholder rights are determined in the articles of incorporation, the bylaws, and any shareholder agreements.

Stock Certificates Printed documents that indicate share

ownership.

Stockholder status comes from the legal rights a person has acquired in the corporation, not the mere possession of a stock certificate.

Shareholder Rights Among the rights granted to shareholders are:

The right to vote on management issues

The right to a percentage of corporate earnings

The right to corporate assets if the company should be dissolved

The right to elect directors

The right to vote on corporate issues is considered to be one of the most important.

Voting Trusts An agreement between shareholders to

vote in a certain way.

The shareholders cannot enter into an agreement that ignores the applicable law.

Proxy Voting Shareholders can temporarily transfer their

voting rights to one individual and allow that individual to vote all the shares in one way.

It allows corporate members a method to exercise greater control over the corporation.

Shareholder Meetings A shareholder meeting is where the

shareholders are permitted to make their voices heard by voting on corporate policies, profit sharing, management issues, and perhaps the most important right: the election of the individuals that comprise the board of directors.

Directors

Directors have many duties that include, but are not limited to:

Election of the directors

Management of the business of the corporation (Olson Bros. v. Englehart, 42 Del. Ch. 348, 211 A.2d 610 (1965), aff'd, 245 A.2d 166 (Del. 1968)).

Control of the business and delegation of duties to officers to put policy into practice (Cahall v. Lofland, 12 Del. Ch. 299, 114 A. 224 (1921), aff'd, 13 Del. Ch. 384, 118 A. 1 (1922)).

Duties Directors owe a fiduciary duty to their

shareholders and the corporation.

A fiduciary is someone who has ethical, moral, and financial duties to act in the best interests of another.

Conflicts of Interest

The fiduciary duty imposed on directors is straightforward: They owe the corporation an undivided loyalty that prohibits them from self-dealing and conflicts of interest (Talo-Petro. Corp. of Am. v. Hannigan, 40 Del. 534, 14 A.2d 401 (1940)).

Directors have a duty to refrain from doing anything in their capacity as director of a corporation that would injure corporate interests, deprive it of profit, or take personal advantage of corporate information (Guth v. Loft, Inc., 23 Del. Ch. 255, 5 A.2d 503 (1939), aff'd, 25 Del. Ch. 363, 19 A.2d 721 (1941)).

Limitations on Directors The corporation might impose a limitation that

only someone who owns shares in the corporation can qualify as a director.

A director may be removed by vote of the shareholders.

Shareholder Control of Directors Shareholders elect the directors, and they

have the power to remove them.

They have the right to remove a director for “good cause,” such as a proven allegation of fraud or embezzlement.

Officers An officer is an individual hired or selected

by a board of directors who has specific authority, such as the ability to bind the corporation to contracts and other agreements.

Most corporations have the following classifications of officers:

President

Vice President

Treasurer

Secretary

President The corporate president is the person

empowered to act as the agent for the corporation (Joseph Greenspon's Sons Iron & Steel Co. v. Pecos Valley Gas Co., 34 Del. 567, 156 A. 350 (1931)).

Most corporate presidents act as chief executive officer, which gives them the power to:

Decide whom to hire and fire Manage the business Oversee other employees Sign contracts Enter into negotiations on behalf of the

corporation

Vice President Corporate vice presidents have very little

to do with the day-to-day function of a corporation.

Usually, they are only authorized to take action in specific situations, such as when the corporate president is unavailable.

Treasurer

The treasurer is the person responsible for maintaining records of the corporation’s finances by ensuring that all corporate checking accounts, revenues, and accounts receivable are accurate and up-to-date.

Secretary The corporate secretary is responsible for

maintaining nonmonetary records for the corporation.

The corporate secretary keeps the corporate seal and the records of all shareholder and directors’ meetings and also ensures that proper documentation is filed with the state secretary of state’s office.

Difference betweenOfficer and Agent

Officers are employees of the corporation who have general duties.

Agent is a broad term encompassing any individual who works, even temporarily, for another’s interest.

“Insider Trading”

Insider trading is a term that is often used to describe unethical, or illegal, activity by a corporate officer.

Not all insider trading is illegal.

Summary There are three different classes of

members in a corporation.

Shareholders: the corporation and their shareholder rights include the right to vote on management issues in the corporation itself and to share any of the profits.

The officers carry out the business of the corporation.

They are responsible for paying bills, insuring that the product is manufactured, and double-checking to make sure that payments have been received.

They are also responsible for marketing and advertising the business.

Summary

Directors consist of individuals who are responsible for the management of the business.

Directors hire and fire employees, including corporate officers.

Summary

Directors have a fiduciary responsibility to shareholders, and that responsibility is reflected on the various duties imposed upon them.

Corporate directors must always act in the best interests of the shareholders and avoid conflicts of interest and other ethical dilemmas that might put their own personal interests ahead of those of shareholders.

Summary