Dynamic business law 4e kubasek 4e CH39

Chapter 39 Corporations: Directors, Officers, and Shareholders Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO39-1: Why is it important to regulate the interactions among directors, • • • • officers, and shareholders within a corporation? LO39-2: What is the role of a director, an officer, and a shareholder? LO39-3: What are the duties of directors, officers, and shareholders? LO39-4: In what ways can a director, officer, and shareholder be held liable? LO39-5: What are the rights of directors, officers, and shareholders? 39-2 Chapter 39 Hypothetical Case • Having built a successful lawn care service over the past five years, Brian Creighton has decided to incorporate his business The new company, Pastures of Plenty Lawn Care Service, Inc., will have four shareholders: Creighton, his wife Tamara, his father Albert, and his father-in-law Hal Stockton Creighton remembers from his college business law class that the the board of directors has an important role in the operation of a corporation—specifically, deciding what action the corporation should take when facing an important decision Creighton wonders whether his new company must have a board • Will Pastures of Plenty Lawn Care Service, Inc be required to have a board of directors? 39-3 Chapter 39 Hypothetical Case • Zaxxone Oil Company, Inc., headquartered in Mobile, Alabama, is a multinational corporation with 2012 annual profits of $45 billion Zaxxone has 12 board members who serve the company on a part-time basis, with each board member receiving an average of $300,000 per year in compensation Emily Chanel, a pre-law student at the University of Alabama at Mobile, is very familiar with Zaxxone, and she has studied her business law textbook material on corporations and their directors, officers, and shareholders very carefully She recalls that a board of directors and its members owe a strict fiduciary duty to the corporation; as part of this fiduciary duty, the board must exercise oversight in monitoring the actions of corporate employees, including the executives and officers of the corporation 39-4 Chapter 39 Hypothetical Case • Chanel ponders, "How can board members of a major corporation be truly objective when they are being paid such lavish sums of money? Wouldn't Zaxxone board members have a 'don't rock the boat' mentality in terms of exercising their oversight function? "Why, for example, would a Zaxxone board member question the practices of the company's high-ranking executives and officers when such an inquiry might jeopardize his or her $300,000 per year annual compensation? Make no bones about it—if I were a board member at Zaxxone, I would probably be a 'yes-woman' and approve of everything the chief executive officer, the chief financial officer, and the chief operating officer wanted to do!" • How would you respond to Chanel's questions and overall concerns about board member compensation and objectivity? 39-5 Critical Corporate Actors • Directors • Officers • Shareholders 39-6 Why Is Regulation Important? • Each has different interests, sometimes interests conflict • Directors and officers' goals: Survival of institution, keeping their jobs • Shareholders' goal: Raising value of stock • Different roles regulate one another and maintain checks and balances 39-7 Roles of Directors, Officers, and Shareholders • Directors • • • • Vote on important corporate decisions • • Run day-to-day business of firm • • Elect board of directors Appoint and supervise officers Declare and pay corporate dividends Manage corporation • Officers Agents of corporation • Shareholders Approve major board decisions 39-8 Fiduciary Duties • Definition: Duties to corporation that individuals within corporation have • Primary fiduciary duties include: • Duty of care • Duty of loyalty • Duty to disclose conflict of interest 39-9 Liability of Directors and Officers • Can be held personally liable for their own torts and crimes • Can be held personally liable for torts and crimes of other employees they • • supervise Can be held liable for wrongful transactions involving company stock Cannot be held liable for decisions that harm company if they were acting in good faith at time of decision 39-10 Liability of Shareholders • Liable (to extent of their investment) for debts of corporation • Liable for breach of contract if stock subscription agreement signed and • • no stock purchased Liable for watered stock Personally liable for receiving illegal dividends 39-11 Rights of Directors, Officers, and Shareholders • Directors • • • • Right to compensation • Rights determined in employment contract Right to participation Right to inspection Right to indemnification • Officers • Shareholders • • • • • • • • Stock certificates Preemptive rights Right to dividends Right to transfer shares Inspection rights Right to corporate dissolution Right to file derivative suit Right to file direct suit 39-12 Terminology Relating to Directors, Officers, and Shareholders • • • Quorum: Minimum number of directors necessary to validate corporate directors' meeting Proxy: Provides authorization for third party to vote in place of shareholder at shareholders' meeting Voting trust: Agreement between stockholder and trustee in which stockholder transfers his/her legal share titles to trustee; trustee is then responsible for voting for those shares • Business judgment rule: Provides that directors and officers are not liable for decisions that harmed corporation if they were acting in good faith at time of decision 39-13 Other Terms Relating to Directors, Officers, and Shareholders • • • • • Stock subscription agreement: Contractually obliges individual to buy shares in corporation • Stock warrants: Vouchers issued to shareholders, entitling them to given number of shares at specified price Par-value shares: Fixed face value noted on stock certificate No-par shares: Stock shares without a par value Watered stock: Stock issued below its fair market value Preemptive rights: Preferential rights given to existing shareholders to purchase shares of new stock issue; preference given in proportion to percentage of stock shareholder already owns 39-14 Other Terms Relating to Directors, Officers, and Shareholders (cont'd) • • • • Dividend: Distribution of corporate profits/income ordered by directors and paid to shareholders in proportion to their respective shares in corporation Inspection rights: Protect shareholder interest by giving them right to inspect corporation's books and records after asking in advance to inspect and having proper purpose Right of first refusal: Given to existing shareholders to purchase any shares of stock offered for resale by shareholder within specified period of time Shareholder's derivative suit: Filed by corporate shareholder when corporate directors fail to sue in situation where corporation has been harmed by individual/another corporation 39-15 Chapter 39 Hypothetical Case • Dr Charles Finnegan is a newly-appointed member of the Board of Directors of Walnut Grove Community College (WGCC) in Walnut Grove, California The position is unpaid, but it does come with the perks of positive exposure and prestige in the local community At his first board meeting, the directors are discussing and considering for approval service contracts between WGCC and the local business community The third contract for consideration is a janitorial service contract, valued at $150,000, between WGCC and Antiseptic Andy Cleaning Service, Inc Finnegan is quite surprised; after all, Antiseptic Andy is owned and operated by his first cousin, Andrew Deere Cousins Finnegan and Deere have not seen each other in three years, nor have they otherwise communicated during that period of time The chairperson of the Board of Directors calls for a vote on the janitorial service contract According to WGCC regulations, the board must unanimously approve contracts with the business community 39-16 Chapter 39 Hypothetical Case (cont'd) • Finnegan is perplexed If he votes and says nothing about his kinship to Deere, he still feels he can sleep at night, since he will not receive any financial gain from the contract If he discloses his kinship to Deere, he fears that Deere's business opportunity will be jeopardized • Does Finnegan have a legal obligation to disclose his relationship to Deere? Would it be a conflict of interest for Finnegan to vote in favor of the contract? Does he have an ethical obligation to disclose the relationship? 39-17 Chapter 39 Hypothetical Case • Marc Mayweather is the brother of tech genius Brian Mayweather He has been a strong financial supporter of his brother's many business ventures, most of which resulted in substantial losses to both brothers Brian Mayweather hit it big with his latest fledgling corporation, ParaDoubt Last year, ParaDoubt, a public company with more than 2,000 investors, launched a mobile app called Identibug The app allows a smartphone user to take a photo of a pest and immediately identify what the pest is and the best ways to get rid of it Marc Mayweather was an initial investor in ParaDoubt, just as he was with his brother's previous companies, but his stake was relatively small—only 10 percent of the company's shares 39-18 Chapter 39 Hypothetical Case (cont'd) • A year ago, pest control giant Pestex approached ParaDoubt about an acquisition Brian Mayweather shared information about the upcoming acquisition with his brother and offered him an opportunity to buy another 5,000 shares (about five percent of the overall total of shares in the company) at a greatly reduced price Marc Mayweather joyfully accepted his brother's offer and bought the shares The deal with Pestex was finalized a month ago, and ParaDoubt is now part of Pestex An original ParaDoubt shareholder, who is now also a Pestex shareholder, learned of Marc Mayweather's on-the-cheap stock buy just before the acquisition was announced and has demanded an emergency shareholder meeting • Was Brian Mayweather wrong to share information of the upcoming acquisition with his brother? Was he wrong to offer up additional shares a reduced price? Was Marc Mayweather wrong to accept? What are the Mayweather brothers' respective liabilities in this matter? Explain your answer 39-19 ... • Having built a successful lawn care service over the past five years, Brian Creighton has decided to incorporate his business The new company, Pastures of Plenty Lawn Care Service, Inc., will... Creighton, his wife Tamara, his father Albert, and his father-in -law Hal Stockton Creighton remembers from his college business law class that the the board of directors has an important role... year in compensation Emily Chanel, a pre -law student at the University of Alabama at Mobile, is very familiar with Zaxxone, and she has studied her business law textbook material on corporations