After studying this chapter you will be able to understand: Why is it important to regulate the interactions among directors, officers, and shareholders within a corporation? What is the role of a director, an officer, and a shareholder? What are the duties of directors, officers, and shareholders? In what ways can a director, officer, and shareholder be held liable? What are the rights of directors, officers, and shareholders?
Chapter 39 Corporations: Directors, Officers, and Shareholders Copyright © 2015 McGrawHill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education Summary of Roles of Directors, Officers, and Shareholders Directors Officers Shareholders Vote on important corporate decisions Appoint and supervise officers Declare and pay corporate dividends Manage corporation Run “daytoday” business of firm Agents of corporation Elect board of directors Approve major board decisions 392 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 393 Exhibit 392: Liability of Directors and Officers Can be held personally liability 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 394 Exhibit 393: Liability of Shareholders Shareholders liable (to extent of their investment) for debts of corporation Shareholders liable for breach of contract if stock subscription agreement signed and no stock purchased Shareholders liable for watered stock Shareholders personally liable for receiving illegal dividends 395 Summary of Rights of Directors, Officers, and Shareholders Directors Officers Shareholders Right to Compensation Right to Participation Right to Inspection Right to Indemnification Rights determined in employment contract 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 396 Corporations: Directors, Officers, and Shareholders—Terminology Quorum (Definition): Minimum number of directors necessary to validate corporate directors’ meeting 397 Corporations: Directors, Officers, and Shareholders—Terminology Proxy (Definition): Provides authorization for third party to vote in place of shareholder at shareholders’ meeting 398 Corporations: Directors, Officers, and Shareholders—Terminology Voting Trust (Definition): 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 399 Corporations: Directors, Officers, and Shareholders—Terminology Business Judgment Rule (Definition): Provides that directors and officers are not liable for decisions that harmed corporation if they were acting in good faith at time of decision 3910 Corporations: Directors, Officers, and ShareholdersOther Relevant Terminology Stock Subscription Agreement: Contractually obliges individual to buy shares in corporation ParValue Shares: Fixed face value noted on stock certificate NoPar 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 Stock Warrants: Vouchers issued to shareholders, entitling them to given number of shares at specified price 3911 Corporations: Directors, Officers, and ShareholdersOther Relevant Terminology (Continued): 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 3912 ...Summary of Roles of Directors, Officers, and Shareholders Directors Officers Shareholders Vote on important corporate decisions Appoint and supervise officers Declare and pay corporate ... agreement signed and no stock purchased Shareholders liable for watered stock Shareholders personally liable for receiving illegal dividends 395 Summary of Rights of Directors, Officers, and Shareholders Directors... Corporations: Directors, Officers, and Shareholders Terminology Quorum (Definition): Minimum number of directors necessary to validate corporate directors’ meeting 397 Corporations: Directors, Officers,