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Corporations Governance and Fundaenta! C"an#es$

Core Concepts
A% S"are"o!der &i#"ts
1. Shareholders participate indirectly in corporate policy and management by meeting annually
and electing directors. They can act only at a meeting.
2. Shareholders must approve 'undaenta! c"an#es: amendments to the articles of
incorporation; all actions of merger or consolidation; and any proposal by directors to sell,
lease, or exchange all or substantially all of the corporations assets.
. Shareholders have votin# ri#"ts that may include cumulative voting, preemptive rights, the
right to inspect the boo!s and records, and the right to sue the corporation or on behalf of
the corporation.
B% Board o' Directors
1. " minimum of one director is re#uired. Some states re#uire three, but if there are fe$er than
three shareholders, the number may be e#ual to the number of shareholders. %oreover,
under the &%'(", the shareholders, by unanimous agreement, may dispense $ith a board.
'ut such an agreement is ineffective if the corporations shares are publicly traded. )nside
directors are also officers or employees of the corporation. "n outside director is not an
officer or employee of that corporation.
C% Board Aut"orit( and Actions
1. *hile the directors formulate overall corporate policy, they are neither trustees nor agents of
the corporation. " director cannot act individually to bind the corporation.
D% Directors) Duties
1. +irectors have a fiduciary relationship to the corporation and its shareholders. They can be
held personally liable for failure to be informed of matters internal and external to, but also
relevant to, the corporation. " directors conduct is tested ob,ectively. The &%'(" re#uires
that a director discharge his-her duties in good faith, $ith reasonable care, and in a manner
.s/he reasonably believes to be in the best interests of the corporation. )n addition, directors
o$e a dut( o' !o(a!t( to the corporation and its shareholders.
2. T"e Sar*anes-+,!e( Act o' -..- /S+01 relates to corporate #overnance. )t applies to
issuers of publicly traded securities sub,ect to federal securities la$s.
a. )t re#uires that each member of the audit coittee, including at least one $ho is a
'inancia! e,pert, be an independent member of the issuers *oard o' directors. "n
independent director is not affiliated $ith, and receives no compensation .other than for
service on the board/ from, the issuer.
1/ The audit committee must be directly responsible for appointing, compensating,
and overseeing the $or! of the registered pu*!ic accountin# 'ir employed by
the issuer.
2/ )n addition, the firm must report direct!( to the audit committee. This firm is
prohibited from performing many nonaudit services for the client.
/ The audit committee also must implement procedures for the receipt, retention,
and treatment of cop!aints a*out accountin# and auditin# atters and be
appropriate!( 'unded by the issuer.
0/ )t may hire independent counsel or other advisors.
1 2223 4leim 5ublications, )nc. and-or 4leim )nternet, )nc. "ll rights reserved. +uplication prohibited.
E% Business 2ud#ent &u!e
1. (ourts avoid substituting their business ,udgment for that of the corporations officers or
directors. The rule protects a director from personal liability if .s/he acted in good faith; $as
not motivated by fraud, conflict of interest, or illegality; and $as not guilty of gross
2. +''icers are elected or appointed by the board. They generally serve at the $ill of the
board, $hich may remove any officer at any time. 6o$ever, the board may not remove
$ithout cause an officer elected or employed by the shareholders. The officers are agents
of the corporation. They have e,press aut"orit( conferred by the byla$s or the board.
They have ip!ied aut"orit( to do things that are reasonably necessary to accomplish their
express duties. 7fficers, li!e directors, o$e fiduciary duties to the corporation.
. 8nder S79, the c"ie' e,ecutive o''icer and c"ie' 'inancia! o''icer of the issuer must
certi'( that 'inancia! stateents and disc!osures :fairly represent, in all material respects,
the operation and financial condition of the issuer.; This statement must accompany the
audit report.
a. The annual report must contain ana#eent)s assessent o' t"e e''ectiveness o'
interna! contro! and the issuers procedures for financial reporting. The auditor must
express separate opinions on management<s assessment and on the clients internal
b. )t is illegal for an officer or director to exert iproper in'!uence on t"e conduct o' an
audit $ith the intent to ma!e financial statements materially misleading.
c. )t is also illegal in most cases for an officer or director to receive a personal loan from
the issuer.
d. )f an issuer materially restates its 'inancia! stateents as a result of material
noncompliance $ith reporting re#uirements, the (=7 and (>7 must return to the
issuer any amounts received $ithin 12 months after the issuance or filing in the form of
incentive? or e#uity?based compensation and profits from sale of the issuers securities.
e. The S=( may 'ree3e e,traordinar( pa(ents to directors, officers, and others during
an investigation of securities la$ violations.
f. The S=( also may prohibit anyone convicted of securities 'raud from serving as an
officer or director of a publicly traded firm.
F% Tender +''ers
1. " merger, consolidation, or purchase of substantially all of a corporations assets re#uires
approval of the board of directors of the corporation $hose shares or assets are ac#uired.
"n ac#uiring corporation may bypass board approval by extending a tender offer directly to
shareholders to purchase a certain number of the outstanding shares.
1 2223 4leim 5ublications, )nc. and-or 4leim )nternet, )nc. "ll rights reserved. +uplication prohibited.