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Chapter 45 Review Sheet Introduction to Corporations Nature of a Corporation  A corporation is recognized as a legal entity, existing apart from, and

independent of, its owners or investors. o The law recognizes a corp. as a fictitious being or artificial person.  The corporation has unlimited liability for corporate obligations, while the investors are only liable to the extent of their investment.  The corporation is not affected by changes in ownership.  The corp. can own property, enter into contracts, sue, be sued, and may be subject to criminal liability (though it is entitled to many of the protections accorded natural persons under state and federal constitutions). Types of Corporations  Public Corporation‐ a corp. created by the government for political purposes to administer civil government, and often invested with local legislative powers. o Ex: School districts, cities, counties, the FDIC, etc.  Private Corporation‐ those formed by private individuals for private purposes and included, generally, non‐profit and business organizations.  Closely‐held Corporation‐ one whose shares are owned by one shareholder or a closely knit group of shareholders. o No public market exists for the corp.’s shares, and the owners may impose restrictions on the transfer of shares. o Generally operate internally like proprietorships or partnerships, but use the corporate form for limited liability or tax advantages.  Publically‐held Corporation‐ one whose shares are owned by many people. o Have their shares traded on securities exchanges for which public share price quotations exist, and shares are freely transferable to new owners. o Unlike closely‐held corps, the participation of shareholders in management is limited to electing corporate directors and voting on major corp. issues.  Professional Corporation (or association)‐ a closely‐held corp. formed by professionals such as doctors, lawyers, accountants, etc. o Allowed in all states and D.C. o All shareholders must be licensed in the profession involved.  C and S Corporations o The income of most corporations (known as C corps) is subject to double taxation, where the corp. is taxed first on its own tax return

is authorized to issue. prepare a document known as the articles of incorporation. o To avoid this situation certain corporations may elect to be taxed under subchapter S of the Internal Revenue Code. known as incorporators.  Under the RMBCA. the secretary will issue a certificate of incorporation. who reviews it. Contents of Articles  In many states official forms are used.  Typically. even among MBCA jurisdictions. shareholders. because the Act has been frequently amended and is intended merely as a drafting guide.  Then the articles of incorporation are delivered. the number of shares of stock the corp. o S corps pay no income tax at the corporate level. incorporation begins when the certificate is issued or articles are filed. o Differences between jurisdictions are still common.  Corporate law is also derived from other statutory and common law sources.and then shareholders are taxed on the dividends they receive from the corp. corporation law is heavily influenced by the Revised Model Business Corporation Act.  In many jurisdictions. o To qualify. and must meet other requirements of the federal tax code. similar to partnerships. Sources of Corporation Law  Most small businesses are incorporated under the law of the jurisdiction in which their property and principal place of business are located. but the articles of incorporation must contain certain information prescribed by statute regardless of their format. and the public. rather income is passed through the corp.  The following elaborates upon certain typical provisions of the articles: . and taxed directly to shareholders. may have no more than 100 shareholders and one class of stock.  If the articles conform to legal requirements. and the name & address of each incorporator. the corp. the articles need only state the name of the corporation. o These model acts are designed to balance the interests of management. not uniform statute. corporations. together with the necessary fee. the address of the registered office & name of the corporation’s registered agent. usually the secretary of state. Incorporation and Admission Procedures for incorporation  One or more persons. to an appropriate state official.

Corporate Duration  All modern statutes permit perpetual corporate existence.  At the meeting. and may not be deceptively similar to any other corporate name. amend. o Bylaws are a set of rules governing the corps internal affairs. Organization of the Corporation  After the certificate of incorporation is issued.  Changes in the registered office or agent may be made by filling a statement outlining the change with the state secretary of state. Corporate Purposes  The modern trend is to authorize extremely broad corporate purpose clauses. but simply presumes that every corporation is organized to conduct any lawful business unless a narrower purpose is outlined in the articles. both shareholders and the board may make. other notices or demands. shares of stock are issued. if desired. Registered Office and Agent  A corporation is required to maintain a registered office with a registered agent in the state of incorporation.  Corp. which often is presumed unless a limited period of duration is stated in the articles. bank account that designates those persons authorized to sign checks.  In addition corporate bylaws. names are allocated on a first‐come‐first‐serve basis.  The registered office need not be the principle place of business. are adopted. Corporate Name  Generally.  The registered agent is the person authorized to receive service of process on the corporation. a resolution is made to open a corp. or to dispense with them entirely. the directors are formally elected. pre‐ incorporation contracts are adopted or rejected.” “incorporated. the directors named in the articles hold a meeting to complete the organization of the corp. and official communications from the state. o May contain any provision as long as it is consistent with the law and articles of incorporation. officers are appointed. or repeal the bylaws.” “company.  The RMBCA does not require that the articles contain purpose clauses. and a corporate seal is adopted. unless that power is reserved exclusively by the shareholders in the articles of incorporation. the corporate name must include language indicating corporate form such as “corporation. Corporate Powers Statutory Powers . o Under the RMBCA.” etc.

the corp.  Foreign corporations must qualify to do business in states outside the state of incorporation. name 3) to acquire. if such a corporation does business in another state. pledge. Admission of Foreign Corporations  A corporation organized under the laws of a given state is referred to as a domestic corporation in that state.   “Ultra Vires” Acts  A corporation that acts beyond the scope of its powers or stated purpose acts ultra vires.  Even if corp. o To qualify. The RMBCA provides that each corp. be sued. lease. essentially the same powers as a natural person. mortgage. and issue notes. including stocks and bonds 4) to sell. to borrow money. and use any interest in either real or personal property. bonds. hold. improve. must obtain a “certificate of authority” from the state secretary of state of each state in which it is a foreign corp.  Due to broad purpose statements few corp. . assets 7) to make charitable contributions 8) to be the member of any partnership or joint venture 9) to exercise other powers necessary to effect its purpose This enumeration gives the corp. convey. has the power: 1) to have perpetual existence. and defend in the corp. it is referred to as a foreign corporation in that state. and 3) A suit by the state attorney general to dissolve the corporation or to enjoin it from transacting unauthorized business. Every state corporation statute includes an extensive list of powers possessed by businesses incorporated in the jurisdiction. except in three limited circumstances: 1) A suit by a shareholder against the corporation to enjoin (prohibit) it from doing an act 2) A proceeding by the corporation against incumbent or former officers or directors for their unauthorized acts. or otherwise transfer any or all of its property 5) to lend money and take a security interest in either real or personal property to secure its repayment 6) to make contracts and guarantees. purposes or powers are restricted. unless limited in the articles of incorporation 2) to sue. own.  Ultra vires acts include both those expressly prohibited and those in excess of granted powers or purposes. or other obligations that may be secured by corp. the RMBCA and state statutes provide that no corporation lacked the power to act. activities are Ultra Vires.

is denied the use of the courts of the state. or “adopting. Once authorized to do business. is personally liable on the contract. upon coming into existence. as its agent because the corp. without a certificate of authority that transacts business is liable for all fees or franchise taxes that would have been imposed.    o The foreign corp. is liable upon contracts made by the promoters. is in existence. must continuously maintain both a registered office and agent in that state. without disclosing that fact. it is not permitted to maintain any action or suit in the state with respect to its business.  If the promoter discloses to the third party that the corp.  A promoter who represents that a corp. Liability of the Corporation  The corporation. and for all penalties imposed for failure to pay taxes and fees. Until it obtains a certificate of authority.  The corp. upon coming into existence. is not immediately liable upon the promoter’s contracts.  In this case the law must determine: 1) To what extent the promoters are personally liable upon contracts made with third parties on behalf of the corporation. must also file a verified copy of its articles of incorporation and pay all required fees and taxes.” or by taking an “assignment” of the contract from the promoter. becomes liable by “accepting” the third party’s offer. the result depends upon how the parties characterize the transaction. is not yet formed. from defending a suit in the state. or upon misrepresentation grounds. makes. A foreign corp.” “assuming. incurs personal liability to the third party for breach of the warranty of competent principal made by agents generally. nor impairs the validity of any contract the corp. Promoter and Shareholder Liability Liability for Pre‐incorporation Transactions  Before corporate existence begins. the promoters often enter into contracts or other transactions on behalf of the corporation not yet formed. when it in fact is not. o To avoid litigation the extent of the promoter’s undertaking should be carefully drafted into the agreement between the promoter and third party. a foreign corp. Liability of the Promoter  A promoter who contracts on behalf of a corp. and 2) To what extent the corporation. Failure to obtain the certificate neither prevents the corp.  The promoter cannot bind the corp. was not in existence at the time the contract was made. not yet formed. the foreign corp. .

may not assert lack of corporate status as a basis to impose personal liability on the owners. co‐promoters are treated as joint ventures or partners. such as creditors. citing Defective Corporation.  If these standards are met then only the state can challenge corporate existence. firm creditors will likely seek to hold the shareholders personally liable as partners for business debts. while in fact the provisions authorizing corporate status are not fully complied with. the parties have made a good faith effort to comply with the statute. Promoters’ Fiduciary Duties  During the promotional stage. o However characterized. when a third party transacts business with a corporation. and its shareholders after incorporation. has not been formed. o Corporation by Estoppel  This doctrine has been applied.  In this situation common law has recognized two doctrines to protect shareholders: o The de facto incorporation doctrine:  Under the traditional test. the third party seeks to hold the promoters or shareholders personally liable on the obligation as partners. and therefore owe each other the strict fiduciary duties of fair dealing and disclosure generally existing among partners. for all purposes and its existence is not subject to attack by the state or any creditors.  If the parties conduct business as a corporation.  Subsequently. o Recognized as a corp. o Promoters also owe similar duties to the corp. Defective Incorporation  A “de jure” corporation is one formed in compliance with all mandatory state requirements. a de facto corporation is created. . liability requires some affirmative action by the corp. after discovering that a corp.  Third parties. unaware of its defective organization and relying solely upon the corp. Corp. indicating its assent to the pre‐incorporation transaction. if an enabling statute exists permitting corporate form.’s credit. o Secret profits obtained by the promoter in violation of these duties may be recovered by the corp. and the parties subsequently conduct business as a corporation.

The use of the corporate entity in promoting injustice or fraud  Cases generally arise in one‐person. Absence of corporate records 7. credit. Issuance of Shares  Preemptive right: allows an existing shareholder to purchase a new issue of shares in proportion to his present interest in the corporation. or other interest in the property of the issuing corporation (an equity security) or an obligation of the issuer (debt security)  Equity securities: create an ownership interest in the business.  Security: a share. or from a tort committed by a corp. redeemable shares. debentures. Siphoning of corporate funds by the dominant stockholder 5. Failure to observe corporate formalities 3. eight factors have been considered: 1. common shares. such as shares of stock  Types of equity securities: preferred shares. is liable.  The courts reason that it is unjust to hold someone personally liable when the other party relied on corp.  In determining whether disregarding the corporate entity is appropriate. participation. or prevent. and bonds . convertible shares. or “pierce the corp. The use of the corporation as a façade for operations of the dominant stockholder or stockholders. Chapter 46 Review Sheet Corporate Financial Structure On these facts courts often estop. unpaid corp. Nonfunctioning of other officers or directors 6.” to impose personal liability upon owners. warrants rights  Debt securities—notes. and a third party.  The corporate claim asserted against the shareholders may result either from a contract between the corp. before the shares are sold to others. Disregarding Corporate Existence‐ “Piercing the Corporate Veil”  If a corporation incurs debts in excess of its assets. family. and 8.  To prevent fraud or injustice courts in certain limited circumstances disregard the corp. or closely‐held corporations. creditors have no recourse against the corporation’s shareholders. veil. entity. agent for which the corp. the third party from holding the owners personally liable. especially when the failure of incorporation was not caused by negligence or willful failure to comply with statutory requirements. options. Undercapitalization of a corporation 2. Nonpayment of dividends 4.

 Watered shares: issued for property or services worth less than the required consideration  If a holder of watered shares later sells them. a dividend payment is prohibited if the corporation is insolvent or would be rendered insolvent by the distribution.  Interest payments on debt are deductible by the corporation and dividend payments aren’t. the shareholder becomes an unsecured creditor of the company.  If a company declares a cash dividend on its preferred stock.  Equity Insolvency: inability to pay debts as they come due in the ordinary course of business  Bankruptcy Insolvency: excess of total liabilities over total assets . Distributions and Redemptions  Distributions: transfers of money or other property by the corporation to its shareholders. Shareholder Liability for Watered Shares  Shares issued to persons who pay less than the law requires are called bonus. treasury stock may be sold for any price fixed by the board of directors without regard to any par value stated on the stock. the transferor remains liable despite the transfer.  Dividend: a distribution out of a corporation’s current or past earnings. a good faith purchaser incurs no liability to the corporation or its creditors for any unpaid consideration. Stock Subscriptions  Stock subscription: an offer or agreement by a subscriber to purchase and pay for a specified number of previously unissued shares of the corporation  A subscription for shares of a corporation to be organized is irrevocable for six months unless the subscription agreement provides otherwise or all other subscribers agree to revocation. No double taxation.  Cumulative dividend preference: entitles a shareholder to receive a prescribed dividend for the current year and all prior years in which the preferred dividend wasn’t paid.  Treasury stock may be distributed as a stock dividend.  However. discount. unless that right is reserved to the shareholders in the articles of incorporation. determined by the board of directors. or watered shares. before any dividend may be paid on the common shares. property and share of stock. Dividends. A corporation has the power to create and issue the number of shares stated or authorized in its articles of incorporation  Both par and no par shares are issued for consideration.  In both cases.  3 Types of Dividends: cash.  In all states.  A creditor to whom the holder transfers the shares as collateral is not personally liable as a shareholder.

This list must be made available to shareholders for inspection and copying at the meeting and under some statutes. the officer or gent in charge of the stock transfer books prepares a complete “voting list” or “voting record” of shareholders entitled to vote.  Corporations usually are required to hold an annual shareholders’ meeting at a time stated in. The articles may provide for more than one vote for any share. or fixed by. Treasury shares and shares held by other corporations controlled by the issuing corporation are not entitled to vote and are not counted in determining the number of outstanding shares. and shareholders may generally repeal or change bylaws adopted by the directors. Voting rights of any lass of shares may be limited or denied in the articles of incorporation. dissolution. regardless of class. is entitled to one vote on each matter presented at the meeting. Noncumulative: preferred dividends not paid in prior years don’t accumulate and need not be satisfied before dividends are subsequently paid to shares with subordinate dividend rights.  At annual and special meetings.  To determine which shareholders are entitled to notice of a meeting. Shareholder Meeting    Unless otherwise provided in the articles of incorporation. their participation in management is generally limited to voting on the election of directors and upon extraordinary corporate matters such as amendments to the articles of incorporation. Chapter 47 Corporate Management – Structure and Duties Shareholders  Although the shareholders are the owners of the corporation.”  Once the record date is established. merger or consolidation. other business also may be conducted. or to take other shareholder action.  The power to amend. the bylaws or board of directors may fix a “record date.  Although the primary purpose of the annual meeting is to elect some or all of the directors. or sale of corporate assets outside the ordinary course of business. to vote. Election of Directors – Straight and Cumulative Voting . adopt. in advance of the meeting. the bylaws. each outstanding share. or repeal bylaws may be reserved to the shareholders in the articles of incorporation. shareholders may vote in person or may authorize other persons to vote their shares by proxy. to demand a special meeting.

each share is entitled to one vote on each matter. many states require cumulative voting. provide that revocation by operation of law is ineffective. Proxies and Proxy Voting  The grant of authority by a shareholder to another to vote his or her shares is a proxy.  . A proxy also may be revoked by operation of law upon the shareholder’s death or incapacity.”  Corporate dividends and other distributions usually are passed through the trust to the equitable owners of the shares.  Modern corporation statutes uniformly authorize voting trusts subject to certain restrictions.  To assure minority representation on the board of directors.  Under cumulative voting. unless notice of the death or incapacity is communicated to the corporation before the proxy is exercised. need not be a shareholder but must have capacity to act as an agent. Under this approach.  A proxy may be irrevocable if it is “coupled with an interest” or “given as security.  Under the RMBCA.  Many statutes require that the proxy be in a writing signed by the shareholder. the number of votes each shareholder receives is equal to the number of his or her shares multiplied by the number of directorships to be filled. to be enforceable. however. which applies only to the election of directors.  A voting trust is created when a group of shareholders transfer legal title to their shares to a trustee in exchange for “voting trust certificates. A general proxy authorizes the proxy holder to vote on all issues presented at the meeting. The voting trust certificates often are freely transferable.  Appointment of a proxy is generally revocable by the shareholder. like the shares they represent.” Voting Trusts and Voting Agreements  A person who accumulates sufficient proxies from shareholders can obtain control of the corporation or at least assure representation on the board of directors. the agent appointed to vote the shares. and is not valid for more than ten years unless the parties extend it.  Voting trusts often are used in corporate reorganizations to give control to former creditors whose debt has been reclassified as a stock as part of the reorganization plan.Straight Voting is the usual method of shareholder voting. a voting trust must be in writing signed by the participating shareholders. the holders of the voting trust certificates.  The proxy holder. including one vote for each vacant directorship.  Some statutes.

 Shareholders may have no preemptive right to acquire shares issued: 1. directors. Preemptive Rights  A preemptive right allows an existing shareholder to purchase a new issue of shares in proportion to his present interest in the corporation. dividends. and a detailed record of its shareholders. before the shares are sold to others.  . Shareholders’ Right to Information  Corporate Records – Each corporation is required by law to keep appropriate accounting books and records minutes of its shareholders’ and board of directors’ meetings. consolidation.The shareholder voting agreement (or pooling agreement) is a less formal control device.  Shareholder agreements are enforceable under basic contract principles and generally are expressly authorized by statute. is absolute.”  Under the RMBCA. and surplus.  Inspection of other records.  Unlike the voting trust. a shareholder’s right to inspect certain records. which involves a transfer of title to the shares to a third party. For property or services rather than cash 2.  Prevents dilution of a shareholder’s financial or voting interest in the corporation.  Preemptive rights are likely to be valuable to shareholders of a closely‐held corporation to protect proportionate interests in control. Or to officers. such as the articles of incorporation or bylaws. or employees under incentive or compensation plans. or reorganization 3.  Preemptive rights generally apply only to new issues.  Shareholder agreements often are used to allocate and maintain control in closely‐held corporations.  The RMBCA and many state statutes provide that shareholders have no preemptive right to acquire the corporation’s unissued shares unless a provision creating such a right is included in the articles of incorporation. or to a reissue of treasury shares. a shareholder voting agreement is simply a contract between two or more shareholders providing how their shares will be voted on certain matters. such as accounting records or the list of shareholders. requires that the demand be made in good faith and for a proper purpose. To satisfy conversion or option rights 4.  Shareholder Inspection of Records – Both common law and statute give shareholders a qualified right to inspect corporate books and records. In connection with a merger. not to shares that were previously authorized but unissued.  Under common law. usually the election of directors. however. shareholders have the right to inspect books and records for “proper purposes.

(2) selects. Discovering the existence of dishonesty or mismanagement by corporate officers or directors 3.A proper purpose is one designed to obtain information to protect the shareholder’s interest in the corporation. Directors need not be shareholders. supervises. the number of directors may be increased or decreased by appropriate amendment of the articles of incorporation or bylaws. the value of shares. and subject to the oversight. (6) adopts. or labor relations. prices. acquiring trade secrets for personal benefit or a corporate competitor.  The board also may include “outside” directors. (5) determines financing and capital changes.  Because the terms are staggered. and removes corporate officers and other executive personnel and delegates authority to them. each class comes up for election every other year. all directors are elected each year. Although the directors are elected by the shareholders. Constitution.  Proper purposes include: 1.  Under the RMBCA. when and in what form or amount dividends will be paid. that is.  A director whose term has expired continues to serve until a successor is elected and qualified. and Tenure of Board of Directors  The number and qualifications of directors must be specified in eh articles of incorporation or bylaws. (7) participates with shareholders in effecting major corporate changes such as merger or dissolution. Ascertaining the financial condition of the corporation. only one class’s term expires in any given year.  . Communicating with other shareholders to solicit proxies or publicize mismanagement by corporate officers or directors. the articles of incorporation may provide for two or three classes of directors. After incorporation. and obtaining the shareholder list to sell for profit. each serves a two‐year term. of the board of directors. and repeals bylaws. In the absence of classification. If there are two classes.  As part of its management function the board (1) makes basic policy decisions concerning products. amends. they have a statutory right to manage the corporation independent of any direct shareholder influence.  Improper purposes include harassment or extortion. (4) determines if. or the propriety of dividend payments 2. Corporate Management Directors  The business and affairs of the corporation are managed under the direction. Election. persons not affiliated with management. and (8) supervises the overall operation of the enterprise. services. (3) determines executive compensation including pension and retirement plans. Vacancies on the board are filled as provided by statute or the bylaws.

unless the articles of incorporation provide otherwise.  Meetings are either regular or special and may be held either within or outside the state of incorporation. Each committee may exercise the board’s authority to the extent specified by the board or provided in the articles or bylaws. affording opportunity for discussion. their powers are limited by statute.  During their terms of office. (3) fill vacancies on the board. such as fraud or breach of duty. amend. deliberation. the vote of a majority of directors present is the act of the board unless the articles or bylaws prescribe a greater number.  To prevent excessive delegation of board authority to committees. a majority of the number of directors fixed in the bylaws or articles of incorporation constitutes a quorum for transaction of business. not in individual directors.  Unless prohibited by the articles of incorporation or bylaws. stating the action taken.  If a quorum is present.Vacancies caused by death or resignation usually are filled by the board of directors. meetings. is signed by all directors. Officers  . or repeal bylaws.  RMBCA permits removal without cause by shareholder vote.  Each director is entitled to one vote and may generally not vote by proxy  Although the board usually acts in a meeting.  A director who objects to an action authorized by a majority of the board must either request that a dissent be entered in the minutes of the meeting or give written notice of dissent. the board of directors may establish one or more committees and appoint board members to serve on them. usually by majority vote. or (4) adopt. directors may be removed by the shareholders for cause.  Unless the articles or bylaws provide otherwise. and collective judgment. but not regular.  Directors must act in properly constituted meetings. Committees of Directors  The board of directors of a large corporation delegates much of its management authority to corporate officers and to executive and other committees of the board. Formalities of Board Action  Corporate management authority is vested in the board of directors as a body. (2) approve actions requiring shareholder vote. the RMBCA and most state statutes permit directors to act without a meeting if a written consent.  Directors generally are entitled to advance written notice of special.  The RMBCA provides that a committee may not (1) authorize distributions.

possess little. Officers’ Authority  Like other agents. A corporation will have a president.  Many modern courts have expanded the implied authority of corporate presidents to include transactions within the corporation’s ordinary or everyday course of business. If a valid employment contract exists between the officer and the corporation. the bylaws. or vice presidents. an officer must discharge his duties “(1) in good faith. or (3) corporate ratification of a previously unauthorized act.  Officers usually are appointed by the board of directors and serve at the pleasure of the board. and (3) in a manner the officer reasonably believes to be in the best interests of the corporation. and a secretary.  Under the RMBCA. (2) apparent authority. who is the principal executive officer of the corporation. a treasurer.  Even if a corporate officer possesses no express or implied actual authority. Other courts give a president implied authority to bind the corporation to any contract that the board of directors could authorize or ratify. implied authority by virtue of their offices. the corporation may be bound by the officer’s apparent authority or on grounds of ratification. the corporation may be bound if it ratifies the previously unauthorized act of the officer. and resolutions of the board of directors. the articles of incorporation. and include primarily (1) the duty to exercise reasonable care in managing the corporation and (2) the fiduciary duty of loyalty to the corporation. such as secretaries.  Corporate officers may possess a degree of implied authority that flows from their express authority. a corporate officer’s authority to act for the corporation is derived from (1) actual authority – express or implied.  An officer’s express authority is derived primarily from four sources: the state corporation statute. subject to removal at any time. if any. premature termination constitutes a breach of contract. (2) with the care a person in a like position would reasonably exercise under similar circumstances.Agents of the corporation to whom the board delegates authority to execute and administer board policy decisions. treasurers. Duties of Management  The most important duties imposed upon management under state law are derived from the common law. one or more vice presidents in charge of various aspects of the business.  Even if the officer’s conduct is beyond the cope of her actual or apparent authority. however.”  .  The most common and reliable of these sources is a resolution adopted by the board of directors authorizing the transaction in question. Most corporate officers.  State corporation statutes require or authorize a corporation to have certain officers.

 Most state legislatures have enacted states limiting the personal liability of corporate directors for money damages. 2. 3.  The RMBCA also incorporates a charter option provision.  The duty of care does not.  Directors and officers also must keep reasonably informed of corporate affairs. shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. “charter option” statutes. Statutes limiting the amount of money damages. however. or a committee of the board of directors.” Directors “when becoming informed in connection with their decision‐ making function or devoting attention to their oversight function. subject to stated exceptions. 3. 2. which permit the articles of incorporation to include a provision eliminating or limiting a director’s personal liability for damages. except liability for: 1. legal counsel. state business corporation acts commonly impose liability upon officers and directors for violations of specific statutory directives.  This duty simply renders directors and officers liable to the corporation for negligence in the performance of their responsibilities. even if it later appears that that act was ill advised or mistaken.   A director must act “(1) in good faith. subject to stated exceptions. Intentional infliction of harm on the corporation or its shareholders. public accountants.  These statutes are of three basic types: 1. Duty of Care  The RMBCA requires officers and directors to exercise the degree of care a person in a like position would reasonably exercise under similar circumstances. which permits the articles of incorporation to include a provision limiting or eliminating director liability to the corporation or its shareholders for money damages for any action or omission. render management liable for every mistake or error in judgment.  The RMBCA and many state statutes permit officers and directors who act in good faith to rely upon information prepared by other corporate officers or employees. which automatically limit a director’s liability.” In addition to the duties of care and loyalty. .  Business Judgment Rule – Officers and directors have no liability for honest. unbiased transactions undertaken with reasonable care. with stated exceptions. and (2) in a manner the director reasonably believes to be in the best interests of the corporation. “self –executing” statutes. The amount of any financial benefit received by the director to why she is not entitled. Improper corporate distributions.

 The RMBCA is applicable only to actions for money damages maintained by the corporation or its shareholders. or a authorized by a vote of the disinterested members of the board or of the shareholders after full disclosure of all relevant facts. here the corporation. One that the corporation had already formulated plans or taken steps to acquire for its own use. and in good faith. ratified. or is approved. Conflict of Interest  The duty of loyalty may be breached when an officer or director has an interest actually or potentially in conflict with the interest of the corporation.  The rule prevents fiduciaries from using the corporate position to unfairly or inequitably favor personal over corporate interests. or that in fairness should belong to the corporation.  The officer or director asserting the validity of the transaction usually has the burden of proving fairness.  Fiduciary transactions involving outright fraud or bad faith are voidable by the corporation. or similar to. Developed by the director through the use of the corporation’s property. or . including whether the opportunity was: 1. The same as.  A fiduciary who wrongfully competes is liable to the corporation for money damages and may hold any property acquired in breach of duty on a constructive trust for the benefit of the corporation. Competing with the Corporation  Officers and directors may not compete with the corporation in business transactions within the scope of their corporate responsibilities. Duty of Loyalty  Officers and directors owe a fiduciary duty of loyalty to the corporation. and solely in the interest of another. property interest or right.  Corporate directors and officers are under strict duty to act honestly. regarding matters within the scope of the relation.  In determining what constitutes a corporate opportunity.  Under the modern approach.  Corporate opportunity doctrine prevents corporate officers directors from usurping and diverting to themselves a business opportunity in which the corporation has an expectancy. personnel or proprietary information. 3. Intentional violation of criminal law.4. the corporation’s current or planned business activities. courts have developed a number of tests. 2. other transactions in which an officer or director has an interest are voidable by the corporation unless the contract or transaction is fair to the corporation.

6. or authorizing a plan of merger or dissolution. 4. and are subject to fiduciary duties when undertaking corporate actions such as issuance or redemption of shares. Arrangements for providing adequate and timely information to directors.  A duty to disclose material information to superiors or the board is imposed on officers. 5. The composition of the board and its committees.  Thus. 7. corporate governance. taking into account the important role of independent directors. controlling shareholders. and the accuracy. the Model Business Corporation act adopted a number of provisions also designed to improve governance of “public corporations. Presented to the director with the explicit or implicit expectation that the director would present it to the corporation for its consideration or in contrast. through their ability to elect directors or approve extraordinary corporate matters. audit quality and auditor independence. 2.  Courts have subjected a shareholder who possesses a controlling block of stock to fiduciary duties. The effectiveness of the corporation’s internal controls. that the officer believes has occurred or is about to occur. reliability. and 8. Policies and practices to foster the corporation’s compliance with law and ethical conduct. one that initially came to the director’s attention in the director’s individual capacity unrelated to the director’s corporate role. may not cause the corporation to take action that unfairly and adversely affects the right of minority shareholders.  The ordinary shareholder has no fiduciary duty to the corporation and is entitled to vote her shares for directors or other corporate actions as desired. Management Duties in Public Companies  Sarbanes‐Oxley Act of 2002 – designed to improve for companies whose stock is publicly traded. Preparation of the corporation’s financial statements. Major risks to which the corporation is or may be exposed. who also must report “any actual or probable material violation of law involving the corporation or material breach of duty to the corporation by an officer.4. 3.”  The oversight responsibilities of directors of public corporations include attention to: 1. Duties to Minority Shareholders  Directors are under a statutory duty to manage in the best interests of the corporation as a whole. . or agent of the corporation.  In 2004 and 2005. and timeliness of corporate disclosures. amending the articles of incorporation. The performance and compensation of senior officers. employee. Business performance and plans.

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