Clarkson14e PPT ch40

BUSINESS LAW
TEXT AND CASES

Fourteenth Edition
CLARKSON MILLER CROSS  
CHAPTER 40: CORPORATE

DIRECTORS, OFFICERS, AND
SHAREHOLDERS
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
§1: ROLE OF DIRECTORS
AND OFFICERS (1 OF 11)
 A corporation is governed by a board of
directors elected by shareholders.
 Individual directors are not agents or
trustees of the corporation. Only the board

itself can bind the corporation.
 Few qualifications are required to be a
director.
 A director can also be a shareholder. 
2
ROLE OF DIRECTORS AND OFFICERS
(2 OF 11)
 Election of Directors: Generally, the number

of directors is set forth in the articles of
incorporation. Directors are appointed at the
first organizational meeting.
Term of office is generally for one year. It
is common practice to elect one-third of
the board members each year for a three-
year term for greater management
continuity. 
3
(3 OF 11)
 Election of Directors:
Removal of Directors: Directors can be
removed for cause.
Vacancies on the Board: When a board
vacancy occurs, the shareholders or the
board itself can fill the vacant position,
depending on state law and the bylaws. 
4
(4 OF 11)
Compensation of Directors:
• Most states permit the corporate
articles or bylaws to authorize
compensation for directors. Directors
also receive indirect benefits (such as
business contacts) and other rewards
(such as stock options). 
5
(5 OF 11)
Compensation of Directors:
• An inside director is also an officer of
the corporation.
• An outside director does not hold a
management position in the company.
• Boards typically have inside and
outside directors. 
6
(6 OF 11)
 Board of Directors’ Meetings: Used to

conduct business by holding formal
meetings with recorded minutes.
Quorum of Directors: Unless otherwise
stated in the articles of incorporation or
bylaws, a majority of the board of
directors normally constitutes a quorum
(RMBCA 8.24). 
7
ROLE OF DIRECTORS AND OFFICERS (7
OF 11)
 Board of Directors’ Meetings:

Voting: Once a quorum is present, the
directors transact business and vote on
issues affecting the corporation. Each
director present at the meeting has one
vote. 
8
(8 OF 11)
 Committees of the Board of Directors:

Delegating tasks can increase the
efficiency of the board.
Common committee types include
executive and audit committees.
The Sarbanes-Oxley Act requires all
publicly held corporations to have an
audit committee.
9
(9 OF 11)
 Rights of Directors:
Right to Participation: Directors are
entitled to participate in all board of
directors’ meetings and to be notified of
these meetings.
Right of Inspection: Each director has the
right to access the corporation’s books
and records, facilities, and premises. 
10
(10 OF 11)
 Rights of Directors:
Right to Indemnification: Corporation
should guarantee reimbursement
(indemnification) or purchase liability
insurance to protect the board from
personal liability.
11
(11 OF 11)
 Corporate officers and executives are hired

by the board of directors. They are also
agents as well as employees of the
corporation.
Though their rights are defined by
employment contracts, the board of
directors normally can remove a
corporate officer at any time with or
without cause.  12
§2: DUTIES AND LIABILITIES OF
DIRECTORS AND OFFICERS (1 OF 11)
 Duties and Liabilities of Directors and
Officers:
Directors and officers are fiduciaries and
owe the company ethical and legal
duties.
Their fiduciary duties include the duty of
care and the duty of loyalty. 
13
DUTIES AND LIABILITIES OF
 Duty of Care:
• Act in good faith (honestly).
• Exercise the care that an ordinarily prudent
(careful) person would exercise in similar
circumstances.
• Do what she/he believes is in the best
interests of the corporation [RMBCA
8.30(a), 8.42(a)]. 
14
 Duty of Care:
Duty to Make Informed Decisions: Stay fully
informed and conduct reasonable
investigation on corporate matters before
making decisions.
Duty to Exercise Reasonable Supervision:
Supervise officers and employees when work
is delegated. 
15
 Duty of Care:
Dissenting Directors: An individual
director may disagree with the majority’s
vote (which becomes an act of the board
of directors). Unless a dissent is entered
in the minutes, the director is presumed
to have assented. 
16
 Business Judgment Rule:
Immunizes a director or officer from
liability from bad decisions.
Court will not require directors or
officers to manage “in hindsight.” 
17
When the Rule Applies: The business
judgment rule will apply as long as the
decision was reasonable, informed, and
made in good faith and in the best
interests of the corporation. 
18
Provides Broad Protections: The
business judgment rule provides broad
protections to corporate decision
makers.
Most courts will apply the rule unless
there is evidence of bad faith, fraud, or
a clear breach of fiduciary duties.
19
 Duty of Loyalty: Subordination of personal
interests to the welfare of the corporation.
No competition with corporation.
No “corporate opportunity.”
No conflict of interests.
No insider trading. 
20
 Duty of Loyalty:
No transaction that is detrimental to
minority shareholders.
No selling control over the corporation.
• SEE CLASSIC CASE 40.2 GUTH V. LOFT, INC. (1939).
21
 Conflicts of Interest: The fiduciary duty of
directors and officers requires them to make a
full disclosure of any potential conflicts of
interest that might arise in any corporate
transaction (RMBCA 8.60).
Director or officer must make a full disclosure
of the nature of the conflicting interest and all
facts related to the transaction and abstain
from voting on the proposed transaction.
22
 Liability of Directors and Officers: Corporate
directors and officers are liable for crimes and
torts committed and for those committed by
employees under their supervision.
If shareholders perceive that the corporate
directors are not acting in the best interests
of the corporation, they may sue the
directors in a shareholder derivative suit.
23
§3: THE ROLE OF SHAREHOLDERS (1 OF
10)
 Acquisition of shares grants an equitable

ownership interest in a corporation.
 Shareholders generally have no right to
manage the daily affairs of the

corporation, but do so indirectly by
electing directors. 
24
THE ROLE OF SHAREHOLDERS (2 OF 10)
 Shareholders’ Powers:
Approve all fundamental changes to the
corporation.
Amend articles of incorporation or bylaws.
Approve mergers or acquisitions, the sale
of all corporate assets, or a dissolution.
Shareholders also elect and remove the
board of directors. 
25
 Shareholders’ Meetings:
Must occur at least annually. Notice of a
meeting must be given at least ten days,
but not more than sixty days, before the
meeting date (RMBCA 7.05).
Proxies: An agent’s formal authorization
to vote the shares in a shareholder’s
absence. 
26
Shareholder Proposals: To change a
company policy, shareholders can submit
a proposal to the board of directors and
ask the board to include the proposal in
the proxy materials that are sent out
before meetings. 
27
Rules for Proxies and Shareholder Proposals:
Under SEC Rule 14a-8, all shareholders who
own at least $1,000 of stock are eligible to
submit proposals for inclusion in corporate
proxy materials. Under the SEC’s e-proxy
rules, all public companies must post proxy
materials online and notify shareholders how
to find that information.
28
 Shareholder Voting: Corporate business
matters are presented in the form of
resolutions, which shareholders vote to
approve or disapprove.
Each common shareholder normally gets
one vote per share.
Quorum Requirements: Shareholders
representing more than 50% of shares
must be present to conduct business. 
29
 Shareholder Voting:
Voting Lists: Ordinarily, only persons
whose names appear on the corporation’s
stockholder records as owners are
entitled to vote. Voting lists contain
shareholders’ names, addresses, and
number of voting shares as shown on the
corporate records on a given cutoff date,
or record date.  30
Cumulative Voting: Allows minority
shareholders to be represented on the
board of directors.
• Formula: Each shareholder is entitled to
a total number of votes equal to the
number of board members to be elected
multiplied by the number of voting
shares that the shareholder owns.
31
Other Voting Techniques:
• Before a meeting, a group of
shareholders can make a shareholder
voting agreement in writing to vote their
shares together in a specified manner.
• A shareholder can also vote by proxy. 
32
Other Voting Techniques:
• Shareholders can also enter into a voting
trust (an agreement, or trust contract).
The trustee is responsible for voting the
shares on behalf of all the shareholders in
the trust. The shareholder retains all
rights of ownership except the power to
vote the shares (RMBCA 7.30).
33
§4: RIGHTS OF SHAREHOLDERS (1 OF 11)
 Stock Certificates: Few jurisdictions still
require physical stock certificates but
shareholders there can demand that
corporation issue certificates (or replace
those that were lost or destroyed).
 Preemptive Rights: Allows each shareholder
to maintain his proportional control. 
34
RIGHTS OF SHAREHOLDERS (2 OF 11)
 Stock Warrants: Rights to buy at a stated
price by a given date.
 Dividends: Distribution of corporate profits
or income to shareholders based in
proportion to their shares.
Dividend can be paid in cash, property, or
stock (company’s own or another
corporation). 
35
 Dividends:
Illegal Dividends: Those that are
improperly paid from an unauthorized
account or that cause the corporation
to become insolvent. 
36
 Dividends:
Directors’ Failure to Declare a Dividend:
Shareholders can ask a court to compel
the directors to pay a dividend if they
show that the directors have acted so
unreasonably in withholding the
dividend that their conduct is an abuse of
their discretion. 
37
 Inspection Rights: Every shareholder is
entitled to examine specified corporate
records, including voting lists (RMBCA 7.20,
16.02).
Proper Purpose: A shareholder has a right
to inspect/copy corporate books and
records only for a proper purpose, and the
request to inspect must be made in
advance.  38
 Inspection Rights:
Potential for Abuse: The power of
inspection has the potential for abuse and
the corporation is allowed to protect itself.
• Shareholders can properly be denied
access to corporate records to prevent
harassment or to protect trade secrets or
other confidential corporate information.
39
 Transfer of Shares: The owner has a right to
transfer stock to another person unless there
are valid restrictions on its transferability.
Until the corporation is notified of the
stock transfer and updated the transfer in
its records, all ownership rights remain
with the current record owner.
40
 Shareholder’s Derivative Suit: A lawsuit
brought by shareholders against a third
party that has harmed the company when
the corporate directors have failed to bring
a suit against that party. 
41
 Shareholder’s Derivative Suit:
Written Demand Required: Before
bringing a derivative suit, shareholders
must submit a written demand to the
corporation, asking the board of
directors to take appropriate action
(RMBCA 7.40). 
42
Written Demand Required: The directors
then have ninety days to act. If they refuse
to do so, then the derivative suit can go
forward. A court will dismiss a suit if a
majority of the directors or independent
panel determines that the lawsuit is not in
the best interests of the corporation
(RMBCA 7.44). 
43
Any Damages Awarded Go to the
Corporation: When shareholders bring a
derivative suit, they are doing so in the
name of the company, not individually.
• If the suit is successful, any damages
recovered normally go into the
corporation’s treasury, not to the
shareholders personally.
44
§5: DUTIES AND LIABILITIES
OF SHAREHOLDERS (1 OF 5)
 A shareholder can be personally
liable in certain rare instances
relating to illegal dividends and
watered stock.
 A majority shareholder who engages
in oppressive conduct or attempts to
exclude minority shareholders from
receiving certain benefits can also be
45
DUTIES AND LIABILITIES
 Watered Stock: Shares that a corporation
issues for less than their fair market value.
A shareholder who receives watered stock
must usually pay the difference to the
corporation.
In some states, the shareholder who
receives watered stock may be liable to
creditors of the corporation for unpaid
corporate debts. 
46
 Duties of Majority Shareholders:
 Majority shareholders own enough shares
to exercise de facto (actual) control over
the corporation. 
47
 Majority shareholders own enough shares
to exercise de facto (actual) control over
the corporation. 
48
 Majority shareholders owe a fiduciary duty
to the corporation and the minority
shareholders and creditors when they sell
their shares because of the possibility of
transfer of control.
49

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BUSINESS LAW

TEXT AND CASES

CLARKSON MILLER CROSS  

CHAPTER 40: CORPORATE

trustees of the corporation. Only the board

 Election of Directors: Generally, the number

 Board of Directors’ Meetings: Used to

 Board of Directors’ Meetings:

 Committees of the Board of Directors:

 Corporate officers and executives are hired

 Acquisition of shares grants an equitable

manage the daily affairs of the

to maintain his proportional control. 

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