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Basic Business Law (BPP432/80) 2006 Fall Quarter

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Title: Basic Business Law (BPP432/80) 2006 Fall Quarter


1
Basic Business Law (BPP432/80) 2006 Fall Quarter
  • Instructor David Oliveiri
  • Week 11 Facilitating Exchange Through Business
    Association Corporations Governance,
    Sarbanes-Oxley, Fundamental Changes

2
Agenda
  • Role of Shareholders
  • Role of Directors
  • Role of Officers
  • Duties of Directors and Officers
  • Sarbanes-Oxley Impacts
  • Fundamental Changes of Corporations

3
Learning Objectives
  • Understand Shareholder, Director, and Officer
    Relationships, and How Corporate Risk/Control
    Bargaining Orders These Relationships
  • Understand the Elements of the Shareholders Role
  • Understand the Elements of the Directors and
    Officers Roles and Pertinent Distinctions
    Between These Roles
  • Understand the Legal Standards of Director and
    Officer Performance
  • Understand What Sarbanes-Oxley Act Provides and
    How the Act Affects Director and Officer Roles
  • Understand What are Fundamental Corporate
    Changes, Requiring Special Approval

4
Corporate Governance, Generally
  • New Participants Shareholders, Directors,
    Officers
  • Primary Theme
  • Separation of Ownership and Control
  • Broad Delegation (Shareholders Directors
    Officers) of Day-to-Day Operations
  • Agency Principles Interwoven
  • Deal Point of Risk vs. Control Foremost in
    Defining Relationships Among Participants

5
Shareholders
  • Owners of Corporation
  • Residual or Equity Interest
  • Similar to Sole Proprietors, Partners?
  • Role of Shareholders f (VD, VFC, P)

6
Shareholders Voting Rights One Share/One
Vote
  • Primary Forum Annual (By-Laws) and Special
    Shareholder Meetings
  • Meeting Requirements -- Quorum (Majority
    Outstanding Stock Represented) Majority Vote
    -- Exception Articles
  • Election of Directors Annual (Unless 9 or
    More), Straight Voting v. Cumulative Voting
  • Approval of Fundamental Changes
  • Concentrations of Voting Power Proxies, Voting
    Trusts, Shareholder Voting Agreements
  • Restrictions on Transfers of Shares Note on
    Stock Certificate

7
Concentrations of Voting Power
8
Shareholders Policing Rights
  • Right to Inspect Books and Records f (Good
    Faith, Proper Purpose)
  • Right to Sue to Enforce Shareholder Rights
  • Direct Suits
  • Derivative Suits
  • Right to Dissent to Fundamental Changes
    Appraisal and Cash Out

Compaq Case (SR p. 707) v. Honeywell Case
9
Shareholder Suits Direct Suit
Direct Suit 1. Compel payment of properly
declared dividends 2. Enforce right to inspect
corporate records 3. Protect preemptive
rights 4. Compel dissolution 5. Enjoin an ultra
vires act
Personal Rights of Shareholder
10
Shareholder Suits Derivative Suit
Derivative Suit 1. Recover damages from
management for breach of duty 2. Recover
improper dividend 3. Enjoin wrongful issuance of
shares 4. Recover damages from third party 5.
Recover damages from management for ultra vires
act.
On Behalf Of Corp. All SH Benefit
11
Directors
  • Basic Function Delegated Power and Duty to
    Manage the Corporation
  • Not Strictly Agents of Shareholders or
    Corporation
  • But Trustee-Like (Agent-Like) Fiduciary Duties
  • Basic Directors Duties
  • Determine By-Laws
  • Select and Remove Officers
  • Determine Capital Structure
  • Initiate Fundamental Changes
  • Declare Dividends
  • Determine Management Compensation
  • SOX Enhancements

12
Directors 101
  • Who Are They?
  • Insiders
  • Friends/Associates
  • Outsiders
  • How Do People Become Directors?
  • Number (NY -- 3 or More Unless)
  • Election (Articles 1st SH Meeting Annually
    Unless Staggered)
  • How Do Directors Do Their Job?
  • Collectively In Meetings!!
  • Quorum and Voting
  • Action Taken Without Meeting
  • Delegation of Powers
  • Directors Inspection Rights
  • Compensation

13
Officers
  • Selection and Removal (Exception Employment
    Contract)
  • Role /Agents of the Corporation
  • Authority Set and Delegated by Directors (Via
    By-Law or Board Resolution)
  • Authority Impacts f (Actual Express Authority
    Articles, By-Laws, Board Resolution, Implied
    Authority, Apparent Authority, Ratification)

14
Fiduciary Duties of Directors and Officers ?
Standards of Performance!!
  • Obedience
  • Diligence -- Review Quality of Decision Process
    Ordinary Care
  • Reliance Upon Others Permitted
  • Business Judgment Rule Immunizes Good Faith
    Decisions in Face of Uncertainty
  • Loyalty Review Fairness and Reasonableness of
    Specific Activities
  • Conflict of Interest
  • Loans to Directors
  • Corporate Opportunity Broz
  • Transactions in Shares
  • Duty Not to Compete

15
Management Structure of Corporations The
Statutory Model
16
Management Structure of Typical Closely Held
Corporation
Shareholders Directors Officers
Relative Problems Boards of Family Businesses
Grapple With How to Sack Executives Who Are Kin
WSJ 7/24/06
17
Management Structure of Widely-Held Public
Corporation
18
Sarbanes-Oxley Act
An Act to protect investors by improving the
accuracy and reliability of corporate disclosures
made pursuant to the securities laws, and for
other purposes 1/23/02
19
Sarbanes-Oxley Act (a.k.a. Public Company
Accounting Reform and Investor Protection Act of
2002, SOX, SarbOx)
  • Legislative Reaction to Corporate and Accounting
    Scandals (Enron, Tyco, WorldCom, )
  • New and Enhanced Standards for U.S. Public
    Companies, Boards, Management, and Public
    Accounting Firms
  • Requires the SEC to Implement Regulations
  • Specific Provisions
  • Public Company Accounting Oversight Board
  • Auditor Independence
  • Corporate Responsibility
  • Enhanced Financial Disclosures
  • Enhanced White Collar Crime Penalties

20
Fundamental Changes of Corporations
  • Economic Good Sense to Facilitate Fundamental
    Changes
  • But Fundamental Changes Materially Impact
    Interests of Shareholders, Officers, and
    Directors
  • So, Legal Rules for Approval Balance Economic
    Good Sense and Interests of Stakeholders
  • What Are Fundamental Changes?
  • Charter Amendments
  • Combinations
  • Dissolution/Going Private
  • Rights of Dissenting Shareholders

21
Fundamental Changes
Under pre-1999 RMBCA
22
Bottom Lines QA
  • Separation Of Ownership And Management
    Characterizes Corporations And Minimizes
    Shareholder Transactions Costs
  • Shareholders Have No Duties, Generally!
  • Broad Director and Officer Authority Is Bounded
    By Shareholder ( Regulatory) Oversight/Legal
    Standards Of Performance
  • The Business Judgment Rule Immunizes Good Faith
    Decisions Application Is Fact-Based (i.e. Local)
  • Sarbanes-Oxley Enhances Legal Standards Of
    Performance For Public Company Officers,
    Directors, Auditors, Lawyers
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