43-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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10• History and Nature of Corporations

• Organization and Financial Structure of Corporations

• Management of Corporations• Shareholders’ Rights and Liabilities

• Securities Regulation• Legal and Professional Responsibilities

of Auditors, Consultants, and Securities Professionals

Corporations

PART

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Management of Corporations

PA ET RHC 43

Managers should work for their people…and not the reverse.

Kenneth Blanchard Leadership and The One Minute Manager (2000)

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Learning Objectives

• Recognize limits on the objectives and powers of corporations

• Describe the roles of the board of directors and various committees

• Discuss recent developments in corporate governance

• Adapt corporate governance rules to the close corporation

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• Shareholders own the corporation, but elect a board of directors to manage the firm and, typically, the board delegates most management duties to officers, who in turn hire managers and employees

• Model Business Corporation Act (MBCA) states that a corporation has power to do anything that an individual may do

Corporate Powers

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• Historically, an act of a corporation beyond its powers was a nullity since it was ultra vires (“beyond the powers”)

• MBCA and MNCA state that ultra vires may be asserted by three types of persons: – (1) a shareholder seeking to enjoin a

corporation from executing a proposed ultra vires action; (2) the corporation suing management for damages caused by exceeding corporate powers; and (3) the state’s attorney general

The Ultra Vires Doctrine

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• The board of directors supervises the actions of its committees, the chairman, and officers to ensure the board’s policies are being carried out and the corporation is managed wisely

• Some corporate actions require board initiative and shareholder approval– Amending articles of incorporation,

mergers, and dissolution

The Board of Directors

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• Under straight voting, shareholder casts as many votes for each nominee as s/he has shares and top vote-getters are elected

• Class voting gives certain shareholder classes right to elect a specified number of directors

• Cumulative voting permits shareholders to multiply their shares by number of directors to be elected and cast the resulting total for one or more directors

Electing Directors

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• Once public ownership of shares exceeds 50 percent, management must solicit proxies from passive shareholders to have a quorum and achieve a valid shareholder vote– A proxy is a person designated to

vote for the shareholder– Wall Street rule: either support

management or sell the shares

Proxy Solicitation

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• Officers of a corporation include the president, one or more vice presidents, a secretary, and a treasurer

• Officers are agents of the corporation, thus have express authority conferred on them by the bylaws or the board of directors and implied authority to do things reasonably necessary to accomplish duties

Officer Authority & Liability

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• Directors and officers owe a fiduciary duty to the corporation, including duty to act within the scope of the powers of the corporation

• Officers must within authority conferred by the articles of incorporation, bylaws, and board of directors

• Directors and officers are liable for losses to the corporation caused by their lack of care or diligence

Director & Officer Duties

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• The MBCA duty of care test requires a director or officer to make a reasonable investigation and honestly believe that the decision is in the corporation’s best interests

• Business judgment rule: absent bad faith, fraud, or breach of fiduciary duty, the judgment of directors and officers is conclusive

Business Judgment Rule

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• When an outsider attempts to gain control of a publicly held corporation (the target), the outsider (raider) makes a tender offer for the shares of a corporation – Tender offer is an offer to shareholders to buy

their shares at a price above market price

• Corporate management generally opposes tender offers using a variety of defenses

Acquiring Control of a Corporation

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• As agents, directors and officers owe the corporation duties of loyalty, including the duty not to self-deal (a conflict of interest)

• If a director has a conflict of interest, a court may void the transaction with the corporation if it is unfair to the corporation

• Intrinsic fairness standard: a transaction is fair if reasonable persons in an arm’s-length bargain would have bound the corporation

Conflicting Interest Transaction

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• Shareholders isolated by another group of shareholders may complain of oppression

• A freeze-out is oppression in which the corporation merges with a newly formed corporation under terms by which minority shareholders receive cash instead of shares of the new corporation– Going private is a freeze-out of shareholders

of publicly owned corporations

Minority Shareholders

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• A person is always liable for his own torts, even if committed on behalf of a principal– A director is liable for authorizing a tort

or participating in its commission

• A person is always liable for his own crimes, even if committed on behalf of a principal

• Corporations may also be liable for crimes as an entity or for employees

Management Liability

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• Because officers and directors have a risk of liability, corporations often indemnify those who serve as a director or an officer– Indemnify: to protect or insure; refers to

practice by which corporations pay expenses of officers or directors named as defendants in litigation

• D & O insurance used as risk management tool

Indemnification & Insurance

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Thought Question

• Roberto Goizueta, former CEO of Coca-Cola, said in 1992: Business now shares in much of the responsibility for our global quality of life.

• Do you agree or disagree with Goizueta? Support your opinion.