Management of Corporations

Management of Corporations

Management of Corporations


Corporate Objectives

Raise profits and shareholder gain

Corporate Constituency Laws- broadens legal objectives of corporations beyond profits


Corporate Powers

Laid out in statutes

Model Business Corporation Act – MBCA – they can do anything individuals can do


Purpose Clauses in Articles of Incorporation

MBCA allows any legal business to be done

Ultra Vires Doctrine – beyond the powers

–          If action not laid out in articles (though usually its general and allows all legal)

–          Most laws prevents a contract being canceled due to the ultra vires defense

  • May only be asserted by 3 types of people
    • Shareholder seeking to enjoin a corporation from executing an action that is beyond their power
    • A corporation that is suing management for damages caused by going beyond its powers
    • State’s AG for a corporation exceeding power

Powers of Nonprofits

Model Nonprofit Corporation Act  – MNCA is similar to MBCA


Board of Directors

Small companies they manage

Large ones use MBCA to permit them to be managed “under the direction of” the BoD

Board Authority

Can manage and direct

Issue shares and set price of shares

Declare dividends

Elect officers


Committees of the Board

Only directors may serve

Powers may not be given such as dividends, changing bylaws, issuing shares…

Executive Committee

–          Given power to act for board when not in session


Audit Committee

–          Appoint, compensate and oversight CPA’s

–          SoX mandates public companies have these

Nominating Committees

–          Choose management’s slate of directors that is then submitted to shareholders

Compensation Committees

–          Review and approve salaries, bonuses, stock options, benefits

Shareholder Litigation Committee

–          Decides if they should sue someone


Powers, Rights, Liabilities of Directors

Director is not an agent by default

Director may manage only when they act as a board  unless directed otherwise

Director has right to inspect corporate books and records needed for performance

Director generally not liable for contracts or torts


Election of Directors

Minimum of one director required

Top votegetters are elected – straight voting

–          Top shareholders thus decide usually

Class voting

–          Classes can choose specified number of directors

Cumulative Voting

–          Shareholders can multiply the number of their shares by the number of directors

Directors allowed to serve staggered terms, but standard is 1 year

Many vote by proxy

Wall Street Rule- support management or sell their shares

–          They therefore almost always get the 50% required to vote


Director’s Meetings

Quorum needed to have meeting

–          Majority of directors

–          Each director have one vote

–          Directors allowed to have notice of special meetings


Officers of the Corporation

Officers are agents

President – presiding officer at meetings

Vice President- no authority by virtue of office

Secretary- keeps minutes

Treasurer- receives payments, disburse payments,

Corporate officer has no liability on contracts made on behalf of his principal

–          It is signed on behalf of the corporation, not individual


Managing Close Corporations

–          May impose supermajority voting for board actions and restrictions on managerial discretion


Managing Nonprofit Corporations

Must have at least 3 directors

No more than 49% of directors may have financial interest in the business



Directors and Officer’s Duties to Corporation

Fiduciary duties- directors and officers owe it to the corporation

–           Duties to act within the authority of the position and within the objectives of the corporation, with due care and loyalty

Acting Within Authority

–          Acting within articles


Duty of Care

–          Directors and officers are liable for losses from a lack of due care

–          Shall act in good faith

–          Reasonably believe it is in the best interest

Managers must be ordinarily prudent

Reasonable investigation

Honestly believe

Business Judgment Rule- officers and directors duty of care

-3 rules

–           1. Manager must make an informed decision through reasonable investigation

2. No conflict of interest

3. Rational Basis for believing and making decisions


Board Opposition to Acquisition of Control of a Corporation

Raiders- outsides trying to take control – will make a tender offer for the shares – the target –

Pg 1019 is all tender offer defenses

In Unocal ruling the courts found that board of directors must prove

  1. Reasonable grounds to believe a danger to corporate policy is posed by the takeover attempt
  2. Acted to protect the corporation
  3. Defense tactic was reasonable to the threat posed


Duties of Loyalty

Utmost loyalty and fidelity


Conflicting Interest Transactions

Under MBCA a conflict of interest will not cancel a transaction if any of the 3 are true

  1.  Transaction was approved by a majority of informed directors
  2. Transaction was approved by a majority of informed shareholders
  3. The transaction is fair

Intrinsic fairness standard – if a person at arm’s length would have done the same


Usurpation of a Corporate Opportunity

Directors and officers can steal opportunities the corporation would have had

–          Liable for usurping corporate opportunities


Oppression of Minority Shareholders

Freeze-out – merging corporation with a newly created corporation under terms that the minority shareholders do not receive any shares of the new corporation

Going Private – freeze out term for public companies

Legal Standard –

Total fairness test

Fair dealing

Fair price

Business purpose test- freeze out must serve a business purpose

Right of Appraisal – requires corporation to buy out shareholder at fair price


Trading on inside information


Director’s Right to Dissent

Liable if assent

Must not vote in favor of action to dissent and must make position clear

–          Makes clear in minutes or giving written notice

Not liable for missing a meeting but is liable for continuing to miss meetings that allows him to not prevent the board from harming the corporation


Corporation is liable for tort committed by employee acting under employment

Corporation can be charged with crime when authorized/performed by:

Board of directors


Person formulating company policy

High level administrator or supervisor


Director’s and Officer’s liabilities for torts and crimes and torts

–          Always liable for his own actions

–          Must use independent judgment

–          Has tort liability if he authorizes it

–          Criminal liability if he authorizes it


Insurance and Indemnification

–          Corporations indemnify directors to encourage them to join company

–          Can also purchase insurance

–          MBCA mandates indemnification for reasonable litigation expenses when the lawsuit is won completely

–          Permissible indemnification is when they can choose to, but not required

  • Must identify a reasonable cause the director did not think action was illegal

–          Corporation permitted to give a director an advance to help win case

–          Court ordered indemnification

Management of Corporations


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