Chapter 39Chapter 39Corporations: Corporations:

Directors, Officers, Directors, Officers, and Shareholdersand Shareholders

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Summary of Roles of Directors, Summary of Roles of Directors, Officers, and ShareholdersOfficers, and Shareholders

Directors--Directors--

Officers--Officers--

Shareholders--Shareholders--

Vote on important corporate Vote on important corporate decisionsdecisions

Appoint and supervise officersAppoint and supervise officers Declare and pay corporate Declare and pay corporate

dividendsdividends Manage corporationManage corporation

Run “day-to-day” business of Run “day-to-day” business of firmfirm

Agents of corporationAgents of corporation

Elect board of directorsElect board of directors Approve major board decisionsApprove major board decisions

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Fiduciary DutiesFiduciary Duties

Definition: Duties to corporation that individualsDefinition: Duties to corporation that individualswithin corporation havewithin corporation have

Primary fiduciary duties include:Primary fiduciary duties include:

Duty of CareDuty of Care

Duty of LoyaltyDuty of Loyalty

Duty to Disclose Conflict of InterestDuty to Disclose Conflict of Interest

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Exhibit 39-2: Liability of Directors Exhibit 39-2: Liability of Directors and Officersand Officers

Can be held personally liability for their own torts and Can be held personally liability for their own torts and crimescrimes

Can be held personally liable for torts and crimes of Can be held personally liable for torts and crimes of other employees they superviseother employees they supervise

Can be held liable for wrongful transactions involving Can be held liable for wrongful transactions involving company stockcompany stock

Cannot be held liable for decisions that harm company if Cannot be held liable for decisions that harm company if they were acting in good faith at time of decisionthey were acting in good faith at time of decision

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Exhibit 39-3: Liability of Exhibit 39-3: Liability of ShareholdersShareholders

Shareholders liable (to extent of their investment) Shareholders liable (to extent of their investment) for debts of corporationfor debts of corporation

Shareholders liable for breach of contract if stock Shareholders liable for breach of contract if stock subscription agreement signed and no stock subscription agreement signed and no stock purchasedpurchased

Shareholders liable for watered stockShareholders liable for watered stock

Shareholders personally liable for receiving Shareholders personally liable for receiving illegal dividendsillegal dividends

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Summary of Rights of Directors, Officers, and Summary of Rights of Directors, Officers, and ShareholdersShareholders

Directors--Directors--

Officers--Officers--

Shareholders--Shareholders--

Right to CompensationRight to Compensation Right to ParticipationRight to Participation Right to InspectionRight to Inspection Right to IndemnificationRight to Indemnification

Rights determined in Rights determined in employment contractemployment contract

Stock certificatesStock certificates Preemptive rightsPreemptive rights Right to DividendsRight to Dividends Right to Transfer SharesRight to Transfer Shares Inspection RightsInspection Rights Right to Corporate DissolutionRight to Corporate Dissolution Right to File Derivative SuitRight to File Derivative Suit Right to File Direct SuitRight to File Direct Suit

Corporations: Directors, Corporations: Directors, Officers, and Shareholders—Officers, and Shareholders—

TerminologyTerminologyQuorum (Definition): Minimum Quorum (Definition): Minimum

number of directors necessary to number of directors necessary to validate corporate directors’ validate corporate directors’

meetingmeeting

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Corporations: Directors, Corporations: Directors, Officers, and Shareholders—Officers, and Shareholders—

TerminologyTerminologyProxy (Definition): Provides Proxy (Definition): Provides

authorization for third party to authorization for third party to vote in place of shareholder at vote in place of shareholder at

shareholders’ meetingshareholders’ meeting

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Corporations: Directors, Corporations: Directors, Officers, and Shareholders—Officers, and Shareholders—

TerminologyTerminologyVoting Trust (Definition): Agreement Voting Trust (Definition): Agreement between stockholder and trustee in between stockholder and trustee in which stockholder transfers his/her which stockholder transfers his/her

legal share titles to trustee; trustee is legal share titles to trustee; trustee is then responsible for voting for those then responsible for voting for those

sharesshares

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Corporations: Directors, Corporations: Directors, Officers, and Shareholders—Officers, and Shareholders—

TerminologyTerminologyBusiness Judgment Rule Business Judgment Rule

(Definition): Provides that (Definition): Provides that directors and officers are not directors and officers are not

liable for decisions that harmed liable for decisions that harmed corporation if they were acting in corporation if they were acting in

good faith at time of decisiongood faith at time of decision

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Corporations: Directors, Officers, and Corporations: Directors, Officers, and Shareholders--Other Relevant Shareholders--Other Relevant

TerminologyTerminology Stock Subscription Agreement: Contractually obliges Stock Subscription Agreement: Contractually obliges

individual to buy shares in corporationindividual to buy shares in corporation

Par-Value Shares: Fixed face value noted on stock certificatePar-Value Shares: Fixed face value noted on stock certificate

No-Par Shares: Stock shares without a par valueNo-Par Shares: Stock shares without a par value

Watered Stock: Stock issued below its fair market valueWatered Stock: Stock issued below its fair market value

Pre-emptive Rights: Preferential rights given to existing Pre-emptive Rights: Preferential rights given to existing shareholders to purchase shares of new stock issue; shareholders to purchase shares of new stock issue; preference given in proportion to percentage of stock preference given in proportion to percentage of stock shareholder already ownsshareholder already owns

Stock Warrants: Vouchers issued to shareholders, entitling Stock Warrants: Vouchers issued to shareholders, entitling them to given number of shares at specified pricethem to given number of shares at specified price

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Corporations: Directors, Officers, and Corporations: Directors, Officers, and Shareholders--Other Relevant Terminology Shareholders--Other Relevant Terminology

(Continued):(Continued): Dividend: Distribution of corporate profits/income ordered by Dividend: Distribution of corporate profits/income ordered by

directors and paid to shareholders in proportion to their directors and paid to shareholders in proportion to their respective shares in corporationrespective shares in corporation

Inspection Rights: Protect shareholder interest by giving them Inspection Rights: Protect shareholder interest by giving them right to inspect corporation’s books and records after asking in right to inspect corporation’s books and records after asking in advance to inspect and having proper purposeadvance to inspect and having proper purpose

Right of First Refusal: Given to existing shareholders to Right of First Refusal: Given to existing shareholders to purchase any shares of stock offered for resale by shareholder purchase any shares of stock offered for resale by shareholder within specified period of timewithin specified period of time

Shareholder’s Derivative Suit: Filed by corporate shareholder Shareholder’s Derivative Suit: Filed by corporate shareholder when corporate directors fail to sue in situation where when corporate directors fail to sue in situation where corporation has been harmed by individual/another corporationcorporation has been harmed by individual/another corporation