Managment of Corporations.

Hierarchy of
Amending the Articles of Incorp.
Governance.
Articles of AMENDING ART b4 issuing shares AMENDING ARTICLES already
Incopopration. MBA § 10.02 written
Fed. Constitution - If shares are not yet issued, BoD may MBA § 10.01
Core vote to totally adopt amendments before - ONly the SHAREHOLDERS may
coverning issuance of shares. Maj vote. change a provision of the AoI once it is
documents.
State Laws (1) main issue
Thats it.
is the
Procedure for Amending Post-Issuance. MBA § 10.03
authorization
of shares 3) Directors MUST give 4) SH Vote
2) Directors MUST
(2) other corp. ALL SH notice of the
Articles of Incoproation submit proposal
gov. here but 1) Directors meeting (even if Note: Even if not
to SH for approval;
MOSTLY in MUST adopt non-voter); entitled to generally
the bylaws. proposed vote; if an
Must either
(3) Rights of amendment. Notice must include amendment would
recommend of
Bylaws classes must purpose and copy of alter the rights fof
NOT recommend.
be here. proposed amendment a non-voting SH
AS A CLASS, then
they must also
If the board does NOT NOTE: May condition the apporve it. AS A
Shareholder Resolutions CLASS.
recommend adoption, must submission of an amendment
disclose why. to the SH on anything.

Board of Directors
Board of Directors Shareholders

Bylaws Default: The BoD may Can ALWAYS

Amending unilaterally change the bylaws unilaterally
Officers/MGMT General corp.
the at a meeting. amend the bylaws.
Bylaws governing; far
eaiser to alter Exception a: The ARTICLES may Problem: As
than be modified to say that only the practical matter,
Agents/Employees SH the BoD will "get
may change these. to it first"

Shareholder Basics -> What do they do? Shareholder Meetings.

Election Rights Resolution Annual Meeting §
Approval Rights 7.01 Special Meetings § 7.02
Rights
Purpose: Elect & Inspection Any meeting other than the
remove directors. ORGANIC CHANGE Rights Right to express Specified in
annual meeting
views; even articles.
Forbidden: No SH votes are
Limited, though they have NOTICE:
micromanagment required NOTICE:
qualified right NO POWER TO
of directors. -Sale of Sub all
to invormation: ENFORCE.
assets
needs a proper
-Merger
Two ways to purpose Calling such a
-Change of corp (a)(1) (a)(2)
influence: realted to meeting is proper
purpose Board or Official SH
investment purpose EVEN
-Dissolution May be called by at least 10% of
1) Ballot box @ decision. THOUGH the
-Amendment to THE BoD or a voting SH may
annual decision is
articles person designated call meeting
non-binding.
in articles or FOR A PROPER
2) [when allowed]
bylaws to call a PURPOSE.
Force removal of
Be careful of meeting Two Req.
directors and
wording: (1) 10% thresh;
replace them. ex1) BoD must do (2) Purpose must
this = IMPROPER be in writing.
(mandatory)
ex2) BoD should do
this = PROPER
(advisory)

MBA 8.01
All corporate power must be
exercised by or under the
directon of the board
Note: MBA 7.32 permits a
shareholder agreement to
eliminate the BoD.
Types of Directors.
Outside
Inside
Directors:
Directors:
Not employees,
Officers OR
managers, &
major
generally
shareholders of
non-affiliated b/y
the corporation
stock
Some Boards Must be Maj Outside.
1. Sarbanes-Oxley: Audit Committees
must be solely outside directors
2. NYSE rules say all boards must be
MAJORITY outside directors
Board Functions
Basic Functions
(1) Select, evaluate, &
replace CEO;
(2) Set compensation;
(3) Future strategic plans;
(4) Review of financial
-No need to state proper
objectives;
(5) Advise SH on strategic
issues; -Rights are ABSOLUTE
(6) Provide advise to
counsel & top mgmt;
(7) Recommend directors -Delaware: Inspection
for SH election;
(8) Review internal related to the position as
controls and compliance
systems.
Board of Directors
Note: The shareholders may Committee Agency
Agency:
BoD may ONLY act as an entity;
not force the board to do Board is fully responsible for
anything; they cannot set up any actions taken by
no single member of the board
an independent committee committee
has any authority to bind.
to control board from afar.
Removal of Directors (By
SHAREHOLDERS) Even if no cause, needs
Election of Directors to be mentioned in premeeting mats
Removal rights only changable in ARTICLE
Total Number of BoD cannot unilaterally
Estb. in AoC. MBA 8.08 Cumulative Vote?
Directors change; SH req.
Without -> Must have more
BoD CAN CHANGE Cause. votes to remove than
Two ways. Estb. in BYLAWS
UNILATERALLY director recieved in
Del C. Same cumulative vote.
All directors voted for
Annual Meeting. Stnd Board
every year.
Req.
Selection done at MBA 8.08 (1) Notice &
1/3 every 3 years.
annual meetings. Staggerd
TextBoard With Cause opportunity to defend
Spc. Removal Rule
case b4 SH vote
Del. C. Same. (2) SH vote is
1 vote per share, per subject to judicial
Standard director; cannot review
aggregate votes. No statute? CL
Voting Rights. Inherent right to remove for cause.
1 vote per share, per
Cumulative director; CAN
aggregate votes.
By Juducial
Action
MBA 8.09 Reqs.
(1) Brought by >
FILLING A VACANCY SH may petition 10% voters;
court for removal (2) there was fraud,
" Unless This means the directors dishonesty, or gross
Both BoD & SH w/ cause.
otherwise ALMOST ALWAYS fill the
have ability to abuse; AND
provided in spot; speed of meeting (3) removal is in
unilaterally fill NOT
the [Thgh Del SH could act by
vacancies RECOGNIZED IN best interests.
ARTICLES consent]
DELAWARE
Inspection Rights Director Compensation Action by Committee
Generally, BoD committees (properly authorized) have the
At CL, presumed to serve
- Broad inspection full powers of the board.
w/o comp.
rights
Non-Voting Committee Members: Advisory committes of
MBCA 8.11 -> Expressly
non-directors are permitted but do not bind the board.
allows board to make
purpose.
compensation.
MBCA 8.25(a) Voting Members of Committe must be BoD
Generally; Committees MAY NOT - MBA 8.25(e)
(in most states)
large corps, Directors get
stipends & fees on per (1) Approve dividends; unless it is by formula from full BoD;
meeting basis. (2) Approve or propose to SHs an action that must be
must be reasonably
approved by SHs (no organic changes in committee)
Board fixes and ratifies (3) Fill vacancies on board;
direct.
OWN compensation. (4) Adopt, amend, or repeal bylaws
SEC Reg
Sarbanes-Oxley Act
Must disclose committee's
All publicly held corporations
existence and Members on
must have audit committee
them
 Action Without Duly Convened Board Meeting
RATIFICATION. Unanimous Written Approval
Housekeeping for NOTE: Articles
Directors The BoD may ratify an act it Most states permit unanimous written or Bylaws may
previously took which was not consent to an action to be equivalent to a preclude this
in compliance. board meeting. (No consent by mere majority) power.

Board Meetings. All board action must be at duly convened meeting. MBA 8.20.

Regular Meetings No notice for regular meetings. Notice may be WAIVED

by director. Attendance is NOT a
Notice MBA 8.23 -> Notice of waiver if the appearnce
Requirements meeting may be waived is for purpose of
2 days notice. Notice need NOT have
Special Meetings either: objecting to no notice.
purpose, unless AoC or bylaws say
(1) by written waiver;
otherwise
(2) by attendance
Quorum
Requirements Counted when vote is taken. MBCA
8.24 Changing a Quorum Requirement.
In chc,
failure to -Majority of members on board. SUB-quorum Req. Super Quorum Req.
appear w/o (unless there is a vacancy bringing Del. C.
good reason total board to below quorum; then Arts OR bylaws may Arts OR bylaws may
+ action quorum = total of remaining directors) alter a quorum to being alter quorum to >
inevitable at less-than-majority; but majority; but courts
next SH ie Quorum Breaking no lower than 1/3. dislike unanimity.
elecion, -MBCA -> works. can leave b4 vote.
then qm -In Del, quorum taken at beginning
MBCA is silent on this; b/c it speaks to
bypass increasing, veto by silence.

Default: Majority of Board PRESENT. (comp.: SH quorum reqs. only alterabel in ARTICLES)
ie 10 person board. 7 show up. vote of
4 binds whole board.

No proxies. Directors must actually Changing a Vote Requirement.

Voting
vote.
Rights Increasing Threshold.
Electronic Conveaynce: If not MBCA 8.25(c) May not
Voting While Absent
present, MAY vote by phone and decrease
electronic means, so long as every BYLAWS OR ARTICLES threshold.
board member can have 2-way may allow an increased
communication threshold.

Election of Officers
Removal of Officers - Exclusive power of BoD (SH have no say)
MBA 8.40 - BoD elects the officers.
Officers MBA 8.43 - Officers are removable at any time with or without cause.
MBA 8.40(a) - A corp has the offices
MBA 8.44 - If removed without cause, the officer has a breach of
described in the bylaws OR designated by
contract claim (but no right to regain position).
the board in accordance with the bylaws

President (CEO)
1. HIre, fire, open accounts. Decides to call
SH meetings.
2. Top Officer Position Discretionay
Authority.
May NOT delegate discretionary tasks; may
delegate ministerail tasks.
Some implied/apparent authority.
Vice President
1. NO inherent authority.
2. Adding a title (VP of FInance)
may give some implied/apparent
auth.
3. Often meaningless title
Secretary (Often also gen counsel)
1. Purely minsteral w/ no
decision-making.
2. Keeps corporate seal & certifies
action
Sec binds the corp; therefore there
is authority.
Secretary (Often also gen counsel)
1. Purely minsteral w/ no
decision-making.
2. Keeps corporate seal & certifies
action
Sec binds the corp; therefore there
is authority.

Express/ Inherent Creation of Sub

Express must come Agents Treasurer/Comptroller/CFO
Level of sub-agent
from bylaws.
authority is only Treasurere is generally minsterial
Officer Officers have right to
valid so far as it is
Authority 1. May have inherent delegate ministerial
traceable to the CFO is executive; with discretionary
from title or position. authority.
BoD. authority.
2. Apparent is ? of May not delegate
fact. discretion.
 fact. discretion.

The Duty of Care Elements of Duty of Care Claim Litigation Difficulties

(1) Standard of care (reasonable director)
Although not agents, directors are fiduciaries b/c (2) Breach of Standard (business judgment rule) -BJR difficult to overcome;
they stand in the role of trsutees when managing (3) Causation (prox & actual) - Directors can rely on reports of officers
other people's money

Standard of Care Obligation to Procedural Attentiveness Ability to Rely Obligation to have RATIONAL BASIS for
decisions.
MBCA 8.30 - Duty to Monitor Absent suspicions ->
"Director must act" Directors may rely on duly Incredibly broad standard. So long as a
(1) in good faith, Duty to be (1) Must set uf intenral officers, employees, or rational basis is artculable, it is fine.
and (2) in a manner Informed. controls to monitor outside consultants in
the director activities. being informed. If "Decision so unwise or unreasonable as to fall
"reasonably (1) no blind eye reasonably believed to be outside permsisble bounds of sound
believes" is in the to bad conduct; 13(b) - Public companies competent. discretion"
best interst of (2) regular must report these internal
coproation meeting controls to SEC MBCA 8.30(d)
attendance 10(a) - Corporate Del. C. 141(e). Remember: They have the ability to
Good faith + rsnbl accountans must use
Red flags? rely when making this based on
belief in best audit procedures
Rational Basis.
interests. designed to detect illegal
actions Affirmative duty to
investigate.
Where suspicions are
aroused, there is affirmative
duty to investigate.
Causation

Even if standard is MBCA 8.31(b) Del C. -> Different

breached, there will
not be liability Plaintiff has burden of establishing Once plaintiff proves deviation from
unless it was loss/harm AND that the harm was standard, then the defendant has to
causally related to proximately caused by the defendant. disprove causation.
the shareholder's
injury
UnInformed? (ie no reliance at all)
No reliance
Rule: In making on any info If the board members were not informed
BJR
business decisions, or other end. (read not agreements; just blindly agreed).
Business directors must or
So long as a decision is made to inform selves
Judgment Rule consider all material Fraud, Illegality, self-dealing
(1) in good faith and (2) in
information which
Even if stnd furtherance of business
is reasonably NO BJR.
breached AND interest; it will NOT BE
avaliable.
causation; the CONSIDERED NEGLIGENT.
standard of Reliance on bad Good Faith Reliance on BAD ADVICE
May rely on experts
REVIEW may In essence: Directors not liable advice
to do this.
preclude recover. for losses due to honest errors GF attempt to If board members in (1) good faith AND (2)
of judgment if they first be informed reasonable reliance on advice -> BJR
IF DONE -> BJR
attempted to inform themselves applies.
exculpates.

Contracting out of the Duty of Care.

Cannot K out of . . .
MBCA 2.02(b)(4) & Del. C. 102(b)(7)

ARTICLES may be modified to exempt certain duty of care breaches. Breach of Loyalty

Reqs. Bad faith acts or omissions

(1) Only for duty of care [No K around duty of loyalty]
(2) Applies ONLY to breaches in capacity as director Intentional misconduct or knowing violation of law
(3) Applies only to actions for money damages
(4) Applies only against the corp. or SHs (still liable to 3rd parties) Self-Dealing transactions.
(5) Applies only if transaction fair -> directors bear burden.

Self-Dealing transactions. CAN k out of this, so long as

Directors prove they took actions in order to eliminate a conflict
of interset. (cleansing) but this also feels... out of place?
 - Self-Dealing Transactions
The Duty of Loyalty
- Corporate Oportunities

While fiduciaries of the corp, the BoD -Competition

and officers MUST ACT in the best
interests of the corporation. -Executive Compensation

Self-Dealing Cleansing
Transactions
1) Disclosure + Vote of disinterested board. Del C. 144(a)(1). 'Safe Harbor' Cleasing Process
If a same person is 1) Full disclosre [director has
General
on both ends of (i) Interested director discloseds interest AND (ii) a majority of duty to disclose any info which
Rule: A
transaction, there is disinterested directors ratify or approve may be injurious to CORP
contract b/w
a conflict of Interested directors COUNT for quorum. But do not count for
an
interest. majority threshold. 2) Vote by disinterested group
interested
(board or SH; except SH in del)
director and
Transaction is not
Copr. is
inherently bad, only 2) Disclosure + Vote of shareholders. Del C. 144(a)(2) 3) Vote is in good faith
VOIDABLE
problematic if
unless (i) Interested director discloseds interest AND (ii) a majority of
transaction favors 4) Burden shift. If the safe
cleansed. SHAREHOLDERS ratify or approve
the fiduciary harbor is satisfied, the platiniff
NOTE: In the MBCA vote includes ONLY disinterested must prove UNFAIRNESS.
shareholders. In Del. the interested shareholders are incl.

3) Entire Fairness Rule. Del C. 144(a)(3).

Process & Burdens If intrinsic fairness is
Interested director must prove the transaction is intrinsically proved, then transaction is
1) Interested director must either fair to the corporation at time of ratification/approval by the COMPLETELY CLEANSED.
prove (a) no conflict; or (b) safe board. Interested party wins.
harbor applies. First step -> cleansing vote wtih disclosure to rafity or approve
the transaction This is the dispositive "last
2) Once safe harbor applies, straw".
PLAINTIFF has burden of proving Second step -> is it "fair"
unfairness. Fairness: Did the fiduciary treat the corp's itnerest as his own in converse; if Safe Harbor
and the transaction relfected what would be expected in applies, these are what
3) If NO safe harbor, the arms length transaction. plaintiff must prove of
DEFENDANT must prove the fairness.
entire fairness. "Utmost good faith" PLUS "most scrupulous inherent fairness"

Determining Reflection: Actual Consideration paid v.

independent appraisal of fair market value.

Corporate
Opportunities Determining if an Opportunity Belongs to the Other Factors to Consider
Corporation. - If recieved in capacity as director, fact is
If a corporate opportunity Line of Business General Right or non-dispositive
appears, the corporation's Test: Fairness Test Expectancy Test -If the corp's only interest in property is to keep
fiduciaries may not accept away from comp. (going dark agressivelyb)
it without first offering it to Was the Do considerations Off/Direc. ONLY then not an opportunity
the corporation. opprotunity related of fairness usurps an -Is it a unique opportunity?
to "same line of indicate that opportunity where -Is corp already seeking such an opportunity?
business" as the opportunity it arises from -Was director/officer who took opportunity in
More of a 'right of first
corporation's belonged to existing interest charge of finding opportunities?
refusal' than any sort of flat
current business? corporation. in property OR an -Did director/off use corporate funds to develop
prohibition on the practice.
expectancy opportunity?
Ability to Enjoy is -> Corp has Theives must growing out of -Does the acquisition place d/o in adverse
IRRELEVANT "fundamental prove that exsiting right. position to corp?
knowledge of, transaction was
Even if Corp lacks funds to parcitcal "just & Important: Is the
take advantage; the officers experience in, and reasonable" -> opportunity If found,
must still offer it to the ability to pursue the meaning, this is "essential" to
corporation first opportunity" transaciton that corporation's
the corp would Remedy?
operations.
-> Opportunity is not want.
Personal Capacity EXCEPTION Usurper must place profits of the transaction
"logically and ex) K'ing to give in a constructive trust in favor of corporation
If a fiduciary is approached with naturallya daptable Meiselman v. services to client
opportunity in personal capacity, Mesil. (ie the usurper must keep and continue to
to corp's buness" which corp had operate whatever he did, but gets no profits)
there is no need to offer it to the NC.
corporation
 While a fiduciary, MAY NOT Background
COMPETE. -Fiduciaries are under duty to act solely for benefit of corp.
-While still in a fiduciary relationship, may NOT compete.
Competition and
After fiduciary ends, MAY However -> may plan new business as long as corporate assets
Duty of Loyalty are not used.
COMPETE (unless a
separate K'al agreement -Use of inside information undermines best interests of
not-to-compete) corporation and violates confidentiality

Timing is Central Issue.

May
Still with Quit May
-Plan to compete on own time, using
corp no K -Directly compete.
own resources
May NOT Full Disclosure
-Directly compete. +
-[On company time] plan to compete. Consent
-[With company resources] plan to Cleansing
compete. Valid K to not compete?
-Plan to take business from corp (see Must be reasonable; courts
Quit
corp opp. doctrine) disfavor these b/c competition is
good for the public.

BIG NOTE: Sliding Scale of Fiduciary Duties. This one ONLY APPLIES TO HIGH-LEVEL EMPLOYEES
An employee who is not an officer, is not in a discretionary or controlling position is NOT a heightened fiduciary. A non-discretionary,
non-controlling employee does NOT owe the same obligation that directors or partners owe company.

Sarbanes Oxley Act

Executive
Compensation -Corporations must have audit
committee
General Rule: Closely Held Corps Publicly-Held Companies -NO LOANS TO EXECUTIVES
These were being used to squirrel
-If executive makes the -B/c SH are also officers/employees, Less incentive to increase them money without taxation.
decision about salary, seek to maximize salaries for tax salaries.
will be treated as purposes. Exception: Loans in ordinary
self-interested Independent coures of business (ie Wachovia
transaction -Salaries are tax-deductible and lessen Compensation Committee gives CEO a mortgage) are
bite of double-taxation. rtequired to determine
permitted.
-If the executive executive salaries (outside
doesn't make the DIsguised Dividend Doctrine: IF the directors)
decision about her IRS finds out that salaries are really SEC Rules
salary, PLAINTIFF disguised profit shares, it will tax the But these are still tainted by
bears burden of shit out of them. structural bias. -All exec compensation must be
showing reported and compared to stock
UNFAIRNESS growth

Goal of Executive Compensation - Reduce tax consequences.

Deferred True Equity Compensation Bonus Plans

Stock
Compensation Stock Option
Appreciation Be careful -> cannot Bonus Cleansing
Rights Stock Plan/Call Option Backdating Golden
be a gift or it is ultra w/ vote
ie Phantom ESOP - Purcahse Option Parachute
vires. (1) Disclosure
Stock. Employee Plan Employees have
Like phantom (2) Ratification by
Employee given stock right to buy stock Illegal. Severance
stock, but with no Bonus must have disinterested
'simulated' stock ownership Employees at future date, at Grant payments; are
dividends. USed relation to the value SH/Directors
as part of salary. to provide cash ot plan can buy back specificd price. option for intended to
of services for which (3) Plaintiff must
-At retirement, stock on Controversial. stock with reduce conflicts
exeuctive planning given. prove
will exchange the Tax-favored discounted Effects a of interest in
to exercise option. WASTE/gift
simulated shares device in basis. 1) Lowers value retro-active mergers;
for the difference which corp BJR can cleanse but
NOTE: The of existing stock low price. Bonus Cleansing
b/w the stock gives money ie) Able to Super first, there must be
employee must 2) Share dilution w/o vote executives win
price when to group purchase at illegal. APPROVAL BY
come up with cash MAJORITY OF (1) Disclosure either way so
recieved and retirement direct Put Option they have
to pay for stock DISINTERESTED (2) Ratification by
current level upfront. When the account. market From corp nothing left but
(shareholders) or INTERESTED sh
employee sells, value, w/o Publicly traded perspective fiduciary duties
(directors) or bord
Dividends the get cash back ERISA brokerage option emplee -> free
(3) Directors must
included; meant to + profit fees can pay for right $$$
If there is a formula, prove fairness
prevent dilution to sell option.
likely fine