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Sunday, March 29, 2020
Business Law (part 48)
"Charity is no substitute for justice withheld."
-Saint Augustine
Management and Dissolution of a Corporation (part B)
by
Charles Lamson
Rights of Stockholders
The stockholders of a corporation enjoy several important rights and privileges.
A stockholder has the right to receive a properly executed certificate as evidence of ownership of shares of stock.
A stockholder has the right to attend corporate meetings and to vote unless this right is denied by express agreement, the articles of incorporation, or statutory provisions.
A stockholder has the right to receive a proportionate share of the profits when profits are distributed as dividends.
A stockholder has the right to sell and transfer shares of stock.
A stockholder has the right, when the corporation issues new stock, to subscribe for new shares in proportion to the shares the stockholder owns. For example, a stockholder who owns 10 percent of the original capital stock has a right to buy 10 percent of the shares added to the stock. If this were not true, stockholders could be deprived of their proportionate share in the accumulated surplus out of the company. This is known as a preemptive right. Only stockholders have the right to vote to increase the capital stock.
A stockholder has the right to inspect the corporate books and to have the corporate books inspected by an attorney or an accountant. This is not absolute, since most states have laws restricting the right. These laws tend to be drawn to protect the corporation from indiscriminate inspection, not to hamper a stockholder who has a proper purpose for the inspection.
A stockholder has the right, when the corporation is dissolved, to share pro rata (proportional."as the dollar has fallen, costs have risen on a pro rata basis") in the assets that remain after all the obligations of the company have been paid. In the case of certain preferred stock, the shareholders may have a preference in the distribution of the corporate assets upon liquidation.
Directors
A board of directors elected by the stockholders manages every corporation. Laws normally require every board to consist of at least three members; but if the number exceeds three, the articles of incorporation and the by-laws of the corporation fix the number, together with qualifications and manner of election.
The directors, unlike the stockholders, can not vote by proxy, nor can they make corporate decisions as individual directors. All decisions must be made collectively and in a called meeting of the board.
The functions of the directors can be classified as:
Powers
Duties
Powers
Law, the articles of incorporation, and the bylaws limit the powers of the board of directors. The directors have the power to manage and direct the corporation. They may do any legal act reasonably necessary to achieve the purpose of the corporation so long as this power is not expressly limited. They may elect and appoint officers and agents to ask for the corporation, or they may delegate authority to any number of its members so too so act. If I director of pains knowledge of something while acting in the course of employment and in the scope of authority with the corporation, the corporation is charged with this knowledge.
Duties
The directors have the duty of establishing policies that will achieve the purpose of the corporation, selecting executives to carry out these policies and supervising these executives to see that they efficiently execute the policies. They must act in person in exercising all discretionary power. The directors may delegate ministerial and routine duties to subagents, but the duty of determining all major corporate policies, except those reserved to the stockholders, must be assumed by the board of directors.
Officers
In addition to selecting and removing the officers of a corporation, the board of directors authorizes them to act on behalf of the corporation in carrying out the board's policies. As agents of the corporation, the principles of agency apply to the officers relationship with the cooperation and define many of their rights and obligations.
Some statutes may specify a few of the officers that corporations must have. The corporation's bylaws will specify what additional officers the corporation must have and the duties of each officer. A corporation commonly has a president, vice president, secretary, and treasurer. In small corporations, some of these officers may be combined. Additional officers may be assistant secretaries or treasurers, additional vice presidents, and the chief executive officer (CEO). The CEO is frequently the president of the chairman of the board of directors. The board of directors creates or delete some positions.
Liabilities of Directors and Officers
While directors and officers of all corporations have potential liability for actions taken as a result of their position with the corporation, directors and officers of publicly held corporations are subject to additional potential liabilities. This is because such individuals have a responsibility to perhaps hundreds of thousands of investors, both small and large. If the actions of directors or officers leads to the financial collapse of huge corporations, there can be a serious impact on enormous numbers of people. The responsibility for protecting investors in publicly held corporations has led to laws providing serious penalties for officers, directors, and even employees or those under contract with corporations who misuse corporate funds or mislead the public about the financial condition of the corporation. The most recent legislation is the Sarbanes-Oxley act. Directors and officers of a corporation face the potential of personal liability for actions taken on behalf of the corporation as well as actions taken for personal gain. They can be liable if the corporation suffers losses or simply if the action is wrongful.
Director Liability
Corporate Losses. As fiduciaries of the corporation, directors incur liability for losses when they are caused by bad faith and by negligence. They do not incur liability for losses when they act with due diligence and reasonably sound judgment. Directors make countless errors of judgment annually in operating a complex business organization. Only when losses are caused by errors resulting from a negligence or a breach of good faith can a director be held personally liable.
The test of whether the directors failed to exercise due care depends upon whether they exercised the care that a reasonably prudent person would have exercised under the circumstances. If they did that, they were not negligent and do not incur liability for the loss that follows.
The test of whether directors acted in bad faith is whether they acted in a way that conflicted with the interest of the corporation. The corporate directors have a duty of loyalty to the corporation similar to the duty of loyalty an agent has to a principal, or a partner has to the partnership and the other partners.
Wrongful Actions. Directors may be held liable for some act without evidence of negligence or bad faith, either because the act is illegal or bad faith is presumed. Paying dividends out of capital and ultra vires acts (acting or done beyond one's legal power or authority) constitute illegal acts. Loaning corporate funds to officers and directors constitutes an act to which the court will impute bad faith.
The members of the board of directors incur civil and criminal liability for their corporate actions. This means a director does not get any immunity or protection from the legal consequences of actions taken. Because of this, individual directors who do not agree with actions taken by the other directors must be careful to protect themselves by having the minutes of the meeting of the directors show that they dissented from the action. Otherwise stated, every director present at a board meeting is conclusively presumed to have assented to the action taken unless the director takes positive action to overcome this presumption. If the directors present who descent have a record of their dissent entered in the minutes of the meeting, then they cannot be held liable for the acts of the majority.
Officer Liability
A corporate officer or agent who commits a tort or crime incurs personal liability even when the act was done for the corporation in a corporate capacity. In this case, both the corporation and the individual could be jointly liable. Only personal liability is imposed when the acts are detrimental to the corporation and outside the scope of the officer's authority. Thus, an officer has liability when actions are improper or unjustified such as when based on spite toward the injured party. Federal law even imposes liability on officers and agents for aiding and abetting lower-ranking employees in the commission of crimes. Specific statutes may impose liability on officers if they have a duty to ensure violations do not occur and to seek out and remedy violations that do occur. Corporate officers and agents are not personally liable for acts in which they do not participate, authorize, consent to, or direct.
Sarbanes-Oxley. The financial collapse of corporations such as Enron and Worldcom led to the demand for stronger federal laws imposing liability on corporate officers and directors. The Sarbanes-Oxley act does so by requiring greater financial disclosure and by putting the responsibility for that disclosure on the CEOs and Chief Financial Officers (CFOs) of corporations. It also requires attorneys and accountants to report evidence of certain law violations to the corporation's chief in-house lawyer or CEO. If they do not respond appropriately, the matter must be reported to the corporation's board of directors or audit board.
The law penalizes individuals who alter, destroy, or conceal records to obstruct an investigation and increases the penalties for certifying reports that do not comply with legal requirements.
The law also makes protection for informants stronger. People who expose wrongdoing in an organization are called whistleblowers. Often corporate whistleblowers may face loss of their jobs. Sarbanes-Oxley penalizes anyone who takes action harmful to a person who truthfully reports information about the commission or possible commission of a federal crime to a law enforcement officer.
Corporate Combinations
When two corporations wish to combine, they frequently do so by means of a merger or a consolidation. A merger of two corporations occurs when they combine so that one survives and the other ceases to exist. One absorbs the other. A consolidation occurs when two corporations combine to form a new corporation. Both of the two previous corporations disappear.
It has become a rather common practice recently for a corporation to try to take over another corporation. The acquiring corporation can do this by making a formal tender offer, an offer to buy stock in the target corporation at a set price. Since attempts at takeovers usually cause the price of the stock of the target company to rise, the acquiring corporation may try to obtain the amount of stock it wants in its target through the purchase of large blocks of the target stock. The purchase of a large amount of stock cannot be kept quiet for long, however, because the Securities Exchange Act requires any person who acquires 5 percent of any class of stock to file a schedule reporting the acquisition within 10 days.
Dissolution
A corporation may terminate its existence by paying all its debts, distributing all remaining assets to the stockholders, and surrendering its articles of incorporation. The collaboration then ceases to exist and completes its dissolution. This action may be voluntary on the part of the stockholders, or it may be involuntary by action of the court or state. The state may ask for dissolution for any one of the following reasons:
Forfeiture or abuse of the corporate charter
Violation of the state laws
Fraud in the procurement of the charter
In some states, failure to pay a specified taxes for a specified number of years
A foreign corporation that has been granted authority to do business in a state may have its authority revoked for similar reasons.
When a corporation dissolves, its existence is terminated for all purposes except to wind up its business. It cannot sue, transfer property, or form contracts except for the purpose of converting its assets into cash and distributing the cash to creditors and stockholders. Similarly, a foreign corporation whose authority to do business in the state has been revoked may not sue, transfer property, or form contracts until this authority has been reinstated.
In the event that assets cannot cover the corporation's debt, the stockholders do not incur personal liability. This is one of the chief advantages to business owners of a corporation over a sole proprietorship or partnership. It is an advantage from the stockholders' standpoint, but a disadvantage from the creditors standpoint.
INTERNET RESOURCES FOR BUSINESS LAW
Name
Resources
Web Address
Business and General Forms
The 'Lectric Law Library's business forms include a variety of sample partnership and corporation documents.
CNNfn: Turner Broadcasting's financial news compliment to CNN, provides reports on mergers and takeovers. CNNfn is interactive, allowing visitors to ask the experts or respond to the day's program.
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