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Business Organizations
Villanova University School of Law
O'Hare, Jennifer

O’Hare – Business Organizations – Fall 2016
Corporate Governance
The Statutory Role of Shareholders, Directors, and Officers
Archetypical corporation separates ownership and management into three specialized roles:
Shareholders – provide capital and elect board of directors
Directors – make major policy decisions
Officers – execute policies and make day-to-day decisions
Individuals can occupy more than one role
In closely-held corporations, shareholders are often also the directors and officers of the corp.
In public corporations, shareholders, directors, and officers are often different people
Does not have to be this way, however, and one person can wear all three hats
Corporations are separate legal entities from the directors, officers, and shareholders
Corporations are granted the same legal rights and responsibilities as a person
Corporations can own property, assert legal rights, and continue if one participant retires, quits, is fired, dies, etc.
Corporations have the potential to exist in perpetuity
Corporations provide limited liability for directors, officers, and shareholders
Owners of the corporation but DO NOT have management rights
Have the right to sell their shares if they do not like the way the board is managing the business (shares are freely transferrable)
Have the right to sue for breach of fiduciary duties by directors
Residual claimants of the corporation
If the corporation goes out of business, shareholders get what is left over after the creditors are paid
Extremely limited voting rights
Right to elect the board of directors
Required to approve certain M&A transactions
Required to approve changes to the articles of incorporation (but directors must submit/approve amendment prior to shareholder vote)
Shareholder can also:
Initiate amendments to corporate bylaws (provided the amendment doesn’t infringe of the board’s right to make ordinary business decisions or to establish corporate policies)
Bring shareholder proposals that directors adopt a new policy or take a particular action
EXAM NOTE: Even if it seems like shareholders ought to be able to vote on a transaction (even material changes to the corporation), they cannot unless it falls under one of these rights (Right to elect board of directors, right to approve certain M&A transactions, right to approve changes to C/I)
Shareholders have limited liability
Shareholders are not liable for the debts of the business
Board of Directors
Del. GCL § 141: “The business and affairs of every corporation . . . shall be managed by or under the direction of a board of directors”
Center of all legal power and authority exercised by the corporation à they act collectively and have no power on their own
Management power is exercised collectively and by majority rule to determine basic corporate policies, appoint and monitor officers, and determine when/if to pay dividends (“declare dividends”)
Also Elect a Chairman of the Board to be in charge, set agenda, etc.
Entitled to compensation, BUT do not share in residual profits
May also be given stock to align board members’ interests with the best interests of the corporation
Incentive directors to increase value of the business to increase stock price à which they can then turn around and sell to make a profit, but it would be sold at a loss if the value decreases due to their bad decisions à theory: caring more when you have skin in the game!
Individual directors are NOT given agency power to deal with outsiders
Law imposes certain constraints on director behavior to the extent that directors owe fiduciary duties to the corporation and its shareholders
Courts give deference to the business judgments of the board of directors (business judgment rule)
Judicial presumption that directors acted properly
In closely-held corporations, the directors are usually also the shareholders
In publicly traded corporations, the size of the board varies and usually includes both inside directors (CEO and subordinate officers) and outside directors (who are usually CEOs of other corporations, lawyers, or investment bankers)
Appointed by the board
Responsible for day-to-day operation of business affairs
RULE: Agents of the corporation (can bind corporation to K if there is actual, apparent, or inherent authority)
Lee v. Jenkin Brothers Corp.: P contends that D, CEO and President of Jenkins verbally agreed to give P a lifetime pension if he joined Jenkins
Actual Authority
Actual authority is determined according to the corps bylaws (Page 538 of stat. supp. provides an example of bylaws)
Can be conferred by a Board resolution authorizing an action
Implied: (court skipped this part
Can be conferred by showing that the action done by the officer is recurring and, therefore, has been implicitly authorized.
Court concluded that there wasn’t actual authority
Apparent Authority
Corporation creates appearance to reasonable people that officer has the authority to act on corporation’s behalf and the 3rd party believes in good f

ons to include additional provisions in C/I
To vary the default rules of DGCL
To take advantage of special rules in DGCL
i.e., DGCL §102(b)(7): provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty of  a director . . .
Additional Provisions that must be included in COI:
Number of directors
Give BOD right to amend bylaws
Stock: Total number of authorized shares, type of stock
Par value
102(b)(7) exculpatory provision
Allowing for cumulative or class voting for director elections
Name of people allowed to call special meetings
Amendments: Board initiation then submitted to SHs for approval
After C/I is filed, there is usually an Organizational Meeting to elect directors, issue stock, draft bylaws, appoint officers, etc.
Determining Shares of Stock to Issue
Stock – an instrument that signified ownership in a corporation
May have several classes of stock as specified in the C/I
All stock of a given class have identical rights, preferences, and limitations
Common Stock v. Preferred Stock
Common stock:
Has limited voting rights (basic rule – 1 share = 1 vote)
Last in line in liquidation
Not entitled to dividends, but can receive them
Preferred Stock
Typically no voting rights
Preference in liquidation
Preference in dividends
Cumulative dividends – A cumulative dividend must be paid, whereas a regular dividend, also called a non-cumulative dividend, may be paid to or withheld from shareholders at the company's discretion. If a company cannot pay a cumulative dividend when it is due, it is still responsible for paying it in the future, possibly with interest, and it must fulfill this obligation before it can award dividends to common shareholders.
Redemption Rights – the company can either force you to sell the stock at a certain point or you can force the corporation to buy it from you; requirement; not an option
Conversion rights – right to convert preferred stock to common stock