Transcript Document

Basic Business Law (BPP432/80)
2006 Fall Quarter
Instructor: David Oliveiri
Week 11: Facilitating Exchange Through
Business Association; Corporations –
Governance, Sarbanes-Oxley,
Fundamental Changes
Agenda
Role of Shareholders
Role of Directors
Role of Officers
Duties of Directors and Officers
Sarbanes-Oxley Impacts
Fundamental Changes of Corporations
Learning Objectives
Understand Shareholder, Director, and Officer
Relationships, and How Corporate Risk/Control
Bargaining Orders These Relationships
Understand the Elements of the Shareholder’s Role
Understand the Elements of the Director’s and Officer’s
Roles and Pertinent Distinctions Between These Roles
Understand the Legal Standards of Director and Officer
Performance
Understand What Sarbanes-Oxley Act Provides and
How the Act Affects Director and Officer Roles
Understand What are Fundamental Corporate Changes,
Requiring Special Approval
Corporate Governance, Generally
“New” Participants – Shareholders, Directors, Officers
Primary Theme:
– Separation of Ownership and Control
– Broad Delegation (Shareholders Directors Officers) of Day-toDay Operations
Agency Principles Interwoven
Deal Point of Risk vs. Control Foremost in Defining
Relationships Among Participants
Institutional Shareholder Services, Inc. – Service Providing
Corporate Governance Ratings That Correlate Various
Governance Variables and Financial Performance
Shareholders
Owners of Corporation
Residual or Equity Interest
Similar to Sole Proprietors, Partners?
Role of Shareholders = f (VD, VFC, P)
Shareholders’ Voting Rights –
“One Share/One Vote”
Primary “Forum” – Annual (By-Laws) and Special Shareholder
Meetings
Meeting Requirements -- Quorum (Majority Outstanding Stock
“Represented”) + Majority Vote -- Exception: Articles
Election of Directors – Annual (Unless 9 or More), Straight Voting v.
Cumulative Voting
Approval of Fundamental Changes
Concentrations of Voting Power – Proxies, Voting Trusts, Shareholder
Voting Agreements
Restrictions on Transfers of Shares – Note on Stock Certificate
[S&R 36 – Problem 8]
Concentrations of Voting Power
Proxy
Voting Trust
Shareholder
Agreement
Definition
Authorization of an Conferral of voting
agent to vote shares rights on trustee
Agreement among
shareholders on
voting of shares
Formalities
Signed writing
delivered to
corporation
Signed writing
delivered to
corporation
Signed writing
Duration
Eleven months,
unless otherwise
agreed
Ten years; may be
extended
No limit
Revocability
Yes, unless coupled No
with an interest
Prevalence
Publicly held
Only by unanimous
agreement
Publicly and closely Closely held
held
Shareholders’ Policing Rights
Right to Inspect Books and Records = f (Good Faith,
Proper Purpose)
Compaq Case (S&R p. 707) v.
Honeywell Case
Right to Sue to Enforce Shareholder Rights
– Direct Suits
– Derivative Suits
Right to Dissent to Fundamental Changes; Appraisal and
“Cash Out”
Steve Case, co-founder of AOL and architect of the ill-fated AOL-Time Warner
merger, resigned from TW’s Board in the face of the opposition of shareholders
angered by the deal, which led to massive write-downs, shareholder lawsuits,
regulatory scrutiny, and a management purge – Rochester D&C 11/1/05
Shareholder Suits: Direct Suit
Direct
Suit
Shareholder
Corporation
Recovery
Direct Suit
1. Compel payment of properly declared dividends
2. Enforce right to inspect corporate records
3. Protect preemptive rights
4. Compel dissolution
5. Enjoin an ultra vires act
Personal Rights of Shareholder
Shareholder Suits: Derivative Suit
Derivative Suit
Shareholder
Third Party
Recovery
Corporation
Derivative Suit
1. Recover damages from management for breach of duty
2. Recover improper dividend
3. Enjoin wrongful issuance of shares
4. Recover damages from third party
5. Recover damages from management for ultra vires act.
“On Behalf Of ” Corp.; All SH Benefit
Directors
Basic Function: Delegated Power and Duty to Manage
the Corporation
Not Strictly Agents of Shareholders or Corporation
But … Trustee-Like (Agent-Like) Fiduciary Duties
Basic Directors’ Duties:
–
–
–
–
–
–
–
Determine By-Laws
Select and Remove Officers
Determine Capital Structure
Initiate Fundamental Changes
Declare Dividends
Determine Management Compensation
+SOX Enhancements
Directors 101
Who Are They?
– Insiders
– Friends/Associates
– Outsiders
How Do People Become Directors?
– Number (NY -- 3 or More Unless…)
– Election (Articles 1st SH Meeting Annually Unless Staggered)
How Do Directors Do Their Job?
– Collectively – In Meetings!!
Quorum and Voting
Action Taken Without Meeting
– Delegation of Powers
– Directors’ Inspection Rights
– Compensation
[S&R 36 – Problem 2, 3]
Officers
Selection and Removal (“Exception”: Employment
Contract)
Role /Agents of the Corporation
Authority Set and Delegated by Directors (Via By-Law
or Board Resolution)
Authority Impacts = f (Actual Express Authority
[Articles, By-Laws, Board Resolution], Implied
Authority, Apparent Authority, Ratification)
Fiduciary Duties of Directors and
Officers ― Standards of Performance!!
Obedience
Diligence -- Review Quality of Decision Process – Ordinary Care
– Reliance Upon Others Permitted
– Business Judgment Rule – Immunizes Good Faith Decisions in Face of
Uncertainty
[S&R 36 – Problem 1]
Loyalty – Review Fairness and Reasonableness of Specific Activities
–
–
–
–
–
Conflict of Interest
[S&R 36 – Problems 5a, b]
Loans to Directors
Corporate Opportunity [Broz]
Transactions in Shares
Duty Not to Compete
+SEC Standards – The SEC notified 3 high-profile current and former
directors of Hollinger International Inc. that they may be sued for failing to
spot fraud that senior execs of the newspaper company are suspected of
committing – NY Times 12/15/05
Management Structure of Corporations:
The Statutory Model
Officers
Run the day-to-day
operations of the
corporation
Board of Directors
Declare dividends
Delegate authority to officers
Manage the business of the corporation
Select, remove, and determine compensation
of officers
Shareholders
Elect and remove directors
Approve fundamental changes
Smith & Roberson’s Business Law
§
Chapter 36
Management Structure of Typical
Closely Held Corporation
Shareholders = Directors = Officers
Relative Problems – Boards of Family Businesses
Grapple With How to Sack Executives Who Are Kin
– WSJ 7/24/06
Management Structure of WidelyHeld Public Corporation
Shareholders
Sign and return proxies
Sell Shares
Board of Directors
Delegate authority to officers
Ratify actions of officers
Officers
Influence selection
of directors
Run day-to day
business
Influence
proxy
votes
Sarbanes-Oxley Act
An Act to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes – 1/23/02
Sarbanes-Oxley Act (a.k.a. Public Company
Accounting Reform and Investor Protection
Act of 2002, SOX, SarbOx)
Legislative Reaction to Corporate and Accounting Scandals
(Enron, Tyco, WorldCom, …)
New and Enhanced Standards for U.S. Public Companies,
Boards, Management, and Public Accounting Firms
Requires the SEC to Implement Regulations
Specific Provisions:
–
–
–
–
–
Public Company Accounting Oversight Board
Auditor Independence
Corporate Responsibility
Enhanced Financial Disclosures
Enhanced White Collar Crime Penalties
• Restatements of financial results by public companies soared in 2005, in part due to SOX – WSJ
3/3/06
• Make SOX Fit – WSJ Editorial (Harvey L. Pitt, Former SEC Chairman) 4/13/06
Fundamental Changes of Corporations
Economic Good Sense to Facilitate Fundamental Changes
But … Fundamental Changes Materially Impact Interests
of Shareholders, Officers, and Directors
So, …Legal Rules for Approval Balance Economic Good
Sense and Interests of Stakeholders
What Are Fundamental Changes?
– Charter Amendments
– Combinations
– Dissolution/Going Private
Rights of Dissenting Shareholders
Fundamental Changes***
Change
Board of Director
Resolution Required
Shareholder
Approval Required
Shareholders’
Appraisal Remedy
Available
A amends its articles of
incorporation
A: Yes
A: Yes
A: No, unless amendment materially
and adversely affects rights of shares
B sells its assets in usual
and regular course of
business to A
B: Yes
B: No
B: No
B: Yes
B: Yes
B sells its assets not in usual B: Yes
and regular course of
business to A
A voluntarily purchases
shares of B
A: Yes
B: No
A: No
B: No, individual
shareholders decide
A: No
B: No
A acquires shares of B
through a compulsory
exchange
A: Yes
B: Yes
A: No
B: Yes
A: No
B: Yes
A and B merge
A: Yes
B: Yes
A: Yes
B: Yes
A: Yes
B: Yes
A merges its 90 percent
subsidiary B into A
A: Yes
B: No
A: No
B: No
A: No
B: Yes
A and B consolidate
A: Yes
B: Yes
A: Yes
B: Yes
A: Yes
B: Yes
A voluntarily dissolves
A: Yes
A: Yes
A: Not usually
*** Under pre-1999 RMBCA
Bottom Lines; Q&A
Separation Of Ownership And Management
Characterizes Corporations – And Minimizes
Shareholder Transactions Costs
Shareholders Have No Duties, Generally!
Broad Director and Officer Authority Is Bounded By
Shareholder (+ Regulatory) Oversight/Legal Standards
Of Performance
The Business Judgment Rule Immunizes Good Faith
Decisions; Application Is Fact-Based (i.e. Local)
Sarbanes-Oxley Enhances Legal Standards Of
Performance For Public Company Officers, Directors,
Auditors, Lawyers