McGraw-Hill/Irwin
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
P
A
R
T
Corporations
10
• History and Nature of Corporations
• Organization and Financial Structure
of Corporations
• Management of Corporations
• Shareholders’ Rights and Liabilities
• Securities Regulation
• Legal and Professional Responsibilities of
Auditors, Consultants, and
Securities Professionals
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C H A P
T
E R
43
Management of Corporations
Managers should work for their people…and not the reverse.
Kenneth Blanchard
Leadership and The One Minute Manager (2000)
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Learning Objectives
• Recognize limits on the objectives
and powers of corporations
• Describe the roles of the board of
directors and various committees
• Discuss recent developments in
corporate governance
• Adapt corporate governance rules
to the close corporation
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Corporate Powers
• Shareholders own the corporation, but
elect a board of directors to manage
the firm and, typically, the board
delegates most management duties to
officers, who in turn hire managers and
employees
• Model Business Corporation Act (MBCA)
states that a corporation has power to
do anything that an individual may do
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The Ultra Vires Doctrine
• Historically, an act of a corporation beyond
its powers was a nullity since it was ultra vires
(“beyond the powers”)
• MBCA and MNCA state that ultra vires may
be asserted by three types of persons:
– (1) a shareholder seeking to enjoin a
corporation from executing a proposed ultra
vires action; (2) the corporation suing
management for damages caused by
exceeding corporate powers; and (3) the
state’s attorney general
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The Board of Directors
• The board of directors supervises the
actions of its committees, the
chairman, and officers to ensure the
board’s policies are being carried out
and the corporation is managed wisely
• Some corporate actions require board
initiative and shareholder approval
– Amending articles of incorporation,
mergers, and dissolution
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Electing Directors
• Under straight voting, shareholder casts as
many votes for each nominee as s/he has
shares and top vote-getters are elected
• Class voting gives certain shareholder
classes right to elect a specified number of
directors
• Cumulative voting permits shareholders to
multiply their shares by number of directors
to be elected and cast the resulting total for
one or more directors
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Proxy Solicitation
• Once public ownership of shares
exceeds 50 percent, management must
solicit proxies from passive shareholders
to have a quorum and achieve a valid
shareholder vote
– A proxy is a person designated to vote
for the shareholder
– Wall Street rule: either support
management or sell the shares
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Officer Authority & Liability
• Officers of a corporation include the
president, one or more vice presidents,
a secretary, and a treasurer
• Officers are agents of the corporation,
thus have express authority conferred
on them by the bylaws or the board of
directors and implied authority to do
things reasonably necessary to
accomplish duties
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Director & Officer Duties
• Directors and officers owe a fiduciary duty
to the corporation, including duty to act
within the scope of the powers of the
corporation
• Officers must within authority conferred by
the articles of incorporation, bylaws, and
board of directors
• Directors and officers are liable for losses to
the corporation caused by their lack of
care or diligence
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Business Judgment Rule
• The MBCA duty of care test requires a
director or officer to make a
reasonable investigation and honestly
believe that the decision is in the
corporation’s best interests
• Business judgment rule: absent bad
faith, fraud, or breach of fiduciary
duty, the judgment of directors and
officers is conclusive
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Acquiring Control of a Corporation
• When an outsider attempts to gain control
of a publicly held corporation (the target),
the outsider (raider) makes a tender offer
for the shares of a corporation
– Tender offer is an offer to shareholders to buy
their shares at a price above market price
• Corporate management generally
opposes tender offers using a variety of
defenses
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Conflicting Interest Transaction
• As agents, directors and officers owe the
corporation duties of loyalty, including the
duty not to self-deal (a conflict of interest)
• If a director has a conflict of interest, a
court may void the transaction with the
corporation if it is unfair to the corporation
• Intrinsic fairness standard: a transaction is
fair if reasonable persons in an arm’s-length
bargain would have bound the
corporation
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Minority Shareholders
• Shareholders isolated by another group of
shareholders may complain of oppression
• A freeze-out is oppression in which the
corporation merges with a newly formed
corporation under terms by which
minority shareholders receive cash
instead of shares of the new corporation
– Going private is a freeze-out of shareholders
of publicly owned corporations
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Management Liability
• A person is always liable for his own torts,
even if committed on behalf of a principal
– A director is liable for authorizing a tort or
participating in its commission
• A person is always liable for his own
crimes, even if committed on behalf of a
principal
• Corporations may also be liable for crimes
as an entity or for employees
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Indemnification & Insurance
• Because officers and directors have a risk
of liability, corporations often indemnify
those who serve as a director or an officer
– Indemnify: to protect or insure; refers to
practice by which corporations pay
expenses of officers or directors named as
defendants in litigation
• D & O insurance used as risk management
tool
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Thought Question
• Roberto Goizueta, former
CEO of Coca-Cola, said
in 1992: Business now
shares in much of the
responsibility for our
global quality of life.
• Do you agree or disagree
with Goizueta? Support
your opinion.
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