Book Opener

CHAPTERASSESSMENTSection 29.1 Managing the Corporation● Corporate directors manage a corporation. Theyare responsible for broad policy decisions madeby a corporation, and are subject to corporatebylaws and state laws regulating their behavior.You don’t need special qualifications to be adirector of a corporation, and usually the shareholderselect and remove directors. However, acorporation’s certificate of incorporation or itsbylaws may specify that one director must be ashareholder and one must be a state resident.Directors generally serve for a set number ofyears and then must sit for reelection by theshareholders. Often, corporate bylaws call forstaggered elections so that all of a corporation’sdirectors are not elected at the same time.Directors meet regularly, at a time and placeof their choosing.● Corporate officers carry out the day-to-dayoperations of the corporation. Officers are agentsof the corporation and principal-agent rulesapply. Like directors, officers are subject to theduties of loyalty and due care. Each officer’sduties are generally spelled out in the corporation’sbylaws.● Shareholders are owners of stock in a corporation.They have the right to: (1) receive dividendsas declared by the board of directors; (2) receiveand possess a stock certificate; (3) have readyaccess to corporate records; (4) maintain a proportionateshare of stock in the corporation; and(5) exercise a vote for each share of stock owned.● To vote, a shareholder can attend the annualshareholders meeting in which the board ofdirectors and officers present corporate businessto be voted upon. Most states allow this meetingto be held anywhere, and many corporations renthalls to encourage attendance. The president orchairman of the board usually presides at shareholdersmeetings. A majority of the shareholdersmust be represented either in person or by proxybefore business can be conducted. Shareholderscan vote independently or under the terms of avoting trust or pooling agreement.Section 29.2 Management Responsibilities● The courts have tried to clarify the concept ofdue care to encourage competent people tobecome and remain corporate directors andofficers. They have often given a liberal interpretationto the duty of due care, applying thebusiness judgment rule. Corporate directors arepresumed to be acting with due care, and thecourts will defer to their judgment and decisionsunless the directors lack good faith, commitillegal acts, or have conflicts of interest.● A director’s decision will stand, despite a conflictof interest in the transaction between the corporationand another party, if the director can provethat the decision would have involved the sameconditions, price, or terms if it had been made atarm’s length.● An extension of the director’s duty of loyalty tothe corporation prohibits a director from taking abusiness opportunity for himself or herself if heor she has knowledge that the corporation wouldwant to take that opportunity for itself. If thecorporation turns down the opportunity, thedirector is then free to take it without conflict.The only exception to this rule is if the directoror officer knows that the corporation is financiallyincapable of taking the opportunity, despiteits interest. In such a situation, the director orofficer would be permitted to take the opportunitywithout violating the doctrine.● In a limited liability company, the owners caneither manage the firm on their own, or they canchoose to enlist the services of outside administrators.A member-managed LLC is one that isrun by the owners themselves; a managermanagedLLC is one that is directed by anoutside manager.640 Unit 6: Starting a Business