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297
responsibility.”
Ambrose Bierce
I. Teacher to Teacher Dialogue
allows for many distinct advantages to the corporate entity; but what the law gives with one hand,
it can take away with the other. How to protect those corporation-based prerequisites is really
1. A diagram of the corporate lines of authority.
2. The respective rights and duties of the various parties in that line of authority.
3. A listing of responsibilities and liabilities of these parties not only to each other, but also to
key third parties such as shareholders and parties having a contract or tort nexus with the
corporation.
In all three scenarios try to give case examples that illustrate the rule of law being discussed.
There are two basic theories under which most of the limitations to corporate entity and/or
corporate participants’ liability are restricted or eliminated. First, public policy never has allowed
the corporate form to act as a total shield from liability to third parties. From the very inception of
corporate law, courts and legislators have clung to the back door option of holding someone
The second theory is found in the intracorporate workings of the organization itself. Just as
the corporate form should not be allowed to defraud creditors and the like, so too should it not be
allowed to be used by various members of corporate organizations to harm each other. The
cornerstone of relationships among shareholders, directors, and officers is founded in the law of
CORPORATE GOVERNANCE AND
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Finally, Congress acted quickly in 2002 when passing the Sarbanes-Oxley Act to help restore
II. Chapter Objectives
corporation.
2. Describe a director’s and an officer’s duty of care and the business judgment rule.
III. Key Question Checklist
What are the fiduciary duties of a director?
IV. Text Materials
Introduction to Corporate Governance and the Sarbanes-Oxley Act
Following decades of financial frauds and scandals involving directors and officers at some of the
largest companies in the United States, Congress enacted the Sarbanes-Oxley Act of 2002. This
Shareholders – The corporation shareholders are the owners of the corporation, and have the
Shareholders’ Meetings – Annual meetings are held to elect the board and appoint auditors at
the time prescribed by the bylaws. If a meeting is not held within 15 months of the last annual
Proxies – Shareholders may appoint another person to act as their agent to vote at the meeting.
Voting Requirements – Every corporation has at least one class of shares which has voting
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Quorum and Vote Required – Unless otherwise provided in the articles of incorporation, if a
majority of shares entitled to vote are represented at a meeting in person or by proxy, there is a
Straight (Noncumulative) Voting – Unless otherwise stated in the articles or bylaws, votes for
Cumulative Voting – A corporation’s articles of incorporation may provide for cumulative
voting for the election of directors. This means that each shareholder is entitled to multiply the
Supramajority Voting Requirement – Either the articles or the bylaws may call for greater than
the simple majority of shares to fulfill a quorum or vote requirement. Such votes are often
duration and filed with the corporation.
Shareholder Voting Agreements – Shareholder voting agreements are agreements
methods are:
Right of First Refusal – This is an agreement that grants certain shareholders the right of
Buy-and-Sell Agreement – This agreement requires that shareholders sell their shares to
be offered elsewhere.
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shareholders at a set record date.
Stock Dividends – These are distributions of additional stock shares in proportion to the existing
ownership interests of shareholders.
is not in the best interests of the corporation. If successful, the plaintiff (shareholder) may recover
reasonable expenses and attorneys’ fees, with the remainder of the money going to the
corporation.
Critical Legal Thinking – Piercing the corporate veil enables a plaintiff to obtain personal assets
of a defendant, officer, or director who has been sued as a result of liability in a corporation. The
corporate veil doctrine permits plaintiffs to obtain personal assets of officers and directors when
fraudulent.
Case 37.1 Piercing the Corporate Veil: Northeast Iowa Ethanol, LLC v. Drizin
2006 US Dist Lexis 4828 (2006), United States District Court for the Northern District of Iowa
Facts: Local farmers in Manchester, Iowa, decided to build an ethanol plant in the Manchester
million, for which financing needed to be secured. Jerry Drizin formed Global Syndicate
International, Inc. (GSI), a Nevada corporation with $250 capital. GSI was formed for the
purpose of assisting Northeast Iowa raise the additional financing for the project. Traditional
financing from banks was not available for such a project, so Drizin looked for other sources of
a shareholder of GSI. The plaintiffs alleged that the doctrine of piercing the corporate veil applied
and that Drizin was therefore personally liable for the funds.
Corporate Governance and Sarbanes-Oxley Act
301
fraud?
Decision: The U.S. District Court held that the corporate veil of GSI could be pierced to reach its
shareholder Drizin. The Court awarded the plaintiff compensatory damage of $3.8 million and
punitive damages of $7.6 million against Drizin. Generally a corporation is a distinct entity from
its shareholders. This distinction usually insulates shareholders from personal liability for
risk of loss, this is a ground for denying the separate entity privilege. Secondly, if corporate funds
are not segregated, there is a strong inference that they are being used by the shareholders for
their individual purposes.
Ethics Questions: Civil fraud is the intentional misrepresentation of a material fact, knowing
Board of Directors
The board of directors of a corporation is elected by the shareholders of the corporation. The
board of directors is responsible for formulating policy decisions that affect the management,
Resolutions of the Board of Directors – The board of directors acts by adopting resolutions.
Digital Law: Corporate E-Communications
efficient.
Selecting Directors – The board consists of both inside directors, who are also officers of the
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Quorum and Voting Requirement – The articles usually require that a simple majority of the
board members be present to constitute a quorum.
Ethics: Sarbanes-Oxley Act Imposes Responsibilities on Audit Committee
officers will engage in some kind of fraud because they have total control over a corporation. To
deter such wrongful acts we need laws such as the Sarbanes-Oxley Act. The requirement of
Corporate Officers
offices simultaneously.
Agency Authority of Officers – Because they are agents, officers have the express authority
Fiduciary Duty: Duty of Obedience
shareholders.
Fiduciary Duty: Duty of Care
Directors and officers must use care and diligence, discharging their duties in good faith and
corporation and its shareholders.
Critical Legal Thinking – The business judgment rule is an affirmative defense which officers
