978-1133019145 Chapter 9 Solution Manual

subject Type Homework Help
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subject Authors Angela Schneeman

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©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
CHAPTER 9
The Corporate Organization
THEME
Chapter 9 focuses on the roles of the officers,
directors, and shareholders in the operation of
the corporation. Special attention is given to
the authority and duties of the directors and to
the rights of shareholders.
CHAPTER GOAL
The goal of this chapter is for students to
Roles of the corporation’s officers,
directors, and shareholders
Authority and duties of the corporation’s
directors and officers
Rights and responsibilities of the corp-
oration’s shareholders
Purpose and requirements for shareholder
meetings
The role of corporate paralegals when
assisting with board of director and
shareholder meetings and actions
Resources available to corporate
paralegals who may be assisting with
meetings and actions of the corporation’s
board of directors and shareholders
SUGGESTED APPROACH
Lawsuits and other disputes involving corporate
officers, directors, and shareholders are often the
center of media attention. In addition to your
focus on the chapter material, you may want to
bring in pertinent news stories, or ask students to
do so. Through class discussions, students can
try to analyze the information in the news stories
in light of what they have learned in Chapter 9.
LECTURE NOTES
Introduction
1. Corporations act through their agents,
especially their officers, directors, and
shareholders.
2. Most corporations are required to have a
board of directors. There may be exceptions
for statutory close corporations.
directors that range from one director to
several.
4. The directors of smaller corporations
may also be employees, officers, and
shareholders of the corporation.
Authority and Duties of Directors
5. The corporation’s shareholders elect the
directors, who are given statutory
authority to make most decisions
regarding the operation of the corporation.
6. The board of directors elects the officers
of the corporation and delegates authority
to them.
7. The board of directors may delegate
certain authority to the officers, but the
directors must maintain general
supervision of the activities of the
officers. Directors are generally
responsible for the actions of the officers
they elect.
8. The board of directors may also delegate
authority to committees comprised of
members of the board of directors. The
right to this delegation is usually granted
by state statutes and the bylaws of the
corporation.
64 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
9. The board of directors is responsible for
overseeing the management and affairs of
the corporation. The responsibilities the
board of directors must oversee will vary
depending on the size and business of the
corporation, and whether the stock of the
corporation is publicly traded. Some state
statutes list items representative of those
for which directors of a publicly traded
corporation have oversight
responsibilities.
10. Not all authority may be delegated to
committees. The Model Business
Corporation Act specifies that a
committee may not do the following:
Authorize dividends or distributions
to the shareholders of the corporation
Approve or propose to shareholders
action required by law to be approved
by shareholders
Fill vacancies on the board of
directors or on any of its committees
Amend the articles of incorporation
Adopt, amend, or repeal bylaws
Approve a plan of merger that does
not require shareholder approval
Authorize or approve reacquisition of
shares, except according to a formula
or method prescribed by the board of
directors
Under most circumstances, authorize
or approve the issuance, sale, or
contract for sale of shares, or
determine the designation and
relative rights, preferences, and
limitations of a class or series of
shares
11. There are also limitations on the authority
of the board of directors. State statutes
and the corporation’s articles of
incorporation or bylaws may provide that
certain extraordinary actions require the
approval of the corporation’s
shareholders.
12. Under the Model Business Corporation
Act, directors must discharge their duties
(1) in good faith, (2) with the care an
ordinarily prudent person in a like
position would exercise under similar
circumstances, and (3) in a manner they
reasonably believe to be in the best
interests of the corporation.
13. A director who acts contrary to the best
interests of the corporation for his or her
own personal gain is breaching his or her
fiduciary duty to the shareholders of the
corporation.
14. A director’s duty of care can be
measured, in part, by the time and
attention he or she devotes to the affairs
of the corporation and the skill and
judgment he or she uses in business
decisions.
15. The director’s duty of loyalty means that
he or she must at all times remain loyal to
the corporation and act in the best
interests of the corporation and its
shareholders as opposed to the director’s
other business or personal interests.
Personal Liability of Directors
16. The business judgment rule protects
directors from personal liability for
informed decisions made in good faith
where there is no conflict of interest and
the director feels the corporation’s best
interests are being served by the decision.
17. The business judgment rule protects
directors and officers from personal
liability for business decisions made in
the context of the following:
Good faith
Where the director or officer has no
personal interest in the subject of the
business judgment
Where the director or officer is
informed with respect to the subject
of the business judgment to the extent
CHAPTER 9 The Corporate Organization 65
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
the director reasonably believes to be
appropriate under the circumstances
Where the director or officer
rationally believes that the business
judgment in question is in the best
interests of the corporation
18. Directors will generally not be held
personally liable for any damages caused
to the corporation or its shareholders as a
result of their decisions made in good
faith.
19. Directors may be held personally liable
for the following:
Breaches of the director’s fiduciary
duty, duty of care, or duty of loyalty
Unauthorized acts (acts clearly
beyond the scope of their authority)
Negligence
Fraud or other illegal acts
Acts that are controlled by state
statute or the corporation’s articles of
incorporation or bylaws that provide
for personal liability by directors
Compensation and Indemnification of
Directors
20. Directors may or may not receive
compensation specifically for their roles
as directors in the corporation. Director
compensation is usually set by the board
of directors, unless the right to set
director compensation is limited to the
shareholders by state statute or the
corporation’s articles of incorporation or
bylaws.
21. Provisions in the articles of incorporation
and bylaws may provide for
indemnification to reimburse directors
for expenses incurred by them in
defending a lawsuit to which they
become a party due to their position with
the corporation.
22. State statutes may provide for mandatory
director indemnification under certain
circumstances and prohibit indemnification
under other situations, such as when a
director incurs legal expenses due to his or
her own wrongdoing.
Election and Term of Directors
23. Directors are elected by a vote of the
shareholders to serve for the term
specified by the shareholder resolution or
in the corporation’s articles of
incorporation or bylaws.
24. The corporation’s shareholders may
decide to ensure the continuity of
management by staggering the terms of
the directors.
25. Directors may usually resign at any time
and for any reason by giving written
notice to the chairman of the board.
26. Directors may be removed by the
shareholders with or without cause in the
manner provided for by state statute and
the corporation’s articles and bylaws.
27. In some states, board vacancies may be
filled by a vote of the remaining
directors. Other states require a special
meeting of the shareholders to elect a
new director.
Board of Directors Meetings and
Resolutions
28. Actions by the board of directors may be
taken by a resolution passed at a meeting
or by a written consent signed by all
directors (or a majority of the directors if
provided for by state statutes and the
corporation’s articles of incorporation).
29. Annual meetings of the board of directors
are generally held to review important
events that have occurred during the past
year and to take actions on those matters
requiring action for the upcoming year.
30. Proper notice of meetings of the board of
directors must be given in accordance
with state statutes and the articles of
incorporation and bylaws of the
corporation.
66 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
31. The board of directors must have a
quorum to take action at a meeting. A
quorum is the minimum number of
individuals who must be present or
represented at a meeting to take a valid
action. The quorum for the meeting of
the board of directors may be set by the
corporation’s bylaws or articles of
incorporation, or by state statute.
32. The minutes of meetings or written
consents of the board of directors and
shareholders are kept in the corporation’s
corporate minute book, along with other
important corporate documents.
33. Meetings of the board of directors may
also be held via telephone, web
conference, or by any means of
communication by which all directors
participating may simultaneously hear
each other talk during the meeting.
Corporate Officers
34. The board of directors elects the officers
of the corporation. The titles and duties of
officers are usually set forth in the bylaws
of the corporation. State statutes often
require that a corporation elect certain
officers, such as a chief executive officer
and chief financial officer. The
corporation’s officers may include the
following:
Chief executive officer
President
Chairman of the board
Vice president
Chief financial officer
Treasurer
Secretary
Assistant secretary
35. Officers are generally held to the same
standards of conduct as directors of the
corporation, and they owe the same
fiduciary duty, duty of care, and duty of
loyalty to the corporation and the
corporation’s shareholders.
White-Collar Crime and Corporate
Compliance Programs
36. White-collar crime is an important issue
to the board of directors, officers, and
shareholders of any corporation.
Financial loss due to white-collar crime is
a concern, as is criminal prosecution of
corporate executives.
37. Corporations are proactively adopting
corporate compliance programs to
prevent and detect criminal conduct
within their organizations.
Shareholders’ Rights and Responsibilities
38. A shareholder or stockholder holds stock
in the corporation. In effect, the
shareholders are the owners of a
corporation.
39. Shareholders may be individuals or other
corporations or entities.
40. Preemptive rights granted to shareholders
allow them to purchase new shares issued
by the corporation before persons who
are not current shareholders may do so.
This allows current shareholders to
preserve their percentage of ownership in
the corporation. Preemptive rights may
be granted by state statute or the
corporation’s articles of incorporation.
Preemptive rights are typically granted
only in smaller corporations.
41. Shareholders have a right to inspect the
records of the corporation.
42. Shareholders are generally protected from
personal liability for the debts and
obligations of the corporation, unless the
corporate veil is pierced, as discussed in
Chapter 7.
Shareholder Meetings
43. Shareholders participate in the
management of the corporation by
electing directors and through their
participation in annual shareholder
meetings. Certain acts of the corporation
must be approved by the shareholders.
CHAPTER 9 The Corporate Organization 67
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
44. Corporations are generally required by
state law to hold annual shareholder
meetings. If the board of directors does
not hold meetings in accordance with its
bylaws, shareholders may move for a
court order to compel the corporation to
hold an annual meeting.
45. In some states, shareholders may be
granted the right to cumulate their votes
for directors of a corporation. Cumulative
voting rights give minority shareholders a
better chance of electing at least one
director to the board of directors.
46. In lieu of meetings, shareholders may
take actions by unanimous written
consents.
47. Special meetings of the shareholders may
be called between the annual meetings to
allow shareholders to vote on
extraordinary matters.
48. Shareholders must be given notice of all
shareholder meetings in accordance with
state statute and the corporation’s
bylaws.
49. Shareholders may vote in person or by
proxy. A proxy is authority given in
writing by one shareholder to another to
exercise the shareholder’s voting rights.
50. A quorum of the shareholders must be
present to take action at a shareholder
meeting.
Restrictions on Transfer of Shares of
Corporate Stock
51. Although the freedom to transfer
corporate stock without restriction is
usually a shareholder right, the transfer of
shares of stock may be restricted by
shareholder agreements.
52. Buy-sell agreements are agreements
among shareholders that provide terms
for the purchase of the shares of a
shareholder who withdraws or dies.
Shareholder Actions
53. Shareholder lawsuits include individual
actions, representative actions, and
derivative actions.
54. An individual shareholder who is injured
by an action of the corporation may bring
an individual (or direct) action against
the corporation.
55. A representative action may be brought
against the corporation by a shareholder
on behalf of that shareholder and his or
her entire class of shareholders.
56. Derivative actions are brought by one or
more shareholders to enforce a corporate
right or remedy a wrong to the corporation
in cases where the corporation, because it
is controlled by the wrongdoers or for
other reasons, fails or refuses to take
appropriate action for its own protection.
The Paralegal’s Role
57. Corporate paralegals are often involved
in preparing for meetings of the board of
directors and of the shareholders and in
preparing minutes of meetings and
written consents.
58. Corporate paralegals are often assigned
the task of reviewing and updating
corporate minute books.
CASE BRIEFS
Grassmueck v. Barnet, et al. 281 F.Supp.2d
1227 (Wash. 2003)
Purpose: This case demonstrates how
directors who act in bad faith can be held
personally accountable, even when the articles
of incorporation of the subject corporation
provide for the maximum amount of liability
protection for directors.
Cause of Action: Breach of duty, negligence,
and bad faith
Facts: In this case, the defendants were
outside directors of Znetix Inc., while Znetix’s
founder and principal stockholder, Kevin
Lawrence, served as director. Mr. Lawrence
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68 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
was accused of exerting “unchecked power
and control” over Znetix, and diverting
millions of dollars from the day-to-day
operations for the personal benefit of himself,
his family, friends, and accomplices.
As a result of Lawrence’s acts, the
Securities and Exchange Commission forced
Znetix into receivership and forced
liquidation. The complaint alleges losses to
shareholders exceeding $10,000,000.
The plaintiff and receiver, Michael
Grassmuek, claimed that the defendant
directors and officers should be held
personally liable for damages to the creditors
and investors because they were negligent and
exercised bad faith by failing to act to prevent
or control Lawrence’s wrongful acts. The
complaint alleges that the directors and
officers had knowledge of, or recklessly failed
to learn of, Lawrence’s wrongful acts when
they recklessly and negligently continued to
work for Znetix and/or allowed their names,
services, and work product to be used in
furtherance of Lawrence’s wrongful acts,
without disclosing those acts or taking steps to
prevent them. The complaint alleges that they
acted in bad faith by accepting compensation
for a job they did not intend to properly
perform, acting in their own self-interest at the
expense of the corporation. The defendants in
this case brought this motion to dismiss the
suit against them. They claim that the plaintiff
pleads insufficient facts to elevate the duty of
care claim outside of the maximum protection
provided in the articles of incorporation.
The pertinent state laws protect
duty of care. However, if directors breach the
duty of care intentionally, knowingly, or in
bad faith, the director protection statutes will
not shield them from personal liability.
Further, when directors breach the duty of
loyalty or act in bad faith, they are not
shielded by the director protection statutes.
act in a manner that subjects them to personal
liability, in light of the fact that the
corporation’s articles of incorporation
provided for the maximum protection from
personal liability allowed under law?
Holding: The defendants’ actions were not
protected under the director protection
statutes. The motion to dismiss was denied.
Reasoning: In Washington and Delaware,
directors are protected against general claims
for breach of the duty of care when pursuant to
state law a corporation adopts a director
protection provision into its articles of
incorporation. However, if directors breach the
duty of care intentionally, knowingly, or in bad
faith, the director protection statutes will not
shield them from personal liability. The plaintiff
listed several factors showing that the defendant
officers and directors acted in bad faith, in that
they knew or should have known about Kevin
Lawrence’s wrongful acts. Plaintiff sufficiently
stated claims for negligent or bad faith
performance of duties and breach of duty under
Washington law and Delaware law.
Note for Discussion: On July 28, 2003, Kevin
Lawrence pled guilty to three felony counts of
conspiracy, securities fraud, and wire fraud.
On November 25, 2003, he was sentenced to
20 years of imprisonment, to be followed by 3
years of supervised release, and was ordered
to pay more than $91,000,000 in restitution to
the Receiver.
REVIEW QUESTIONS
1. Where does a committee get its
authority?
Who is ultimately responsible for the acts
of the committee?
2. What are the three types of duties a
director owes to the corporation?
Fiduciary duty
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CHAPTER 9 The Corporate Organization 69
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
personal assets to recover their damages?
No, directors cannot be held personally
What if one director withheld
information from the other directors and
personally benefited from the decision?
Yes, a director who acts contrary to the
best interest of the corporation,
4. Suppose that Albert is on the board of
directors of Acme Sailboard Company,
Inc. As the result of a contract dispute,
Acme Sailboard Company, Inc. and
Albert are both named in a lawsuit
brought by one of the company’s
suppliers. If Albert is found at the trial to
be innocent of any wrongdoing, who is
Acme Sailboard Company, Inc. would
be responsible for Albert’s attorney’s
fees and legal expenses. State statutes
and Section 8.52 of the Model Business
What if it is determined at trial that there
5. Can a corporation incorporated under a
state following the MBCA consist of one
Yes
6. Must all corporations have a board of
directors?
No, in some states statutory close
8. Under the MBCA, what is the minimum
number of votes required to pass a
resolution of the shareholders if 1,000
shares of the corporation’s stock have
been issued?
The vote of 501 shares of stock would
be required to pass most resolutions,
9. If the shareholders of a corporation feel
that their stock has lost its value due to the
mismanagement and/or misconduct of the
corporation’s officers and directors, what,
they may vote the directors out of
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70 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
10. Who typically benefits when cumulative
voting for the directors of a corporation is
allowed?
Minority shareholders who would not
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The first two Practical Problems in this
chapter ask students to research the
preemptive rights and cumulative rights
granted to shareholders by statute in their
home state. Preemptive rights and cumulative
rights are two important shareholder rights
that are not desirable in every instance. The
statutes of many states grant these rights,
unless otherwise provided in the articles of
incorporation. In several other states, these
rights are not granted unless provided for in
the articles. It will be important for students to
know how these rights are treated by the
statutes in their state.
Students are asked to locate the
pertinent statute sections and determine what
rights shareholders are granted if the articles
of incorporation remain silent on the issues.
The third of the Practical Problems
asks students to locate and analyze state
statutes concerning written consents in lieu of
meetings. These rules have been changing in
recent years, and vary between the states. In
some states, written consents of the directors
must be unanimous unless the articles of
incorporation provide otherwise. In other
states, resolutions may only be passed by a
unanimous writing signed by all directors.
Corporate paralegals are often asked to
prepare corporate resolutions, and it will be
important for students to know the rules in
their home states.
on the CourseMate website that accompanies
this text at http://www.cengagebrain.com.
EXERCISE IN CRITICAL
THINKING
implications of the business judgment rule.
Exercise:
Why is the business judgment rule
so important to both directors and
shareholders? What would be some
possible consequences if directors
could not rely on the business
judgment rule?
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE
WORKPLACE SCENARIO
The Workplace Scenario at the end of this
chapter asks students to prepare sample
unanimous writings in lieu of annual meetings
of the shareholders and directors of their
fictitious corporation, Cutting Edge Computer
Repair, Inc.
Appendix J(a) is a sample unanimous
writing in lieu of the annual meeting of
shareholders. Appendix J(b) is a sample
unanimous writing in lieu of the annual
meeting of the board of directors.
ALTERNATIVE WORKPLACE
SCENARIO EXERCISE
Instead of preparing unanimous writings in
lieu of the annual meetings of the shareholders
and directors of Cutting Edge Computer
Repair, Inc., students can hold mock annual
meetings and prepare minutes of those
meetings. If time permits, students may enjoy
some role-playing with this assignment.
In addition to annual minutes, students
should prepare the proper notices and/or
waivers of notice as described in the text,
following the samples provided therein.

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