978-1285770178 Lecture Note BL ComLaw 1e IM-Ch05 Part 1

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

Directors hold positions of trust and control over their corporation, but unlike trustees, they do not own or hold

title to property for the use and benefit of others.

A. ELECTION OF DIRECTORS

The number of directors is stated in the articles or bylaws. Close corporations may eliminate the board

altogether. The incorporators, or the corporation in the articles, appoint the first board, which serves until

the first shareholders’ meeting. A majority vote of the shareholders elects subsequent directors.

Directors typically serve for a year or more.

1. Removal of Directors

There is no inherent right to compensation, but many states permit the articles or bylaws to authorize it,

and in some cases the board can set its own. Directors may set their own compensation [RMBCA 8.11].

A director who is also a corporate officer is an inside director. A director who does not hold a

management position is an outside director.

2. Voting

Each director has a vote [RMBCA 8.24]. Ordinary matters require majority approval—certain

extraordinary matters may require more.

ENHANCING YOUR LECTURE—

 THE TIMING OF DIRECTORS’ ACTIONS

IN AN ELECTRONIC AGE



Corporate directors can hold special board meetings to deal with extraordinary matters, provided that they

give proper notice to all members of the board. If a special meeting is called without giving sufficient notice to

all of the directors, are the resolutions made at that meeting invalid? If so, can the directors validate these

resolutions by holding a second special board meeting with proper notice? In today’s electronic age, matters

of timing can be complicated and can affect a variety of other issues, including the effective date of a

director’s resignation and the validity of a resolution appointing a new director. These were the central issues

presented by In re Piranha, Inc.a

whole or in part.

4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

THE ISSUE OF PROPER NOTICE

In May 2001, Edward Sample, the chairman of the board of directors of Piranha, Inc., called a special

meeting for May 25 to consider restructuring Piranha’s management in response to serious financial

problems. The four members of the board of directors at that time were Sample, Richard Berger, Larry

Greybill, and Michael Steele. Berger objected to the lack of notice of the May 25 meeting and refused to

attend, claiming that the meeting was invalid. The other directors held the meeting without him and, among

other things, voted to accept the resignations of two of the directors, Greybill and Steele, and appoint a new

director, Mike Churchill.

After the meeting, Greybill submitted his written resignation, but Steele did not, fearing that Berger might

be correct about the lack of notice rendering the meeting invalid. Nonetheless, the corporation’s legal counsel

filed a form with the Securities and Exchange Commission (SEC) on May 25 indicating the changes made to

the board of directors. The SEC form stated that Steele had resigned as director and contained Steele’s

electronic signature.

THE SECOND MEETING

By early June, Piranha’s legal counsel concluded that insufficient notice had probably rendered the May

25 meeting—and the resolutions made at that meeting—invalid. The attorneys informed the directors that, to

effect the changes to the board, they would need to call another special meeting and provide sufficient notice.

A second special meeting was held on June 15 with proper notice (to Berger, Sample, and Steele), and

Churchill was voted in as a director. Steele, now confident that Churchill was validly appointed as a director,

submitted his written resignation the following day.

Berger, however, contended that Churchill was not truly a corporate director because Steele had no right

to vote at the second board meeting. At issue was whether the SEC filing of May 25 bearing Steele’s

electronic signature meant that Steele had effectively resigned on that date. If Churchill was not a valid

director, then his subsequent vote that the corporation should file for bankruptcy would be invalid.b

THE COURT’S CONCLUSION

Ultimately, a federal appellate court held that Steele’s electronic signature on the SEC filing did not

operate as his formal resignation. Under the Uniform Electronic Transactions Act (UETA), a signature may not

be denied legal effect solely because it is in an electronic form. Section 107(a) of the UETA, however, also

allows a person to disavow the signature. Here, Steele claimed that he did not authorize his signature on the

form submitted to the SEC. Therefore, the court found that Steele had not resigned until he submitted his

written resignation following the second meeting. Thus, Churchill was a corporate director and could vote for

the corporation to file bankruptcy.

FOR CRITICAL ANALYSIS

What would the legal consequences have been if Berger had attended the first special board

meeting despite the lack of sufficient notice?

a. 2003 WL 22922263 (5th Cir. 2003).

b. After the June 15 meeting, the directors voted that the corporation should file a petition for bankruptcy. Berger originally filed an action

requesting that the court dismiss the bankruptcy petition because Churchill was not a valid director at the time of the vote. The

bankruptcy court rejected this contention and Berger appealed, resulting in the decision discussed here.

whole or in part.

10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

4. Electronic Proxy Materials

Publicly held companies must post proxy materials (e-proxy) online. If a company wishes to

distribute the materials only online, it must notify shareholders, who can request paper copies.

ENHANCING YOUR LECTURE—

 A SHAREHOLDER ACCESS RULE 

Shareholders elect the board of directors. Shareholders who have a relatively small percentage of the

outstanding shares of any corporation have little success, though, in proposing candidates to boards of

directors.

Enter the possibility of a “shareholder access” rule. Such a rule would make it easier for shareholders to

use the proxy process to elect dissident candidates for a board of directors of a publicly held company. The

Securities and Exchange Commission (SEC) made a modest attempt to allow such shareholder access in the

early part of the 2000s. Such a proposed change was highly controversial and died in 2003.

It has been resurrected in the last few years, however. Until a court challenge in late 2006, the SEC

interpreted its own rule as specifically allowing a corporation to exclude any shareholder proposal from its

proxy materials “if the proposal relates to an election for membership on the company’s board of directors . . .

.” a The Second Circuit Court of Appeals rejected the SEC’s interpretation of that rule.b The court ruled that

the American Federal of State, County & Municipal Employees (AFSCME) could include a shareholder

proposal in a proxy statement that, if adopted by the majority of shareholders, would amend bylaws to require

a corporation to publish the names of shareholder-nominated candidates for director positions, in addition to

any candidates nominated by the corporation’s board of directors.

INVESTOR ACTIVISTS AND OTHERS ARE IN FAVOR OF SHAREHOLDER ACCESS

Whatever the decision the SEC takes on interpretation of its own rule, shareholder access will remain a

controversial topic. Investor activists have always claimed that without a shareholder access rule, directors

have little incentive to pay attention to the concerns of their shareholders. They point out that most

shareholders are discouraged by the current system from putting any effort into guiding the corporations.

They argue that the lack of corporate dialogue with shareholders promotes frequent litigation. When

shareholders attempt to alter what they view as questionable corporate behavior, their only remedy seems to

be a lawsuit.

Much of the media have also argued that shareholders in public companies are relatively helpless in the

face of managerial greed.

SHAREHOLDER ACCESS MAY LOWER RETURNS TO SHAREHOLDERS

The arguments against shareholder access have a certain amount of empirical data to substantiate them.

Opponents of shareholder access point out that, if passed, such a rule would dramatically accelerate “an

already dangerous trend: ‘the flight of corporation away from public investors into the arms of private equity.’”

These are the words of law professor Lynn A. Stout of the UCLA-Sloan Research Program on Business

Organizations. Stout points out that, in any event, today’s shareholders have more influence and power over

top management and directors than ever before. They can be part of class-action lawsuits, they benefit from