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

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subject Authors Roger LeRoy Miller

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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 approvalcertain
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
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whole or in part.
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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 meetingand the resolutions made at that meetinginvalid. 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 COURTS 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.
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whole or in part.
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page-pf7
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whole or in part.
page-pf9
whole or in part.
page-pfa
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
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
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 approvalcertain
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 meetingand the resolutions made at that meetinginvalid. 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 COURTS 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.
whole or in part.
whole or in part.
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
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

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