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in whole or in part.
in whole or in part.
in whole or in part.
4 UNIT ONE: BUSINESS ORGANIZATIONS
© 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.
shareholders of a close corporation (like the McCann firm) so long as those decisions are
genuine.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Duties of directors
As a director, Brock is in a fiduciary relationship with the corporation, which means that he owes
to Firm Body the duty of care and the duty of loyalty.
loyalty to Firm Body.
3A. Breach of loyalty
The business judgment rule immunizes decisions that are made in good faith as long as the
decision complies with the manager’s fiduciary duties and was within the manager’s power to
words, Peñada could file a suit on behalf of the corporation claiming that Brock’s breach of his
fiduciary duties caused harm to the corporation. If the suit was successful, any damages
recovered would go to the corporation, not Peñada.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
erned. Therefore, even though on paper shareholders control corporations because they can
vote out bad directors, they really never do.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 5
© 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.
When a corporation is badly managed, that corporation’s stock price drops. That is
because shareholders vote with their “wallets” by selling the shares in that company, thereby
lowering the price of the stock. When the price of the stock gets low enough, outside groups
attempt a takeover in order to put in place their preferred group of directors. That’s how the
market for corporate control works.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
2A. Nico is Omega Corporation’s majority shareholder. He owns enough stock in
Omega that if he were to sell it, the sale would be a transfer of control of the firm.
Discuss whether Nico owes a duty to Omega or the minority shareholders in selling his
shares. Yes. A single shareholder—or a few shareholders acting together—who owns enough
5-1A. Conflicts of interest
(Chapter 5—Page 82)
Various state statutes contain different standards for contracts made between two corporations
when a director of one corporation has a material interest in the other. In general, however, the
courts will uphold these contracts providing that:
In the case of Wick and Oxy Corp., the contract may be set aside for two reasons. First, the
conflict-of-interest transaction was not fully disclosed to all members of the board; and second,
6 UNIT ONE: BUSINESS ORGANIZATIONS
© 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.
the contract was not approved by a majority of disinterested directors. Thus, Wick has
breached his fiduciary duties to Oxy, and Oxy can set aside the contract.
5-2A. Liability of directors
(Chapter 5—Page 82)
Directors are personally answerable to the corporation and the shareholders for breach of their
duty to exercise reasonable care in conducting the affairs of the corporation. Reasonable care
is defined as being the degree of care that a reasonably prudent person would use in the
conduct of personal business affairs. When directors delegate the running of the corporate
the president. If so, and particularly if the board failed to provide a reasonable amount of su-
pervision (and openly embezzled funds indicate that failure), the directors will be personally
liable. This liability will include Eckhart unless she can prove that she dissented and that she
tried to reasonably supervise the new president. Considering the facts in this case, it is
questionable that Eckhart could prove this.
to vote. Each shareholder is entitled to one vote per share, and although it appears that Lucia
has only one vote out of thousands or millions, she has the right to attend shareholder meetings,
participate therein, and vote her share.
(b) As a general rule, shareholders or their representatives have a right to inspect the
corporate books and records for a proper purpose upon making a request in advance.
(c) A shareholder is not entitled to a yearly dividend. Dividends are declared only by and
at the discretion of the board of directors, and directors are not required to declare dividends.
Unless the directors have acted so unreasonably in withholding dividends that they have abused
their discretion, the court will not require dividends to be paid. It is unlikely that Lucia can
require the company to pay yearly dividends even if the corporation has retained net earnings,
in whole or in part.
in whole or in part.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 9
© 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.
remains that a president must account. There is really no other option provided he wants to
remain in the position. The president serves at the pleasure of the board, not the other way
around.”
(b) The court characterized that JES's actions as “duplicitous and self serving. On
more than one occasion, JES has taken a liberal view of his power as president at the expense
of the directors or Reuther as CEO. It is clear to this Court that JES lacks the appropriate
respect for the lines of authority in any corporate structure.
“For example, JES locked Reuther out of the corporate offices at a time when he was
both CEO and a director, refusing him access to the books and records of the companies . . . .
5–9A. LEGAL REASONING GROUP ACTIVITY—Shareholders’ duties
(a) These parties owed fiduciary duties to each other, which they breached by
withholding cash from each other. Weintraub misappropriated corporate cash and Griffith kept
all of the proceeds from the sale of the casino.
it would be inequitable for the parties to enjoy the full benefits of the sale and profits of the
corporation without also being responsible for the money they each withheld from the other.
in whole or in part.
in whole or in part.
4 UNIT ONE: BUSINESS ORGANIZATIONS
© 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.
shareholders of a close corporation (like the McCann firm) so long as those decisions are
genuine.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Duties of directors
As a director, Brock is in a fiduciary relationship with the corporation, which means that he owes
to Firm Body the duty of care and the duty of loyalty.
loyalty to Firm Body.
3A. Breach of loyalty
The business judgment rule immunizes decisions that are made in good faith as long as the
decision complies with the manager’s fiduciary duties and was within the manager’s power to
words, Peñada could file a suit on behalf of the corporation claiming that Brock’s breach of his
fiduciary duties caused harm to the corporation. If the suit was successful, any damages
recovered would go to the corporation, not Peñada.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
erned. Therefore, even though on paper shareholders control corporations because they can
vote out bad directors, they really never do.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 5
© 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.
When a corporation is badly managed, that corporation’s stock price drops. That is
because shareholders vote with their “wallets” by selling the shares in that company, thereby
lowering the price of the stock. When the price of the stock gets low enough, outside groups
attempt a takeover in order to put in place their preferred group of directors. That’s how the
market for corporate control works.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
2A. Nico is Omega Corporation’s majority shareholder. He owns enough stock in
Omega that if he were to sell it, the sale would be a transfer of control of the firm.
Discuss whether Nico owes a duty to Omega or the minority shareholders in selling his
shares. Yes. A single shareholder—or a few shareholders acting together—who owns enough
5-1A. Conflicts of interest
(Chapter 5—Page 82)
Various state statutes contain different standards for contracts made between two corporations
when a director of one corporation has a material interest in the other. In general, however, the
courts will uphold these contracts providing that:
In the case of Wick and Oxy Corp., the contract may be set aside for two reasons. First, the
conflict-of-interest transaction was not fully disclosed to all members of the board; and second,
6 UNIT ONE: BUSINESS ORGANIZATIONS
© 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.
the contract was not approved by a majority of disinterested directors. Thus, Wick has
breached his fiduciary duties to Oxy, and Oxy can set aside the contract.
5-2A. Liability of directors
(Chapter 5—Page 82)
Directors are personally answerable to the corporation and the shareholders for breach of their
duty to exercise reasonable care in conducting the affairs of the corporation. Reasonable care
is defined as being the degree of care that a reasonably prudent person would use in the
conduct of personal business affairs. When directors delegate the running of the corporate
the president. If so, and particularly if the board failed to provide a reasonable amount of su-
pervision (and openly embezzled funds indicate that failure), the directors will be personally
liable. This liability will include Eckhart unless she can prove that she dissented and that she
tried to reasonably supervise the new president. Considering the facts in this case, it is
questionable that Eckhart could prove this.
to vote. Each shareholder is entitled to one vote per share, and although it appears that Lucia
has only one vote out of thousands or millions, she has the right to attend shareholder meetings,
participate therein, and vote her share.
(b) As a general rule, shareholders or their representatives have a right to inspect the
corporate books and records for a proper purpose upon making a request in advance.
(c) A shareholder is not entitled to a yearly dividend. Dividends are declared only by and
at the discretion of the board of directors, and directors are not required to declare dividends.
Unless the directors have acted so unreasonably in withholding dividends that they have abused
their discretion, the court will not require dividends to be paid. It is unlikely that Lucia can
require the company to pay yearly dividends even if the corporation has retained net earnings,
in whole or in part.
in whole or in part.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 9
© 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.
remains that a president must account. There is really no other option provided he wants to
remain in the position. The president serves at the pleasure of the board, not the other way
around.”
(b) The court characterized that JES's actions as “duplicitous and self serving. On
more than one occasion, JES has taken a liberal view of his power as president at the expense
of the directors or Reuther as CEO. It is clear to this Court that JES lacks the appropriate
respect for the lines of authority in any corporate structure.
“For example, JES locked Reuther out of the corporate offices at a time when he was
both CEO and a director, refusing him access to the books and records of the companies . . . .
5–9A. LEGAL REASONING GROUP ACTIVITY—Shareholders’ duties
(a) These parties owed fiduciary duties to each other, which they breached by
withholding cash from each other. Weintraub misappropriated corporate cash and Griffith kept
all of the proceeds from the sale of the casino.
it would be inequitable for the parties to enjoy the full benefits of the sale and profits of the
corporation without also being responsible for the money they each withheld from the other.
