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1
CHAPTER 40
CORPORATE DIRECTORS,
OFFICERS, AND SHAREHOLDERS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
GLOBAL INSIGHT—CRITICAL THINKING
Why do you think officers and directors of accused companies accept dissent decrees
rather than contest accusations at trial? In the last few years, those companies accused of
violating anti-bribery laws, particularly the FCPA, believe that it is most cost effective to
cooperate fully with the government. They also believe it best to undertake exhaustive internal
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 40.1—CRITICAL THINKING
LEGAL ENVIRONMENT
In a letter to the Oliveiras, the board explained that it saw “no upside—and much
downside—to the action and lawsuit proposed in the Demand.” What would the
“downside” consist of? The downside of the action proposed by the Oliveiras consists of a
variety of likely possibilities whether or not the action was successful.
2 UNIT EIGHT: BUSINESS ORGANIZATIONS
In this case, iStar promised awards of company stock to employees if the shares
averaged a certain target price over a specific sustained period before a stated date. The
stock’s value tripled, but the target price was not met. The company’s board modified the
1. iStar was likely to lose a suit based on the Oliveiras’ claim, and incur costly
attorney’s fees in doing so.
WHAT IF THE FACTS WERE DIFFERENT?
Only one member of the iStar board—Sugarman—received an award as an employee.
The others who made the decision to change the award were, like Ridings, outside
directors. Suppose that the opposite had been true. Would the result have been the
same? It is possible that the result in this case would have been the same, even under the
facts given in the question—if only one member of the board had been an outside, non-
management director and the others had received awards.
CASE 40.2—CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Loft’s board of directors had approved Pepsi-Cola’s use of its personnel
and equipment. Would the court’s decision have been different? Discuss. Possibly. Guth
contended that the Loft board had approved Pepsi’s use of Loft’s personnel and facilities, but
CASE 40.3—LEGAL REASONING QUESTIONS
1A. How many shareholders were present at the shareholders’ meeting that gave rise
to the dispute in this case? During the shareholders’ meeting of Sink & Rise, Inc., that give
rise to the dispute in the Case case, James (Cale) Case was the only shareholder present in
2A. How did the court “characterize” and “classify” the shares of stock that Cale and
Shirley Case held jointly? The lower court “characterized” the sixteen shares of stock held
jointly by Cale and Shirley as owned with rights of survivorship. The court further “classified” the
4 UNIT EIGHT: BUSINESS ORGANIZATIONS
3A. According to the court, how many shares were represented at the shareholders’
meeting? Was a quorum present? Explain. Both the lower court and the state supreme court
agreed that a majority of the outstanding voting shares of Sink & Rise were represented at the
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Duties of directors
2A. Conflict of interest
The duty of loyalty requires officers and directors to disclose fully to the board of directors any
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
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 5
4A. Shareholder’s suit
If the corporation does not bring suit against Brock for breaching his duty of loyalty, then Peñada
could file a shareholder’s derivative suit to redress a wrong suffered by the corporation. In other
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Because most shareholders never bother to vote for directors, shareholders have
no real control over corporations. The statistics are indeed shocking—almost no
shareholders of corporations ever bother to vote for directors. Most shareholders don’t know
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Wonder Corporation has an opportunity to buy stock in XL, Inc. The directors
decide that, instead of Wonder buying the stock, the directors will buy it. Yvon, a Wonder
shareholder, learns of the purchase and wants to sue the directors on Wonder’s behalf.
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
6 UNIT EIGHT: BUSINESS ORGANIZATIONS
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
40-1A. Conflicts of interest
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:
(a) The contract was fair and reasonable to the corporation at the time the contract
40-2A. Liability of directors
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
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
40–3A. Fiduciary duty of officers
Arizona Tile supplied materials to Designer Surfaces. The statute regarding the suppliers of
materials created an obligation on Designer’s part to treat funds it obtained for the sale of
40–4A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Rights of shareholders
40–5A. Duty of loyalty
Dweck breached the fiduciary duty of loyalty that a director and officer owes to his or her
corporation—in this case, Kids. The essence of the duty of loyalty is the subordination of self-
40–6A. Duties of majority shareholders
Ron may arguably have been the victim of a freeze out by Bill and Gertrude. A majority
shareholder is sometimes regarded as having a fiduciary duty to the corporation and the
minority shareholders. This occurs when a few shareholders acting together own enough shares
to exercise control over the corporation. A breach of fiduciary duty by those who control a close
8 UNIT EIGHT: BUSINESS ORGANIZATIONS
40–7A. Business judgment rule
No, the Songers are not personally liable for Country’s failure to complete its contract with A
Westside Storage. A hallmark of the corporate form of business organization is that
shareholders are not personally liable for the debts of the corporation. If the corporation fails, the
40–8A. Rights of shareholders
Clifford can pursue his action on the companies’ behalf against Frederick. When a corporation is
harmed by the actions of a director or officer, the other directors can bring a suit in the name of
the company against that party. If the directors do not bring a suit, the shareholders can do so
filing what is known as a shareholder’s derivative suit.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 9
40-9A. A QUESTION OF ETHICS—Duties of directors and officers
(a) Reuther, as a director, was entitled to full access to all financial information. As a
shareholder, Reuther could also have access to the information. The court extrapolated that “[t]o
hold otherwise would put directors in the untenable position of being legally and personally
10 UNIT EIGHT: BUSINESS ORGANIZATIONS
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
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
40–10A. Shareholders’ duties
(a) These parties owed fiduciary duties to each other, which they breached by
all of the proceeds from the sale of the casino.
(b) Griffith owed $58,447.20 to Weintraub for his 49 percent share of the proceeds
(c) Of course, Weintraub violated his ethical duties to Griffith and to their corporation
