mt311 – business law i
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MT311 – Business Law I. Seminar Presentation UNIT 9 Business Organizations IChapter 26, Corporate Directors, Officer, and Shareholders II. Chapter 27, Investor Protection, Insider Trading, and Corporate Governance. Role of Directors and Officers. - PowerPoint PPT PresentationTRANSCRIPT
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MT311 – Business Law IMT311 – Business Law I
Seminar Presentation
UNIT 9Business Organizations
I Chapter 26, Corporate Directors, Officer, and Shareholders
II. Chapter 27, Investor Protection, Insider Trading, and
Corporate Governance
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Role of Directors and OfficersRole of Directors and Officers
• Every corporation is governed by a board of directors.
• Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation.
• A director can also be a shareholder, especially in closely-held corporations.
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Election and Compensation Election and Compensation of Directorsof Directors
• The number of directors is set forth in the articles of incorporation:– Directors are appointed at the first organizational
meeting– In closely held companies, directors are generally
the incorporators and/or the shareholders– Term of office is generally for one year– Director can be removed for cause
• In very large companies, directors can be compensated, and may be officers as well.
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Board of Directors’ MeetingsBoard of Directors’ Meetings
• Directors hold meetings pursuant to bylaws with recorded minutes
• Special meetings may be called with sufficient notice
• Meetings require QUORUM (minimum number of directors to conduct official corporate business, usually majority)
• Each director generally has one vote
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Rights of DirectorsRights of Directors
Directors have the right to:• Participate in corporate decisions and inspect
corporate books and records• Compensation (usually a nominal sum) and
indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability
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• Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well
• Their employment relationships are generally governed by contract law and employment law
• Officers may be terminated for cause
Corporate Officers and Corporate Officers and ExecutivesExecutives
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• Fiduciaries of corporation - ethical & legal duties
• Duty of Care – Act in good faith and in best interests of the corp.;
– Make informed and reasonable decisions; and
– Exercise reasonable supervision
• Duty of Loyalty– No conflict of interest
– No insider trading
• A dissenting director is rarely held liable
Duties and Liabilities of Duties and Liabilities of Directors and OfficersDirectors and Officers
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Business Judgment RuleBusiness Judgment Rule
• Immunizes a director or officer from liability from consequences of a business decision that turned sour
• Court will not require directors or officers to manage “in hindsight”
• As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply
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Role of ShareholdersRole of Shareholders
• Ownership of shares grants a shareholder an equitable ownership interest in a corporation.
• Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.
• Shareholders are generally protected from personally liability by the corporate veil of limited liability.
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• Common shareholder - one vote per share
• Articles and bylaws can exclude or limit voting rights of certain classes of stock
• Quorum must be present
• Cumulative Voting allows minority shareholders to get a board member elected
Shareholder VotingShareholder Voting
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• To vote• To have a stock certificate• To purchase newly issued stock• To dividends, when declared by board• To inspect corporate records• To transfer shares, with some exceptions• To a proportionate share of corporate assets on
dissolution• To file suit on behalf of corporation
Rights of ShareholdersRights of Shareholders
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• Shareholders can sue a 3rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury.
• Directors may refuse to take action because they might personally be liable.
• Any damages recovered go to corporation’s treasury.
Shareholder’s Derivative SuitShareholder’s Derivative Suit
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• Shareholders are generally not liable for the contracts or torts of the corporation.
• If the corporation fails, shareholders cannot lose more than their investment, except when: – A shareholder hasn’t paid for stock pursuant to the
stock subscription agreement.– Shareholder buys “watered stock” which is below
the stock’s par value.
Liabilities of ShareholdersLiabilities of Shareholders
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The Securities ActsThe Securities Acts
• In response to the stock market crash of 1929 and the Great Depression, Congress enacted two acts:– Securities Act of 1933– Securities Exchange Act of 1934
• Apply to public companies
• To structure and oversee the offering, selling, and trading of securities in ways that would protect investors
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Securities Act of 1933Securities Act of 1933
• Requires that investors receive information about securities offered for public sale
• Prohibits fraud in the sale of securities by requiring that securities be registered
• Registration includes information including– a description of properties and business,
– a description of the security to be offered for sale,
– information about management of the company, &
– financial statements certified by independent accountants
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Registration ProcessRegistration Process
• Registration statement does not become effective until approval by SEC.
• Pre-Filing Period: issuer cannot offer or sell securities.
• Waiting Period: securities can be offered by not sold. 2005: Free-writing prospectus.
• Post-Effective Period: registration effective 20 days after approval.
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Violations of the 1933 ActViolations of the 1933 Act
• Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus.
• Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true.
• Penalties:
– Criminal: up to 5 years in prison and $10,000 fine.
– Civil: damages, refund of investment, injunction.
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Securities Exchange Act of 1934 Securities Exchange Act of 1934
• Created the Securities and Exchange Commission (SEC)
• Power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities self-regulatory organizations
• To give the investor confidence and prevent another collapse in the system
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Section 10(b) and Rule 10b(5) Section 10(b) and Rule 10b(5)
• Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC.
• Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.
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• Advance information available to corporate officers and directors that can affect future value of stock.
• Insider information must be material
• Must be a fiduciary relationship for liability
Insider TradingInsider Trading
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Insider Reporting and Insider Reporting and Trading—Section 16(b)Trading—Section 16(b)
• Section 16(b)– Recapture by corporation of profits during
previous six months gained by insider trading.– Applies to stocks, warrants, options and
convertible securities.
• Proxy Statements, Section 14(a)– Whoever solicits a proxy must fully disclose all of
the facts and which shareholders must vote.
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Comparison of 10b-5 and 16(b)Comparison of 10b-5 and 16(b)
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Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002
• In response to the Enron fall in 2001, Congress enacted the Sarbanes-Oxley Act of 2002 (SOX).– To protect investors by improving the accuracy
and reliability of corporate disclosures,– To enhance corporate responsibility, – To end corporate and accounting fraud, and– To restore the image of stock purchases as
investments worth the risk.
• Requires documented internal controls
• Requires CEO and CFO certifications24
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Key Provisions: Sarb-OxKey Provisions: Sarb-Ox
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Questions & RemindersQuestions & Reminders
• Questions on Unit 9 material?
• Unit 8 Grades Available by Monday
• Remember to complete Final Assignments– Final Exam (Graded Automatically)
• 100 true/false and/or multiple choice questions
• unlimited amount of time to take the exam
• worth 200 points for course
– Discussion (See Discussion Board Posting Requirements)
– Ethics Post-Test (Automatic 30 points for taking it!)
– Writing Assignment
• Good luck on the final!26