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Quiz 40 :

Corporate Directors, Officers, and Shareholders

Quiz 40 :

Corporate Directors, Officers, and Shareholders

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Rights of Shareholders Lucia has acquired one share of common stock of a multimillion-dollar corporation with more than 500,000 shareholders. Lucia's ownership interest is so small that she is not sure what her rights are as a shareholder. For example, she wants to know whether this one share entitles her to (1) attend and vote at shareholders' meetings, (2) inspect the corporate books, and (3) receive yearly dividends. Discuss Lucia's rights in these three matters.
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Rights of Shareholders:
(1) Lucia has the right to attend shareholder meetings, participate, and vote her shares unless the articles of the corporation expressly deny the shareholder's right to vote. Shareholders are entitled to one vote per share.
(2) With advance notice shareholders have the right to inspect the corporate books and records for a proper purpose. State statutes may impose qualifications regarding when and how a shareholder may request and inspect the books.
(3) Since dividends are declared at the discretion of the board of directors, and directors are not required to declare dividends, a shareholder is not entitled to a yearly dividend.

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David Brock is on the board of directors of Firm Body Fitness, Inc., which owns a string of fitness clubs in New Mexico. Brock owns 15 percent of the Firm Body stock and is also employed as a tanning technician at one of the fitness clubs. After the January financial report showed that Firm Body's tanning division was operating at a substantial net loss, the board of directors, led by Marty Levinson, discussed the possibility of terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs' overall fitness package. By April, the tanning division's financial losses had risen. The board hired a business analyst, who conducted surveys and determined that the tanning operations did not significantly increase membership. A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following questions. Suppose that Firm Body brought an action against Brock claiming that he had breached the duty of loyalty by not disclosing his interest in Sunglow to the other directors. What theory might Brock use in his defense? DEBATE THIS: Because most shareholders never bother to vote for directors, shareholders have no real control over corporations.
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B can take the defense of the above provision. Moreover as per the business judgment rule , courts give significant deference to the decisions of corporate directors and officers, and consider the reasonableness of a decision at the time it was made without the benefit of hindsight.
Thus, corporate decision makers are not subjected to second guessing by shareholders in the corporation.

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Fiduciary Duty of Officers Designer Surfaces, Inc., supplied countertops to homeowners who shopped at stores such as Lowe's and Costco. The homeowners paid the store, which then contracted with Designer to fabricate and install the countertops. Designer bought materials from Arizona Tile, LLC, on an open account. Designer's only known corporate officers were Howard Berger and John McCarthy. Designer became insolvent and could not pay Arizona Tile for all the materials it had purchased, including materials for which Designer had already received payment from the retail stores. Arizona Tile sued Designer and won a default judgment, but the company had no funds. Arizona Tile then sued Berger and McCarthy personally for diverting company funds that Designer had received in trust for payment to Arizona Tile. Arizona Tile argued that the use of the funds for other purposes was a breach of fiduciary duty. Berger and McCarthy argued that corporate law imposed neither a fiduciary duty on corporate officers nor personal liability for breach of a duty to suppliers of materials. Which argument is more credible and why? [ Arizona Tile, LLC v. Berger , 223 Ariz. 491, 224 P.3d 988 (Ariz.App. 2010)]
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Officers owe the same fiduciary duty to a corporation as the directors. This duty includes a duty of care, which means that the officer must act in good faith, use prudent judgment and act in the best interest of the corporation. Officers should also put the interests of the corporation in front of their own personal interests. Thus, the officers should be held to a fiduciary duty in this case.

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CASE PROBLEM WITH SAMPLE ANSWER: Duties of Directors and Officers. First Niles Financial, Inc., is a company whose sole business is to own and operate a bank, Home Federal Savings and Loan Association of Niles, Ohio. First Niles's directors included bank officers William Stephens, Daniel Csontos, and Lawrence Safarek; James Kramer, president of an air-conditioning company that serviced the bank; and Ralph Zuzolo, whose law firm served the bank and whose title company participated in most of its real estate deals. First Niles's board put the bank up for sale and received three bids. Farmers National Bank Corp. stated that it would not retain the board. Cortland Bancorp indicated that it would terminate the directors but consider them for future service. First Financial Corp. said nothing about the directors. The board did not pursue Farmers' offer, failed to timely respond to Cortland's request, and rejected First Financial's bid. Leonard Gantler and other First Niles shareholders fled a suit in a Delaware state court against Stephens and the others. What duties do directors and officers owe to a corporation and its shareholders? How might those duties have been breached here? Discuss. [ Gantler v. Stephens, 965 A.2d 695 (Del.Sup.Ct. 2009)]
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Fiduciary Duties and Liabilities Harry Hoaas and Larry Griffiths were shareholders in Grand Casino, Inc., which owned and operated a casino in Watertown, South Dakota. Griffiths owned 51 percent of the stock and Hoaas 49 percent. Hoaas managed the casino, which Griffiths typically visited once a week. At the end of 1997, an accounting showed that the cash on hand was less than the amount posted in the casino's books. Later, more shortfalls were discovered. In October 1999, Griffiths did a complete audit. Hoaas was unable to account for $135,500 in missing cash. Griffiths then kept all of the casino's most recent profits, including Hoaas's $9,447.20 share, and, without telling Hoaas, sold the casino for $100,000 and kept all of the proceeds. Hoaas filed a suit in a South Dakota state court against Griffiths, asserting, among other things, a breach of fiduciary duty. Griffiths countered with evidence of Hoaas's misappropriation of corporate cash. What duties did these parties owe each other? Did either Griffiths or Hoaas, or both of them, breach those duties? How should their dispute be resolved? How should their finances be reconciled? Explain. [Hoaas v. Griffiths, 2006 SD 27, 714 N.W.2d 61 (2006)]
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Rights of Shareholders Lucia has acquired one share of common stock of a multimillion-dollar corporation with more than 500,000 shareholders. Lucia's ownership interest is so small that she is not sure what her rights are as a shareholder. For example, she wants to know whether this one share entitles her to (1) attend and vote at shareholders' meetings, (2) inspect the corporate books, and (3) receive yearly dividends. Discuss Lucia's rights in these three matters.
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QUESTION WITH SAMPLE ANSWER: Liability of Directors. AstroStar, Inc., has approximately five hundred shareholders. Its board of directors consists of three members (Eckhart, Dolan, and Macero). At a regular board meeting, the board selects Galiard as president of the corporation by a two-to-one vote, with Eckhart dissenting. The minutes of the meeting do not register Eckhart's dissenting vote. Later, an audit reveals that Galiard is a former convict and has embezzled $500,000 from the corporation that is not covered by insurance. Can the corporation hold directors Eckhart, Dolan, and Macero personally liable? Discuss.
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Rights of Shareholders Stanka Woods was the manager and sole member of Hair Ventures, LLC, which owned 3 million shares of stock in Biolustré, Inc. For several years, Woods and other Biolustré shareholders did not receive notices of shareholders' meetings or financial reports. Nevertheless, Woods learned that Biolustré planned to issue more stock, and her boyfriend, Daniel Davila, proposed that they meet with other shareholders to discuss the company's operations and oppose the issue. To obtain information regarding what was going on at Biolustré, Woods, through Hair Ventures, sent Biolustré a demand to examine its books and records. Biolustré did not respond. Hair Ventures filed a suit in a Texas state court against the corporation, seeking an order to compel it to comply. Biolustré asserted that Hair Ventures' request was not for a proper purpose. Does a shareholder have a right to inspect corporate books and records? If so, what are the limits? Do any of those limits apply in this case? Explain. [Biolustré Inc. v. Hair Ventures, LLC, __ S.W.3d __ (Tex.App.-San Antonio 2011)]
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Conflicts of Interest Oxy Corp. is negotiating with the Wick Construction Co. for the renovation of the Oxy corporate headquarters. Wick, the owner of the Wick Construction Co., is also one of the five members of Oxy's board of directors. The contract terms are standard for this type of contract. Wick has previously informed two of the other directors of his interest in the construction company. Oxy's board approves the contract by a three-to-two vote, with Wick voting with the majority. Discuss whether this contract is binding on the corporation.
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Role of Directors The board of directors of Necanicum Investment Co., a property management corporation in Oregon, meets on a regular basis. Necanicum paid the directors $6,000 each in the third quarter of 2003. It did not report the payments as part of its payroll and did not pay unemployment tax on the payments. The Oregon Employment Department contended that the company owed $700 in unemployment taxes on the payments to the directors. Necanicum protested. The administrative law judge (ALJ) for the Employment Departmentheld that the company owed the taxes because directors fees are the same as wages for unemployment tax purposes. Necanicum appealed, but the court of appeals affirmed the ALJ's ruling. The company appealed again. Are payments to directors the same as wages for tax purposes? Why or why not? [ Necanicum Investment Co. v. Employment Department , 345 Or. 138, 190 P.3d 368 (2008)]
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A QUESTION OF ETHICS: Duties of Directors and Officers. New Orleans Paddlewheels, Inc. (NOP), is a Louisiana corporation formed in 1982 when fames Smith, Sr., and Warren Reuther were its only shareholders, with each holding 50 percent of the stock. NOP is part of a sprawling enterprise of tourism and hospitality companies in New Orleans. The positions on the board of each company were split equally between the Smith and Reuther families. At Smith's request, his son James Smith, Jr. (JES), became involved in the businesses. In 1999, NOP's board elected JES as president, to be in charge of day-to-day operations, and Reuther is chief executive officer (CEO), to be in charge of marketing and development. Over the next few years, animosity developed between Reuther and JES. In October 2001, JES terminated Reuther as CEO and denied him access to the offices and books of NOP and the other companies, literally changing the locks on the doors. At the next meetings of the boards of NOP and the overall enterprise, deadlock ensued, with the directors voting along family lines on every issue. Complaining that the meetings were a "waste of time," JES began to run the entire enterprise by taking advantage of an unequal balance of power on the companies' executive committees. In NOP's subsequent bankruptcy proceeding, Reuther filed a motion for the appointment of a trustee to formulate a plan for the firm's reorganization, alleging , among other things, misconduct by NOP's management. [ In re New Orleans Paddlewheels, Inc., 350 Bankr. 667 (E.D.La. 2006)] (a) Was Reuther legally entitled to have access to the books and records of NOP and the other companies? JES maintained, among other things, that NOP's books were "a mess." Was JES's denial of that access unethical? Why or why not? (b) How would you describe JES's attempt to gain control of NOP and the other companies? Were his actions devious and self-serving in the pursuit of personal gain or legitimate and reasonable in the pursuit of a business goal? Discuss.
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David Brock is on the board of directors of Firm Body Fitness, Inc., which owns a string of fitness clubs in New Mexico. Brock owns 15 percent of the Firm Body stock and is also employed as a tanning technician at one of the fitness clubs. After the January financial report showed that Firm Body's tanning division was operating at a substantial net loss, the board of directors, led by Marty Levinson, discussed the possibility of terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs' overall fitness package. By April, the tanning division's financial losses had risen. The board hired a business analyst, who conducted surveys and determined that the tanning operations did not significantly increase membership. A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following questions. Now suppose that Firm Body did not bring an action against Brock. What type of lawsuit might Peñada be able to bring based on these facts? DEBATE THIS: Because most shareholders never bother to vote for directors, shareholders have no real control over corporations.
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David Brock is on the board of directors of Firm Body Fitness, Inc., which owns a string of fitness clubs in New Mexico. Brock owns 15 percent of the Firm Body stock and is also employed as a tanning technician at one of the fitness clubs. After the January financial report showed that Firm Body's tanning division was operating at a substantial net loss, the board of directors, led by Marty Levinson, discussed the possibility of terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs' overall fitness package. By April, the tanning division's financial losses had risen. The board hired a business analyst, who conducted surveys and determined that the tanning operations did not significantly increase membership. A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following questions. What duties did Brock, as a director, owe to Firm Body? DEBATE THIS: Because most shareholders never bother to vote for directors, shareholders have no real control over corporations.
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David Brock is on the board of directors of Firm Body Fitness, Inc., which owns a string of fitness clubs in New Mexico. Brock owns 15 percent of the Firm Body stock and is also employed as a tanning technician at one of the fitness clubs. After the January financial report showed that Firm Body's tanning division was operating at a substantial net loss, the board of directors, led by Marty Levinson, discussed the possibility of terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs' overall fitness package. By April, the tanning division's financial losses had risen. The board hired a business analyst, who conducted surveys and determined that the tanning operations did not significantly increase membership. A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following questions. Does the fact that Brock owned shares in Sunglow establish a conflict of interest? Why or why not? DEBATE THIS: Because most shareholders never bother to vote for directors, shareholders have no real control over corporations.
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