Chapter 43 – Management of Corporations


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  • WARNING: This is a long and detailed chapter!
  • James Donald was the CEO of DSC Communications, a Delaware corporation headquartered in Plano, Texas. In 1990, DSC’s board of directors entered an employment agreement with Donald that ran until his 75th birthday. The employment agreement provided that Donald “shall be responsible for the general management of the affairs of the company and report to the Board.” Donald’s employment could be terminated by death, disability, for cause, and without cause. The agreement provided, however, that Donald could declare a “Constructive Termination Without Cause” by DSC, if there was “unreasonable interference, in the good faith judgment of Donald, by the Board or a substantial stockholder of DSC, in Donald’s carrying out of his duties and responsibilities.” When there was termination without cause, the employment agreement provided that Donald was etitled to payment of his annual base salary ($650,000) for the remainder of the contract, his annual incentive award ($300,000), and other benefits. The total amount of payments and benefits for the term of the contract was about $20,000,000. C. L. Grimes, a DSC shareholder, sued Donald on behalf of the corporation asking the court to invalidate the employment agreement between Donald and DSC on the grounds that the agreement illegally delegates the duties and responsibilities of DSC’s board of directors to Donald. The Delaware Chancery Court dismissed the case, and Grimes appealed to the Supreme Court of Delaware.
  • Directors may not delegate duties which lie at the heart of the management of the corporation. The Donald agreement does not formally preclude the DSC board from exercising its statutory powers and fulfilling its fiduciary duty. If an independent and informed board, acting in good faith, determines that the services of a particular individual warrant large amounts of money, whether in the form of current salary or severance provisions, the board has made a business judgment. That judgment normally will receive the protection of the business judgment rule unless the facts show that such amounts, compared with services to be received in exchange, constitute waste or could not otherwise be the product of a valid exercise of business judgment. So far, we have only a rather unusual contract, but not a case of abdication. Judgment for Donald affirmed.
  • Hyperlink is to the 2006 opinion in pdf. Case prior to this one (in the Delaware Court of Chancery) was styled In re The Walt Disney Company Derivative Litigation, 2003 WL 21267266 (Del. Ch. May 28, 2003). The court’s ruling was appealed to the Delaware Supreme Court where it was re-styled as Brehm v. Eisner . The full citation is Brehm v. Eisner (In re Walt Disney Company Derivative Litig.), 906 A2d 27 (Del. 2006) aff'g In re The Walt Disney Company Derivative Litigation, 908 A2d 693 (Del. Ch. 2005). CEO Michael Eisner promoted the candidacy of his long-time friend, Michael Ovitz, who was the head of the very successful Creative Artists Agency (CAA). To leave CAA and join Disney as its president, Ovitz insisted on an employment agreement that would provide him downside risk protection if he was terminated by Disney or if he was interfered with in his performance in his duties as president. After protracted negotiations, Ovitz accepted an employment package that would provide him $23.6 million per year for the first five years of the deal, plus bonuses and stock options. The agreement guaranteed that the stock options would appreciate at least $50 million in five years or Disney would make up the difference. The employment agreement also provided that if Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a Non-Fault Termination payment (NFT), which consisted of his remaining salary, $7.5 million a year for any unaccrued bonuses, the immediate vesting of some stock options, and a $10 million cash out payment for other stock options. While there was some opposition to the employment agreement among directors and upper management at Disney, Ovitz was hired in October 1995 largely due to Eisner’s insistence. At the end of 1995, Eisner’s attitude with respect to Ovitz was positive. Unfortunately, such optimism did not last long. By the summer of 1996, Eisner had spoken with several directors about Ovitz’s failure to adapt to the Company’s culture. In the fall of 1996, directors began discussing that the disconnect between Ovitz and Disney was likely irreparable, and that Ovitz would have to be terminated. In December 1996, Ovitz was officially terminated by action of Eisner alone. Eisner concluded that Ovitz was terminated without cause, requiring Disney to make the costly NFT payment. Shareholders of Disney brought a derivative action on behalf of Disney against Eisner and other Disney directors and officers. The shareholders alleged breaches of fiduciary duty in the hiring and firing of Ovitz.
  • Eisner was compelled to resign from Disney in Sept. 2005 Eisner defended on the grounds that he had complied with the business judgment rule. Because Disney was incorporated in Delaware, the case was brought in the Delaware Court of Chancery. Chancery Court: “ The business judgment rule is not actually a substantive rule of law, but instead it is a presumption…This presumption applies when there is no evidence of fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment on the part of the directors. In the absence of this evidence, the board’s decision will be upheld unless it cannot be “attributed to any rational business purpose.” The protections of the business judgment rule will not apply if the directors have made an “unintelligent or unadvised judgment.”… Eisner was clearly the person most heavily involved in bringing Ovitz to Disney and negotiating the employment agreement…. In that aspect, Eisner is the most culpable of the defendants…. Eisner knew Ovitz; he was familiar with the career Ovitz. had built at CAA, and he knew that the company was in need of a senior executive, especially in light of the upcoming CapCities/ABC merger. In light of this knowledge, I cannot find that Disney shareholders have demonstrated by a preponderance of the evidence that Eisner failed to inform himself of all material information reasonably available or that he acted in a grossly negligent manner… Notwithstanding the foregoing, Eisner’s actions in connection with Ovitz’s hiring should not serve as a model for fellow executives and fiduciaries to follow. His lapses were many…. To my mind, these actions fall far short of what shareholders expect and demand from those entrusted with a fiduciary position…. Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith…. In conclusion, Eisner acted in good faith and did not breach his fiduciary duty of care because he was not grossly negligent. I turn to whether Eisner acted in accordance with his fiduciary duties and in good faith when he terminated Ovitz. I conclude that Eisner did not breach his fiduciary duties and did act in good faith in connection with Ovitz’s termination and concomitant receipt of the NFT…. Eisner inquired of Sanford Litvack [Disney’s legal counsel] on several occasions as to whether a for-cause termination was possible such that the NFT payment could be avoided, and then relied in good faith on the opinion of the company’s general counsel….. I conclude that the shareholders have not demonstrated by a preponderance of the evidence that Eisner breached his fiduciary duties or acted in bad faith in connection with Ovitz’s termination and receipt of the NFT. Judgment for Eisner and the other defendants.
  • Supreme Court: “ In our view, a helpful approach is to compare what actually happened here to what would have occurred had the committee followed a “best practices” (or “best case”) scenario, from a process standpoint. In a “best case” scenario, all committee members would have received, before or at the committee’s first meeting on September 26, 1995, a spreadsheet or similar document prepared by (or with the assistance of) a compensation expert (in this case, Graef Crystal). Making different, alternative assumptions, the spreadsheet would disclose the amounts that Ovitz could receive under the OEA in each circumstance that might foreseeably arise. One variable in that matrix of possibilities would be the cost to Disney of a nonfault termination for each of the five years of the initial term of the OEA. The contents of the spreadsheet would be explained to the committee members, either by the expert who prepared it or by a fellow committee member similarly knowledgeable about the subject. That spreadsheet, which ultimately would become an exhibit to the minutes of the compensation committee meeting, would form the basis of the committee’s deliberations and decision. Had that scenario been followed, there would be no dispute…[however] the Court of Chancery had a sufficient evidentiary basis in the record from which to find that, at the time they approved the OEA, the compensation committee members were adequately informed of the potential magnitude of an early NFT severance payout…. Based upon this record, we uphold the Chancellor’s conclusion that, when electing Ovitz to the Disney residency the remaining Disney directors were fully informed of all material facts, and that the shareholders failed to establish any lack of due care on the directors’ part.”
  • See Fig. 1, page 1088, for details of tender offer defenses. In Paramount v. Time case, the Supreme Court of Delaware expanded board discretion in fighting hostile takeovers, holding that a board may oppose a hostile takeover provided the board had a preexisting, deliberately conceived corporate plan justifying its opposition. The existence of such a plan enabled Time’s board to meet the reasonable-tactic element of the Unocal test.
  • An example of a conflict of interest is a director that pushes the corporation to deal with a company in which the direct has a direct or indirect interest. Sarbanes–Oxley Act of 2002 prohibits public companies from making loans to their directors or executive officers.
  • Loft, Inc., manufactured and sold candies, syrups, and beverages and operated 115 retail candy and soda fountain stores. Loft sold Coca-Cola at all of its stores, but it did not manufacture Coca-Cola syrup. Instead, it purchased its 30,000-gallon annual requirement of syrup and mixed it with carbonated water at its various soda fountains. In May 1931, Charles Guth, the president and general manager of Loft, became dissatisfied with the price of Coca- Cola syrup and suggested to Loft’s vice president that Loft buy Pepsi-Cola syrup from National Pepsi-Cola Company, the owner of the secret formula and trademark for Pepsi-Cola. The vice president said he was investigating the purchase of Pepsi syrup. Before being employed by Loft, Guth had been asked by the controlling shareholder of National Pepsi, Megargel, to acquire the assets of National Pepsi. Guth refused at that time. However, a few months after Guth had suggested that Loft purchase Pepsi syrup, Megargel again contacted Guth about buying National Pepsi’s secret formula and trademark for only $10,000. This time, Guth agreed to the purchase, and Guth and Megargel organized a new corporation, Pepsi-Cola Company, to acquire the Pepsi-Cola secret formula and trademark from National Pepsi. Eventually, Guth and his family’s corporation owned a majority of the shares of Pepsi-Cola Company. Very little of Megargel’s or Guth’s funds were used to develop the business of Pepsi-Cola. Instead, without the knowledge or consent of Loft’s board of directors, Guth used Loft’s working capital, credit, plant and equipment, and executives and employees to produce Pepsi-Cola syrup. In addition, Guth’s domination of Loft’s board of directors ensured that Loft would become Pepsi-Cola’s chief customer. By 1935, the value of Pepsi-Cola’s business was several million dollars. Loft sued Guth, asking the court to order Guth to transfer to Loft his shares of Pepsi-Cola Company and to pay Loft the dividends he had received from Pepsi-Cola Company. The trial court found that Guth had usurped a corporate opportunity and ordered Guth to transfer the shares and to pay Loft the dividends. Guth appealed. Court: “The fiduciary relation demands something more than the morals of the marketplace. Guth did not offer the Pepsi-Cola opportunity to Loft, but captured it for himself. He invested little or no money of his own in the venture, but commandeered for his own benefit and advantage the money, resources, and facilities of his corporation and the services of his officials. He thrust upon Loft the hazard, while he reaped the benefit. In such a manner he acquired for himself 91 percent of the capital stock of Pepsi-Cola, now worth many millions. A genius in his line he may be, but the law makes no distinction between the wrongdoing genius and the one less endowed. Judgment for Loft affirmed.”
  • Case began in mid-1970s. The trial judge found the freezeout merger to be illegal and ordered the payment of damages to Coggins and all other Old Patriots shareholders who voted against the merger and had not accepted the $15 per share merger payment. Sullivan and Old Patriots (Patriots corporation prior to freezeout merger & creation of New Patriots corporation) appealed to the Massachusetts Supreme Judicial Court. Appellate court’s conclusion: “Sullivan and Old Patriots have failed to demonstrate that the merger served any valid corporate objective unrelated to the personal interests of Sullivan, the majority shareholder. The sole reason for the merger was to effectuate a restructuring of Old Patriots that would enable the repayment of the personal indebtedness incurred by Sullivan. Under the approach we set forth above, there is no need to consider further the elements of fairness of a transaction that is not related to a valid corporate purpose. Judgment for Coggins affirmed as modified.”
  • Hyperlink is to the opinion on the website. The case is a primer on why corporations backdated options for their top executives and how courts determine an appropriate sentence, including imprisonment, for executives who willingly violate the law
  • After 2002, a company’s ability to fraudulently backdate option grants became much more difficult. On August 29, 2002, Congress passed the Sarbanes-Oxley Act, which instituted new reporting requirements for stock option grants. Before Sarbanes-Oxley, an employee who received a stock option grant had to file financial forms with the SEC within 45 days after the company’s fiscal year end. After Sarbanes-Oxley, an employee must file financial forms with the SEC within two days of receiving the stock option grant. After Sarbanes-Oxley, a company fraudulently backdating stock options by a few weeks or months would not have the required SEC forms filed on time, raising red flags with the SEC. There have been several highly publicized options backdating cases involving American corporations. One involved Brocade Communications issuing backdated options to its CEO Gregory Reyes. Not only were Brocade Communications and Reyes prosecuted for violating federal securities laws, but also Stephanie Jensen, a Brocade vice president and director of its human resources department. At their trial, Dr. John Garvey, an expert witness for the prosecution, provided testimony about the size of the compensation expenses that went unstated as a result of Brocade’s options pricing practices. Dr. Garvey testified that Brocade failed to recognize more than $173 million of compensation expenses in 2001 and more than $161 million in 2002. He further testified that, if Brocade had properly accounted for the stock options it had backdated, then the company would have recorded a loss of $110 million in 2001, rather than the profit of $3 million it actually reported, and would have recorded a loss of $45 million in 2002, rather than the profit of nearly $60 million it actually reported. Court: “With a base offense level of six, plus two-level enhancements for abuse of trust and obstruction of justice, the Guidelines recommend a sentence of 6-12 months. The minimum term may be satisfied by a sentence of imprisonment that includes a term of supervised release with a condition that substitutes community confinement or home detention, provided that at least one month is satisfied by imprisonment. Order entered sentencing Jensen to imprisonment.”
  • Under the MBCA, a director is entitled to mandatory indemnification of her reasonable litigation expenses when she is sued and wins completely (is wholly successful ). Under the MBCA, a director who loses a lawsuit may be indemnified by the corporation. This is called permissible indemnification, because the corporation is permitted to indemnify the director but is not required to do so.
  • False. Shareholders own a corporation and elect a board of directors and officers to run or manage the corporation. Directors and officers may also be shareholders. True. True. False. Cumulative voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors. Class voting may give certain shareholder classes the right to elect a specified number of directors.
  • True. False. A tender offer is an offer to shareholders to buy their shares at a price above current market price . False. As fiduciaries, directors and officers are liable to their corporation for usurping corporate opportunities.
  • The correct answer is (c).
  • The correct answer is (c).
  • Opportunity to discuss corporate social responsibility in the context of corporate management.
  • Chapter 43 – Management of Corporations

    1. 1. C H A P T E R 43Management of CorporationsManagers should work for their people…and not the reverse. Kenneth Blanchard Leadership and The One Minute Manager (2000) 43-1
    2. 2. Learning Objectives• Recognize limits on the objectives and powers of corporations• Describe the roles of the board of directors and various committees• Discuss recent developments in corporate governance• Adapt corporate governance rules to the close corporation 43-2
    3. 3. Overview• Shareholders own the corporation, but elect a board of directors to manage the firm and, typically, the board delegates most management duties to officers, who in turn hire managers and employees 43-3
    4. 4. Corporate Objectives• The traditional objective of the corporation has been to enhance corporate profits and shareholder gain• However, corporations may take socially responsible actions to enhance long-term profits or corporate goodwill – Corporate constituency statutes support these actions 43-4
    5. 5. Corporate Powers• Model Business Corporation Act (MBCA) states that a corporation has power to do anything that an individual may do• Historically, an act of a corporation beyond its powers was a nullity since it was ultra vires (“beyond the powers”) – Now corporate purposes are broadly stated limiting the use of the ultra vires doctrine 43-5
    6. 6. The Ultra Vires Doctrine• The MBCA and MNCA state that ultra vires may be asserted by three types of persons: (1) a shareholder seeking to enjoin a corporation from executing a proposed ultra vires action; (2) the corporation suing its management for damages caused by exceeding corporate powers; and (3) the state’s attorney general 43-6
    7. 7. The Board of Directors• The board of directors supervises the actions of its committees, chairman, and officers to ensure the board’s policies are being carried out and the corporation is managed wisely• Some corporate actions require board initiative and shareholder approval – Amending articles of incorporation, mergers, and dissolution 43-7
    8. 8. Committees of the Board• The most common board committee, the executive committee, has authority to act for the board on most matters when the board is not in session• Audit committees are directly responsible for appointment, compensation, and oversight of independent public accountants – Sarbanes– Oxley Act requires all publicly held firms to have audit committees of independent directors 43-8
    9. 9. Committees of the Board• A nominating committee chooses a slate of directors to be submitted to shareholders at the annual election of directors• A compensation committee reviews and approves salaries, stock options, and other benefits of high-level corporate executives• A shareholder litigation committee decides whether a corporation should sue someone who has allegedly harmed the corporation 43-9
    10. 10. Electing Directors• Directors are elected by shareholders at the annual shareholder meeting• Under straight voting, a shareholder may cast as many votes for each nominee as s/ he has shares and the top votegetters are elected as directors 43-10
    11. 11. Electing Directors• Class voting may give certain shareholder classes the right to elect a specified number of directors• Cumulative voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors 43-11
    12. 12. Proxy Solicitation• Once public ownership of shares exceeds 50 percent, management must solicit proxies from passive shareholders to have a quorum and achieve a valid shareholder vote – A proxy is a person designated to vote for the shareholder – Wall Street rule: either support management or sell the shares 43-12
    13. 13. Grimes v. Donald• Facts: – DSC Communications Board of Directors entered into an employment agreement with Donald, the CEO, that potentially provided $20 million of payments and benefits after Donald’s termination without cause – Grimes, a shareholder, sued to invalidate the agreement arguing that it illegally delegated duties of the board of directors to Donald – Trial court dismissed case and Grimes appealed 43-13
    14. 14. Grimes v. Donald• Legal Analysis & Holding: – “Directors may not delegate duties which lie at the heart of the management of the corporation.” – Agreement does not preclude DSC board from exercising powers and fulfilling its fiduciary duty – If an independent and informed board makes a decision, it normally will receive the protection of the business judgment rule – “So far, we have only a rather unusual contract, but not a case of abdication.” Judgment affirmed. 43-14
    15. 15. Directors’ Meetings• For directors to act, a quorum (generally, a majority) of directors must be present and each director has one vote• Most state corporation laws and the MBCA permit action by directors without a meeting if all directors consent in writing or through telecommunications 43-15
    16. 16. The Officers• Officers of a corporation include the president, one or more vice presidents, a secretary, and a treasurer• Same person may hold any two or more offices – Except for the offices of president and secretary 43-16
    17. 17. Officer Authority & Liability• Officers are agents of the corporation, thus have express authority conferred on them by the bylaws or the board of directors and implied authority to do things reasonably necessary to accomplish duties• A corporate officer ordinarily has no liability on contracts made for the corporation if the officer signs on behalf of the corporation rather than in a personal capacity 43-17
    18. 18. Close Corporations• Statutory Close Corporation Supplement to the MBCA – permits a close corporation to dispense with a board of directors and be managed by the shareholders – grants unlimited power to shareholders to restrict the board’s discretion 43-18
    19. 19. Nonprofit Corporations• Board of directors must have at least three directors and members elect directors• Directors of public benefit corporations and religious corporations generally volunteer services and receive no compensation• Officers not required, except for an officer performing duties of corporate secretary 43-19
    20. 20. Director & Officer Duties• Directors and officers owe a fiduciary duty to the corporation, including duty to act within the scope of the powers of the corporation• Officers must within authority conferred by the articles of incorporation, bylaws, and board of directors• Directors and officers are liable for losses to the corporation caused by their lack of care or diligence 43-20
    21. 21. Business Judgment Rule• The MBCA duty of care test requires a director or officer to make a reasonable investigation and honestly believe that the decision is in the corporation’s best interests• Business judgment rule: absent bad faith, fraud, or breach of fiduciary duty, the judgment of directors and officers is conclusive 43-21
    22. 22. Brehm v. Eisner• Facts: – Michael Ovitz was hired as Disney president at insistence of CEO Eisner – Ovitz hired with employment agreement that provided substantial Non-Fault Termination (NFT) payment if termination without cause – Eisner terminated Ovitz “without cause” – Shareholders brought a derivative action on behalf of Disney against Eisner for breach of fiduciary duty 43-22
    23. 23. Brehm v. Eisner• Legal Analysis: – Eisner argued he met business judgment rule – Court reviewed the business judgment rule and evidence of Eisner’s hire and subsequent termination of Ovitz • Key items of evidence: Eisner knew Ovitz well, thought Ovitz would be a good president, obtained legal counsel regarding the termination and NFT payment, and even tried to “trade” Ovitz rather than terminate him 43-23
    24. 24. Brehm v. Eisner• Supreme Court of Delaware Holding: – Chancery (trial) court concluded that while Eisner “enthroned himself as the omnipotent and infallible monarch,” he acted in good faith and did not breach fiduciary duty of care – Moreover, shareholders failed to establish any lack of due care on the board of directors’ part. – Judgment affirmed for Eisner and other defendants 43-24
    25. 25. Acquiring Control of a Corporation• When an outsider attempts to gain control of a publicly held corporation (the target), the outsider (raider) makes a tender offer for the shares of a corporation – Tender offer is an offer to shareholders to buy their shares at a price above current market price• Raiders hope to acquire a majority of shares, giving control of the target corporation 43-25
    26. 26. Opposing the Tender Offer• A corporation’s management generally opposes tender offers using a variety of defenses, including Pac-Man, white knight, greenmail, poison pill, and lock-up option• Business judgment rule protects a board’s opposition unless directors decide to oppose a tender offer before carefully studying it – See Paramount Communications, Inc. v. Time, Inc. 43-26
    27. 27. Conflicting Interest Transaction• As agents, directors and officers owe the corporation duties of loyalty, including the duty not to self-deal (a conflict of interest)• If a director has a conflict of interest, a court may void the transaction with the corporation if it is unfair to the corporation• Intrinsic fairness standard: a transaction is fair if reasonable persons in an arm’s-length bargain would have bound the corporation 43-27
    28. 28. Usurpation of Corporate Opportunity • Directors & officers have opportunity to steal business opportunities their companies could have exploited • As fiduciaries, directors and officers are liable to their corporation for usurping corporate opportunities – The corporation must be able financially to take advantage of the opportunity 43-28
    29. 29. Guth v. Loft• 1930s case: Court held that Guth, the president of a corporation (Loft) that manufactured beverage syrups and operated soda fountains usurped the firm’s opportunity to become the manufacturer of Pepsi- Cola syrup 43-29
    30. 30. Minority Shareholders• Shareholders isolated by another group of shareholders may complain of oppression• A freeze-out is oppression in which the corporation merges with a newly formed corporation under terms by which minority shareholders receive cash instead of shares of the new corporation – Going private is a freeze-out of shareholders of publicly owned corporations 43-30
    31. 31. The Law of Oppression• Most states apply total fairness test to freeze-outs: fair dealing and fair price• Some states apply business purpose test: freezeout must accomplish some legitimate business purpose• Other states place no restrictions on freeze-outs if minority shareholder has a right of appraisal 43-31
    32. 32. Coggins v. New England Patriots Footb • Court required that freezeout of minority shareholders of New England Patriots football team meet both business purpose and intrinsic (total) fairness tests Freezing out shareholders just to repay majority shareholder’s personal debts was not a proper business purpose! 43-32
    33. 33. Management Liability: Torts• A person is always liable for his own torts, even if committed on behalf of principal – A director is liable for authorizing a tort or participating in its commission• Under the vicarious liability doctrine of respondeat superior, a corporation is liable for employee’s tort that is reasonably connected to authorized conduct of the employee 43-33
    34. 34. Management Liability: Crimes• A person is always liable for his own crimes, even if committed on behalf of a principal• Corporations may be liable for crimes when the criminal act is requested, authorized, or performed by: (a) board of directors, (b) an officer, (c) another person with responsibility for formulating company policy, or (d) a high-level administrator with supervisory responsibility over the subject matter of the offense and acting within the scope of his employment 43-34
    35. 35. Management Liability: Crimes• A director or officer may bear criminal liability if s/he requests, conspires, authorizes, or aids and abets the commission of a crime by an employee 43-35
    36. 36. U.S. v. Jensen• Stock options to officers, directors, and employees are granted at certain exercise price; if stock price rises after the date of the grant, the option has value• Granting an option with exercise price lower than market price (backdates, in- the-money) gives employee an instant chance for profit• Backdating stock options is not illegal unless done for a fraudulent purpose 43-36
    37. 37. U.S. v. Jensen• Brocade Communications vice president (Jensen) issued backdated options to CEO• Proper accounting would have given the company a loss of $110 million in 2001 rather than reported profit of $3 million• Jensen convicted of willingly and knowingly falsifying Brocade’s records over a three-year period to conceal actual date when stock options were granted to Reyes 43-37
    38. 38. Indemnification & Insurance• Because officers and directors have a risk of liability, corporations often indemnify those who serve as a director or an officer – Indemnify: to protect or insure; refers to practice by which corporations pay expenses of officers or directors named as defendants in litigation• D & O insurance used as risk management tool 43-38
    39. 39. Test Your Knowledge• True=A, False = B – The board of directors own a corporation. – A corporation has legal power to do anything that an individual may do. – Sarbanes–Oxley Act requires all publicly held firms to have audit committees comprised of independent directors. – Class voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors 43-39
    40. 40. Test Your Knowledge• True=A, False = B – Officers are agents of the corporation. – A hostile takeover occurs when there is an offer to shareholders to buy their shares at a price above current market price. – Under the intrinsic fairness test, directors and officers are protected from liability to their corporation for usurping corporate opportunities. 43-40
    41. 41. Test Your Knowledge• Multiple Choice – Absent bad faith, fraud, or breach of fiduciary duty, the rule that the judgment of directors and officers is conclusive is known as: a) The fiduciary duty rule b) The D&O rule c) The business judgment rule d) The business purpose test e) none of the above 43-41
    42. 42. Test Your Knowledge• Multiple Choice – Which of the following statements is false? a) Each person is liable for his/her own torts b) A corporation may be criminally liable if an officer or director authorized an employee to do a criminal act c) An officer or director cannot be personally liable for a crime d) Corporations may protect or insure their officers and directors from risk of liability 43-42
    43. 43. Thought Question• Roberto Goizueta, former CEO of Coca-Cola, said in 1992: Business now shares in much of the responsibility for our global quality of life.• Do you agree or disagree with Goizueta? Support your opinion. 43-43