3. Learning Objectives
v Corporate objectives
v Corporate powers
v The Board of Directors
v Officers of the corporation
v Directors’ and officers’ duties to the
corporation
v Corporate and management liability
43 - 3
4. Overview
v 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
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5. Corporate Objectives
v The traditional objective of the corporation
has been to enhance corporate profits and
shareholder gain
v However, corporations may take socially
responsible actions to enhance long-term
profits or corporate goodwill
w Corporate constituency statutes support
these actions
43 - 5
6. Corporate Powers
v Model Business Corporation Act (MBCA)
states that a corporation has power to do
anything that an individual may do
v Historically, an act of a corporation beyond
its powers was a nullity since it was ultra
vires (“beyond the powers”)
w Now corporate purposes are broadly stated
limiting the use of the ultra vires doctrine
43 - 6
7. The Ultra Vires Doctrine
v 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 - 7
8. The Board of Directors
v The board of directors supervises the
actions of its committees, the chairman, and
officers to ensure the board’s policies are
being carried out and the corporation is
managed wisely
v Some corporate actions require board
initiative and shareholder approval
w Amending articles of incorporation, mergers,
and dissolution
43 - 8
9. Committees of the Board
v 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
v Audit committees are directly responsible
for appointment, compensation, and
oversight of independent public accountants
w Sarbanes– Oxley Act requires all publicly held firms
to have audit committees of independent directors
43 - 9
10. Committees of the Board
v A nominating committee chooses a slate of
directors to be submitted to shareholders at
the annual election of directors
v A compensation committee reviews and
approves salaries, stock options, and other
benefits of high-level corporate executives
v A shareholder litigation committee decides
whether a corporation should sue someone
who has allegedly harmed the corporation
43 - 10
11. Electing Directors
v Directors are elected by shareholders at the
annual shareholder meeting
v 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 - 11
12. Electing Directors
v Class voting may give certain shareholder
classes the right to elect a specified number
of directors
v 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 - 12
13. Proxy Solicitation
v 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
w A proxy is a person designated to vote for the
shareholder
w Wall Street rule: either support management or
sell the shares
43 - 13
14. Grimes v. Donald
v Facts:
w The 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
w Grimes, a shareholder, sued to invalidate the
agreement arguing that it illegally delegated duties
of the board of directors to Donald
w Trial court dismissed case and Grimes appealed
43 - 14
15. Grimes v. Donald
v Legal Analysis & Holding:
w “Directors may not delegate duties which lie at the
heart of the management of the corporation.”
w Agreement does not preclude DSC board from
exercising powers and fulfilling its fiduciary duty
w If an independent and informed board makes a
decision, it normally will receive the protection of
the business judgment rule
w “So far, we have only a rather unusual contract,
but not a case of abdication.” Judgment affirmed.
43 - 15
16. Directors’ Meetings
v For directors to act, a quorum (generally, a
majority) of directors must be present and
each director has one vote
v Most state corporation laws and the MBCA
permit action by directors without a meeting
if all directors consent in writing or through
telecommunications
43 - 16
17. The Officers
v Officers of a corporation
include the president, one
or more vice presidents, a
secretary, and a treasurer
v The same person may hold
any two or more offices
w Except for the offices of
president and secretary
43 - 17
18. Officer Authority & Liability
v 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
v 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 - 18
19. Close Corporations
v Statutory Close Corporation
Supplement to the MBCA
w (a) permits a close corporation
to dispense with a board of
directors and be managed by
the shareholders
w (b) grants unlimited power to
shareholders to restrict the
board’s discretion
43 - 19
20. Nonprofit Corporations
v Board of directors must have at least three
directors and members elect directors
v Directors of public benefit corporations and
religious corporations generally volunteer
services and receive no compensation
v Officers not required, except for an officer
performing duties of corporate secretary
43 - 20
21. Director & Officer Duties
v Directors and officers owe a fiduciary duty to
the corporation, including duty to act within
the scope of the powers of the corporation
v Officers must within the authority conferred
by the articles of incorporation, bylaws, and
board of directors
v Directors and officers are liable for losses to
the corporation caused by their lack of care
or diligence
43 - 21
22. Business Judgment Rule
v 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
v Business judgment rule: absent bad faith,
fraud, or breach of fiduciary duty, the
judgment of directors and officers is
conclusive
43 - 22
23. Brehm v. Eisner
v Facts:
w Michael Ovitz was hired as Disney president at
the insistence of CEO Eisner
w Ovitz hired with employment agreement that
provided a substantial Non-Fault Termination
(NFT) payment if termination was without cause
w Ovitz was terminated by Eisner “without cause”
w Shareholders brought a derivative action on behalf
of Disney against Eisner for breach of fiduciary
duty
43 - 23
24. Brehm v. Eisner
v Legal Analysis:
w Eisner argued he met the business judgment rule
w The court reviewed the rule and evidence of
Eisner’s hire and subsequent termination of Ovitz
w Keyitems 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 - 24
25. Brehm v. Eisner
v Supreme Court of Delaware Holding:
w The Chancery (trial) court concluded that while
Eisner “enthroned himself as the omnipotent and
infallible monarch” he acted in good faith and did
not breach his fiduciary duty of care
w Moreover, shareholders failed to establish any
lack of due care on the board of directors’ part.
w Judgment affirmed for Eisner and other
defendants
43 - 25
26. Acquiring Control of a
Corporation
v 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
w Tender offer is an offer to shareholders to buy
their shares at a price above current market price
v Raiders hope to acquire a majority of
shares, giving control of the target
corporation
43 - 26
27. Opposing the Tender Offer
v 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
v Business judgment rule protects a board’s
opposition unless directors decide to oppose
a tender offer before carefully studying it
w See Paramount Communications, Inc. v. Time,
Inc.
43 - 27
28. Conflicting Interest Transaction
v As agents, directors and officers owe the
corporation duties of loyalty, including the
duty not to self-deal (a conflict of interest)
v If a director has a conflict of interest, a court
may void the transaction with the corporation
if it is unfair to the corporation
v Intrinsic fairness standard: a transaction is
fair if reasonable persons in an arm’s-length
bargain would have bound the corporation
43 - 28
29. Usurpation of
Corporate Opportunity
v Directors & officers have the opportunity to
steal business opportunities their companies
could have exploited
v As fiduciaries, directors and officers are
liable to their corporation for usurping
corporate opportunities
w The corporation must be able financially to
take advantage of the opportunity
43 - 29
30. Guth v. Loft
v 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 - 30
31. Minority Shareholders
v Shareholders isolated by another group of
shareholders may complain of oppression
v 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
w Going private is a freeze-out of shareholders
of publicly owned corporations
43 - 31
32. The Law of Oppression
v Most states apply total fairness test to
freeze-outs: fair dealing and fair price
v Some states apply business purpose test:
freezeout must accomplish some legitimate
business purpose
v Other states place no restrictions on freeze-
outs if minority shareholder has a right of
appraisal
43 - 32
33. Coggins
v. New England Patriots Footbal
v 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 - 33
34. Management Liability: Torts
v A person is always liable for his own torts,
even if committed on behalf of a principal
w A director is liable for authorizing a tort or
participating in its commission
v Under the vicarious liability doctrine of
respondeat superior, a corporation is liable
for employee’s tort that is reasonably
connected to the authorized conduct of the
employee
43 - 34
35. Management Liability: Crimes
v A person is always liable for his own crimes,
even if committed on behalf of a principal
v 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 - 35
36. Management Liability: Crimes
v 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
v Example: United States
v. Jensen
43 - 36
37. U.S. v. Jensen
v 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
v Granting an option with exercise price lower
than market price (backdates, in-the-money)
gives employee an instant chance for profit
v Backdating stock options is not illegal unless
done for a fraudulent purpose
43 - 37
38. U.S. v. Jensen
v Brocade Communications vice president
(Jensen) issued backdated options to CEO
v Proper accounting would have given the
company a loss of $110 million in 2001 rather
than the reported profit of $3 million
v Jensen convicted of willingly and knowingly
falsifying Brocade’s records over a three-year
period to conceal the actual date when stock
options were granted to Reyes
43 - 38
39. Indemnification & Insurance
v Because officers and directors have a risk of
liability, corporations often indemnify those
who serve as a director or an officer
w Indemnify: to protect or insure; refers to practice
by which corporations pay expenses of officers
or directors named as defendants in litigation
v D & O insurance also available as a risk
management tool
43 - 39
40. Test Your Knowledge
v True=A, False = B
w The board of directors own a corporation.
w A corporation has legal power to do anything
that an individual may do.
w Sarbanes–Oxley Act requires all publicly held
firms to have audit committees comprised of
independent directors.
w 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 - 40
41. Test Your Knowledge
v True=A, False = B
w Officers are agents of the corporation.
w A hostile takeover occurs when there is an
offer to shareholders to buy their shares at a
price above current market price.
w Under the intrinsic fairness test, directors and
officers are protected from liability to their
corporation for usurping corporate
opportunities.
43 - 41
42. Test Your Knowledge
v Multiple Choice
w 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 - 42
43. Test Your Knowledge
v Multiple Choice
w 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
43 - 43 officers and directors from the risk of liability
44. Thought Question
v Roberto Goizueta, former
CEO of Coca-Cola, said
in 1992: Business now
shares in much of the
responsibility for our
global quality of life.
v Do you agree or disagree
with Goizueta? Support
your opinion.
43 - 44
Editor's Notes
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.
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 1064, 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.”
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.
