Allocation of powers between directors and shareholders

ALLOCATION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS

1.MANAGEMENT OF CORPORATION’S BUSINESS --corporate statutes vest the power to manage in the board of directors , except as provided by valid agreement in a close corp. He board’s power is limited to proper purposes.

2.SHAREHOLDER APPROVAL OF FUNDAMENTAL CHANGES --shs must approve certain fundamental changes in the corp, e.g., amendment of articles, merger, sale of substantially all assets, and dissolution.

3.POWER TO ELECT DIRECTORS --shs have the power to elect dirs and to remove them for cause , absent provisions for removal without cause in the certificate, bylaws, or in statutes. Some statutes also permit the board or the courts to remove a dir for certain specific reasons (e.g., felony conviction).

4.POWER TO RATIFY MANAGEMENT TRANSACTIONS --shs have the power to ratify certain management transactions and insulate the transactions against a claim that managers lacked authority, or shift the burden on the issue of self-interest.

5.POWER TO ADOPT PRECATORY RESOLUTIONS --shs may also adopt advisory but nonbinding (precatory) resolutions on proper subjects of their concern.

6.BYLAWS --shs usually have the power to adopt and amend bylaws, although some statutes give the board of dirs the concurrent power to do this.

7.CLOSE CORPORATION --this is a corp owned by a small number of shs who may actively manage; it has no general market for its stock, and it has some limitations regarding transferability of stock.

8.STATUTORY CLOSE CORPORATION STATUS --the basic requirements to qualify for special treatment under the statutes are that, in its cert of incorp’n, a statutory close corp must identify itself as such, and must include certain limitations as to the number of shs, transferability of shares, or both.

a)Functioning As a Close Corporation --there may be sh agreements relating to any phase of the corp affairs.

B.DIRECTORS

1.APPOINTMENT OF DIRECTORS --initial dirs are either designated in the articles of incorporation or elected at a meeting of incorporators. Subsequent elections are by shs at their annual meetings. The number of dirs is usually set by the articles or bylaws.

a)Qualifications --absent a contrary provision in the articles or bylaws, dirs need not be shs of the corp or residents of the state of incorporation.

b)Vacancies --statutes vary, but under Model Act, a vacancy may be filled by either the shs or dirs.

1)Compare--removal : some statutes require that vacancies created by removal of a dir be filled by the shs unless the articles or bylaws provide otherwise.

2.TENURE OF OFFICE

a)Term of Appointment --under most statutes, office is held until the next meeting, although on a classified board, dirs may serve staggered multi year terms.

b)Power to Bind Corporation Beyond Term --unless limited by the articles, the board has the power to make contracts biding the corp beyond the dirs’ term of office.

c)Removal of Director During Term --at common law, shs can remove a dir for cause (e.g., fraud, incompetence, dishonesty) unless an article or bylaw provision permits removal without cause. a dir being removed for cause is entitled to a hearing by shs before a vote to remove. a number of statutes permit removal without cause.

1)Removal by Board --board can NEVER remove a dir unless authorized by statute;

2)Removal by Court --there is a split authority as to whether a court can remove a dir for cause.

I)Statutes--some statutes permit courts to remove a dir for specified reasons. Usually, a petition for removal can be brought only by a certain percentage of shs or the attorney general.

3.FUNCTIONING OF BOARD

a)Meetings --absent a statute, dirs can act only at a duly convened meeting consisting of a quorum. In most jurisdictions, a meeting can be conducted by telephone or other means whereby participants can hear each other simultaneously. Most statutes also allow board action by unanimous written consent without a meeting.

1)Notice --although formal notice is unnecessary for a regular meeting, special meetings require notice to every dir of date, time, and place. Usually, notice can be waived in writing before or after a meeting. Attendance waives notice unless the dir attends only to protest the meeting.

2)Quorum --a majority of the authorized number of dirs constitutes a quorum. Many statutes permit the articles or bylaws to require more than simple majority or less than that.

3)Voting --absent a contrary provision, an affirmative vote of a majority of those present , not a majority of those voting, is required for board action.

b)Effect of Noncompliance With Formalities --today, most courts hold that informal but unanimous approval of a transaction is effective , as is a matter receiving the explicit approval by a majority of dirs without a meeting, plus acquiescence by the remaining dirs.

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