Chapter

45 Review Sheet Introduction to Corporations Nature of a Corporation A corporation is recognized as a legal entity, existing apart from, and independent of, its owners or investors. o The law recognizes a corp. as a fictitious being or artificial person. The corporation has unlimited liability for corporate obligations, while the investors are only liable to the extent of their investment. The corporation is not affected by changes in ownership. The corp. can own property, enter into contracts, sue, be sued, and may be subject to criminal liability (though it is entitled to many of the protections accorded natural persons under state and federal constitutions). Types of Corporations Public Corporation a corp. created by the government for political purposes to administer civil government, and often invested with local legislative powers. o Ex: School districts, cities, counties, the FDIC, etc. Private Corporation those formed by private individuals for private purposes and included, generally, nonprofit and business organizations. Closelyheld Corporation one whose shares are owned by one shareholder or a closely knit group of shareholders. o No public market exists for the corp.s shares, and the owners may impose restrictions on the transfer of shares. o Generally operate internally like proprietorships or partnerships, but use the corporate form for limited liability or tax advantages. Publicallyheld Corporation one whose shares are owned by many people. o Have their shares traded on securities exchanges for which public share price quotations exist, and shares are freely transferable to new owners. o Unlike closelyheld corps, the participation of shareholders in management is limited to electing corporate directors and voting on major corp. issues. Professional Corporation (or association) a closelyheld corp. formed by professionals such as doctors, lawyers, accountants, etc. o Allowed in all states and D.C. o All shareholders must be licensed in the profession involved. C and S Corporations o The income of most corporations (known as C corps) is subject to double taxation, where the corp. is taxed first on its own tax return

and then shareholders are taxed on the dividends they receive from the corp. o To avoid this situation certain corporations may elect to be taxed under subchapter S of the Internal Revenue Code. o S corps pay no income tax at the corporate level; rather income is passed through the corp. and taxed directly to shareholders, similar to partnerships. o To qualify, the corp. may have no more than 100 shareholders and one class of stock, and must meet other requirements of the federal tax code. Sources of Corporation Law Most small businesses are incorporated under the law of the jurisdiction in which their property and principal place of business are located. In many jurisdictions, corporation law is heavily influenced by the Revised Model Business Corporation Act. o These model acts are designed to balance the interests of management, shareholders, corporations, and the public. o Differences between jurisdictions are still common, even among MBCA jurisdictions, because the Act has been frequently amended and is intended merely as a drafting guide, not uniform statute. Corporate law is also derived from other statutory and common law sources. Incorporation and Admission Procedures for incorporation One or more persons, known as incorporators, prepare a document known as the articles of incorporation. Then the articles of incorporation are delivered, together with the necessary fee, to an appropriate state official, usually the secretary of state, who reviews it. If the articles conform to legal requirements, the secretary will issue a certificate of incorporation. Typically, incorporation begins when the certificate is issued or articles are filed. Contents of Articles In many states official forms are used, but the articles of incorporation must contain certain information prescribed by statute regardless of their format. Under the RMBCA, the articles need only state the name of the corporation, the number of shares of stock the corp. is authorized to issue, the address of the registered office & name of the corporations registered agent, and the name & address of each incorporator. The following elaborates upon certain typical provisions of the articles:

 Corporate Name Generally, the corporate name must include language indicating corporate form such as corporation, company, incorporated, etc, and may not be deceptively similar to any other corporate name. Corp. names are allocated on a firstcomefirstserve basis. Corporate Duration All modern statutes permit perpetual corporate existence, which often is presumed unless a limited period of duration is stated in the articles. Corporate Purposes The modern trend is to authorize extremely broad corporate purpose clauses, or to dispense with them entirely. The RMBCA does not require that the articles contain purpose clauses, but simply presumes that every corporation is organized to conduct any lawful business unless a narrower purpose is outlined in the articles. Registered Office and Agent A corporation is required to maintain a registered office with a registered agent in the state of incorporation. The registered office need not be the principle place of business. The registered agent is the person authorized to receive service of process on the corporation, other notices or demands, and official communications from the state. Changes in the registered office or agent may be made by filling a statement outlining the change with the state secretary of state. Organization of the Corporation After the certificate of incorporation is issued, the directors named in the articles hold a meeting to complete the organization of the corp. At the meeting, the directors are formally elected, officers are appointed, pre incorporation contracts are adopted or rejected, shares of stock are issued, a resolution is made to open a corp. bank account that designates those persons authorized to sign checks, and a corporate seal is adopted. In addition corporate bylaws, if desired, are adopted. o Bylaws are a set of rules governing the corps internal affairs. o May contain any provision as long as it is consistent with the law and articles of incorporation. o Under the RMBCA, both shareholders and the board may make, amend, or repeal the bylaws, unless that power is reserved exclusively by the shareholders in the articles of incorporation. Corporate Powers Statutory Powers

Ultra Vires Acts A corporation that acts beyond the scope of its powers or stated purpose acts ultra vires. Ultra vires acts include both those expressly prohibited and those in excess of granted powers or purposes. Due to broad purpose statements few corp. activities are Ultra Vires. Even if corp. purposes or powers are restricted, the RMBCA and state statutes provide that no corporation lacked the power to act, except in three limited circumstances: 1) A suit by a shareholder against the corporation to enjoin (prohibit) it from doing an act 2) A proceeding by the corporation against incumbent or former officers or directors for their unauthorized acts, and 3) A suit by the state attorney general to dissolve the corporation or to enjoin it from transacting unauthorized business. Admission of Foreign Corporations A corporation organized under the laws of a given state is referred to as a domestic corporation in that state; if such a corporation does business in another state, it is referred to as a foreign corporation in that state. Foreign corporations must qualify to do business in states outside the state of incorporation. o To qualify, the corp. must obtain a certificate of authority from the state secretary of state of each state in which it is a foreign corp.

Every state corporation statute includes an extensive list of powers possessed by businesses incorporated in the jurisdiction. The RMBCA provides that each corp. has the power: 1) to have perpetual existence, unless limited in the articles of incorporation 2) to sue, be sued, and defend in the corp. name 3) to acquire, own, hold, improve, and use any interest in either real or personal property, including stocks and bonds 4) to sell, convey, mortgage, pledge, lease, or otherwise transfer any or all of its property 5) to lend money and take a security interest in either real or personal property to secure its repayment 6) to make contracts and guarantees, to borrow money, and issue notes, bonds, or other obligations that may be secured by corp. assets 7) to make charitable contributions 8) to be the member of any partnership or joint venture 9) to exercise other powers necessary to effect its purpose This enumeration gives the corp. essentially the same powers as a natural person.

o The foreign corp. must also file a verified copy of its articles of incorporation and pay all required fees and taxes. Once authorized to do business, the foreign corp. must continuously maintain both a registered office and agent in that state. Until it obtains a certificate of authority, a foreign corp. is denied the use of the courts of the state; it is not permitted to maintain any action or suit in the state with respect to its business. Failure to obtain the certificate neither prevents the corp. from defending a suit in the state, nor impairs the validity of any contract the corp. makes. A foreign corp. without a certificate of authority that transacts business is liable for all fees or franchise taxes that would have been imposed, and for all penalties imposed for failure to pay taxes and fees.

Promoter and Shareholder Liability Liability for Preincorporation Transactions Before corporate existence begins, the promoters often enter into contracts or other transactions on behalf of the corporation not yet formed. In this case the law must determine: 1) To what extent the promoters are personally liable upon contracts made with third parties on behalf of the corporation, and 2) To what extent the corporation, upon coming into existence, is liable upon contracts made by the promoters. Liability of the Promoter A promoter who contracts on behalf of a corp. not yet formed, without disclosing that fact, is personally liable on the contract. A promoter who represents that a corp. is in existence, when it in fact is not, incurs personal liability to the third party for breach of the warranty of competent principal made by agents generally, or upon misrepresentation grounds. If the promoter discloses to the third party that the corp. is not yet formed, the result depends upon how the parties characterize the transaction. o To avoid litigation the extent of the promoters undertaking should be carefully drafted into the agreement between the promoter and third party. Liability of the Corporation The corporation, upon coming into existence, is not immediately liable upon the promoters contracts. The promoter cannot bind the corp. as its agent because the corp. was not in existence at the time the contract was made. The corp. becomes liable by accepting the third partys offer, or adopting, assuming, or by taking an assignment of the contract from the promoter.

 Promoters Fiduciary Duties During the promotional stage, copromoters are treated as joint ventures or partners, and therefore owe each other the strict fiduciary duties of fair dealing and disclosure generally existing among partners. o Promoters also owe similar duties to the corp. and its shareholders after incorporation. o Secret profits obtained by the promoter in violation of these duties may be recovered by the corp. Defective Incorporation A de jure corporation is one formed in compliance with all mandatory state requirements. o Recognized as a corp. for all purposes and its existence is not subject to attack by the state or any creditors. If the parties conduct business as a corporation, while in fact the provisions authorizing corporate status are not fully complied with, firm creditors will likely seek to hold the shareholders personally liable as partners for business debts, citing Defective Corporation. In this situation common law has recognized two doctrines to protect shareholders: o The de facto incorporation doctrine: Under the traditional test, a de facto corporation is created, if an enabling statute exists permitting corporate form, the parties have made a good faith effort to comply with the statute, and the parties subsequently conduct business as a corporation. If these standards are met then only the state can challenge corporate existence. Third parties, such as creditors, may not assert lack of corporate status as a basis to impose personal liability on the owners. o Corporation by Estoppel This doctrine has been applied, when a third party transacts business with a corporation, unaware of its defective organization and relying solely upon the corp.s credit. Subsequently, after discovering that a corp. has not been formed, the third party seeks to hold the promoters or shareholders personally liable on the obligation as partners.

o However characterized, Corp. liability requires some affirmative action by the corp. indicating its assent to the preincorporation transaction.

Disregarding Corporate Existence Piercing the Corporate Veil If a corporation incurs debts in excess of its assets, unpaid corp. creditors have no recourse against the corporations shareholders. To prevent fraud or injustice courts in certain limited circumstances disregard the corp. entity, or pierce the corp. veil, to impose personal liability upon owners. In determining whether disregarding the corporate entity is appropriate, eight factors have been considered: 1. Undercapitalization of a corporation 2. Failure to observe corporate formalities 3. Nonpayment of dividends 4. Siphoning of corporate funds by the dominant stockholder 5. Nonfunctioning of other officers or directors 6. Absence of corporate records 7. The use of the corporation as a faade for operations of the dominant stockholder or stockholders, and 8. The use of the corporate entity in promoting injustice or fraud Cases generally arise in oneperson, family, or closelyheld corporations. The corporate claim asserted against the shareholders may result either from a contract between the corp. and a third party, or from a tort committed by a corp. agent for which the corp. is liable. Chapter 46 Review Sheet Corporate Financial Structure

On these facts courts often estop, or prevent, the third party from holding the owners personally liable. The courts reason that it is unjust to hold someone personally liable when the other party relied on corp. credit, especially when the failure of incorporation was not caused by negligence or willful failure to comply with statutory requirements.

Issuance of Shares Preemptive right: allows an existing shareholder to purchase a new issue of shares in proportion to his present interest in the corporation, before the shares are sold to others. Security: a share, participation, or other interest in the property of the issuing corporation (an equity security) or an obligation of the issuer (debt security) Equity securities: create an ownership interest in the business, such as shares of stock Types of equity securities: preferred shares, common shares, redeemable shares, convertible shares, options, warrants rights Debt securitiesnotes, debentures, and bonds

 A corporation has the power to create and issue the number of shares stated or authorized in its articles of incorporation Both par and no par shares are issued for consideration, determined by the board of directors, unless that right is reserved to the shareholders in the articles of incorporation. Interest payments on debt are deductible by the corporation and dividend payments arent. No double taxation. Stock Subscriptions Stock subscription: an offer or agreement by a subscriber to purchase and pay for a specified number of previously unissued shares of the corporation A subscription for shares of a corporation to be organized is irrevocable for six months unless the subscription agreement provides otherwise or all other subscribers agree to revocation. Shareholder Liability for Watered Shares Shares issued to persons who pay less than the law requires are called bonus, discount, or watered shares. Watered shares: issued for property or services worth less than the required consideration If a holder of watered shares later sells them, a good faith purchaser incurs no liability to the corporation or its creditors for any unpaid consideration. A creditor to whom the holder transfers the shares as collateral is not personally liable as a shareholder. In both cases, the transferor remains liable despite the transfer. However, treasury stock may be sold for any price fixed by the board of directors without regard to any par value stated on the stock. Dividends, Distributions and Redemptions Distributions: transfers of money or other property by the corporation to its shareholders. Dividend: a distribution out of a corporations current or past earnings. 3 Types of Dividends: cash, property and share of stock. Cumulative dividend preference: entitles a shareholder to receive a prescribed dividend for the current year and all prior years in which the preferred dividend wasnt paid, before any dividend may be paid on the common shares. If a company declares a cash dividend on its preferred stock, the shareholder becomes an unsecured creditor of the company. Treasury stock may be distributed as a stock dividend. In all states, a dividend payment is prohibited if the corporation is insolvent or would be rendered insolvent by the distribution. Equity Insolvency: inability to pay debts as they come due in the ordinary course of business Bankruptcy Insolvency: excess of total liabilities over total assets

 Noncumulative: preferred dividends not paid in prior years dont accumulate and need not be satisfied before dividends are subsequently paid to shares with subordinate dividend rights. Chapter 47 Corporate Management Structure and Duties Shareholders Although the shareholders are the owners of the corporation, their participation in management is generally limited to voting on the election of directors and upon extraordinary corporate matters such as amendments to the articles of incorporation, dissolution, merger or consolidation, or sale of corporate assets outside the ordinary course of business. The power to amend, adopt, or repeal bylaws may be reserved to the shareholders in the articles of incorporation, and shareholders may generally repeal or change bylaws adopted by the directors. Corporations usually are required to hold an annual shareholders meeting at a time stated in, or fixed by, the bylaws. Although the primary purpose of the annual meeting is to elect some or all of the directors, other business also may be conducted. At annual and special meetings, shareholders may vote in person or may authorize other persons to vote their shares by proxy. To determine which shareholders are entitled to notice of a meeting, to demand a special meeting, to vote, or to take other shareholder action, the bylaws or board of directors may fix a record date. Once the record date is established, the officer or gent in charge of the stock transfer books prepares a complete voting list or voting record of shareholders entitled to vote. This list must be made available to shareholders for inspection and copying at the meeting and under some statutes, in advance of the meeting. Shareholder Meeting Unless otherwise provided in the articles of incorporation, each outstanding share, regardless of class, is entitled to one vote on each matter presented at the meeting. The articles may provide for more than one vote for any share. Treasury shares and shares held by other corporations controlled by the issuing corporation are not entitled to vote and are not counted in determining the number of outstanding shares. Voting rights of any lass of shares may be limited or denied in the articles of incorporation.

Election of Directors Straight and Cumulative Voting

Straight Voting is the usual method of shareholder voting. Under this approach, each share is entitled to one vote on each matter, including one vote for each vacant directorship. To assure minority representation on the board of directors, many states require cumulative voting. Under cumulative voting, which applies only to the election of directors, the number of votes each shareholder receives is equal to the number of his or her shares multiplied by the number of directorships to be filled. Proxies and Proxy Voting The grant of authority by a shareholder to another to vote his or her shares is a proxy. Many statutes require that the proxy be in a writing signed by the shareholder. The proxy holder, the agent appointed to vote the shares, need not be a shareholder but must have capacity to act as an agent. A general proxy authorizes the proxy holder to vote on all issues presented at the meeting. Appointment of a proxy is generally revocable by the shareholder. A proxy also may be revoked by operation of law upon the shareholders death or incapacity. Some statutes, however, provide that revocation by operation of law is ineffective, unless notice of the death or incapacity is communicated to the corporation before the proxy is exercised. A proxy may be irrevocable if it is coupled with an interest or given as security. Voting Trusts and Voting Agreements A person who accumulates sufficient proxies from shareholders can obtain control of the corporation or at least assure representation on the board of directors. A voting trust is created when a group of shareholders transfer legal title to their shares to a trustee in exchange for voting trust certificates. Corporate dividends and other distributions usually are passed through the trust to the equitable owners of the shares, the holders of the voting trust certificates. The voting trust certificates often are freely transferable, like the shares they represent. Modern corporation statutes uniformly authorize voting trusts subject to certain restrictions. Under the RMBCA, to be enforceable, a voting trust must be in writing signed by the participating shareholders, and is not valid for more than ten years unless the parties extend it. Voting trusts often are used in corporate reorganizations to give control to former creditors whose debt has been reclassified as a stock as part of the reorganization plan.

The shareholder voting agreement (or pooling agreement) is a less formal control device. Unlike the voting trust, which involves a transfer of title to the shares to a third party, a shareholder voting agreement is simply a contract between two or more shareholders providing how their shares will be voted on certain matters, usually the election of directors. Shareholder agreements are enforceable under basic contract principles and generally are expressly authorized by statute. Shareholder agreements often are used to allocate and maintain control in closelyheld corporations. Preemptive Rights A preemptive right allows an existing shareholder to purchase a new issue of shares in proportion to his present interest in the corporation, before the shares are sold to others. Prevents dilution of a shareholders financial or voting interest in the corporation. The RMBCA and many state statutes provide that shareholders have no preemptive right to acquire the corporations unissued shares unless a provision creating such a right is included in the articles of incorporation. Preemptive rights generally apply only to new issues, not to shares that were previously authorized but unissued, or to a reissue of treasury shares. Shareholders may have no preemptive right to acquire shares issued: 1. For property or services rather than cash 2. In connection with a merger, consolidation, or reorganization 3. To satisfy conversion or option rights 4. Or to officers, directors, or employees under incentive or compensation plans. Preemptive rights are likely to be valuable to shareholders of a closelyheld corporation to protect proportionate interests in control, dividends, and surplus. Shareholders Right to Information Corporate Records Each corporation is required by law to keep appropriate accounting books and records minutes of its shareholders and board of directors meetings, and a detailed record of its shareholders. Shareholder Inspection of Records Both common law and statute give shareholders a qualified right to inspect corporate books and records. Under common law, shareholders have the right to inspect books and records for proper purposes. Under the RMBCA, a shareholders right to inspect certain records, such as the articles of incorporation or bylaws, is absolute. Inspection of other records, however, such as accounting records or the list of shareholders, requires that the demand be made in good faith and for a proper purpose.

A proper purpose is one designed to obtain information to protect the shareholders interest in the corporation. Proper purposes include: 1. Ascertaining the financial condition of the corporation, the value of shares, or the propriety of dividend payments 2. Discovering the existence of dishonesty or mismanagement by corporate officers or directors 3. Communicating with other shareholders to solicit proxies or publicize mismanagement by corporate officers or directors. Improper purposes include harassment or extortion, acquiring trade secrets for personal benefit or a corporate competitor, and obtaining the shareholder list to sell for profit. Corporate Management Directors The business and affairs of the corporation are managed under the direction, and subject to the oversight, of the board of directors. Although the directors are elected by the shareholders, they have a statutory right to manage the corporation independent of any direct shareholder influence. Directors need not be shareholders. As part of its management function the board (1) makes basic policy decisions concerning products, services, prices, or labor relations, (2) selects, supervises, and removes corporate officers and other executive personnel and delegates authority to them, (3) determines executive compensation including pension and retirement plans, (4) determines if, when and in what form or amount dividends will be paid, (5) determines financing and capital changes, (6) adopts, amends, and repeals bylaws, (7) participates with shareholders in effecting major corporate changes such as merger or dissolution, and (8) supervises the overall operation of the enterprise. The board also may include outside directors, persons not affiliated with management. Election, Constitution, and Tenure of Board of Directors The number and qualifications of directors must be specified in eh articles of incorporation or bylaws. Under the RMBCA, the articles of incorporation may provide for two or three classes of directors. If there are two classes, each class comes up for election every other year; that is, each serves a twoyear term. Because the terms are staggered, only one classs term expires in any given year. In the absence of classification, all directors are elected each year. After incorporation, the number of directors may be increased or decreased by appropriate amendment of the articles of incorporation or bylaws. A director whose term has expired continues to serve until a successor is elected and qualified. Vacancies on the board are filled as provided by statute or the bylaws.

Vacancies caused by death or resignation usually are filled by the board of directors. During their terms of office, directors may be removed by the shareholders for cause, such as fraud or breach of duty, usually by majority vote. RMBCA permits removal without cause by shareholder vote, unless the articles of incorporation provide otherwise. Formalities of Board Action Corporate management authority is vested in the board of directors as a body, not in individual directors. Directors must act in properly constituted meetings, affording opportunity for discussion, deliberation, and collective judgment. Meetings are either regular or special and may be held either within or outside the state of incorporation. Directors generally are entitled to advance written notice of special, but not regular, meetings. Unless the articles or bylaws provide otherwise, a majority of the number of directors fixed in the bylaws or articles of incorporation constitutes a quorum for transaction of business. If a quorum is present, the vote of a majority of directors present is the act of the board unless the articles or bylaws prescribe a greater number. Each director is entitled to one vote and may generally not vote by proxy Although the board usually acts in a meeting, the RMBCA and most state statutes permit directors to act without a meeting if a written consent, stating the action taken, is signed by all directors. A director who objects to an action authorized by a majority of the board must either request that a dissent be entered in the minutes of the meeting or give written notice of dissent. Committees of Directors The board of directors of a large corporation delegates much of its management authority to corporate officers and to executive and other committees of the board. Unless prohibited by the articles of incorporation or bylaws, the board of directors may establish one or more committees and appoint board members to serve on them. Each committee may exercise the boards authority to the extent specified by the board or provided in the articles or bylaws. To prevent excessive delegation of board authority to committees, their powers are limited by statute. The RMBCA provides that a committee may not (1) authorize distributions, (2) approve actions requiring shareholder vote, (3) fill vacancies on the board, or (4) adopt, amend, or repeal bylaws. Officers

Agents of the corporation to whom the board delegates authority to execute and administer board policy decisions. State corporation statutes require or authorize a corporation to have certain officers. A corporation will have a president, who is the principal executive officer of the corporation, one or more vice presidents in charge of various aspects of the business, a treasurer, and a secretary. Officers usually are appointed by the board of directors and serve at the pleasure of the board, subject to removal at any time. If a valid employment contract exists between the officer and the corporation, however, premature termination constitutes a breach of contract. Officers Authority Like other agents, a corporate officers authority to act for the corporation is derived from (1) actual authority express or implied, (2) apparent authority, or (3) corporate ratification of a previously unauthorized act. An officers express authority is derived primarily from four sources: the state corporation statute, the articles of incorporation, the bylaws, and resolutions of the board of directors. The most common and reliable of these sources is a resolution adopted by the board of directors authorizing the transaction in question. Corporate officers may possess a degree of implied authority that flows from their express authority. Most corporate officers, such as secretaries, treasurers, or vice presidents, possess little, if any, implied authority by virtue of their offices. Many modern courts have expanded the implied authority of corporate presidents to include transactions within the corporations ordinary or everyday course of business. Other courts give a president implied authority to bind the corporation to any contract that the board of directors could authorize or ratify. Even if a corporate officer possesses no express or implied actual authority, the corporation may be bound by the officers apparent authority or on grounds of ratification. Even if the officers conduct is beyond the cope of her actual or apparent authority, the corporation may be bound if it ratifies the previously unauthorized act of the officer. Duties of Management The most important duties imposed upon management under state law are derived from the common law, and include primarily (1) the duty to exercise reasonable care in managing the corporation and (2) the fiduciary duty of loyalty to the corporation. Under the RMBCA, an officer must discharge his duties (1) in good faith; (2) with the care a person in a like position would reasonably exercise under similar circumstances; and (3) in a manner the officer reasonably believes to be in the best interests of the corporation.

A director must act (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation. Directors when becoming informed in connection with their decision making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. In addition to the duties of care and loyalty, state business corporation acts commonly impose liability upon officers and directors for violations of specific statutory directives.

Duty of Care The RMBCA requires officers and directors to exercise the degree of care a person in a like position would reasonably exercise under similar circumstances. This duty simply renders directors and officers liable to the corporation for negligence in the performance of their responsibilities. The duty of care does not, however, render management liable for every mistake or error in judgment. Business Judgment Rule Officers and directors have no liability for honest, unbiased transactions undertaken with reasonable care, even if it later appears that that act was ill advised or mistaken. Directors and officers also must keep reasonably informed of corporate affairs. The RMBCA and many state statutes permit officers and directors who act in good faith to rely upon information prepared by other corporate officers or employees, legal counsel, public accountants, or a committee of the board of directors. Most state legislatures have enacted states limiting the personal liability of corporate directors for money damages. These statutes are of three basic types: 1. charter option statutes, which permit the articles of incorporation to include a provision eliminating or limiting a directors personal liability for damages, subject to stated exceptions. 2. self executing statutes, which automatically limit a directors liability, subject to stated exceptions. 3. Statutes limiting the amount of money damages, with stated exceptions. The RMBCA also incorporates a charter option provision, which permits the articles of incorporation to include a provision limiting or eliminating director liability to the corporation or its shareholders for money damages for any action or omission, except liability for: 1. The amount of any financial benefit received by the director to why she is not entitled; 2. Intentional infliction of harm on the corporation or its shareholders; 3. Improper corporate distributions;

4. Intentional violation of criminal law. The RMBCA is applicable only to actions for money damages maintained by the corporation or its shareholders. Duty of Loyalty Officers and directors owe a fiduciary duty of loyalty to the corporation. Corporate directors and officers are under strict duty to act honestly, and in good faith, and solely in the interest of another, here the corporation, regarding matters within the scope of the relation. Conflict of Interest The duty of loyalty may be breached when an officer or director has an interest actually or potentially in conflict with the interest of the corporation. Fiduciary transactions involving outright fraud or bad faith are voidable by the corporation. Under the modern approach, other transactions in which an officer or director has an interest are voidable by the corporation unless the contract or transaction is fair to the corporation, or is approved, ratified, or a authorized by a vote of the disinterested members of the board or of the shareholders after full disclosure of all relevant facts. The officer or director asserting the validity of the transaction usually has the burden of proving fairness. Competing with the Corporation Officers and directors may not compete with the corporation in business transactions within the scope of their corporate responsibilities. The rule prevents fiduciaries from using the corporate position to unfairly or inequitably favor personal over corporate interests. A fiduciary who wrongfully competes is liable to the corporation for money damages and may hold any property acquired in breach of duty on a constructive trust for the benefit of the corporation. Corporate opportunity doctrine prevents corporate officers directors from usurping and diverting to themselves a business opportunity in which the corporation has an expectancy, property interest or right, or that in fairness should belong to the corporation. In determining what constitutes a corporate opportunity, courts have developed a number of tests, including whether the opportunity was: 1. The same as, or similar to, the corporations current or planned business activities. 2. One that the corporation had already formulated plans or taken steps to acquire for its own use. 3. Developed by the director through the use of the corporations property, personnel or proprietary information; or

4. Presented to the director with the explicit or implicit expectation that the director would present it to the corporation for its consideration or in contrast, one that initially came to the directors attention in the directors individual capacity unrelated to the directors corporate role. Management Duties in Public Companies SarbanesOxley Act of 2002 designed to improve for companies whose stock is publicly traded; audit quality and auditor independence; corporate governance; and the accuracy, reliability, and timeliness of corporate disclosures. In 2004 and 2005, the Model Business Corporation act adopted a number of provisions also designed to improve governance of public corporations. The oversight responsibilities of directors of public corporations include attention to: 1. Business performance and plans; 2. Major risks to which the corporation is or may be exposed; 3. The performance and compensation of senior officers; 4. Policies and practices to foster the corporations compliance with law and ethical conduct; 5. Preparation of the corporations financial statements; 6. The effectiveness of the corporations internal controls; 7. Arrangements for providing adequate and timely information to directors; and 8. The composition of the board and its committees, taking into account the important role of independent directors. A duty to disclose material information to superiors or the board is imposed on officers, who also must report any actual or probable material violation of law involving the corporation or material breach of duty to the corporation by an officer, employee, or agent of the corporation, that the officer believes has occurred or is about to occur. Duties to Minority Shareholders Directors are under a statutory duty to manage in the best interests of the corporation as a whole, and are subject to fiduciary duties when undertaking corporate actions such as issuance or redemption of shares, amending the articles of incorporation, or authorizing a plan of merger or dissolution. The ordinary shareholder has no fiduciary duty to the corporation and is entitled to vote her shares for directors or other corporate actions as desired. Courts have subjected a shareholder who possesses a controlling block of stock to fiduciary duties. Thus, controlling shareholders, through their ability to elect directors or approve extraordinary corporate matters, may not cause the corporation to take action that unfairly and adversely affects the right of minority shareholders.