Allocation of powers between directors and shareholders
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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.
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.
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