The USA Corporations Law - Assignment Example

Students Name Topic Lecturer’s Name Date USA Corporations Law Legal Issue One Directors of corporations hold a fiduciary duty towards the shareholders in the management and activities undertaken within the organization. Directors are categorized differently depending on their presence and absence of their other relationships to the organization. These categories of directors include: director, inside director, outside director, executive director and non-executive director. Generally, a director is any person considered a member of the board of directors. An inside director serves both the organization and the board, while an outside director serves only the board and not the organization. According to Del. Supreme Court, the law requires that “in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the shareholders (Calder, 2005, p34).” Knowledge of these facts is essential in providing a clear cut on the legal issues concerning Manua. On one hand, Manua is an executive director of Lubbock State Bank, while on the other hand she is an outside director of Good Faith Incorporated. However, in the two instances Manua has a fiduciary duty towards the company, which is represented by the shareholders. As a director, Manua is required to act honestly and bona fide (in good faith). Manua’s venture into the new business does not constitute breach of any fiduciary duties towards GFI and neither towards Lubbock State Bank. GFI must show that Manua, as a director, breached the fiduciary duty of care or loyalty or acted in bad faith. Therefore, if Manua’s duties in the new venture are will violate her fiduciary duties in GFI, then GFI is entitled to damages for breach of fiduciary duty from Manua. But basically, the operations undertaken in the new venture are not per se capable of interfering with those of GFI. Legal Issue Two Basically, voting can be done by a stockholder present or through proxy. Stockholders and proxy-holders not physically present at a meeting of stockholders may, by means of remote communication be deemed present in person and vote at the meeting. In the case of Gaga, Chooka, Parker, Justin and Eminem, if straight voting applies, Chooka is entitled to 400 numbers of directors, while Gaga is entitled to 410. Under these circumstances Chooka is not entitled to demand for cumulative voting since Gaga and him hold equal number of shares and hence are equal voting rights. Cumulative voting applies to minority shareholders. Legal Issue Three Section 170 of Delaware Code outlines law relating to Dividends, Payments, and Wasting Asset Corporations. Accordingly, the directors of a corporation are entitled to declare and pay dividends to the shareholders out of surplus or out of its net profits for the financial year. Corporations make use of a dividend payout ratio to calculate the amount of dividend to pay out to its stockholders. In the case of GAP the maximum dividend it could lawfully pay is: Total Equity in addition to Total Assets less Total Liabilities (5Million+1Million-4Million=2Million). Therefore, the maximum divided that GAP could lawfully pay is 2 Million. Legal Issue Four Corporations can source finance through equity or debt. Equity financing involves the issuance of stock which investors purchase and represents a share of ownership of the corporation. There are two types of equity stock: common and preferred stock. On the other hand, debt financing involves acquiring funds through borrowing or loan from an investor to the corporation in exchange of debt securities such as bonds. There is a high risk associated with debt finance compared to equity finance (Schneemen, 2005, p425). For instance, if corporation’s debt exceeds assets, the corporation may become insolvent and in addition to this, on winding up, creditors have first claim against the assets of the corporation. Debt and equity financing issues are decided upon by the management of the corporation which is the board of directors. Nevertheless, shareholders have a right to bring legal actions towards the directors in cases breach of fiduciary duty in relation to the funds such as corruption. In the case of Ewing oil, the directors from the two families who are as well the principal shareholders, had agreed on the issue pertaining to the loan. Barnes family claim of breach of fiduciary duties by Ewing’s directors could constitute family or personal interest since the shareholders are at the same time the directors. Ewing’s directors can produce all documentation relating to the loan transaction. Barnes family must prove in a court of law instances in which Ewing directors did not uphold duty of care in approving the loan transaction. The standard of review likely to be applied by the court is to assess the loan transactions as documented, engagement of the directors, Barnes directors stand and possibility of family interest; and where the burden of proof lies within Barnes family ability to show in that court breach of fiduciary of duties by Ewing Directors. Legal Issue Five As noted earlier on, directors hold a fiduciary duty towards the shareholders of the corporations they serve in. Fiduciary duties apply to both majority and minority shareholders. The duties of a director should be in line with those of the other directors. For example, hiring and firing of employees should be done under an agreement by the board of directors. Therefore, a single director does not have the right in his or her capacity as the director or executive director, to hire or fire an employee without prior agreement by the other directors. In addition, the issue of firing is addressed under the ‘doctrine of shareholders oppression’; which protects a close corporation minority investor from improper exercise of majority control (McCahery et al, 2004, p103). Moreover, issues related to fiduciary duty owed to minority shareholders is well addressed through the case of Hollis verses Hill, where both held equal shareholding in First Financial USA (FFUSA). Hill acted as the president and Hollis as the vice- president. Hollis verses Hill represented breach of fiduciary duties where Hill restricted Hollis access to financial statements of FFUSA, opened another company that competed with FFUSA without notifying Hollis and later firing Hollis as the vice- president of FFUSA. The District Court applied Nevada Law in stating that Hill’s conduct was oppressive and ordered him to buy Hollis’ shares in FFUSA. Therefore, if Dharma can bring a claim against Edward Montgomery even at his capacity since Edward was not supposed to fire Dharma without consulting the Board of Directors of Montgomery Enterprise Inc and there was no legitimate business purpose of firing him. In relation to Hollis verse Hill, she can prevail on his claim based on the violation of fiduciary duty owed to her as a minority shareholder since there was no rightful business reason of Edward firing her. Legal Issue Six Under the Delaware Code, companies can come together and combine their operations as well establishing the objective of their combination. Mergers and acquisitions are the terms given to such companies. Merger and acquisition describes the aspect of corporate strategy, finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities. On the other hand, there is a distinction between merger and acquisitions. With acquisition, one company, usually the larger one in terms of operations and finance buys another business or business. A merger is an agreement between two or more companies to pool their resources and create one company. Usually, these are companies or businesses that are in the same line of operations or their operations, though not similar are quite related. In both cases, there is establishment of overall objective. With an acquisition one company swallows the other and therefore there might be no need of changing the management (board of directors) of the new company. However, with mergers, the companies that have merged might require equal representation in the Board of Directors. On the other hand though, one of the companies that have merged will have a larger shareholding than the other. For example, one company may have 65 per cent of shareholding, while the other holds the rest of the shares (35 per cent). It is important to note that, shareholding defines the voting and controlling power of a company or the shareholder. Nevertheless, there are numerous reasons behind formation of mergers and acquisitions. These include: to enjoy the economies of scale, in order to maximize revenue or increase market share, to engage in cross-selling, reduces tax liability where one of the company is making losses and diversification of risk among others. Therefore, it is important for the businesses considering a merger or acquisition to have knowledge of the reason which forms base for establishment of objectives. According to Section 251(b) of Delaware Code, the Board of each corporation must agree to the creation of a merger or acquisition. Further part (c) stipulates that the agreement to the merger or acquisition should be submitted to the stockholders of each corporation. In addition, the agreement is approved if approved by majority of stock entitled to vote of each constituent corporation. On the other hand, if a shareholder has not consented to the merger, he or she is entitled to seek a court appraisal of ‘fair value’ of shares (Section 262). Therefore, the merger between Cheers and the restaurant was legally enforced since all directors, shareholders and investors of Cheers were made aware. As well, the directors of Cheers hold a fiduciary duty and duty of care towards the shareholders and the operations of Cheers. However, in one way or the other, the neglected or failed to upheld their fiduciary duty as well as duty of care related to what has been happening in Cheers. The management of a corporation rest solely on the Board of Directors. However, the Board of Directors failed to be all-rounded and only focused on the profit- making aspect of Cheers. This is because had the board of directors engaged in scrutinizing what was going among the employees, it would have realized the food operations senior manager’s conduct of paying off the health inspectors, “buying” rave reviews from restaurant critics and purchasing meat and fish products of questionable origin. Firing the food operations senior manager may not have been the right solution compared to the board of directors becoming more serious in assessing and evaluating every aspect of Cheers. Moreover, although many other major food service providers established and monitored employees’ compliance with internal controls and procedures to assure the serving of wholesome food, the board of directors of Cheers had never seriously considered doing so. Negligent of fiduciary duty and duty of care by the board of Cheers can be seen where the business valuation of Cheers falls from $10 million to $1 million. Further, according to the facts provided, the $1 million is approximated to represent the operations of the restaurant. Even though the restaurant profit contributions are still remarkable, the reputation and image of Cheers is damaged due to the food poisoning case and the corruption engaged by its senior managers. In addition to this, the newer shareholders of Cheers can prove the directors negligent in their fiduciary duties based on failure to implement an internal control system. This is because three consultants had been recommending internal controls and providing reports related to establishment of a comprehensive audit and review food storage and preparation procedures, but the board did not consider the recommendations nor take any other action based on the reports. Therefore, the newer shareholders are entitled to bring forward claims against directors of Cheers and prove the directors negligence of their fiduciary duties (Fisher, 2003, p508). Legal Issue Seven a). A proxy campaign is an attempt to obtain the votes of enough shareholders to gain control of the corporation’ board of directors. On the other hand, a tender offer is a proposal to buy shares of stock from the stockholders for cash or some type of corporate security of the acquiring company. Cash tender offers intended for corporate takeovers or acquisitions have become favoured over the proxy campaign which it is considered a traditional method. The person making a cash tender offer for a corporation that is required to be registered under Delaware Law to disclose to the Security Exchange Commission (SEC) the source of the funds used in the offer, the purpose for which the offer is made and any contracts concern the target corporation. Cash tenders require full and fair disclosure the stockholders’ benefits from the merger, takeover or acquisition, while at the same time providing the offeror and management equal opportunity to fairly present cases. Consequently, this is why SMC considered the use of a proxy campaign rather than a tender issue. Under the Delaware Statutes, corporations accept acquisition usually when they are not doing well in business tactical reason behind Amore rejection of SMC’s merger offer. b). SMC had been considering the possibility of acquiring Amore and therefore it is aware that board of directors from the two corporations and shareholders approval is quiet necessary for such a fundamental transaction. SMC provided their intention in writing to the board of Amore, though it was rejected. SMC should have considered holding a special meeting for the boards from the two corporations. SMC claims that, postponing of the annual general meeting of the shareholders by the board of Amore was aimed at creating more time for the directors of Amore to campaign against the proposals made on acquisition. Though, SMC holds only 6 per cent of shareholding in Amore, the bylaws would have provided for at least a single representation of a director from SMC in the board of directors of Amore. The Delaware law also imposes miscellaneous substantive restrictions on the mechanics of a cash tender offer, and it imposes a broad prohibition against the use of false, misleading, or incomplete statements in connection with a tender offer. Filing and public disclosures with the SEC are also required of anyone who acquires more than 5 percent of the outstanding shares of any class of a corporation subject to federal registration requirements. Copies of these disclosure statements must also be sent to each national securities exchange where the securities are traded, making the information available to shareholders and investors. On this issue, SMC claims that it had more than 5 per cent (6 per cent) of the outstanding shares and therefore it had an equal capacity and opportunity to make a takeover of Amore. This however may not be a substantial reason for SMC to consider a takeover since Amore has a greater control than SMC. On the other hand, when a fundamental change of a corporation is proposed, such as a takeover shareholders have the right of been made aware of this. It is important to remember that, shareholders are the owners of a corporation, while the directors are the management or the custodians of the operations and assets of the corporation. In order of a fundamental change to take effect, shareholders should provide unanimous consent over it, that is, under the ‘unanimous consent rule’. Based on this, SMC’s claims are that directors of Amore did not provide the shareholders an opportunity to air or vote or vote against the acquisition. In addition, Paulaski and his fellow directors amended the bylaws with the principal reason of expanding the board members to seven in order to make the influence of SMC’s nominees ineffective. With this, SMC presence in the board was diluted. Moreover, the claims of SMC may be invaluable based on the provisions made concerning the primary responsibilities of a board in the Delaware Code. The law stipulates that the primary monitoring responsibilities of a board are to: monitor and evaluate senior management; respond appropriately to credible signals of trouble and assure that there is in place and operating information and reporting system that is appropriate to enable the board to carry out its monitoring responsibilities. Therefore, based on these provisions, it might be observed that the board of Amore was only responding to signs of trouble concerning the Amore acquisition by SMC. The directors of Amore did not consider the acquisition as a good business opportunity for growth and expansion. In addition, SMC did not comprehensively outline the reason as to why it wanted to acquire Amore which was doing quite well. SMC’s claims relate to directors of Amore failure to undertake their fiduciary duties related to loyalty, care and good faith (Dravis, 2007, p29). Under loyalty, disloyal behavior among the directors of Amore is seen where they overlook corporate opportunities provided to them. However, SMC must prove in a court of law that the acquisition was an opportunity for Amore and hence its directors did not upheld loyalty. In relation to directors’ fiduciary duty of care, SMC’s claims can be based on illegal conducts. This is seen where the, immediately after knowledge about SMC’s consideration of a proxy campaign, the directors of Amore went and changed the bylaws relating to the number of directors. This is because, had it not been the SMC’s attempt or move, the bylaws would have remained the way they were. This act was quite unprofessional and shows Amore’s directors opportunistic behaviour. Another evidence of opportunistic behavior of the board of Amore is seen where they postpone the meeting of the shareholders and SMC claims that the board intentionally impeded and interfered with the efforts of the shareholders to effectively exercise their voting rights in a contested election for directors. Finally, SMC’s claims is based on breach of fiduciary duties related to good faith by the directors of Amore, which is component of the duty of loyalty in Stone verses Ritter and or Lyondell Chemical Co. verses Ryan. Examples of lack of good faith include: acting with a purpose other than that of advancing the best interests of the corporation, acting with the intent to violate applicable positive law and intentionally failing to act in the face of a known duty to act, hence demonstrating a conscious disregard for duties. In relation to this, SMC’s claims of lack of good faith in directors of Amore is found where the directors knowing violate the applicable bylaws relating to appointment of directors and the number required since they altered the bylaws in order to suit their interests. References Calder, A. IT Governance: Guidelines for Directors, IT Governance Ltd, New York, 2005, p34. Dravis, BF. The Role of Independent Directors after Sarbanes-Oxley, Bar Association, New Jersey, 2007, p29. Fishher, J. The Law of Investor Protection, Sweet & Maxwell, Bangkok, 2003, 2 Edition, p McCahery, J, Raajimakers, MJ, Theo, R & Vermeulen, EM. The Governance of Close Corporations And Partnerships: US And European Perspectives, Oxford University Press, United States, 2004, p103. Schneemen, A. Law of Corporations and Other Business Organizations, Cengage Learning, United Kingdom, 2009, p425. http://www.2shared.com/document/zZavA6qM/coprpaetions.html Read More