Overview

The highest authority is the state incorporation statute which, in the event of conflict, prevails over the articles of incorporation, which in turn prevail over conflicting by-laws, which prevail over shareholder agreements.

Generally, the power to manage a corporation’s assets and affairs is vested in a majority of the board of directors.

Unless the articles or by-laws provide otherwise, the directors elect the officers of the corporation, who make the day-to-day management decisions.

The shareholders have an indirect power to manage the corporation through their right to elect the board of directors.  In addition, shareholders must approve fundamental changes such as merger, amendment of the articles of incorporation, sale of all or most assets, and dissolution.

Shareholders and Voting

Shareholders have the right to:

• elect and remove directors;
• amend the by-laws; and
• approve fundamental changes, such as amendment of the articles of incorporation, merger, sale of substantially all assets, or dissolution. 

A meeting of shareholders is to be held annually for the election of directors and the transaction of any other business. The by-laws normally specify the date of the annual meeting.

Special meetings of the shareholders may be called by the president, or by the directors, or upon the written application of the holders of a certain percentage of the shares entitled to vote.

Written notice stating the place, date, hour, and the purposes of the meeting must be given by the clerk to each shareholder entitled to vote not less than ten nor more than fifty days prior to the meeting.  Notice may be waived in writing either before or after the meeting.

Unless the articles or the by-laws provide otherwise, a majority of the shares entitled to vote at a meeting constitutes a quorum; if a transaction must be voted on by a class, a majority of the shares in that class constitutes a quorum. 

Any shareholder action that may be taken at a meeting can be taken without a meeting if all the stockholders entitled to vote on the matter consent or as otherwise provided by the articles.

Unless a statute or the articles provide otherwise, each share is entitled to one vote.

The articles of incorporation may deny or limit the voting rights of a class.

Jointly owned stock may be voted by either co-owner, but if co-owners disagree and each tries to vote, the vote is split 50-50.

Stock owned by a partnership can be voted by any partner, but in the event of disagreement, is voted under the terms of the partnership, or by the majority of partners.

Stock owned by a corporation can be voted by the officer or agent prescribed by the by-laws, or as the board of directors determines.

Every shareholder entitled to vote may do so by proxy. Generally, the  proxy must be in writing and it must be executed within eleven months before the meeting or vote at issue.

Unless coupled with an interest, a proxy is freely revocable by the shareholder unless the instrument specifically states otherwise.

Shareholder voting agreements are contracts designed to ensure the shareholders will vote in concert. Absent fraud or other illegal object, they are generally considered valid.

A voting trust involves a transfer of legal title to the shares to a trustee who votes them for a specified period according to the trust terms. Equitable ownership remains in the shareholders and they are entitled to any dividends or distributions and to all other rights except voting. 

To create the trust, shareholders execute a written agreement specifying the terms and conditions of the trust, and transfer their shares to the trustee.

The duration of a voting trust is limited to ten years; however, any of the parties may extend the trust (as to their shares) for one or more additional periods, each not to exceed ten years.

Election of Directors

In straight voting, each share has one vote for each director; thus, a majority stockholder can elect the entire board of directors. To ensure representation of certain shareholders on the board, stock can be classified for the purpose of electing directors.

The articles may provide for staggered terms if there are nine or more directors.  Under this provision, only one third to one half of the directors are up for election at any meeting.

Representation of minority shareholders can be guaranteed by cumulative voting, which grants each share as many votes as there are directors to be elected and allows the shareholder to allocate his votes as he chooses.

Shareholder's Right to Information

By statute , shareholders of record are generally entitled to examine the articles of incorporation, the by-laws, records of all meetings of incorporators and of shareholders, and the stock and transfer records.

The corporation is also required to furnish to its shareholders annual financial statements.

A stockholder also has a common-law right to inspect corporate records, and this may be used to examine books of account and other records unavailable under the statute.

Election and Removal of Directors

Most statutes require only one director. The articles of incorporation or by-laws may provide for variable range for the size of the board of directors.

The initial directors are chosen by the incorporators, and hold office until their successors are elected by shareholders at their first annual meeting.

Directors are usually elected at the annual meeting for a one-year term.

Unless the articles provide otherwise, any board vacancy is filled as prescribed in the by-laws; in the absence of a by-law, by the directors.

The entire board of directors or any individual directors can be removed, with or without cause, by a majority of the shares entitled to vote in the election of such directors. However, a director elected by a particular class may be removed only by a majority of the shares entitled to vote in the class that elected him.

If the corporation has cumulative voting and if less than the entire board is to be removed, no director can be removed if the votes against his removal would be sufficient to elect him if they cumulatively voted at an election of the entire board.

Actions of the Directors

Meetings of the board may be held anywhere, either within or outside the state of incorporation.  The by-laws may specify the time and place for meetings, but absent such a by-law, the directors may select the time and place.

Unless otherwise provided by the by-laws, regular meetings of the board may be held without notice if the time and place of the meetings are fixed by the by-laws or by the board.

Special meetings may be held only upon notice to the directors; the by-laws should prescribe what constitutes proper notice.

Unless otherwise provided in the by-laws, a majority of the directors then in office constitutes a quorum.

Once a quorum is present, the vote of a majority of the directors present at a meeting constitutes an act of the board, unless a statute, the articles or the by-laws require a greater margin or even a unanimous vote.

A directors' meeting should be a collective, deliberative proceeding; therefore, a director cannot vote by proxy.

Any agreement by a director to vote in a certain way is void as against public policy.

Action which may be taken at a meeting can be taken without convening if all the directors sign written consents setting forth the action to be taken.

The board may delegate its powers to officers and to executive committees.  If the articles or the by-laws so provide, the board can elect an executive or other committee of directors. 

The board may delegate to one or more committees all the authority of the board except the power to:

• change the corporation's principal office;
• amend the by-laws;
• issue stock;
• establish and designate series of stock and fix and determine the relative rights and preferences of any series of stock;
• designate candidates for the office of director, or fill vacancies on the board of directors or any committee thereof;
• authorize any dividend or distribution to shareholders;
• authorize the reacquisition of stock of the corporation;
• authorize a merger; or
• approve or recommend to shareholders actions or proposals required to be approved by shareholders.

A director who objects to action to be taken by the board or a committee thereof must dissent by an affirmative act at the time of the meeting at which the vote on the action is taken.

A director who is present at a meeting and makes no objection is deemed to have assented to all corporate action taken at the meeting.

Officers

States generally require that a corporation have at least four officers: a president, a vice-president, a secretary, and a treasurer. Generally, the same person is allowed to fill two or more offices.

Officers are elected or appointed by the board of directors in accordance with the by-laws.

The powers of a corporate officer are, like the powers of an agent, either actual or apparent.  The actual power may be either implied or expressly delegated (e.g., by the board of directors or the corporate by-laws).

The president has the implied authority to do any act on behalf of the corporation that is being performed in the usual and ordinary course of business.

Implied authority generally arises from either general custom or from the practice of the particular corporation. 

Generally, the treasurer has no authority by virtue of his office to bind the corporation.  The treasurer, in most jurisdictions, is charged with responsibility for the corporate treasury.

A corporation may become bound on a contract made on its behalf by an officer, despite his lack of authority, if the contract is ratified by the directors. An implied ratification usually results when there has been an acceptance of the benefits of a transaction, coupled with full knowledge of all the facts.

The personal liability of a corporate officer on corporate contracts or debts is the same as that of any agent.

Any vacancy in an office may be filled in the manner prescribed in the by-laws, or, absent such a by-law, by the directors.

Any officer or agent may be removed by the board of directors whenever in its judgment the best interests of the corporation will be served thereby, with or without cause.