As the Corona Virus continues to spread and cause some issues in the world’s supply chain as well as the major equity markets, corporate governance issues are now being thrust into the spotlight. After all, how does the Board of Directors react to a pandemic? What are the rights of shareholders? What corporate governance practices are necessary to help companies address major crisis? To address these issues, it helps to first consider what corporate governance really entails. Hence a little summary on Corporate Governance and what In-House Counsel should consider.
1. When in-house counsel is briefing the Board of Directors, the briefing should at least cover the following:
• The structure of the corporation
• Basic Organizational Documents
• The role of the shareholders
• The annual meeting of the shareholders
• Liability of shareholders, if any
• The role of the Board of Directors
• Board Meetings
• Board Committees
2. What are the basic organizational documents
• In the US, the organizational structure and roles and duties of the shareholders, directors and officers are determined by the laws of the state in which the corporation is formed and by the basic organizational documents for a corporation. In the US, many corporations are incorporated in the state of Delaware, known for its advanced laws relating to the establishment of corporations.
• One of the documents is the Articles of Incorporation (Charter). The charter sets out the fundamental characteristics of the corporation such as its name, nature of business and classes of stock.
• Another document is called the Bylaws. The bylaws determine the specific procedures for governing the corporation, including:
– Procedures for shareholder and board meetings
– The size of the board
– The officers that the corporation may elect or appoint
3. The Role of the Shareholders
• The shareholders elect the directors
• The shareholders approve certain matters including:
– Authorization of additional shares of stock
– Mergers and acquisitions involving the corporation
– Sale of the corporation’s businesses or substantially all of its assets.
– Dissolution of the corporation
– Change of the corporation’s name
– Amendment of the Bylaws
– Management and operation of the corporation’s business are not included within the legal scope of the shareholder activity
– An annual meeting of the shareholders is required at which the shareholders elect or re-elect the directors
4. Liabilities of Shareholders
• Under US laws, a corporation is a distinct entity, a separate form and independent of its shareholders. A parent company (as a shareholder) as a rule is not liable for the debts, judgements and other liabilities of its subsidiary.
• Shareholders in SU are not usually liable for the debts and liabilities of the company.
• However, the shareholder, may become liable for liabilities for the company if corporate formalities are not followed.
• It is therefore essential that formalities of the corporate existence separate from shareholders be adhered to.
• Processes need to be developed to prevent the -“Piercing of the Corporate Veil”.
• The theory of “piercing the corporate veil” is not a test but a judgment as to which circumstances warrant a departure from the general rule of limited liability.
• Sound corporate practices requires consideration of the various factors that are used in determining whether to pierce the corporate veil.
• Elements of “Piercing the Corporate Veil” include:
-control by the shareholder (often a parent company) to such a degree that the subsidiary has become its mere instrumentality
-fraud or wrong by the parent or shareholder through its subsidiary
-unjust loss or injury to a third party claimant (such as insolvency of the subsidiary)
5. The Role of the Board of Directors
• The board of directors is accountable to the shareholders
• The board must ensure that effective systems of control are in place for safeguarding the corporation’s assets
• The board of directors may legally act only as a body and function in accordance with the Bylaws
• Directors are not responsible for running the business on a day-to day basis
• If a director is an officer, he or she executes documents in the capacity of the office held
• States confer broad powers upon board members and imposes corresponding duties and obligations
• To protect the board’s managerial power, Courts employ the business judgment rule
• The business judgement rule protects directors from liability as long as the directors acted :
– On an informed basis
– In good faith
– In the honest belief that the action taken was in the best interests of the corporation
• The specific responsibilities of the Board includes:
• Duties owed by the Board of Directors to the shareholders and corporation include:
– The duties of care, loyalty and disclosure
– The duty of care focuses on the processes and methods by which the Board reaches decisions
– Standard for a breach of the duty is gross negligence
• Informed judgement requires a director to be :
-Fully informed on matters before the board
-Fully informed of all material information available to the board
-Fully informed of the terms, conditions and consequences of the transaction
– Discussion by the board should be frank, deliberate and open
• The board must represent the interests of the company and shareholders and proceed with a critical eye
• The board must independently assess matters before the board
• Each board member must act in a deliberate and knowledgeable manner
• The duty of due care means each board member must act in good faith
• Decisions must be rational
• As a general matter, each board member owes undivided allegiance to the corporation
6. Board Meetings
• The board of directors should meet as often as necessary
• The bylaws set the minimum number of directors
• A director cannot delegate his or her vote by proxy to another director
• Board meetings are governed by formalities
• Decisions are reflected in resolutions
• Minutes of board meetings:
– Should not recite details of the discussions during the meetings
– The minutes should be limited to recording the normal decisions of the board and key information essential to decisions.
– The board is permitted to adapt actions in writing without a meetings and without the requirement of notice using a “Unanimous Written Consent”