PROTECTING THE SHAREHOLDERSby Mike Arnold
(From One Gro's Company Leadership Lecture Series - 10/31/17)
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| Co-Founders Mike & PJ discussing duties to investors. |
If you are an investor, make sure the management team
you are investing in has standard operating procedures that cause them to thoughtfully
come to strategic decisions and record them.
The last thing you want to do is invest in a company that will in the
future be embroiled in petty infighting and minority suits. This is not only inefficiently bad business
but it also makes the company difficult to sell, hampering your investment exit
strategy and devaluing the company and thus your shares. Do your due diligence and
ask the tough questions about corporate governance.
Here’s some background on how officers/directors of
corporations should be acting. Here’s a quick and dirty explanation of
fiduciary duties.
From Wikipedia:
I.
How
Directors are Presumed to Act
The business
judgment rule is a presumption 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
company.
The directors of a corporation are clothed with the
presumption, which the law accords to them, of being motivated in their conduct
by a bona fide regard
for the interests of the corporation whose affairs the stockholders have
committed to their charge.
To challenge the actions of a corporation's board of directors, a plaintiff assumes
"the burden of providing evidence that directors, in reaching their
challenged decision, breached any one of the triads of their fiduciary
duty — good faith, loyalty,
or due care".
Failing to do so, a plaintiff "is not entitled to
any remedy unless the transaction constitutes waste... [that is,] the exchange
was so one-sided that no business person of ordinary, sound judgment could
conclude that the corporation has received adequate consideration"
II.
How Directors/Officers
Must Act.
A.
What’s a fiduciary
relationship?
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| Carrie, Andy, Brigette and PJ discussing fiduciary duties. |
B.
What’s a fiduciary
duty?
A fiduciary duty, is the
highest standard of care at either equity or law.
A fiduciary is expected to be extremely loyal to the person to whom he owes the
duty (the "principal"): such that there must be
no conflict of duty between fiduciary and principal, and the fiduciary must not
profit from his position as a fiduciary (unless the principal consents).
From the Oregon Revised Statutes:
III.
FIDUCIARY
DUTIES OF DIRECTORS– ORS 60.357
(1) A director shall discharge the duties of a
director, including the duties as a member of a committee, in good faith, with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances and in a manner the director reasonably believes to be in
the best interests of the corporation.
(2) In discharging the duties of a director, a
director is entitled to rely on information, opinions, reports or statements
including financial statements and other financial data, if prepared or
presented by:
(a) One or more officers or employees of the
corporation whom the director reasonably believes to be reliable and competent
in the matters presented;
(b) Legal counsel, public accountants or other persons
as to matters the director reasonably believes are within the person’s
professional or expert competence; or
(c) A committee of the board of directors of which the
director is not a member if the director reasonably believes the committee
merits confidence.
(3) A director is not acting in good faith if the
director has knowledge concerning the matter in question that makes reliance
otherwise permitted by subsection (2) of this section unwarranted.
(4) A director is not liable for any action taken as a
director, or any failure to take any action, if the director performed the
duties of the director’s office in compliance with this section.
(5) When evaluating any offer of another party to make
a tender or exchange offer for any equity security of the corporation, or any
proposal to merge or consolidate the corporation with another corporation or to
purchase or otherwise acquire all or substantially all the properties and
assets of the corporation, the directors of the corporation may, in determining
what they believe to be in the best interests of the corporation, give due
consideration to the social, legal and economic effects on employees, customers
and suppliers of the corporation and on the communities and geographical areas
in which the corporation and its subsidiaries operate, the economy of the state
and nation, the long-term as well as short-term interests of the corporation
and its shareholders, including the possibility that these interests may be
best served by the continued independence of the corporation, and other
relevant factors
IV.
ORS
60.377 - Standard of conduct for officers
(1) An officer with discretionary authority shall
discharge the duties of an officer under that authority:
(a) In good faith;
(b) With the care an ordinarily prudent person in a
like position would exercise under similar circumstances; and
(c) In a manner the officer reasonably believes to be
in the best interests of the corporation.
(2) In discharging the duties of an officer, an officer
is entitled to rely on information, opinions, reports or statements, including
financial statements and other financial data, if prepared or presented by:
(a) One or more officers or employees of the
corporation whom the officer reasonably believes to be reliable and competent
in the matters presented; or
(b) Legal counsel, public accountants or other persons
as to matters the officer reasonably believes are within the person’s
professional or expert competence.
(3) An officer is not acting in good faith if the
officer has knowledge concerning the matter in question that makes reliance
otherwise permitted by subsection (2) of this section unwarranted.
(4) An officer is not liable for any action taken as
an officer, or any failure to take any action, if the officer performed the
duties of the office in compliance with this section
V.
CONFLICT
OF INTEREST – ORS 60.361
(1) A conflict of interest transaction is a
transaction with the corporation in which a director of the corporation has a
direct or indirect interest. A conflict of interest transaction is not voidable
by the corporation solely because of the director’s interest in the transaction
if any one of the following is true:
(a) The material facts of the transaction and the
director’s interest were disclosed or known to the board of directors or a
committee of the board of directors and the board of directors or committee
authorized, approved or ratified the transaction;
(b) The material facts of the transaction and the
director’s interest were disclosed or known to the shareholders entitled to
vote and they authorized, approved or ratified the transaction; or
(c) The transaction was fair to the corporation.
(2) For purposes of this section, a director of the
corporation has an indirect interest in a transaction if:
(a) Another entity in which the director has a
material financial interest or in which the director is a general partner is a
party to the transaction; or
(b) Another entity of which the director is a
director, officer or trustee is a party to the transaction and the transaction
is or should be considered by the board of directors of the corporation.
(3) For purposes of subsection (1)(a) of this section,
a conflict of interest transaction is authorized, approved or ratified if it
receives the affirmative vote of a majority of the directors on the board of
directors, or on the committee, who have no direct or indirect interest in the
transaction. A transaction may not be authorized, approved or ratified under
this section by a single director. If a majority of the directors who have no
direct or indirect interest in the transaction vote to authorize, approve or ratify
the transaction, a quorum is present for the purpose of taking action under
this section. The presence of, or a vote cast by, a director with a direct or
indirect interest in the transaction does not affect the validity of any action
taken under subsection (1)(a) of this section if the transaction is otherwise
authorized, approved or ratified as provided in subsection (1) of this section.
(4) For purposes of subsection (1)(b) of this section,
a conflict of interest transaction is authorized, approved or ratified if it
receives the vote of a majority of the shares entitled to be counted under this
subsection, voting as a single voting group. Shares owned by or voted under the
control of a director who has a direct or indirect interest in the transaction,
and shares owned by or voted under the control of an entity described in
subsection (2)(a) of this section may be counted in a vote of shareholders to
determine whether to authorize, approve or ratify a conflict of interest
transaction under subsection (1)(b) of this section. A majority of the shares,
whether or not present, that are entitled to be counted in a vote on the
transaction under this subsection constitutes a quorum for the purpose of
taking action under this section.
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