There Are Duties and Obligations That Are Assigned to a Board of Directors
Video Transcribed: Oklahoma Medical Marijuana Attorney Isaiah Brydie coming at you with another video. This video is going to be all about disputes that take place in a corporation. Now with that, most of the business filings that I do on behalf of medical marijuana businesses are limited liability companies.
However, I have set up a good amount of corporations as well, either S corps or C corps. It just depends on what your tax filing status wants to be, which I’ve covered in other videos. If you want to go out and look at how filing taxes with an S corps with the two forms looks, go look at those other videos. I don’t want to get back into it right now.
Anyway, when it comes to matters that may lead to a dispute in a corporation, the first thing we have to look at is at what level was the determination made that you might have a problem with. Was it made at the board of directors level, was it made during a shareholder vote?
As a general matter and a corporate bylaws of a company, there are duties and obligations that are assigned to a board of directors and then are left to shareholders. Usually with the corporate bylaws that I have drafted in the past, I have given a good number of powers and responsibilities to the board of directors and left only a couple fundamental things to a shareholder vote, but it depends on the corporate bylaws that are in place, how that’s going to look.
So that’s the first thing we need to look at. From there we can have additional considerations that need to be made. As a general rule, when it comes to a board of directors, we have a couple of things going on. Again, we have those fiduciary duties that I had mentioned before when it comes to members of a limited liability company, so those same duties of care and duties of loyalty, depending on the corporate bylaws on behalf of the business.
There may also be that potential of any interested party to a transaction having to disclose their interest in the transaction and potentially abstain from voting on the board of directors level from conducting that business. And there’s also a third implication, and this is called the business judgment rule.
The business judgment rule is a theory that puts in place that whenever a board of directors or a director was doing any business or activity, it is presumed that that individual has conducted themselves on the level of a reasonably prudent business person with the same level of information in that situation. So it’s a default presumption that that board of directors member or the board of directors in their entirety conducted themselves in the appropriate way. This is backwards looking, obviously.
How you defeat the business judgment rule is you have to prove up a couple of things. So maybe potentially when the directors did their activities, they weren’t adequately informed on the entire issue. Maybe there was someone who was an interested party to the transaction and didn’t disclose their interest in the transaction. Maybe they were just simply stupid. There are a lot of things that go into place here.
Usually the BJR is challenged because of inadequate information as to the nature of the transaction. So whether that was an inappropriate valuation, maybe that was because the accounting firm that was hired on to do the valuation of the company didn’t do things right. Maybe they didn’t follow the guidance of legal counsel. There could be a whole host of things that come into play there.
So that just adds on an additional layer of not only protection, but also, too, of arrows in your quiver where you may be able to come after and try to potentially undo, or get compensation for, problematic decisions that were made on behalf of the business.
Now I’m going down to the shareholder decisions that are made. As a general rule, shareholders are required to have an annual meeting with the business to conduct business dealings. With that, multiple things could be brought up on the agenda for the shareholders.
Let’s say you have a situation where the majority shareholder of a business is basically forcing the minority shareholders to do something that could lead to a detriment of the business. There’s plenty of case law on this.
Let’s say the majority shareholders are literally trying to have a hostile takeover of the corporation and force out all of the minority shareholders either because they don’t have a controlling vote or maybe because they have a subordinate type of stock, what have you.
In that situation, there is some pretty strong case law for minority shareholder rights. You have the Revlon case. You have a couple of other different cases in there that actually lay out certain guidelines on how those things are supposed to and certain protections that are allotted to minority shareholders.
So it’s not just a simple question of, oh, I only own 25 shares of this S corps that has a hundred shares so I can’t do anything. There still are rights that are allotted to you, just from the fact of you being a shareholder in the business.
I’m not going to get that much deeper into them because you have to retain me for that. But just know that you do have rights in that situation and you can’t just simply be steamrolled.But that’s all I got for you guys. If you have any questions, please feel free to reach out to me. This is Isaiah Brydie signing off.