8.1 Corporate Governance & Dissolution

A corporation separates ownership (shareholders) from control (directors and officers). Knowing who has the power to do what — and which decisions require a shareholder vote — is heavily tested in the Corporate/Commercial Law subject area of the NALA Certified Paralegal (CP) Knowledge Exam.

The Corporate Power Structure

• Shareholders own the corporation but do not manage it. Their powers are limited to electing and removing directors, approving fundamental changes (mergers, dissolution, amendments to the articles of incorporation, sale of substantially all assets outside the ordinary course), and, in some states, amending the bylaws.
• Directors set policy and supervise management. The board — not the shareholders — declares dividends, appoints and removes officers, and authorizes major transactions.
• Officers (president, secretary, treasurer) run day-to-day operations as agents of the corporation, with authority drawn from the bylaws and board resolutions.

Shareholder Rights

Voting

Shareholders vote at the annual meeting (required by statute in most states) and at special meetings called for stated purposes. Key rules:

• Each share generally carries one vote, and only owners on the record date may vote.
• A quorum — usually a majority of outstanding shares entitled to vote — must be present in person or by proxy, a written authorization letting another person vote the shares.
• Straight voting lets a majority shareholder elect the entire board. Cumulative voting (where authorized) multiplies a shareholder's votes by the number of open director seats and lets them concentrate votes on one candidate, giving minority shareholders a realistic shot at board representation.
• Ordinary matters pass by a majority of votes cast once a quorum exists. Fundamental changes historically required two-thirds approval; the Model Business Corporation Act (MBCA) now requires only a majority of votes entitled to be cast.

Inspection

Shareholders have a qualified right to inspect corporate books and records — minutes, accounting records, and the shareholder list — upon a written demand stating a proper purpose: one reasonably related to the person's interest as a shareholder, such as investigating suspected mismanagement or valuing shares. Idle curiosity, harassment, or aiding a competitor is not proper. Paralegals routinely draft inspection demands and the corporation's responses.

Dividends

Shareholders have no right to dividends until the board declares them. Once declared, a dividend becomes a debt of the corporation. A board may not declare a distribution that would render the corporation insolvent (unable to pay debts as they mature in the ordinary course) or that violates legal capital limits (after the distribution, assets must at least equal liabilities plus stated capital). Directors who vote for an unlawful distribution can be personally liable.

Fiduciary Duties of Directors and Officers

Directors and officers owe the corporation two core fiduciary duties:

The business judgment rule protects directors from liability for honest decisions that turn out badly. Courts will not second-guess a decision made in good faith, on an informed basis, and without a conflict of interest. The rule does not protect decisions tainted by self-dealing, fraud, illegality, or gross negligence — those lose the presumption, and the burden shifts to the director to prove entire fairness.

Mergers and Fundamental Changes

In a statutory merger, one corporation absorbs another and the target ceases to exist; in a consolidation, two corporations combine into a newly created third entity. The standard procedure:

1. The board of each corporation adopts a plan of merger.
2. Shareholders of each corporation approve — a majority of votes entitled to be cast under the MBCA.
3. Articles of merger are filed with the secretary of state, effective on filing or a stated later date.

Shareholders who vote against a merger may exercise appraisal rights (also called dissenters' rights) — the statutory right to be paid the fair value of their shares in cash, determined by a court if the parties disagree. A short-form merger between a parent owning a statutory supermajority (commonly 90 percent) of a subsidiary and that subsidiary requires no subsidiary shareholder vote.

Dissolution

• Voluntary dissolution: incorporators or initial directors may dissolve a corporation that has not yet issued shares or begun business; otherwise the board proposes dissolution and the shareholders approve it. Articles of dissolution are then filed with the state.
• Administrative dissolution: the secretary of state dissolves a corporation for statutory failures — not filing the annual report, not maintaining a registered agent, or not paying franchise taxes. Reinstatement is usually available within a statutory period by curing the default.
• Judicial (involuntary) dissolution: a court orders dissolution on petition by shareholders (director deadlock, shareholder deadlock, oppression, or waste of assets) or by creditors of an insolvent corporation.

Dissolution does not end the corporation instantly. It continues to exist for winding up: collecting and liquidating assets, discharging liabilities, and distributing any remainder to shareholders. Creditors are paid before shareholders receive anything.

The Paralegal's Role in Corporate Maintenance

Corporate paralegals keep entities in good standing: drafting annual meeting minutes and unanimous written consents, maintaining the corporate minute book and stock ledger, preparing and filing annual reports, tracking registered agent information, drafting articles amendments, and ordering certificates of good standing for closings. A missed annual report leading to administrative dissolution — discovered in the middle of a transaction — is a classic exam scenario and a genuine malpractice trap.

Exam trap: shareholders approve mergers, dissolution, and articles amendments, but only the board declares dividends and appoints officers. Questions love to swap these.