Therefore, publicly held corporations are managed by a relatively small decision-making body, the board of directors, which is subject to the control of shareholders.

Shareholder control is guaranteed by shareholders right to attend annual and emergency meetings to vote on directors and other important matters such as dissolution or merger.

Shareholders can vote in person» but most shareholders in .publicly held corporations vote by proxy.

There are two methods of voting on directors. The normal method is “straight voting”. Under this method shareholders cast their total allotted votes for each of the directorships being voted on.1 This method permits a shareholder who owns a bare majority of corporate shares to elect all of the directors. To protect the minority shareholders» some states allow shareholders to vote cumulatively. Under cumulative voting，the number of votes each shareholder has is the number of the straight votes he could have for each director multiplied by the number o{ directorships to be voted on.2 The shareholder can then allocate this total number of votes among the candidates. This method permits minority representation on the board of directors.

When there is a new authorization of stock, the existing shareholders have a prior right over third parties to subscribe to the increased capital stock. This is called shareholder^ preemptive right and it permits the shareholder to protect and maintain his proportionate control and interest in the corporation.

Since management is vested with the board of directors, the directors have power to take action necessary or proper to conduct the ordinary business activities of the corporation.

However, their powers are subject to many restrictions.

As a general rule» the board of directors must act as a unit at board meetings. This requirement gives the corporation the benefit of deliberative process in decision making.

When directors or other officers act beyond their authority, shareholders may bring suits to enjoin the officers from acting ultra vires or from doing anything that would impair the corporate assets. Shareholders can also bring a suit for dollar damages on behalf of the corporation against officers for ultra vires, negligent or fraudulent conduct. These suits are called derivative suits because in a strict sense, the right to sue for injuries to the corporation rests with the corporation, which is a legal person and can bring a suit in its own name. Shareholders can bring a derivative suit only after first demanding the directors to sue. If the directors refuse to bring the action, courts will usually accept the refusal as a business judgment within the power of the board of directors unless bad faith is proved.

Directors and other officers stand in a fiduciary relationship with the corporation. This relationship requires that they act in good faith and with care. It prohibits conflicts of interest and imposes a duty of undivided loyalty on directors and other officers.

Conflict of interest arises when a corporation enters into a contract with its own director or with another entity in which the director has an interest. Such contracts are valid only if they are approved by a vote of shareholders or disinterested directors after full disclosure of all material acts.

A breach of fiduciary duty typically occurs when a director or officer takes for himself a business opportunity that should go to the corporation or when a corporation is insolvent and the directors or officers give themselves priority over other creditors in collecting debts.

A director or officer also owes the corporation the duty to exercise due care. As a general rule, due care is that degree of care that a businessman of ordinary prudence would exercise in the management of his own affairs. A director must be familiar with the fundamentals of the corporation. He must keep informed about its activities and its finaocial affairs.

Answer the following questions.
1. Explain the separation of ownership and management in a publicly held corporation?
2. How is shareholder control exercised?
3. What are the methods that are intended to protect the interests of the shareholders?
4. What is the purpose of cumulative voting?
5. What is a derivative action? When does it occur?
6. What is the procedural requirement of a derivative action?
7. If the directors refuse to bring a suit after the plaintiff shareholder has served a demand what will be the usual response of the court? What are the justifications for this response?
8. What will the plaintiff in a derivative action have to do if the court has accepted the directors9 refusal to sue as a business decision?
9. Explain the basic elements of fiduciary duty.
10. What is the standard of due care?
11. Explain the concept of shareholder democracy.