What are shareholders’ and board of directors’ responsibilities?

On Behalf of | May 21, 2020 | Business Formation

The individuals that join together to form a corporation are referred to as shareholders. They’re the people or companies that make a financial investment in the corporation. They gain some rights over a company in exchange for making a financial investment in it. Shareholders generally have no direct involvement in the corporation other than having voting rights over it. A shareholder’s voting shares allow them to elect or remove directors on the board if they’re not satisfied with their performance. Directors have more of a stewardship role on the board. The board is generally responsible for managing the corporation. It also can remove the chief executive officer if they fail to work at the level expected. It’s not uncommon for there to be factions of shareholders that may have interests that potentially diverge from the corporation either on a short-term or long-term basis. Its directors have a fiduciary duty to do what’s in the best interest of the corporation rather than what pleases individual shareholders, however. Directors are supposed to avoid any potential conflicts of interest that could breach their fiduciary duty to the corporation. For example, they are supposed to refrain from voting on contracts in which they have a material interest. If they fail to disclose such an interest, then it could result in the contract being nullified and the director being held personally liable for any financial harm that the corporation suffers. While shareholders generally aren’t responsible for the management of the corporation, they may have the right to vote on certain significant matters involving it. These matters include whether to sell all or a significant portion of the corporate assets and add or remove restrictions on what type of businesses it can engage in. Shareholders can also vote as to whether to change the corporation’s share capital and decrease or increase the number of directors. They can also confirm its by-laws and the rules governing the transfer of ownership of shares. If you’re considering forming an Ohio corporation, then you’ll want to understand the roles that directors and shareholders have and what potential issues may arise. An attorney can walk you through all the unique nuances of forming a Cincinnati corporation in hopes of helping you avoid any potential pitfalls in the future.