EDITORIAL NOTE: From June through December 2002, Arctic Slope Regional Corp. ran a series of five articles in its shareholder newsletter regarding the governance of the corporation. The first three articles discussed the various roles the law requires the corporation’s shareholders, board of directors, and management to play in making decisions about how an Alaska Native regional corporation like ASRC is run. The fourth article explained how the law requires the regional corporation to operate and how the corporate veil works to protect ASRC. The final article was prepared to provide shareholders an overview of some of the legal requirements that impact how ASRC is run and how the law governs shareholder requests for corporate information. With permission from ASRC, the series will be reprinted in the CIRI Shareholder Update to share with CIRI shareholders how these same laws affect our corporation, shareholders, directors, and management. Each article will appear in its entirety over the next few months.

At the annual meeting a number of questions were raised about the role shareholders play in a corporation. Most shareholders might be surprised to discover that they do not own the corporation or any of its assets (i.e. money or property). Instead, shareholders own shares of stock which give them the right to share in the financial profits of the corporation when distributed by the board as dividends. For some very important reasons (which we will discuss at the end of this article) a corporation exists as a “person” separate from its shareholders in the eyes of the law.

The law makes a corporation a person with the power to act in its own right and to do many of the same things a physical person can do. For example, a corporation can borrow money, enter into contracts, buy and sell property, hire and fire employees and sue and be sued in its own name. A corporation is even considered to be a citizen of the state in which it is formed and maintains its main place of business.

But clearly a corporation doesn’t have a physical body, so it must take action through people who do. Under the law, a corporation is put into the hands of its board of directors, who are elected by its shareholders. Other than electing the board of directors, the role of the shareholders in corporate management is limited to approval of a few big matters that could seriously impact the corporation. For example, shareholders would have to approve the sale of all the corporation’s property, issuing new kinds of stock or merging the corporation with another corporation.

It might also come as a surprise to learn that the directors and officers of the corporation do not represent the shareholders. Under the law, the directors and officers owe a duty of loyalty, first and foremost, to the corporation as a person in its own right and, then secondarily, to all of its shareholders –not just to the shareholders who voted to elect them to the board. The board must act in the best interest of the corporation overall. The directors’ duty of care and loyalty goes to all the shareholders, and not to any faction or group of them.

The board of directors has a special role of oversight in running the corporation. The board determines overall corporate policy and appoints officers who carry out board policy. The officers of the corporation are responsible for running the day-to-day business of the corporation. The officers hire managers and employees to help them do this. It may seem odd, but the board of directors has no legal right or power to make decisions about the day-to-day business of the corporation. The law gives the officers the exclusive right and power to run the daily business of the corporation.

So, why do shareholders have such a limited role in running the corporation? To protect them from being held personally responsible to pay the debts of the corporation out of their own pocket! So long as the shareholders, board of directors and officers follow their proper roles in running the corporation, the law will protect them. When a corporation is run properly, people who are owed money by the corporation can only be paid with assets owned by the corporation, not with money or property owned by its shareholders. If this legal structure is ignored, attempts by shareholders to directly make decisions can cause them to become personally liable for the actions of the corporation, including paying its debt.

Shareholders also need to understand that ASRC must respect this same legal structure with its subsidiaries. As the parent corporation, ASRC is the sole shareholder of each of its subsidiary corporations. So long as ASRC follows its proper role as a shareholder the law will protect ASRC from having to pay the debts of its subsidiaries. This protection is called the “corporate veil” and it can be lost. Because ASRC has a lot more assets than most of its subsidiaries, loss of the corporate veil presents a real financial risk to ASRC. That’s why it’s important for ASRC and its shareholders to understand their proper roles and work together to follow them. Look for future newsletter articles that will discuss the limited liability protections of the corporate veil in more detail.