3. Directors and Officers Flashcards
What is the minimum # of directors that a corporation can have?
1 or more natural persons (humans) but a greater can be set in:
(i) bylaws;
(ii) by SH act; OR
(iii) by the BOD, if a SH bylaw allows
Who elects the initial BOD?
The incorporators elect initial directors at the organizational meeting. After that, SHs elect at the annual meeting.
What is a staggered or “classified” board?
Where the entire board is not re-elected each year. The certificateor SH bylaw can establish 2, 3, or 4 classes of directorsand then each class is up for election each year
Can a director be removed before the expiration of his term?
“For cause”:
(i) by SHs
(ii) by the BOD, only if the certificate or bylaws allow
(iii) by vote of the class that elected her
(iv) judicial action
For ANY reason:
(i) by SHs, only if the certificate or bylaws allow
How is a board seat filled on event of resignation, death or removal?
General rule: the BOD selects the person who will serve the remainder of the term
Special rule: If director was removed by SHs, without cause, then SHs fill the vacancy (rare case)
What are the only two ways a BOD can take a valid act?
1) UNANIMOUS written consent; OR
2) Via a board meeting
NOTE: individual bd members are NOT agents of the corporation (they have no pwr to bind in their individual capacity); they MUST act as a group
NOTE: If a bd purports to “act” in some other way than listed above, the action is VOID, UNLESS the action was ratified by the BOD via a valid act (e.g. a conversation among a few directors is not a mtg)
What are the four requirements for a valid board meeting?
1) NOTICE:
(i) not required for regular meetings if the time/place is set in bylaws
(ii) required for special meetings, AND must state the time/place of the mtg (need not state the purpose)
Note: If notice is not proper, any action taken at the meeting is VOID unless the director not given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection
2) UNRESTRAINED VOTING: bd cannot vote by proxy or enter voting agreements to vote in a certain way. Voting is a non-delegable fiduciary duty
Note: SHs CAN vote by proxy and enter voting agreements
3) QUORUM: to meet quorum, there must be a majority of the “entire board” present (duly constituted board = the # of positions without vacancies)
E.g. if there are 9 director positions w/o vacancies, then you’d need at least 5 present
Note: Quorum can be “broken” (i.e. if it’s met and sufficient directors leave, then it can fall below required amount)
4) MAJORITY VOTING: once quorum is met, passing a resolution requires a majority of those directors present
E.g. of the 5 directors present, you’d need 3 to pass a resolution
NOTE: The board mtg does NOT have to be in NY and can be via conference call
What is necessay to raise OR lower the quorum requirement?
LOWER: The quorum requirement can be less than a majority only if stated in the certificateor bylaws but can never be fewer than 1/3d of the bd
INCREASE: The quorum requirement can be raised to more than a majority only if stated in the certificate (not bylaws)
What is necessay to raise OR lower the board resolution voting requirement?
LOWER: The corporation can never decrease the resolution voting requirement below a majority
INCREASE: The resolution votingrequirement can be raised to more than a majority (supermajority) only if stated in the certificate (not bylaws)
When can a BOD delegate responsibility to a committee of directors?
A BOD can delegate certain functions if
(i) the certificate OR bylaws allow; AND
(ii) a majority of the “entired board” (without vacancies) votes to delegate
Committee must be made of AT LEAST one director but a BOD cannot delegate all of its powers to a committee
What is a board committee PROHIBITED from doing?
1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to SHs
4) Amend bylaws
NOTE: A committee can recommend any of the above for full board action. Committees are used in conjunction with SH derivative suits
What is the duty of care standard for directors?
and breaches
A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinary prudent person would exercise under similar circumstances in like position
NONFEASANCE (doing nothing/being lazy):
Will breach duty of care if the breach CAUSED a loss to the corporation (very hard to prove)
MISFEASANCE (going something dumb that hurts corp):
Implicates the Business Judgment Rule (BJR): a court will not second guess a business decision if it was made in good faith, was reasonable informed and rational
What is the duty of loyalty standard for directors?
A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries”
Note: BJR does not apply b/c it cannot apply when director has a conflict of interest
What three types of transactions can breach the duty of loyalty?
- INTERESTED DIRECTOR TRANSACTIONS:
Occurs when there is any deal between the corporation and one of its directors (or business of which the director is also a director or has substantial financial interest). Self-dealing can be “cleansed” if:
(i) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND
(i) the deal was approved by:
(a) SH action;
(b) BOD approval by disinterested directors; OR
(c) unanimous approval of disinterested directors if they are insuffiicent in number to take bd action. (NOTE: interested directors do count for quorum purposes; they just can’t vote)
Note: The entire board can set director compensation, but it must be reasonable and in good faith (otherwise, it’s excessive and a waste of corp assets)
Note: To give directors or officers options for stock listed on a stock exchange it must be authorized under exchange policies. If not listed, it must be approved by SHs - COMPETING VENTURES:
Directors cannot compete with their own corporation. If director does compete, a court would establish a constructive trust for the profit made from the competing venture (corp could also get damages, if it were hurt) - CORPORATE OPPORTUNITY:
A director cannot “usurp a corporate opportunity” which is something a corporation needs, has an expectancy interest in, or is logically related to its business. A director can take an opportunity:
(1) he tells the BOD about the opportunity; AND
(2) the director waits for the disinterested BOD to reject it
If he doesn’t, a constructive trust is established, which accounts for any profits made.
Note: “The corporation couldn’t afford it” is not a valid excuse
Is a loan to a director using corporate funds ok?
Only if:
(i) it’s approved by SHs; or
(ii) the board finds that it will benefit the corporation
