3. Directors and Officers

Question 1

How is the number of directors set?

Answer 1

1. In the bylaws, or
2. By shareholder act, or
3. By the Board, if a shareholder bylaw allows.

Question 2

What if no number of directors is set in any such way?

Answer 2

Then we have 1 director

Question 3

Who elects the directors?

Answer 3

Incorporators elect initial directors. After that, the shareholders at the annual meeting.

Question 4

Do we have to elect all new directors every year?

Answer 4

No, the certificate or a shareholder bylaw
can establish 2, 3, or 4 classes of directors, with one class elected each year.

Question 5

Can shareholders remove a director for cause?

Answer 5

Yes

Question 6

Can the board remove a director for cause?

Answer 6

Only if the certificate or a shareholder bylaw allows.

Question 7

Can anyone remove a director without cause?

Answer 7

Shareholders only, and only if the certificate or bylaws allow.

Question 8

Who selects the person who will serve the remainder of the term if there is a vacancy on the board?

Answer 8

The board

Question 9

Who selects the person who will serve the remainder of the term in the rare case when a director is removed by shareholders without cause?

Answer 9

The shareholders.

Question 10

Can individual directors act on behalf of the corporation?

Answer 10

No. Individual directors are NOT agents of the corporation, so they have no power to bind the corporation to anything. Instead, the directors must act as a group.

Question 11

There are only two ways in which the board can take a valid act:

Answer 11

1. Unanimous written consent

2. A meeting

Question 12

If the directors purport to take a corporate act in some other way than the two valid ways (e.g., individual conversations), what is the effect of such an “act”?

Answer 12

It is void, unless ratified by a valid act.

Question 13

Is notice required for regular meetings of the board?

Answer 13

No, if the time and place are set in bylaws or by the Board

Question 14

Is notice required for special meetings of the board?

Answer 14

Yes, and it must state the time and place.

Question 15

What happens if the required notice for a special meeting is not given to a director?

Answer 15

Any action taken at the meeting is void unless the director not given notice waives the notice defect either in a signed writing or by attending the meeting without objection.

Question 16

Can a director give a proxy for director voting?

Answer 16

No, it is void because directors owe non-delegable fiduciary duties to the corporation.

Question 17

Can directors enter voting agreements on how they will vote as directors?

Answer 17

No, it is void because directors owe non-delegable fiduciary duties to the corporation.

Question 18

To do business, how many directors must be present?

Answer 18

To do business, we must have a majority of the “entire board” (duly constituted board - that means the number of positions if no vacancies).

Question 19

Once we have a quorum, passing a resolution (which is how the board takes an act at a meeting) requires

Answer 19

A majority vote of those present.

Question 20

Suppose there are nine directorship positions on the board. Five of the directors show up at a properly called meeting, but then one of them leaves the meeting. Can the board continue to do business?

Answer 20

No, the quorum has been broken

Question 21

Suppose there are nine directorship positions on the board, but two of the directors
have resigned and no successors have been selected. So there are only seven directors
actually serving now. How many must show up at a meeting to constitute a quorum?

Answer 21

We still need at least 5

Question 22

Can the corporation decrease a quorum to less than a majority of directors?

Answer 22

Yes, in the certificate or bylaws, but it can never be fewer than 1/3 of the entire Board.

Question 23

Can the corporation decrease the requirement that passing a resolution requires a majority of the directors present?

Answer 23

No. This cannot be reduced.

Question 24

Can the corporation increase a quorum to greater than a majority of directors (e.g., 90% of the entire board must be present to do business)?

Answer 24

Yes, in the certificate only, not in the bylaws.

Question 25

Can the corporation require a supermajority vote to pass a resolution (e.g., 60% of the directors present must approve the resolution)?

Answer 25

Yes, in the certificate only, and not in the bylaws.

Question 26

May the board delegate substantial management functions to a committee of one or more directors?

Answer 26

If the certificate or bylaws allow, a majority of the “entire board” can delegate substantial management functions to a committee of one or more directors. But, the board cannot delegate all powers and responsibilities to a committee.

Question 27

What can a committee not do?

Answer 27

1. Set director compensation
2. Fill a board vacancy
3. Submit a fundamental change to shareholders
4. Amend bylaws

Question 28

Duty of Care standard

Answer 28

A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under similar circumstances in like position.

Question 29

Will a director be liable for breaching the duty of care?

Answer 29

Only if his breach caused a loss to the corporation.

Question 30

Business Judgment Rule

Answer 30

a court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

Question 31

Duty of Loyalty Standard

Answer 31

A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.

Question 32

Interested Director Transactions

Answer 32

This is any deal between the corporation and one of its
directors (or business of which its director is also a director or officer or in which he has a
substantial financial interest).

Question 33

Interested director transactions will be set aside UNLESS the director shows:

Answer 33

Either:
1. The deal was fair and reasonable to the
corporation when approved
OR

2. The material facts and her interest were disclosed or known and the deal was approved by either:
   i. a shareholder action,
   ii. Board approval by sufficient vote, not counting the votes of interested directors, or
   iii. Unanimous vote of disinterested directors, if the disinterest directors are not sufficient to take a board act.

Question 34

Do interested directors count toward a quorum of the board?

Answer 34

Yes, and they can participate in the meeting, but their votes will not count.

Question 35

X Corp has nine directors. Five of them are interested in an interested director transaction. All nine attend the meeting to consider approving the deal. After appropriate disclosure (or knowledge), what vote could approve the deal?

Answer 35

All 4, because there are not enough disinterested directors for a valid board act

Question 36

Can the board set the compensation of directors?

Answer 36

Yes, BUT compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets.

Question 37

Sometimes a corporation may want to give a director or officer or employee stock options as an incentive to service. If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. What if the stock is not listed on a stock exchange?

Answer 37

It must be approved by the shareholders

Question 38

Sharon is a director of Ozzie’s Music Corp. She can also serve as a director for Home Depot because it does not compete with Ozzie’s. What if Sharon starts her own music corporation, and goes into competition with Ozzie’s?

Answer 38

Ozzie’s gets a constructive trust on Sharon’s profits, meaning she must account to Ozzie’s for her profits. The corporation might recover damages, if the competition harmed it.

Question 39

Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of some land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?

Answer 39

A director cannot usurp a corporate opportunity, meaning he cannot take it until he tells the board about it and waits for the board to reject it.

Question 40

What qualifies as a corporate opportunity?

Answer 40

Something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its business.

Question 41

If there is usurpation, what is the usual remedy?

Answer 41

A constructive trust.

Question 42

The board of directors votes to lend a director $100,000 of corporate funds or to guarantee a
director’s personal obligation. OK?

Answer 42

Yes, if approved by shareholders, or if the board finds that it will benefit the corporation.

Question 43

For anything a director can be liable for, exactly which directors are liable?

Answer 43

A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records.

Question 44

How does a director get her dissent into writing?

Answer 44

1. In the minutes, or
2. In writing to the secretary at the meeting, or
3. Registered letter to the secretary promptly after adjournment.

Question 45

Suppose a director missed a meeting, say because he was sick that day. Is he liable if the board approved something bad that day (like a wrongful dividend)?

Answer 45

Not if he registers written dissent within a reasonable time after learning of the action. He does this by delivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes.

Question 46

What duties do officers owe to the corporation?

Answer 46

The same duties of care and loyalty as directors.

Question 47

Can officers bind the corporation to acts that they take in the corporation’s behalf?

Answer 47

Yes, if they have authority to do so.

Question 48

Who selects and removes the officers?

Answer 48

The board, unless the certificate allows shareholders to elect them.

Question 49

Who hires and fires directors?

Answer 49

The shareholders

Question 50

Compensation of officers. Who sets it?

Answer 50

The board

Question 51

A person is sued in her capacity as officer or director by or on behalf of the corporation. She incurs costs, attorneys’ fees, maybe even fines, a judgment or settlement; she seeks reimbursement (indemnification) from the corporation. Reimbursement is prohibited if:

Answer 51

He was held liable to the corporation. (not just accused)

Question 52

A person is sued in her capacity as officer or director by or on behalf of the corporation. She incurs costs, attorneys’ fees, maybe even fines, a judgment or settlement; she seeks reimbursement (indemnification) from the corporation. The corporation must reimburse the director or officer if:

Answer 52

He won a judgment on the merits or otherwise.

Question 53

Suppose a director or officer is successful in defending a suit against her, so she qualified for reimbursement of right from the corporation. But the corporation refuses to reimburse her. Now she sues the corporation to force it to reimburse her, and wins. Can she recover the attorney’s fees of this suit against the corporation?

Answer 53

No, she pays her own attorneys fees in this case.

Question 54

Can the court (in which the officer or director was sued) order the corporation to reimburse her for litigation expenses and attorney’s fees?

Answer 54

Yes, if it finds that she is reasonably entitled to it.

Question 55

Can the corporation advance litigation expenses to the director or officer?

Answer 55

Yes, but they must be repaid if it turns out she is not entitled to reimbursement.