(6) Corporations: Directors & Officers & Fiduciary Duties Flashcards
Quorum
Board of Directors Meeting
Rule: The board of directors can only act if a quorum is present. A majority of the board of directors is necessary to make a quorum, unless there are provisions in the articles of incorporation stating that a higher or lower number is required. However the articles of incorporation must require that at least one-third of the directors be present to make a quorum.
Rule: A quorum must be present at the time when a vote is taken. If a quorum is present at the beginning of a meeting but directors subsequently leave breaking the quorum before a vote then the board of directors cannot vote or act.
Voting
Board of Directors Meeting
If a quorum of board of directors is present when a vote is taken at a meeting the act is approved by the affirmative vote of a majority of the directors present unless the articles of incorporation or bylaws require a greater number.
Outside Directors - Voting
Board of Directors Meeting
Outside directors are non-employees of the corporation and have full authority to vote and object at a board of director meeting.
Objection to Actions
Board of Directors Meeting
A director who is present at a meeting is deemed to have assented to the action taken at the meeting unless (a) the director objects at the beginning of the meeting to holding it or transacting business at the meeting; (b) dissent or abstains from the action taken and it is entered into the meeting minutes or (c) the director delivers written notice of their dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting.
*The right of dissent or abstention is not available to a director who votes in favor of the action taken.
Compensation of Directors and Officers
The board of directors is allowed to determine the compensation of directors and officers unless the bylaws or articles of incorporation state otherwise. The board of directors have a duty to set compensation in accordance with reasonable parameters taking into account the needs of the corporation and ensuring that they do not commit waste of corporate assets.
Election of Directors
Shareholders elect directors at the corporations annual shareholders meeting. An agreement that prohibits shareholders from electing directors is contrary to public policy and is unenforceable.
Removal of Directors
A director may be removed from a corporations board of directors by a vote of the majority of the shareholders for cause or without cause unless the articles of incorporation set forth that a director may only be removed for cause.
*An agreement that prohibits shareholders from removing directors is contrary to public policy and unenforceable.
Removal of Officers
An officer may be removed at any time with or without cause by (a) the board of directors; (b) the officer who appointed such officer; or (c) any other authorized officer.
*An officers removal does not affect the officers contract rights with the corporation.
Actual Authority of Officers
An officer has actual authority to act consistently with their duties: (a) as outlined in the bylaws; or (b) as provided by the board of directors. An officer has apparent authority to bind the corporation when: (1) a 3rd party reasonably believes the person/entity has authority to act on behalf of the corporation; AND (2) that belief is traceable to the corporations manifestations (the corporation holds the officer out as having authority).
Implied Authority of Officers
An officer has implied authority necessary to perform the functions of their position. The president of a corporation has implied authority to bind the corporation for matters within its ordinary course of business but doesn’t have the authority to bind the corporation for extraordinary acts.
Duty of Care
Fiduciary Duties
Directors and Officers are fiduciaries of a corporation and owe a duty of care to the corporation. If a director breaches the duty of care they may be held personally liable to the corporation for any losses suffered as a result. Under common law, directors and officers must discharge their duties (1) in good faith; (2) in a manner the director reasonably believes to be in the best interests of the corporation; and (3) with the care that a person in a like position would reasonably believe appropriate under similar circumstances (If all elements are satisfied the director is not liable for corporate decisions that have adverse results).
*This doesn’t protect directors who engage in fraud or illegal activities – if a director distributes false information that results in corporate injury that is fraud.
Business Judgement Rule
Fiduciary Duties
A court will not second guess a business decision if: (1) made in good faith; (2) the director was reasonably informed; and (3) the decision had a rational business basis. [It is presumed that the boards business judgement is informed – the person attacking has the burden to disprove the presumption.] The business judgement rule protects one from liability if they breach the duty of care.
Business Advice Rule
Fiduciary Duties
A director may rely on the reasonable advice of advisors, such as attorneys, accountants, officers or committees of the board when (1) such reliance was reasonable; and (2) the advisor or committee was qualified to provide such advice.
Duty of Loyalty - Forbids what?
Fiduciary Duties - Duty of Loyalty
The duty of loyalty forbids directors from (a) entering into conflicting interest transactions; (b) usurping a corporate opportunity; (c) competing with the corporation; or (d) trading inside information.
Duty of Loaylty - Who owes the duty to who?
Fiduciary Duties - Duty of Loyalty
A director or officer owes the corporation a fiduciary duty of loyalty which means that the director must act in the best interests of the corporation and without personal conflicts.
