Action and Liability of Directors and Officers (D & O) Flashcards
Requirements
BOD must have at least 1 member; SHs elect Ds; SHs can remove D for any reason.
Valid meeting required for BOD actions. Quorum for voting
“Valid Meeting” Required
Valid meeting required for BOD actions UNLESS unanimous D consent in writing to act w/o mtg.
Notice can be set in bylaws. No Proxies or voting agmts.
Quorum Requirements
Quorum = Majority of BOD.
Vote = Majority of votes present. Each D presumed to concur w/ BOD action unless dissent/abstention in writing.
Liability of Directors to Corporation and Shareholders
Ds have duty to manage the corp, but are protected from liability by the Business Judgment Rule.
BUT they are fiduciaries who owe duty of care and loyalty.
Business Judgment Rule
Presumption that Ds manage corp in good faith and in best interest of corp.
Duty of Care
D must act with care a prudent person would use with regard to her own business, unless articles have limited D liability for breach.
Duty of Loyalty
D may not receive an unfair benefit to the detriment of corp or SHs, unless there has been material disclosure and independent ratification.
No Self Dealing or Usurping Corp Opportunities.
What is Self Dealing?
D receives unfair benefit in transaction with corp.
Usurping Corporate Opportunities
D receives unfair benefit by usurping an opportunity corp would have pursued.
Ratification of D&O Action
Can defend claim by:
a) Majority vote of independent Ds;
b) Majority vote of committee of at least 2 independent Ds; or
c) Majority vote of shares held by independent SHs.
Interested Director Doctrine
CL: transaction (“tx”) with interested D voidable at corp’s option.
Mod: K invalid unless, BOD approves tx after disclosure and D doesn’t vote; SH approve K after disclosure; or K is fair.
Duties of Officers
Duty of care and loyalty.
Officers are agents of corp and bind corp by authorized acts.
Required Officers: President, Secretary, and Treasurer. Selected and removed by Ds.
Indemnification
What expenses does corp cover?
Corp covers D or O’s costs, attorney fees, fines, judgment or settlement in the course of corp business.
When can corp indemnify Ds and Os?
Never indemnify when D&O loses suit. Always indem if D&O wins suit.
May indem if: liability to 3rd parties or settlement w/ corp; D&O shows action in good faith and conduct in corp’s best interest.
Who decides whether to indemnify?
Majority of independent Ds;
Majority of committee of Independent Ds; Majority shares of independent SHs;
Board pursuant to independent legal counsel’s recommendation.
