Board of Directors Flashcards
Composition requirements
Can have as few as one director. The number or range may be set in the articles or bylaws.
Must be a natural person, qualifications of directors are set forth in the articles or bylaws. Does not have to be a resident of Virginia.
Term of board
Typically one year, but may serve longer if terms are staggered. however, CANNOT BE LONGER THAN 3 Years.
Removal of directors
Can be removed by shareholders with or without cause unless articles state otherwise.
Directors can resign at any time with written notice to the board, its chair, or the secretary.
When can court remove a director ?
Court can remove D if in best interest of the corporation and
1. He committed fraud against C or its shareholders
2. Grossly abused the position, or
3. Intentionally harmed the corp.
Is compensation for directors allowed ?
Yes
Meeting requirements of the board
The director is only entitled to notice of special meeting.
The board can act without meeting by singing a consent, describing the action to be taken
Voting requirements of the board (Quorum)
Quorum of D’s (majority of D’s in office) must have been present.
A higher or lower can be required by the articles or bylaws, but cannot be less than 1/3
Voting requirements of the board (passage level)
Majority vote of the directors present at the time of the vote takes place is necessary for board approval.
Statue, articles or bylaws may set a higher level
Board voting (Director dissent)
To dissent, the director must:
1. Object to the holding of the meeting
2. Vote against the action or abstain from voting; or
3. Properly deliver notice of his dissent
Board voting (voting agreements)
Voting agreements are unenforceable because each director must exercise independent judgment
When can directors vote by proxy ?
Only for non public corporations,
Committees
Unless articles of bylaws state otherwise, the board may generally exercise powers through committees.
Limitations on committees
Committees cannot
1. Authorize distributions
2. Propose actions requiring SH approval
3. Approve plan of merger not requiring SH approval
4. Fill vacancies on the board or committee
5. Amend articles, adopt/amend/repeal bylaws
6. Authorize sale of shares
Director duties
- Statutory standard
- Business judgment rule
- Duty of Care
- Duty of loyalty
Statutory standard
Director must discharge duties in accordance with good faith business judgment of the best interests of the corporation.
No liability of D satisfies this standard
Business Judgment rule
Is a rebuttable presumption that D acted properly and in good faith in the exercise of business judgment.
Usually overcome by showing self-dealing, fraud, or bad faith.
Duty of care
- Good faith- D is not liable for a breach if it was undertaken in good faith, a subjective standard
- Reliance protection- D can rely on information and opinons of O’s employees, attorneys, accountants, or other experts or committees if D reasonably believes them to be reliable or competent
- Absent or dissent- D’ absence from a meeting or dissent on the record are defenses to an alleged breach of duty of care to a C.
Duty of loyalty (4 types)
Requires D to act in a manner that D reasonably believes is in the best interest of the corporation
1. COI
2. Usurpation of Corp opportunity
3. Competition with C
4. Corporate waste
Conflict of interest transaction- self dealing
A d who engages in a COI transaction with his own C violates the duty the loyalty. A D cannot profit at a C’s expense
Duty of loyalty- Safe harbors
A COI transaction is voidable unless:
1. Disclosure of all material facts AND a committee or the board approved the transaction
2. The shareholders were aware of the material facts and approved the transaction, or
3. the transaction was fair to C.
When is a COI transaction fair to C?
Determine whether
(1) the transaction would have been approved by a disinterested board; OR
(2) the same result would have been accomplished between two parties of the same economic bargaining power not acting under duress
Who is a disinterested director ?
Someone who has no financial interest in a matter or relationship that would reasonably impair the objectively of the Director’s judgement
Usurpation of corporate opportunity
D must first offer opportunity to C, may be protected by share harbor provisions if first approve by board or shareholders
Competition with Corporation
A director who engages in a business venture that competes with C has breached the duty of loyalty to the corporation
Corporate waste
Ds have a duty not to waste corporate assets
Mandatory Indemnity
C is required to indemnify a D for any expense incurred in the wholly successful defense of a proceeding against the D in his role as a director
Permissive indemnity
The articles, bylaws, or resolution can authorize C to indemnify a director an reimburse, advance expenses for liability incurred if D acted in good faith believing his conduct was in the best interest of the C, and D had no reasonable cause to believe his conduct was unlawful
Prohibited indemnity
C is prohibited from indemnifying a D against liability for willful misconduct or a knowing violation of criminal law
Liability insurance
C amy acquire insurance to indemnify D’s
Cap on liability
In VA, the corp may cap or eliminate Director liability.
IN a proceeding brought by or in the right of the corp or shareholders, there is a statutory cap on liability (the greater of 100,000 or the cash compensation received by the director during the 12 month period immediately preceding the conduct)
When does the cap on liability apply ?
When C has not adopted a cap or C’s cap is higher than the statutory cap
The cap does not apply to a willful or knowing violation of the law
Inspection
D can seek a court order enforcing right to inspect/copy C’s books and records
