Board of Directors

Question 1

Composition requirements

Answer 1

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.

Question 2

Term of board

Answer 2

Typically one year, but may serve longer if terms are staggered. however, CANNOT BE LONGER THAN 3 Years.

Question 3

Removal of directors

Answer 3

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.

Question 4

When can court remove a director ?

Answer 4

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.

Question 5

Is compensation for directors allowed ?

Answer 5

Yes

Question 6

Meeting requirements of the board

Answer 6

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

Question 7

Voting requirements of the board (Quorum)

Answer 7

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

Question 8

Voting requirements of the board (passage level)

Answer 8

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

Question 9

Board voting (Director dissent)

Answer 9

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

Question 10

Board voting (voting agreements)

Answer 10

Voting agreements are unenforceable because each director must exercise independent judgment

Question 11

When can directors vote by proxy ?

Answer 11

Only for non public corporations,

Question 12

Committees

Answer 12

Unless articles of bylaws state otherwise, the board may generally exercise powers through committees.

Question 13

Limitations on committees

Answer 13

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

Question 14

Director duties

Answer 14

1. Statutory standard
2. Business judgment rule
3. Duty of Care
4. Duty of loyalty

Question 15

Statutory standard

Answer 15

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

Question 16

Business Judgment rule

Answer 16

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.

Question 17

Duty of care

Answer 17

1. Good faith- D is not liable for a breach if it was undertaken in good faith, a subjective standard
2. 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
3. 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.

Question 18

Duty of loyalty (4 types)

Answer 18

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

Question 19

Conflict of interest transaction- self dealing

Answer 19

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

Question 20

Duty of loyalty- Safe harbors

Answer 20

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.

Question 21

When is a COI transaction fair to C?

Answer 21

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

Question 22

Who is a disinterested director ?

Answer 22

Someone who has no financial interest in a matter or relationship that would reasonably impair the objectively of the Director’s judgement

Question 23

Usurpation of corporate opportunity

Answer 23

D must first offer opportunity to C, may be protected by share harbor provisions if first approve by board or shareholders

Question 24

Competition with Corporation

Answer 24

A director who engages in a business venture that competes with C has breached the duty of loyalty to the corporation

Question 25

Corporate waste

Answer 25

Ds have a duty not to waste corporate assets

Question 26

Mandatory Indemnity

Answer 26

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

Question 27

Permissive indemnity

Answer 27

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

Question 28

Prohibited indemnity

Answer 28

C is prohibited from indemnifying a D against liability for willful misconduct or a knowing violation of criminal law

Question 29

Liability insurance

Answer 29

C amy acquire insurance to indemnify D’s

Question 30

Cap on liability

Answer 30

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)

Question 31

When does the cap on liability apply ?

Answer 31

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

Question 32

Inspection

Answer 32

D can seek a court order enforcing right to inspect/copy C’s books and records