Board of Directors

Question 1

Board of Directors - Selection, Removal and Voting

Answer 1

The board of directors manages and directs the management of the corporation’s business and affairs.

• Selection
  
  • Directors are selected by the shareholders at the annual shareholder’s meeting.
• Removal
  
  • Shareholders may remove a director for breach of fiduciary duty (common law) or without cause (modern trend).
• Voting
  
  • For the board of directors’ acts at a meeting to be valid, a quorum of directors must be present at the meeting. A majority of all directors constitutes a quorum.

Question 2

Board of Directors - Fiduciary Duties

Answer 2

Fiduciary Duties (Frequently Tested)

A director owes two basic duties: a duty of care and a duty of loyalty.

Exam Tip #2: Always discuss duty of care and duty of loyalty if a director acts inappropriately.

Question 3

Board of Directors - Fiduciary Duties

Duty of Care

Answer 3

Directors have a duty to act with the care of an ordinarily prudent person in a like position and similar circumstances (objective standard).

1. Reliance:
   
   • A director is entitled to rely on the performance of other officers, employees, and outside experts. This includes reliance on information, reports, and opinions provided by these people.

Exam Tip #3: After discussing whether a director met his/her duty of care, always follow up with a discussion of the business judgment rule.

1. Business Judgment Rule:
   
   • The business judgment rule (BJR) is a rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation. The BJR will protect a director from liability for breaching the duty of care if he acted in good faith.
   • To overcome the BJR, one of the following must be shown:
     
     • The director did not act in good faith
     • The director was not informed to the extent reasonably necessary before making a decision
     • The director did not show objectivity and had a material interest in the decision
     • The director failed to timely investigate after being alerted to a significant matter
     • Any other failure to act as a reasonable director

Question 4

Board of Directors - Fiduciary Duties

Duty of Loyalty

Answer 4

Duty of Loyalty

The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interest of the corporation. Self-dealing and usurping corporate opportunities are violations of the duty of loyalty.

Question 5

Board of Directors - Self Dealing

Answer 5

A director that engages in a transaction with a corporation that benefits himself, or a closely related family member will be considered to have engaged in self-dealing. If the transaction benefits another corporation or partnership that the director is associated with or his closely related family member is associated with, this will also be self-dealing. Self-dealing violates the duty of loyalty unless the transaction is protected under the safe-harbor rule. The business judgment rule does not apply to a self-dealing transaction.

1) Safe Harbor Rules: There are three ways that a self-dealing transaction can be protected and avoid violating the duty of loyalty:

• The interested director discloses all material facts to the board of directors and receives approval by a majority of disinterested board of directors; or
• The interested director discloses all material facts to shareholders and receives approval by a majority of disinterested shareholder votes; or
• The transaction is fair to the corporation at the time of the deal. The fairness test asks if the substance of the transaction was fair and burden is on the interested director to show fairness.

2) Remedies: A self-dealing transaction that is not protected by the safe harbor provisions can be enjoined or rescinded and the corporation can seek damages from the interested director.

Question 6

Board of Directors - Usurption of Coporate Opportunity

Answer 6

A director may violate the duty of loyalty by “usurping” a corporate opportunity for business and taking the opportunity for himself rather than offering it to the corporation first.

1) Corporate Opportunity: To determine whether a business opportunity is one that must first be offered to the corporation, a court will ask if the corporation is seeking the opportunity or if the opportunity is within the corporation’s current or prospective line of business.
2) If the opportunity is a corporate opportunity, the director must present it to the corporation first and it must be declined by the corporation. At that time, the director can take/accept the opportunity for himself without violating the duty of loyalty.