Board of Directors and Corporate Officers

Question 1

What is the general power/duties of the Board of Directors?

Answer 1

The board of directors manages the corporation, meaning it :

• Sets policy,
• Supervises officers,
• Declares distributions,
• Determines when stock will be issued,
• Recommends fundamental corporation changes to shareholders, and so on.

Question 2

How many directors must a Board of Directors have?

Answer 2

Board must have one or more directors. The number can be set in the articles or bylaws, which may require as many directors as desired.

Question 3

How long do directors serve?

Answer 3

The entire board is elected each year unless there is a “staggered” (or “classified”) board.

Staggered Director Terms: A staggered board is divided into half or thirds, with one-half or one-third elected each year.

• Example — Board has 9 directors. Instead of electing all nine each year, we could divide the board into three classes of three directors each, and they would serve three-year terms.

Question 4

How can a director be removed?

Answer 4

Directors may be removed with or without cause by the shareholders (unless the articles require only for cause)

Question 5

Who fills board vacancies?

Answer 5

A vacancy on the board may be filled by either the shareholders or the board. If the directors remaining in office constitute fewer than a quorum, they may fill the vacancy by majority vote of all the directors remaining in office.

Shareholder Created Vacancy: If the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement

Question 6

What are the two main ways that a board may act?

Answer 6

1. Unanimous agreement in writing (email is OK, and separate documents are also OK)
2. At a meeting, which must satisfy the quorum and voting requirements

Question 7

What is ratification?

Answer 7

Directors, incorporators, and officers may ratify defective corporate actions (actions that are void or voidable due to a failure of authorization). To ratify such an action, the board of directors must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek shareholder approval if necessary.

Question 8

What kind of notice is required for a regular board meeting?

Answer 8

Notice is NOT required

Question 9

What kind of notice is required for a special board meeting?

Answer 9

At least two days’ written notice of date, time, and place is required. The notice need not state the purpose of the meeting.

Failure to Give Notice: Failure to give required notice means that whatever happened at the meeting is voidable — maybe even void — unless the directors who were not notified waive the notice defect.

Directors can waive a notice violation:

• In writing any time
• By attending the meeting without objecting at the outset of the meeting.

Question 10

Can directors give proxies or enter voting agreements?

Answer 10

Directors CANNOT give proxies or enter voting agreements for how they will vote as directors. Any efforts to do so are VOID.

• NOTE — This is different from shareholders, who can vote by proxy and enter into voting agreements.

Question 11

What are the main actions that a committee CANNOT do?

Answer 11

1. Declare a distribution
2. Fill a board vacancy
3. Recommend a fundamental change to shareholders

Question 12

What are the main fidicuiary duties that a director owes to the corporation?

Answer 12

1. Duty of Care: Directors are must exercise their management with care that a person in a like position would exercise under similar circumstances.
2. Duty of Loyality: Directors must exercise their duties in good faith and with the reasonable belief that their actions are in the best interest of the corporation
3. Duty to Disclose : The directors also have a duty to disclose material corporate information to other members of the board.

Question 13

Who bears the burden when the director’s duty of care is challenged?

Answer 13

The person challenging the directors’ action has the burden of proving that the standard was not met.

Question 14

Who bears the burden when the director’s duty of loyalty is challenged?

Answer 14

Duty of loyalty cases are about conflicts of interest. The burden is on the defendant because the business judgment rule does not apply when the fiduciary has a conflict of interest.

Question 15

When can a director rely on reports or other information?

Answer 15

In discharging their duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by:

1. Corporate officers or employees whom the director reasonably believes to be reliable and competent
2. Legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence
3. A committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

Question 16

In what situations will a conflicting transaction be allowed (not enjoinyed, set aside, or give rise to damages)?

Answer 16

1. The conflicting transaction was approved by a majority (but at least two) of the disinterested directors (those without a conflicting interest). (see 1 below for requirements)
2. The conflicting transaction was approved by a majority of votes entitled to be cast by disinterested shareholders (those without a conflicting interest) (see 2 below for requirements)
3. Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation.

1. The material facts must either be known by the board or disclosed by the director.
2. The material facts must either be known by the board or disclosed by the director. Notice of the shareholders’ meeting must describe the transaction.
3. Fairness Factors for No. 3: Adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.

Question 17

What is the Corporate Opportunity Doctrine?

Answer 17

The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act. This is known as “usurpation of a corporate opportunity.”

A usurpation problem arises only if a director takes advantage of a business opportunity in which the corporation would have an interest or expectancy

Question 18

What areas of personal director liability may not be limited or eliminated by a corporation’s articles of incorporation?

Answer 18

The articles may not limit or eliminate liability for:

1. Financial benefits received by the director to which she is not entitled
2. An intentionally inflicted harm on the corporation or its shareholders
3. Unlawful corporate distributions
4. An intentional violation of criminal law

Question 19

When is a director liable to the corporation?

Answer 19

Directors may be liable to the corporation for

1. Improper distributions,
2. Improper loans,
3. “Ultra vires” Acts (that is, making the company do things it has no power to do)
4. Breaches of fiduciary duties.

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records.

In writing means:

• In the minutes
• Delivered in writing to the presiding officer at the meeting
• Written dissent to the corporation immediately after the meeting.
• An oral dissent, by itself, is not effective.

Question 20

What are corporate officers?

Answer 20

Officers are agents of the corporation. Agency law determines the authority and powers of officers. The corporation is the principal and the officer is the agent.

Duties: Officers’ general duties are determined by the bylaws or, to the extent consistent with the bylaws, by the board or an officer so authorized by the board.

Question 21

How can officers be selected and removed?

Answer 21

Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause.

If the resignation or removal is a breach of contract, the nonbreaching party may have a right to damages, but note that mere appointment to office itself does not create any contractual right to remain in office

Question 22

When is indemnification prohibited?

Answer 22

Corporation cannot indemnify a director who is held:

• Liable to the corporation OR
• To have received an improper benefit.

Question 23

When is indemnification mandatory?

Answer 23

Unless limited by the articles, a corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.

Question 24

When is indeminification permissibe?

Answer 24

A corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director:

1. Acted in good faith
2. Believed that her conduct was in the best interests of the corporation (when the conduct at issue was within the director’s official capacity)