Boards of Directors Flashcards
What is the composition requirements of a board of directors?
-> can have as few as one director
-> D must be natural person and not a C
-> Ds are selected at the annual SH meeting
What is the term length of directors?
For what reasons can directors be removed and by who?
When can a D resign and who must they give notice to?
Can Ds be compensated?
Typically one year
-> but may serve longer if terms are staggered.
Ds can be removed by SHs wit or without cause UNLESS the articles provide otherwise.
D may resign at any time with written notice to the BD, the chair, or C.
Compensation is permitted.
What notice are Ds entitled to for special meetings and regular meetings?
Special meetings
-> Ds are entitled to two days’ notice of the date, time, and place of special meetings
-> purpose is not required
Regular meetings
-> may be held without notice of the date, time , place, or purpose
Can BD act in a way that doesn’t require a meeting?
BD can act by unanimous written cosent without holding a meeting.
What is the board’s voting requirement?
The assent of a majority of Ds present is necessary for board approval (generally)
-> to be a valid act, a quorum must have been present
-> a majority of all Ds in office constitutes a quorum
Are pooling agreements between Ds enforceable?
Can Ds vote by proxy?
Agreements between Ds as to how to vote (pooling agreements) are generally unenforceable.
Ds cannot vote by proxy.
What powers can committees exercise?
Committees may generally exercise whatever powers are granted to them by the BD, articles, or bylaws.
What is D’s duty of care?
Prudent person - A D has a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances (objective standard), AND is required to use any additional knowledge and special skills he possesses when deciding how to act.
What is D’s reliance protection under their duty of care?
A D can rely on information and opinions of Os, employees, outside experts (e.g. attorneys, accounts), or committees, IF D reasonably believes them to be reliable and competent.
What is the business judgment rule?
A rebuttable presumption that D reasonably believed his actions were in the best interest of C
-> does not apply when D engages in a conflict-of-interest transaction with C.
How do you overcome the business judgment rule?
It must be shown that
-> D did not act in good faith
-> D was not informed to the extent he reasonably believed was necessary
-> D had material interests in challenged conduct and was not objective
-> D failed to devote attention to C’s affairs
-> D failed to timely investigate matters of material concern
OR
-> D received financially benefits to which he was not entitled
When is the presumption of good faith under the BJR overcome?
It is overcome if the challenge shows
-> fraud
-> dereliction of duty
-> condoning illegal conduct
OR
-> a conflict of interest
What is D’s duty of loyalty?
It requires D to act in a manner that D reasonably believes is in the best interest of C.
What are the three ways D violates his duty of loyalty?
-> self-dealing transaction
-> usurpation of corporate opportunity
-> competition with C
What is the rule regarding self-dealing transactions with the D (director’s conflicting interest transaction)?
A D who engages in a conflict-of-interest transaction with his own C violates the duty of loyalty
-> UNLESS the transaction is protected under the safe-harbor rules.
D cannot profit at C’s expense.
What are the types of transactions that fall under self-dealing?
Types of transacitons
-> one that would normally require approval of BD and is of such financial significance to D that it would reasonably be expected to influence D’s vote on the transaction (also includes dealings with persons related to D)
-> the interest must be financial and material
What are the safe harbors with regards to a self-dealing transaction?
Disclosure of all material facts and majority approval by BD or SHs without a conflicting interest.
AND
Fairness (substantive and procedural) of the transaction to C at the time of commencement
What is the second way a D may violate his duty of loyalty?
By usurping a corporate opportunity rather than first offering the opportunity to the corporation.
What are the two tests used to determine if a D has usurped a corporate opportunity?
What other factors does a court look at to determine whether an opportunity belonged to C?
Interest or expectancy test
-> does C have an existing interest or an expectancy arising from an existing right to the opportunity
Line-of business test
-> is the opportunity within the C’s current or prospective line of business
AND
-> how expansive is C’s line of business
Other factors
-> relationship of the third party to D and of D to C
-> how and when D acquired knowledge of the opportunity
How does D violate his duty of loyalty through competition with C?
A D who engages in a business venture that competes with C has breached the duty.
When is C required, prohibited, and allowed to indemnify D?
C is required to indemnify D
-> for any reasonable expense incurred in the successful defense of a proceeding against the D
C is prohibited from indemnifying D
-> against liability due to the receipt of an improper personal benefit ( don’t want to reward bad behavior that benefits C)
C may indemnify in an unsuccessful defense if D
-> acted in good faith with a reasonable belief that the conduct was in C’s best interest
AND
-> D did not have reasonable cause to believe the conduct was unlawful
What is D’s inspection rights?
D has a right to inspect and copy C’s books and records.
