D and O*** Flashcards
statutory requirements for directors
#: 1 or more adult natural persons # is set in bylaws OR by SH act OR by board, if SH bylaw allows. if no # is set in such a way, default is 1 director
incorporators elect initial directors. after that, SH elect at annual meeting. don’t have to elect all new directors every year if you have classified board (as designated in certificate or SH bylaw)
removal of directors before expiration of term:
- SH can remove Ds for cause
- Bd can remove D for cause ONLY if certificate or SH bylaw allows
- SH can remove D without cause ONLY if certificate or bylaws allow
filling a vacancy on board:
- generally: board selects person to serve remainder of term UNLESS D is removed by SH without cause, in which case SH do if allowed in certificate or bylaws
- newly created directorships may be filled by vote of bd
Board acts
-individual Ds are not agents of corp, so no power to bind corp. to anything. instead, act as group
-can only act:
with unanimous written consent, OR a meeting
-meetings don’t need to be held in NY and can be by conference call (assuming everyone can hear all other participants)
bd meetings
- no notice required for regular meetings if time and place is set in bylaws or by board
- notice required for special meetings; notice must state time and place but not purpose
- if required notice for special meeting isn’t given to a D, any action taken at meeting is void unless D not given notice waives notice defect (either waived in signed writing at any time, OR by attending meeting without objection)
- D cannot give proxy for D voting (non-delegable FD)
- D cannot enter voting agreements on how they will vote as directors
Quorum
- to do business, must have majority of entire board (number of positions). Once there is a quorum, passing a resolution requires majority vote of those present.
- can decrease quorum to less than majority in certificate or bylaws but it can never be fewer than 1/3rd of entire board
if 9 directors, 5 must attend for quorum. if 5 attend, 3 must vote for resolution to pass.
- corp cannot decrease majority voting req
- corp can increase quorum to greater than majority (BUT in certificate ONLY, not bylaws)
- corp can require supermajority vote to pass resolution (BUT in certificate only, NOT bylaws)
What does Bd do
- manages business of corp: sets policy, monitors and supervises O, declares dividends, decides when corp will issue stock, recommends fundamental corp changes
- if allowed in certificate or bylaws, majority of entire board can delegate substantial management functions to a committee of one or more Ds BUT bd cannot delegate all powers and responsibilities to a committee
-committees CANNOT:
set D compensation; fill board vacancy; submit fundamental change to SH; amend bylaws BUT committee can recommend any of these things to full bd. Committees used often in SH derivative suits.
Duty of Care
A D must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in like position
Nonfeasance (D does nothing):
liable for breach of DoC only if breach caused loss to corp
Misfeasance (board does something that hurts corp):
D not liable if she meets BJR (ie did their HW–look for deliberation, analysis of options, etc.)
BJR: ct will not second-guess a business decision if it was made in good faith, was reasonably informed, and had rational basis
Duty of Loyalty
A D must act in good faith and with conscientiousness, fairness, and morality, and honesty that law requires of FD
look for conflicts of interest
-BJR doesn’t apply to DoL
INTERESTED DIRECTOR TRANSACTIONS: any deal between corp and one of its Ds (or D’s business)–self-dealing
- interested D transactions set aside unless D shows either that deal was fair and reasonable to corp. when approved OR material facts and her interest were disclosed or known and deal was approved by SH action, BD approval (not counting votes of interested Ds), or unanimous vote of disinterested Ds (if disinterested # is insufficient to take board action)
- interested Ds count towards quorum and can participate in meeting, but votes don’t count
- Bd can set compensation of Ds but compensation must be reasonable and in good faith. If excessive, waste of corporate assets.
- SH approval is needed for stock options for exec comp
COMPETING VENTURES
-D cannot compete with her corp. If D does, corp can get constructive trust on D’s profit and damages if D hurts corp.
CORPORATE OPPORTUNITY
- Ds cannot usurp corp opp. Cannot take opp. until D tells Bd about it, AND waits for board to reject opportunity
- corp opp=something corp needs, or has an interest or tangible expectancy in, or that is logically related to its business
- usual remedy for usurpation is constructive trust (has to account to corp for profits)
other bases of director liability
IMPROPER LOANS OF CORPORATE FUNDS
- loans ok only if approved by SH or if Bd finds it will benefit corp***
- SOX restricts loans to execs in public traded corps and audits with certified financial statements
IMPROPER DISTRIBUTIONS
GENERALLY
- D is presumed to have concurred with board action unless dissent is noted in writing in corp records
- get dissent into writing: in minutes OR in writing to corp secretary at meeting OR registered letter to secretary promptly after adjournment
- oral dissent is never effective by itself
Exceptions to general rule:
- if D missed meeting, not liable if he registers written dissent within a reasonable time after learning of action (by delivering dissent or sending it by registered mail to corp sec)
- good faith reliance on info, opinions, reports, or statements by officers and employees of corp whom D or O believes competent and reliable; lawyers or public accountants whom D and O believes are acting within their competence; OR a committee of which person relying is not a member, as to matters within designated authority
officers
Os owe same duties of care and loyalty as Ds
- Os ARE agents of corp and so they can bind corp to acts they take on corp’s behalf if they had the authority to take those actions
- Bd may select a president, one or more VPs, a secretary, a treasurer, and any others Bd may determine or for which bylaws provide (one person can hold offices simultaneously)
- Bd selects and removes officers unless certificate allows SH to elect them. if silent, Bd. (If SH elect, only SH can fire but D can still suspend officer’s authority to act for cause)
- judicial action: AG or holders of 10% of all shares may sue for a judgment removing an officer for cause. ct. can bar reappointment of a person so removed from office.
- Bd sets compensation of officers
- pres has apparent authority to make ordinary Ks required by customs or necessities of business BUT not unusual or extraordinary Ks
reimbursement of D and O
when a person is sued in her capacity as O or D by or on behalf of corp. that person incurs costs, atty fees, maybe even fines, judgment, settlement –> seeks reimbursement (indemnification) from corp.
reimbursement prohibited: if person was held liable to corp (not just accused)
reimbursement of right: corp must reimburse D or O if she won judgment on merits or otherwise (BUT if person has to sue corp to reimburse, must pay own atty fees in that case)
permissive reimbursement: in any case not (1) or (2), corp may reimburse. In order to be reimbursed, D or O must show that she acted in good faith and for a purpose reasonably believed in company’s best interest ***
- reimbursement here can include settlement amt, expenses, and atty fees
- bd determines eligibility for permissive reimbursement, or if no quorum, SH or quorum of disinterested directors, or bd pursuant to report from independent legal counsel
- ct can order reimbursement if it finds D or O is reasonably entitled to it
- corp can advance to D or O litigation expenses but expenses must be repaid if it turns out D or O is not entitled to reimbursement
- corp can buy insurance to cover D and O liability
- certificate or bylaws can provide for indemnification by resolution of bd or SH or by agreement, unless D or O acted in bad faith, was deliberate and dishonest in a material way and wrongfully profited
***MAGIC LANGUAGE
Certificate may eliminate D liability to corp or SH for damages for breach of duty except if D acted in bad faith, or with intentional misconduct, or received an improper financial benefit, or approved an unlawful distribution or loan, or violated statutory liabilities of directors
–> certificate can exculpate liability for DoC
authority of Os to bring suits without express authorization from Bd
in absence of direct prohibition by board, and unless provided otherwise in certificate or bylaws, pres (or O) has apparent authority to bring suit on behalf of corp.
