Director and Officer Duties Flashcards
Directors
Directors are a group of natural persons elected by shareholders at the annual meeting to manage the business of the corporation. Directors have a duty to manage the corporation and can delegate to committees of one or more directors and can rely on specialist opinions. Directors also owe the corporation a duty of care and duty of loyalty. Here,
Board Action
Directors can only act by a unanimous written agreement or by a vote satisfying quorum and majority voting requirements. No voting agreements or proxies are allowed. Special meetings requires two days’ notice of date, time, and place (but not purpose). Committees can be used to inform/advise Directors, but cannot declare distributions, amend bylaws, or fill board vacancies. Here,
Board Vacancy
A vacancy on the board may be filled by either the other directors or by the shareholders. However, if the shareholders remove a director, the shareholders will replace that director. Here,
Duty of Care
Directors must perform in good faith and exercise the care of a prudent person under similar circumstances. A breach can be the result of nonfeasance (doing nothing) or misfeasance (a wrong decision). D’s are only liable for a breach if it actually caused a loss to the corp and the Business Judgment Rule does not apply. Here,
Business Judgment Rule
A court will not second guess a D’s business decision if it was 1) informed, 2) made in good faith, 3) made without a conflict of interest, and 4) had a rational basis. Even decisions that were very wrong are still protected if made using the factors above. Here,
Duty of Loyalty - SOW
Directors must act in good faith and not engage in self dealings, usurping corporate opportunities, or wasting corporate assets. Here
Self - Dealings (Interested Director Transaction)
Self-dealing is when a director, or a close relative of a director, has a personal interest in a transaction with the corporation. Here,
Approved Self-Dealing
The transaction of a self-dealing director will be void UNLESS the D can show the transaction was 1) objectively “fair” to the company, OR 2) fully disclosed and approved by either a majority of disinterest directors. Here,
Corporate Opportunity Doctrine
Directors cannot usurp a corporate opportunity, or otherwise compete against his corporation, i.e. something 1) within the corporation’s line of business or 2) something discovered using company time or resources. If a director takes a corporate opportunity for himself, the corporation may recover either: damages, constructive trust, or the corporation gets opportunity at cost. Here,
Approved Corporate Opportunity
The D can take the opportunity only after informing the board and waiting for it to reject the opportunity. Here,
Waste
Directors can set their own compensation but it must be reasonable to avoid “waste” and a breach of their duty of loyalty. Here,
Indemnification
Directors and Officers may seek reimbursement for fees and costs incurred when sued by, or on behalf of, the corporation. No indemnification is allowed if the D/O is held liable to the corporation. Mandatory indemnification if the D/O wins the case on its merits. Permissive indemnification in a settlement. Articles can eliminate D liability for reach of care, but not for breach of loyalty. Here,
Officers
Officers are hired and fired by the Board and are agents of the corporation so they can bind the corporation by authorized acts. Officers owe the same duties of care and loyalty as Board members
