Directors

Question 1

Structure

Answer 1

• key for bar

Structure

1. directors can be insiders (CEO, CFO) or outsiders
2. officers work for the company and run it on a day-to-day basis (CEO, CFO, President, etc.)

Question 2

Statutory requirements- directors

Answer 2

1. adults must be humans of the age of majority

Question 3

Election of directors

Answer 3

1. one or more directors required
2. initial directors are usually named in articles
3. afterwards, SHs elect directors at SH meetings
   i. SHs have little management power, except electing directors
4. entire board is elected each year unless there is a staggered board
   i. staggered board: boards divided into halves or thirds, with one-half or one-third elected each year
   ii. staggered board usually set in the articles

Question 4

Removal of directors

Answer 4

1. a majority of SHs can vote to remove directors with or without cause
2. the BoD or SHs can select the replacement for vacant board seats
   i. if SHS created the vacancy by removing the director, they must select the replacement

Question 5

Board action

Answer 5

1. there are only two ways for a BoD take a valid act:
   i. in a BoD meeting after satisfying quorum and voting requirements, or
   ii. without a meeting by unanimous written consent
2. void acts may be validly ratified later
3. conference calls (simultaneous oral communication so each can hear all others) counts as a meeting

Question 6

Meetings

Answer 6

1. Notice.
   i. directors only need notice for special board meetings
   a. regular meetings: no notice required (directors should know)
   b. special meetings: must provide notice stating time and place
   i) notice does not have to state purpose of meeting
   ii. failure to give required required notice voids decisions from the meeting, unless directors not notified waive the notice defects
   a. waiver: expressly by writing, or impliedly by attending the meeting without objecting
2. Quorum.
   i. quorum: the minimum number of directors that must be present for valid decisions
   ii. a quorum requires a majority of all directors to be present
   iii. a quorum of the board can be lost (“broken”) if directors leave
   a. once a quorum is broken, the board cannot take valid actions
   b. decisions made up to that point are still valid
3. Voting.
   i. if a quorum is present, passing a resolution requires a majority of those present
4. Voting Delegation.
   i. directors cannot give proxies for voting
   ii. directors cannot enter into voting agreements for how they will vote as directors

Question 7

Role of directors

Answer 7

1. the board of directors manages the business of a corporation, not SHs
2. sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
3. board can delegate to a committee of one or more directors
4. a committee cannot fill board vacancies or declare dividends
   i. it can recommend such things to the full board for its action

Question 8

Business judgment rule

Answer 8

1. BJR applies automatically, but can be set aside
2. a court will not second-guess a business decision (not set aside BJR) if it was
   i. informed
   ii. made in good faith
   iii. made without conflicts of interest, and
   iv. had a rational basis
3. BJR does not look at outcome
   i. the director is not a guarantor of success

Question 9

Duty of care standard

Answer 9

1. directors owe the corporation a duty of care, so they must act in good faith in a way a reasonably prudent person would with regard to their own business
   i. bar: memorize this
   ii. duty is owed to the corporation, not to individual SHs

Question 10

Nonfeasance

Answer 10

1. breach of a duty of care if the director fails to do something a reasonably prudent person would do for their own business
2. ex. failure to attend meetings, failure to do any work
3. causation: breaching director is only liable if the breach caused a loss to the corporation

Question 11

Misfeasance

Answer 11

1. breach of a duty of care if the director does something a reasonably prudent person would not do for their own business

Question 12

Causation

Answer 12

1. a breaching director is only liable if the breach caused a loss to the corporation

Question 13

Defense

Answer 13

1. a director is entitled to rely in on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional reasonably believed competent

Question 14

Essay

Answer 14

• the directors are fiduciaries of the corporation, and thus owe the corporation a duty of care
• this requires directors to act in good faith and conduct themselves a reasonably prudent person would in their own business
• then:
• there is a breach of the duty of care if the director does an act a reasonably prudent person would not do in their own business
• there is a breach of the duty of care if the director fails to do an act a reasonably prudent person would do in their own business
• the director is liable if their breach of duty of care caused harm to the corporation
• but the director is protected from liability by the BJR unless it is set aside (gross negligence for duty of care)

Question 15

duty of loyalty standard

Answer 15

1. directors owe the corporation a duty of loyalty, so they must act in good faith with a reasonable belief their actions are in corporation’s best interests
2. breach of duty of loyalty if there is a conflict of interest
   i. must be a purely monetary conflict
3. BJR set aside for the following self-dealing transactions:

Question 16

Interested director transaction

Answer 16

1. transactions between the corporation and a director, their close relatives, or their business
2. the transaction will be set aside (and director liable) unless the director shows:
   i. the transaction was fair to the corporation when entered into, or
   ii. ratification by a majority of disinterested, independent, fully informed directors or SHs
   a. approving majority must be disinterested (not conflicted)
   b. approving majority must be independent (not beholden)
   c. approving majority must be informed (director’s interest and all relevant facts disclosed)
3. quorum: in many states interested directors count toward a quorum
4. say on bar: some courts always require a showing of fairness even if the deal is ratified

Question 17

Competing ventures

Answer 17

1. as a fiduciary, a director cannot with her corporation
2. ex. director who starts a competing company
3. remedy: constructive trust on the profits

Question 18

Corporate opportunity

Answer 18

1. a director cannot usurp their corporation’s opportunity; they must disclose the opportunity to the board and wait for the board to reject the opportunity
2. there is a corporate opportunity if the corporation: (all)
   i. is able to take opportunity (minimal bar, can raise capital)
   ii. is in the line of business, and
   iii. has an existing interest or expectancy in the opportunity, or the director found on company time with company resources (how director came into opportunity)
3. remedy: sell the opportunity to the business at director’s cost, and give profits to corporation

Question 19

Essay

Answer 19

• the directors are fiduciaries of the corporation, and thus owe the corporation a duty of loyalty
• this requires directors to not have a conflict of interest

Question 20

Director liability: other legal bases

Answer 20

1. ultra vires acts: responsible officers and directors are liable for ultra vires losses
2. improper distributions
3. improper loans
   i. board can properly make loans if they are reasonably expected to benefit the corporation (ex. paying for directors’ continuing education)

Question 21

Director liability- SOX

Answer 21

i. generally forbids loans to executives in large, publicly traded (“registered”) corporations
ii. BoDs in such corporations establish an audit committee and to oversee work of registered public accounting firm
iii. CEO and CFO and financial officers must certify accuracy and completeness of financial reports

Question 22

Liable directors

Answer 22

1. if all directors can be liable for something, an individual director can escape liability by dissenting or abstaining
2. an absent director is not liable for anything done
3. a present director is presumed to concur unless her dissent or abstention is noted in writing in corporate records, meaning:
   i. recorded in the meeting minutes, or
   ii. delivered in writing to the presiding officer at the meeting, or
   iii. written dissent delivered to the corporation (without concurring at meeting)
4. an oral dissent alone is not effective