Directors and Officers

Question 1

Who elects the directors?

Answer 1

Shareholders, generally by a plurality vote if the quorum requirement is met at a shareholder meeting.

Question 2

Staggered Board

Answer 2

When a corporation has a staggered board, directors hold their post for more than one year, and the shareholds only elect a certain proportion of the directors each year.

Shareholders may remove directors from a staggered board only for cause.

Question 3

Who chooses a director to fill a vacancy on the board?

Answer 3

Generally, the board. However, if the shareholders created the vacancy by removing a director, then the shareholders select the replacement.

Question 4

How does the board act?

Answer 4

1. By a unanimous agreement in writing;
2. By a majority vote at a meeting that meets the quorum reuiqrements.

Question 5

Board Meeting Requirements

Answer 5

Notice: Notice is not requried for regular meetings. It is, however, required for special meetings. Notice of at least two days is required. If the notice requirement is not met, actions taken at the meeting are voidable. A director may waive the defect either (1) in writing or (2) by attending and failing to object at the outset.

Quorum: Unless otherwise required by the articles of incorporation, quorum is a majority of the board. Quorum can be broken if enough directors leave during the meeting.

Question 6

Who declares a distribution?

Answer 6

The directors.

Question 7

Board’s Fiduciary Duties

Answer 7

The board owes fiduciary duties of care and loyalty to the corporation.

Question 8

Duty of Care

Answer 8

Directors must use the care that a reasonably prudent person would consider appropriate under the circumstances.

Question 9

Duty of Loyalty

Answer 9

A director must discharge her duties in good faith and in the reasonable belief that her actions are in the best interests of the corporation.

Question 10

Director’s Liability for Nonfeasance

Answer 10

A director is liable for nonfeasance if:

1. She breaches her duty of care by failing to act when a reasonably prudent person would, and
2. Her breach causes damages to the corporation.

Question 11

Director’s Liability for Misfeasance

Answer 11

A director is liable for misfeasance if plaintiffs can overcome the presumption established by the business judgment rule and establish that the director violated her duty of care to the corporation.

Question 12

The Business Judgment Rule

Answer 12

The business judgment rule is a presumption that a director took action in compliance with her duty of care, acting in good faith, with adequate information, and with a rational basis.

The business judgment rule applies in cases that implicate the duty of care, not the duty of loyalty.

Question 13

Self-Dealing (Interested Director Transactions)

Answer 13

Interested director transactions, or transactions between a director and the corporation, implicate a director’s duty of loyalty. An interested will be set aside unless:

1. The interested director can show that the transaction was fair at the time it was entered into; OR
2. If the interested director discloses the relevant facts to the directors and a majority of disinterested director or disinterested shares approve.

⇒ Quorum is a majority of disinterested directors rather than a mere majority of directors.

Question 14

Competing Ventures

Answer 14

Directors may not compete with the corporation. Thus, they must not operate or work on behalf of competing ventures.

Question 15

Corporate Opportunity

Answer 15

A direct may not usurp a corporate opporutunity. A corporate opportunity is something that the corporation has an interest in or that the director found on company time or with company resource. The director must:

1. Disclose the opportunity to the board;
2. Give the board time to accept or reject the opportunity.

Question 16

When does good faith reliance shield a director from liability?

Answer 16

A director may rely on information from:

1. Corporate insiders, such as officers and employees;
2. Committees that the director does not serve on;
3. Professionals who the director reasonably believes are competent.

Question 17

What duties do officers owe?

Answer 17

Officers owe the same duties of care and loyalty that directors owe to the corporation.

Question 18

Who elects officers?

Answer 18

The board.

Question 19

Indemnification of Directors and Officers

Answer 19

MAY NOT: A corporation may not indemnify a director or officer who is held liable to the corporation for recieving an improper benefit. This does not include a settlement.

MUST: A corporation must indemnify a director or officer who was successful in defending on the merrits or otherwise. This does not include a settlement.

MAY: A corporation may indemnify a director or officer for litigation expenses if the director or officer discharged her duty of loyalty.

Question 20

May the articles of incorporation eliminate director liability?

Answer 20

The articles of incorporation may eliminate director liability for damages resulting from breaches of the duty of care. The articles may not absolve directors from liability for breaches of the duty of loyalty.