Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Corporations > Directors and Officers > Flashcards

Directors and Officers Flashcards

1
Q

What are directors for?

A

Directors are responsible for the management of the business and affairs of the corporation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Qualifications to be a director

A

Absent provisions in the AOI or bylaws: a director need only be a human being with legal capacity. Any provisions set forth must be lawful and cannot limit directors right to discharge duties.

Thus, generally, there is no requirement to be a shareholder or reside in a particular state.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How many directors are required?

A

At least 1. The number can be set forth in the AOI or bylaws and can require as many as they wish.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How are directors elected?

A

Three ways:

  1. Initially set forth in the articles of incorporation
  2. Voted or elected by the incorporators at the organizational meeting (assuming directors not listed in the AOI), and
  3. By shareholders (only after initial AOI or Organizational meeting).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Traditional board versus staggered board?

A

A traditional board is up for election all at once.

A staggered board divides the board into 1/2 or 1/3, and only one-half or third is up for election at any time.

example: Three directors split into three classes. Each class is only up for election every three years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How do shareholders remove board members and how is the process effected with a staggered board?

A

Generally, shareholders can remove a director prior to the expiration of their term, either with or without cause.

If it is a staggered board, some states require a board member to be removed with cause.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Limitations to removal of board members?

A
  1. If a class of stock elects a board member, only that class can remove that board.
  2. If there is cumulative voting, and the amount of votes against removing the officer would be sufficient to elect that officer if it were an election, removal cannot be affected.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Filling vacancies

A

When there is a vacancy (usually by removal or resignation prior to the end of a term) either the board or shareholders can fill the vacancy.

IF the shareholders created the vacancy through removal, the shareholders must generally fill the vacancy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

True or False: Individual board members are agents of the company?

A

False. Individual directors are not agents of the corporation and have no authority to speak for or bind the corproation. They must act as a group.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the requirements for board action?

A

To act as a group in one of the following ways:

  1. Unanimous agreement in writing (which can be email or separate documents), or
  2. At a meeting, which must satisfy the quorum and voting requirements.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

True or false: board can ratify defective corporate action

A

True, through ratification.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How does the board ratify?

A

The board may ratify actions that are void or voidable due to failure of authorization by:

  1. State that the action is ratified
  2. State the nature of the failure to authorize,
  3. Approve the ratification, and
  4. IF necessary, seek shareholder approval.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What type of notice is required for regular board meetings?

A

None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What type of notice is required for special meetings?

A

Written notice at least two days prior, stating the time and place of the meeting. Purpose is not required to be stated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What happens if there is a failure to give notice?

A

Generally, this will render board action voidable or void, unless the directors who were not notified waive the notice defect:

  1. In writing, or
  2. Attending the meeting without objecting at the outset of the meeting (show up, participate and never object before meeting begins).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

True or False: Board of directors may have proxies for voting purposes

A

False. Board of Directors owe non-delegable fiduciary duties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

True or false: Board of directors may enter into voting agreements outlining how they will vote on certain matters.

A

False. Directors owe the corporation non-delegable fiduciary duties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a Quorum?

A

Quorum is the minimum number of directors required to take board action. Generally, the minimum number is a majority of the board (51%), but the bylaws may state otherwise. However, Bylaw may not set a Quorum below 1/3 of directors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is required to approve board action.

A

Passing a resolution requires only a majority of votes present, and the number of votes present must be a quorom.

Example: 9 directors, a quorum is 5. Only 3/5 votes are needed at that meeting to approve action.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Broken Quorum

A

when a quorum is set, if directors leave the meeting and there is no longer a quorum, the board can no longer take action.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Can board action be taken without a meeting?

A

ONLY if there is unanimous written consent.

Note: watch for the Bar examiners tricking you on a director entering into an extraordinary contract with either no approval, some approval, or unanimous approval through “called” individually.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What responsibilities or role does the Board of Directors have?

A

The board manages the corporation, meaning:

  1. Sets policy
  2. Supervises officers,
  3. Declares distributions,
  4. Determines when stock will be issued
  5. Recommends fundamental corporation changes to shareholders,
  6. “and so on….”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

True or false: the board can create committees and those committees may act for the board?

A

True, but the board remains responsible for supervision of the committee.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

True or False: the board can delegate authority to officers?

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What action can a committee NOT take?

A
  1. Declare distributions
  2. Fill board vacancies
  3. Recommend a fundamental change to shareholders.

Note: committees may recommend action to a full board.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What fiduciary duties does a director owe to a corporation?

A

The duty of loyalty and the duty of care.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is the duty of loyalty?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the duty of care?

A

That a director must use the care that a person in like position would reasonably believe appropriate under the circumstances.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Who has the burden in a cause of action for a breach of the duty of care?

A

The plaintiff must show that the standard for duty of care was not met.

30
Q

What are the two most common breaches of duty of care.

A

Nonfeasance or misfeasance

31
Q

What is Nonfeasance?

A

Occurs when a director basically does nothing or is lazy, and their inaction causes a loss to the corporation.

Causation is difficult to show sometimes.

32
Q

What is Misfeasance?

A

Occurs when the board makes a decision that hurts the business and causes a loss. Generally, causation will be more clear in Misfeasance.

Note: Directors will not be liable for bad ideas that cause a loss if they meet the business judgment rule.

33
Q

What is the business judgment rule and who has the burden at trial?

A

BJR is a presumption that when the board took an act, it did so in:
1. good faith
2. While informed, and
3. with a rational basis.

The burden is on the plaintiff to show that the board either did not do appropriate homework or did something entirely unreasonable.

34
Q

What may the director rely on in making business decisions?

A

On any information, reports, opinions, or statements (including financial statements if prepared and presented by:

  1. Corporate officers or employees whom the director reasonably believes is reliable and competent,
  2. Legal counsel, accountants, or other persons reasonably believed to be within the persons professional competence, or
  3. A committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.
35
Q

What is the typical issue associated with a breach of the duty of loyalty?

A

Duty of loyalty cases are about conflicts of interests.

36
Q

True or False: The business judgment rule applies to duty of loyalty cases.

A

False. Only to duty of care.

37
Q

Who has the burden in duty of loyalty case?

A

Defendant.

38
Q

What are the four common scenarios for breaching the duty of loyalty

A
  1. Conflicting Transactions (self dealing)
  2. Competing Ventures
  3. Usurping Corporate Opportunity
  4. Common Law Insider Trading
39
Q

What are Conflicting Transactions?

A

Any transaction between:
1. a director
2. a directors close relative
3. or another business of the director’s.

40
Q

What is the standard for upholding a conflicting interest transaction?

A
  1. Disinterested Directors: Approved by a majority (at least 2) of disinterested directors when the voting directors either know or were disclosed to all of the material facts.
  2. Disinterested Shareholders: a majority vote entitled to be cast by disinterested shareholders after being told or having knowledge of all material facts.

Or,

  1. The transaction is considered fair to the corporation under the circumstances at the time the transaction occurred.
41
Q

What is a quorum when considering a conflicting transaction?

A

Quorum includes all members with a right to vote, excluding the number of shares or votes for a disinterested director.

42
Q

What role does fairness play in considering conflicting transactions

A

Some courts rquire a showing of faireness, and consider:

  1. adequacy of consideration
  2. the corporations need to enter into the transaction,
  3. financial position of corporation, and
  4. available alternatives.

Note: always good to tell examiners that some courts require a showing of fairness and discuss the factors.

43
Q

What are remedies for self-dealing or conflicting transactions?

A
  1. enjoin transx
  2. set transx aside.
  3. damages
  4. “similar remedies”
44
Q

Limitations or exceptions to self dealing transactions

A

Directors may set their own compensation (unless bylaws say otherwise, and it must be reasonable and in good faith otherwise it will constitute waste of corporate assets and result in breach of loyalty).

45
Q

What are Competing Ventures?

A

Directors may not engage in a competing business, but engaging in an unrelated business will not result in a breach of loyalty.

Example: Director for a tire shop, owns a separate tire shop… breach… but if he owned a icecream store… no breach.

46
Q

What is the corporate opportunity doctrine?

A

Prevents a director from usurping business opportunities from their corporation without first giving the corporation an opportunity to act.

47
Q

What constitutes a corporate opportunity?

A

There is no bright line rule, but some courts consider:

  1. Whether the opportunity is in the line of business.
  2. Whether the opportunity is an “interest or expectancy” in or something the defendant found on company time or with company resources.

Note: If it is about the interest or expectancy test, not every conceivable opportunity falls within interest, and similarly, not every opportunity need be necessary for the line of business. The closer the opportunity is though to the line of business, the more likely to consider usurpation.

48
Q

True or False: lack of financial ability is a defense to usurping corporate opportunity.

A

False. Defendant cannot claim that the corporation lacked the financial ability to take advantage of the situation. The director should still present the opportunity to the corporation.

49
Q

What are the remedies for usurping corporate opportunity?

A

A director may be:

  1. sued under constructive trust theory
  2. compelled to transfer property to the corporation (if in possession) for the price paid, or
  3. if sold for a profit, the corporation may recover the profit.

Note that all of these methods leave the director in the position they were prior to usurping the opportunity.

50
Q

What is common law insider trading under special circumstances?

A

A director generally has no common law duty to disclose all facts relevant to a securities transaction between the director and the other party, unless the director has knowledge of special circumstances. (like whether a dividend or split will occur, or merger).

51
Q

Directors Duty to Disclose?

A

Directors have a duty to disclose material corporate information to other members of the board.

52
Q

True or False: a corporation can make a loan to a director?

A

True: only if it is reasonably expected to benefit the corporation.

53
Q

What limitations on liability may the AOI impose?

A

AOI can limit a directors personal liablity for money damages to the corporation for action or inaction.

CANNOT limit liability for:
1. financial benefit received by a director to which they are not entitled.
2. intentionally inflicted harm on the corpraotin or its shareholders
3. Unlawful distribution, or
4. intentional violation of criminal law.

54
Q

Which directors are liable for breach of fiduciary duties?

A

Generally, all directors who are PRESENT FOR THE MEETING, are presumed to have concurred with board action unless their dissent or abstention is noted in writing, which can occur by:

  1. placing objection in minutes
  2. deliver objection in writing to the presiding officer of the meeting, or
  3. written dissent to the corporation immediately after the meeting.

Note: if not present for meeting approving action, cant be liable.

55
Q

What power and status does an Officer have?

A

Officers are considered agents of the corporation (principal) and whether they can bind the corporation will be based on whether they have actual or apparent authority.

Note: The corporation will be generally liable for unauthorized actions if they acted with apparent authority, or the corporation ratified, adopted, or through estoppel.

56
Q

What role does an officer have?

A

Modern law does not require officers, but the bylaws may elect for one. A single officer may also adopt assistant officers if the bylaws allow it.

57
Q

True or False: An officer can fill multiple roles.

A

True

58
Q

What are the duties of officers?

A
  1. The same duty of care and loyalty as directors.
  2. Any duties outlined by the bylaws, and
  3. Any duties determined by the board or another officer authorized by the board.
59
Q

True or false: shareholders can hire and fire officers

A

False

60
Q

Who selects and removes officers?

A

The board: The board will hire and remove officers (and set their compensation) at anytime with or without cause.

Similarly, officers may resign at anytime despite contractual obligations.

Note: If there is a breach of contract, the non breaching party may have a COA for damages.

61
Q

Who can be indemnified?

A

Officer, directors, and employees

62
Q

What is indemnification?

A

Seeking reimbursement for costs incurred when sued in an official capacity, but ultimately someone else should be responsible for those costs.

63
Q

What are three categories of indemnification?

A
  1. No indemnification
  2. Mandatory Indemnification
  3. Permissive indemnification
64
Q

When does no indemnification apply?

A

Because a corporation cannot indemnify a director who is:

(1) held liable to the corporation, and

(2) held to have received an improper benefit.

65
Q

When MUST a corporation indemnify?

A

When an officer or director successfully defends against a proceeding and in the process incurs costs.

Note: Some jurisdictions require that the officer/director win the entire case, while others are indemnified to the extent that they win the case.

66
Q

When is indemnification permissive?

A

The corporation may indemnify an officer or director who unsuccessfully defends against a claim if they (1) acted in good faith, and (2) reasonably believed that their actions were in the best interest of the business.

67
Q

Who can make the determination on whether to indemnify

A
  1. A majority of disinterested directors
  2. If there are no disinterested directors, then a disinterested committee, shareholders, or independent counsel.
68
Q

True or false: officers may generally be indemnified to the same extent as a director.

A

True

69
Q

Court Ordered Indemnification

A

A court may order indemnification if it is justified in view of all circumstances.

70
Q

Limitations on liability:

A

Articles can generally limit liability to the corporation for damages, but generally may not limit liability for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit. (so only duty of Care cases)

71
Q

Can a corporation advance expenses for litigation?

A

Yes, as long as the director furnishes the corporation a statement that the director believes they met the appropriate standard of conduct, and if found not to, will repay.

72
Q

MBCA’s view on Agents and Employees limited liability

A

MBCA does not limit a corporations powers to indemnify, advance expense to, or maintain insurance on agent and employees.

Corporations (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions