Directors and Officers Flashcards
Directors
Responsible for the management of the business and affairs of the corp. Directors must be natural persons, but need not be SHs.
- must have more than one director
- SHs elect the directors at each annual SH meeting
- SHs can remove directors with or without cause before their terms expire (majority vote).
- If vacancy, BOD will select replacements unless SHs removed director
- cannot give proxies or enter voting agreements
Board Action
BOD must act as a group, meaning they can only act when:
1. Unanimous agreement in writing, or
2. proper notice given for meeting (if special meeting), there was quorum, and majority approved
Board can ratify defective corporate actions.
Role of Directors
Board manages the business of a corporation. Directors have right to inspect corp books.
- Board may create committees, who may act for board, but board remains responsibility
- Committees cannot take certain actions:
1. Declare distribution
2. fill board vacancy
3. recommend fundamental change to SHs
Duty of Care
Requires directors act with care of ordinarily prudent person in same position (and good faith).
- Burden on challenger
- Nonfeasance: director basically does nothing
- Misfeasance: decision that hurts the corp (causation clear)
Business Judgment Rule
Directors who meet standard willnot be liable for corp decisions that in hindsight turn out to be erroneous. Court will not second guess business decision if:
1. was informed
2. made in good faith
3. made without conflicts of interest, and
4. had a rational basis
Presumption that board did appropriate homework.
- Director may rely on reports or other information
Duty of Loyalty
A director must act in good faith and with reasonable belief what they do is in the corp’s best interest.
- Burden on defendant
DOL: Self-Dealing
Transaction between corp and director or close relative.
Will be permitted if:
- approved by majority of multiple disinterested informed directors
- approved by majority of disinterest informed SHs
- judged by the circumstances at the time, it was fair to the corp
DOL: Competing Ventures
Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious DOL problems.
DOL: Corporate Opportunity Doctrine
Directors’ fiduciary duties prevent them from usurping a corporate opportunity for themselves without first giving corp opportunity to act.
- Corp must have interest or expectancy (closer to the corp’s line of business the more likely it’s an opp)
- Lack of financial ability is not a defense
- Board generally decides whether to accept or reject
- If director usurps, corp can recover under constructive trust theory. Corp may also recover profit or property
Duty to Disclose
Directors also have a duty to disclose material corp info to other members of the board.
Director Liability
Directors may be liable to the corp for:
1. Ultra vires acts
2. Improper distributions, and
3. Improper loans
- Note federal Sarbanes-Oaxley Act forbids loans to executives in large, publicly traded corps.
A director is presumed to concur with board action unless dissent or abstention is noted in writing.
Exceptions - director not liable if:
- they were absent from board meeting
- they relied in GF on info presented to them
Officers
Officers are agents of the corp. Agency law determines authority and powers (corp is principal).
- Corp need not have any particular officers
- duties determined by bylaws or board.
- SHs do not hire and fire officers
Indemnification of Directors, Officers, and Employees
Three categories of indemnification:
1. corp cannot indemnify director who is (1) held liable to the corp or (2) received improper benefit
2. Unless limited by AOI, corp must indemnify D/O who was successful in defending proceeding for reasonable expenses
3. Corp may indemnify director in other situations (like unsuccessful defense) if (1) they acted in good faith and (2) believed conduct was in corp’s best interests, not opposed to best interests, or not unlawful
- determined by disinterested majority of BOD
