Directors and Officers

Question 1

Statutory Reqs. for Directors

Answer 1

• responsible for management of the business affairs of the corporation
• must be one or more
• must be an adult human w/ legal capacity
• don’t have to be shareholders (unless provided otherwise)
• articles/bylaws can prescribe qualifications so long as they are reasonable and lawful

Question 2

Election of Directors

Answer 2

Initial directors can either be: (1) named in the articles; or (2) elected by incorporators at the organizational meeting.

After that, the shareholders elect directors at the annual shareholder meeting (unless there’s contrary article provisions, like a staggered board)

Question 3

Removal of Directors

Answer 3

Shareholders may remove directors, with or without cause, before their term expires.

In some states, if there’s a staggered board, shareholder can only remove a director WITH cause.

Weird rules:
1. Director elected by cumulative voting CANNOT be removed IF the votes against her removal would be sufficient to elect her if cumulatively voted at an election
2. a director elected by a voting group of shares can ONLY BE removed by that class
3. if shareholders remove director, generally it’s the shareholders that select the replacement

Question 4

Board Action

Answer 4

Must act as a group. Individual director is not an agent.
Board can act as a group in the following ways:
1. unanimous agreement in writing; or
2. at a meeting, which must satisfy the quorum and voting requirements

if there’s defective corporate action, that action may be ratified by the directors, incorporators, or officers.

Question 5

Notice for Board Meetings

Answer 5

Regular Meetings: None
Special Meetings: At least two days’ written notice of date, time, and place required. No purpose stated necessary.

Note - failure to give notice makes the meeting voidable (maybe even void) unless directors who were not notified waive (you can waive by writing or attending the meeting and not objecting at the outset)

Question 6

Can directors give proxies?

Answer 6

NO, only shareholders can. Directors owe non-delegable fiduciary duties.

Question 7

For any meeting of the board, we must have a _______

Answer 7

QUORUM

A quorum is a majlority of all directors, unless the bylaws say otherwise (but a quorum cannot be less than 1/3 of the board). Without a quorum, board can’t act.

Question 8

How do directors pass a resolution at a meeting?

Answer 8

After the quorum element is satisfied, directors may pass a resolution by a majority vote of the directors present.

Example: There are 9 directors total. At least five directors must attend for a quorum. If five directors attend, at least three must vote to pass the resolution.

Question 9

Can a quorum be broken?

Answer 9

Yes - if people leave. Once a quorum is broken, the board cannot act at that meeting.

Question 10

Action by Unanimous Written Consent

Answer 10

REMEMBER: Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, WITHOUT a meeting.

The examiners often ask about the formalities of director’s meetings by setting up facts where there is no meeting. You must recognize that a director does not have the power, by himself, to bind the corporation in a contract unless there is actual authortiy to act. Actual authority generally can arise if: (1) proper notice was given for a director’s meeting, quorum present, majority approved action; or (2) there was unanimous written consent of the directors.

Question 11

Role of the Board

Answer 11

• Manages corporation (sets policy, supervises officers, declares distributions, determines when stocks will be issued, recommends fundamental corporation changes, etc.)
• may create committes and appoint board members to serve (unless articles say otherwise). committees may act for the board, but board has to supervise.

Question 12

What types of actions can committees never take?

Answer 12

• declaring distributions
• filing a board vacancy
• recommending a fundamental change to shareholders

Question 13

Standard of Fiduciary Duty

Answer 13

MEMORIZE:
A director must discharge her duties in good faith and with reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.
* the first sentence is the duty of loyalty
* second sentence is the duty of care

Question 14

Duty of Care

Answer 14

Director owes duty of care to corporation.
- burden on challenger
- two situations where it arises: nonfeasance or misfeasance

Question 15

What is nonfeasance?

Answer 15

Occurs when a director basically does nothing.

The key here: he’s only liable IF his breach causes a LOSS to the corporation. We need good ole causation here.

Question 16

What is misfeasance?

Answer 16

Occurs when the board makes a decision that hurts the business.

Here, causation is clear.

Question 17

Is there a defense for misfeasance?

Answer 17

Yes - the business judgment rule (BJR). ALWAYS INCLUDE THIS ON AN ESSAY ABOUT A DIRECTOR’S BREACH OF FIDUCIARY DUTY. But be careful - it applies ONLY to the duty of care.

The business judgment rule: presumption that when board acted, they did so in good faith, on a reasonably informed and rational basis.

Question 18

What may a director rely on in keeping informed?

Answer 18

Director is entitled to rely on information if it’s prepared and presented by: (1) corporate officers or employees whom the director reasonably believes to be reliable and competent; (2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence; or (3) a committee of the board (in which the director is not a member) if she reasonably believes the committee merits confidence.

Question 19

Duty of Loyalty

Answer 19

• Burden on defendant
• Common scenarios
  1. conflicting transactions (self-dealing)
  2. competing ventures
  3. corporate opportunity doctrine
  4. CL insider trading - special circumstances rule

Question 20

What is a conflicting transaction? Can it be waived?

Answer 20

A conflicting transaction is one between the corporation and (1) one of its directors, (2) directors’ close relative; or (3) another business of the director’s

May be waived:
- if approved by majority of disinterested directors & all material information disclosed or known
- if approved by majority of disinterested shareholders entitled to vote & all material information disclosed & notice of shareholder meeting describes the transaction
- when corporation entered into transaction, it was fair to them

HOWEVER, A TRANSACTION APPROVED BY EITHER DIRECTORS/SH’S CAN STILL BE ASIDE IF THE PARTY CHALLENGING THE TRANSACTION CAN PROVE IT CONSTITUTES WASTE OF CORPORATE ASSETS. Even if deal is approved, always say this on an essay: Some courts also require a showing of fairness.

In determining whether an action is fair, courts look to factors such as adequacy of the consideration, corporate needs to enter into the transaction, financial position of the corporation, and available alternatives.

Question 21

Corporate Opportunity Doctrine

Answer 21

Director’s fiduciary duty prohibits them from diverting a business opportunity from their corporation unto themselves without first giving the corporation an opportunity to act & providing full material disclosure. this is known as “usurpation of a corporate opportunity”

how do we tell if it’s a corporate opportunity?
- line of business test
- whether company has an expectancy or interest

Lack of financial ability on corporation’s part is not a defense. if opportunity is usurped, constructive trust may be imposed or profits can be recovered.

Question 22

Common Law - Insider Trading

Answer 22

CL: a director has no duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction

Today: courts find a duty to disclose where director knows of special circumstances
- duty to disclose material corporate information to other directors of board

Question 23

Can a director take out a loan from a corporation?

Answer 23

Surprisingly, yes - as long as it is reasonably expected to benefit the corporation.

Question 24

Personal Liability of Director Limited

Answer 24

Articles can limit or eliminate a director’s personal laibility ofr money damages to the corporation or shareholders for actions taken or for failure to take action. However, they can’t limit liability for financial benefits for which the director was never entitled to, an intentionally inflicted harm on the corporation/shs, unlawful corporate distributions, or an intentional violation of criminal law.

Question 25

Determining Director Liability

Answer 25

Director is presumed to concur with board action unless her dissent/abstention is noted in writing in the corporate records.

In writing means (i) in the minutsl (ii) delivered in writing to the meeting’s presiding officer or (iii) written dissent to the corporation immediately after the meeting

*Director also not liable if absent from the meeting

Question 26

Officers as Agents

Answer 26

Offciers are agents of the corporation. Agency law determines their authority and power. Whether they can bind the company is determined by whether they have agency (actual or apparent)

Question 27

Duties Owed by Officers

Answer 27

Same duties of care and loyalty as directors

Question 28

Selection and Removal of Officers

Answer 28

Officers are removed and selected by the BOARD, which also sets their compensation.

An officer has the power to resign at ANY TIME by delivering notice to the corporation while the corporation has the power to REMOVE at anytime with or without cause.

If resignation or removal breaches the contract, nonbreaching party may be entitled to damages. however, note that mere appointment to office itself does not create any contractual right to remain in office.

Question 29

Indemnification

Answer 29

**Category 1: No Indemnification **
corp. will not indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit
Category 2: Mandatory Indemnification
Must indemnify if d/o was successful in defending
some states: need to win whole case
other states: “to the extent” that they win case
Category 3: Permissive Indemnification
May indemnify for reasonable expenses incurred in unsuccessfully defending a suit brought against them if they acted in (1) good faith and (2) believed her conduct was in the corporation’s best interests

Question 30

Who makes the decision to indemnify?

Answer 30

1. Disinterested majority of the board
2. If not a disinterested quorum, majority of a disinterested committee or legal counsel
3. shareholders