Directors and Officers

Question 1

Directors: Requirements

Answer 1

1. Adult, Natural Persons
2. One or More
3. Initial directors named in articles/elected by incorporators
4. SHHs elect thereafter
5. BOD elected each year unless staggered BOD; SHHs may remove directors with or without cuase before their term expires (EXCEPT: Staggered BOD - must have cause)

Question 2

Staggered BOD

Answer 2

• 1/2 or 1/3 BOD elected each year
• usually set in the articles
• SHHs can remove directors only with cause on a staggered BOD

Question 3

Vacancy on the BOD

Answer 3

If there is a vacancy before a term is up, BOD or SHHs may elect who fills the spot to complete the term.

BUT if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.

Question 4

BOD Action

Answer 4

• BOD must act as a group.
• Individual Director is NOT an agent of the corp - individual directors have no authority to speak for or bind the corporation.
• Methods of BOD Action: Unanimous agreement in writing; at a meeting.

Question 5

BOD Meetings

Types of Meetings

Answer 5

Regular Meetings
Special Meetings

Question 6

BOD Meetings

Regular Meetings

Answer 6

No notice required

Question 7

BOD Meetings

Special Meetings

Answer 7

• Written Notice required;
• must give at least 2 days notice of date, time, and place of meeting - no purpose needed.

Question 8

BOD Meetings

Failure to Give Notice - Special Meetings

Answer 8

Failure to give notice of special meeting can be remedied by waiving notice defect by:
1. in writign any time, or
2. attending meeting without objecting at ouset of meeting.

Question 9

BOD

Proxies

Answer 9

BOD cannot give prozies or enter voting agreements for how they will vote as directors. Aby efforts to do so are void.

BOD owe the corp non-delegable fiduciary duties.

NOTE: SHHs can vote by proxy and enter into voitng agreements.

Question 10

BOD Meeting

Meeting Requirements

Answer 10

Quorum: Majority of all BOD
* No Quorum –> No BOD Act
* If ther is a Quorum –> BOD Action only requires majority of those present
* A Quorum can be lost if people leave –> No BOD Act

Question 11

BOD

Role of the BOD

Answer 11

The BOD manages the corporation, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, etc.

BOD does big decisiosn; BOD can delegate to committee of directors, but committee cannot declare a distribution or fill a BOD vacancy or recommend fundamental change.

Question 12

BOD Committee

Answer 12

A BOD committee may recommend, but CAN NOT:
* declare distribution
* fill a board vacancy, or
* recommend a fundamental change to shareholders

Question 13

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Fiduciary Duties owed to the Corp

Answer 13

Directors must:
1. Discharge duties in good faith and reasonable belief that actions are in best interest of corp; (Duty of Loyalty)
2. Use care that person in like position would reasonably believe appropriate under circumstances. (Duty of Care)

Duty of Loyalty, Duty of Care

Question 14

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Duty of Care

Answer 14

Burden is on the Plaintiff; Breach may occur through:
* nonfeasance - Director does nothing (i.e., Director is lazy)
* misfeasance - BOD makes decision that hurts business.

Question 15

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Business Judgement Rule

Answer 15

BJR - Courts will not second guess business decision if made in good faith, informed, had rational basis:
* Director is not guarantor of succes –> they promise to bring the kind of care a prudent person would in like circumstances

Question 16

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

BJR: Director may relay on reports or other information

Answer 16

In doing their homework, a director may rely on:
* corporate officers or employees who are reliable and competent;
* professionals within their scope
* committe of BOD, that the director is not a part of.

Question 17

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Duty of Loyalty

Answer 17

Conflict of Interest Cases –> NO BJR
* Burden is on the Defendant
* Director puts herslef in a position where she has a conflic of interest with the corp –> i.e., self-dealing
* Director v. Corp

Question 18

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Duty of Loyalty: Self-Dealing

Answer 18

Director who is self-dealing will not be liable for breach of duty of loyalty if the director shows either:
1. D’s interest was disclosed or known and the deal was approved by either (1) majority of disinterested director’s, (2) majority of disinterested shareholders, or (3) showing of fairness to the corporation.

Question 19

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Special Quorum Requirements for Conflicting Interest vote

Answer 19

For purposes of the vote on a conflicting interest transaction, at a director’s meeting, a quorum is a majority (at least 2) of disinterested directors.

MUST HAVE AT LEAST 2 DISINTERESTED DIRECTORS AT MEETING.

Question 21

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Factos in determining fairness

Answer 21

A transaction approved by the board or shareholders might still be set aside if the party challenging the transaction can prove taht it constitutes a wasste of corporate assets.

I.e., so even if the transaction is approved by teh appropriate group, some courts also require a showing of fairness.

In determining fairness, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.

Question 22

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Remedies for Conflict of Interests

Answer 22

Enjoining the transaction,
setting the transaction aside,
damages, and
similar remedies

Question 23

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Director’s Compensation

Answer 23

Directors may set their own compensatin if it is reasonable and in good faith.

Question 24

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Duty of Loyalty Breach: Competing Ventures

Answer 24

Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems.

Question 25

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Duty of Loyalty Breach: Corporate Opportunity Doctrine

Answer 25

You can’t deprive the corporation of a business opportunity to benefit yourself. You must:
* offer to corp first,
* wait for corp to reject opportunity

I.e., a director can’t usurp a corporate opportunity.

A company’s inability to afford an opportunity is an insufficient defense.

BOD accepts or rejects an opportunity

Remedy: Corp can sue to recover under constructive trust theory.

Question 26

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

What is a corporate opportunity?

Answer 26

It must be something the corp has an interest or expectancy in. It is not limited to corporation’s line of business; maybe found while on company time, used company resources, etc.

Question 27

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

BOD Duty to Disclose

Answer 27

BOD has a duty to disclose material corp info to other memebrs of the BOD.

Question 28

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

BOD Liability

Answer 28

A director may be liable to the corporation for improper distributions, improper loans, ultra vires acts (making the company do things it has no power to do), and for breaches of fiduciary duties.

A director is presumed to concur with BOD action unless dissent/abstention noted in writing in corp record.

Oral dissent is not adequate.

Not liable if absent from the meeting.

Another defense is good faith reliance on info presented by an officer, employee, or committee of whcih the director is not a part of, or reliance on a professional.

Question 29

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Officers: Powers and Status

Answer 29

Officers owe same duty of care and loyalty as directors.

Officers are agents of the corporation –> Agency law determines authority and power of the officers.

Question 30

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Officers: Selection and Removal

Answer 30

Officers are selected and removed by the BOD.
BOD sets Officer salary
BOD may fire officers at anytime with or without cause.

Question 31

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Indemnification of Directors, Officers, and Employees: Categories

Answer 31

1. Corp can’t indemnify (D/O held liable to corp or improper benefit)
2. Corp must indemnify (D/O successful in defending on teh merits or otherwise)
3. Corp may indemnify (D/O shows they acted in good faith with reasonable belief they acted in corp’s best interest)

Option 3 is a catchall, there has to be a holding for option 1 and 2.

Question 32

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Indemnification: Who Decides?

Answer 32

Generally, the determination whether to indemnify is to be made by a disinterested majroity of the BOD, or if there is not a disinterested quorum, by a majority of a disinterested committee or by independent legal counsel.

The SHHs may also make the determination (shares of the director seeking indemnificaiton not counted).

Question 33

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Limitations on Liability

Answer 33

Articles can eliminate D’s (Sometimes O’s) liability to corp for damages.
* Not allowed for intentional misconduct, usurping corp. opportunity, unlawful distributions, or improper personal benefits.
* can only eliminate liability for duty of care cases!!

Question 34

Directors & Officers: Fiduciary Duties, Liability, & Indemnification

Advances

Answer 34

A corp may advance expenses to a director defending an action as long as the director furnishes the corp a statement that hte director believes he met the appropriate standard of conduct and that he will repay the advance if he is later found to have nto met the appropriate standard.