Directors and Officers Flashcards
Who elects the directors?
Shareholders, generally by a plurality vote if the quorum requirement is met at a shareholder meeting.
Staggered Board
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. (some states)
Who chooses a director to fill a vacancy on the board?
Generally, the board. However, if the shareholders created the vacancy by removing a director, then the shareholders select the replacement.
How does the board act?
- By a unanimous agreement in writing;
- By a majority vote at a meeting that meets the quorum reuiqrements.
Under the RMBCA, the Board of Directors can only act if a quorum is present. A majority of the Board of Directors is necessary to make a quorum, UNLESS there are provisions in the Articles of Incorporation stating that a higher or lower number is required. However, the Articles of Incorporation MUST require that at least one-third of the directors be present to make a quorum.
A quorum must be present at the time when a vote is taken. If a quorum is present at the beginning of a meeting, but directors subsequently leave breaking the quorum before a vote, then the Board of Directors CANNOT vote or act.
The Board of Directors may permit any or all Directors to participate in regular or special meetings by any means of communication, BUT all directors participating must be able to simultaneously hear each other during the meeting.
Board Meeting Requirements
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.
Who declares a distribution?
The directors.
Board’s Fiduciary Duties
The board owes fiduciary duties of care and loyalty to the corporation.
Duty of Care
Directors must use the care that a reasonably prudent person would consider appropriate under the circumstances.
The duty of care requires that Directors be reasonably informed on the decisions they make. A Director may rely on the reasonable advice of advisors, such as attorneys, accountants, officers, or Committees of the Board when: (1) such reliance was reasonable; AND (2) the advisor or Committee was qualified to provide such advice.
- A party attacking a board decision must normally rebut the presumption that its business judgment was an informed one. However, the Business Judgment Rule DOES NOT apply or protect Directors: (i) financially interested in a transaction (a conflict of interest); (ii) not acting in* good faith; OR (iii) who engaged in *fraud or illegality.
- If a Director breaches the duty of care, he may be held personally liable to the corporation for any losses suffered as a result.
Half of the BJR
Duty of Loyalty
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.
The duty of loyalty forbids Directors from:
(a) entering into conflicting interest transactions;
(b) usurping a corporate opportunity;
(c) competing with the corporation; OR
(d) trading on inside information.
Director’s Liability for Nonfeasance
A director is liable for nonfeasance if:
- She breaches her duty of care by failing to act when a reasonably prudent person would, and
- Her breach causes damages to the corporation.
Director’s Liability for Misfeasance
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.
The Business Judgment Rule
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.
Alternate formulation: DUTY OF CARE—discharge their duties: (1) in good faith; (2) in a manner the Director reasonably believes to be in the best interests of
the corporation; AND (3) with the care that a person in a like position would reasonably believe appropriate under similar circumstances.
Self-Dealing (Interested Director Transactions)
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:
- The interested director can show that the transaction was fair at the time it was entered into; OR
- If the interested director discloses the relevant facts to the directors OR shareholders and a majority of disinterested director sor disinterested shareholders approve.
⇒ Quorum is a majority of disinterested directors rather than a mere majority of directors.
Some courts require a showing of fairness
= any transaction between corporation and (1) one director or (2) director’s close relative or (3) another business of the director’s
The Business Judgment Rule DOES NOT apply or protect Directors financially interested in a transaction or who engaged in fraud or illegality.
Competing Ventures
Directors may not compete with the corporation. Thus, they must not operate or work on behalf of competing ventures.
Corporate Opportunity
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:
- Disclose the opportunity to the board;
- Give the board time to accept or reject the opportunity.
