Directors and Officers

Question 1

How many directors do there need to be?

Answer 1

One or more adult natural persons.

Question 2

How is the number of directors set?

Answer 2

1) By the bylaws
2) By shareholder act
3) By the board if a shareholder bylaw allows

Question 3

Can shareholders remove a director for cause?

Answer 3

Yes

Question 4

Can the board remove a director for cause?

Answer 4

Only if the certificate or a shareholder bylaw allows.

NOTE: On the bar exam, both are usually silent, so the board generally cannot.

Question 5

Can anyone remove a director without cause?

Answer 5

Shareholders only, and only if the certificate or shareholder bylaws allow.

Question 6

When there is a vacancy on the board, who selects who will serve the remainder of the term?

Answer 6

It is the board of directors.

Question 7

In the rare case when a director is removed by shareholders without cause, who selects the person who will serve the remainder of the term?

Answer 7

Shareholders only

Question 8

In what ways can the board act?

Answer 8

The board can act as a group only. There are only two ways in which the board can take a valid act:

1) Unanimous written consent; or
2) A board meeting.

Actions taken in another way are considered void, unless ratified by a valid act.

Question 9

When is notice required for board meetings?

Answer 9

For regular meetings, notice is not required if the time and place are set in the bylaws or by the Board. For special meetings, it must state the time and place, but doesn’t need to give the purpose.

Question 10

What happens when notice is not given to a director for a special meeting?

Answer 10

Any action taken at the meeting is void unless the director waives the notice defect.

Question 11

How can a director waive a notice defect?

Answer 11

1) In writing and signed at any time; OR
2) Attending the meeting without objection.

Question 12

Can a director give a proxy for director voting?

Answer 12

No, because the director owes non-delegable fiduciary duties to the corporation.

Question 13

Can the directors enter into voting agreements on how they will vote as directors?

Answer 13

No, because they have non-delegable fiduciary duties to the corporation.

Question 14

What constitutes quorum for a board meeting?

Answer 14

There must be a majority of the “entire board” (duly constituted board, meaning the number of positions if no vacancies).

Question 15

Can the corporation decrease a quorum to less than a majority of directors?

Answer 15

Yes, by certificate or bylaws, but never fewer than 1/3 of the entire board.

Question 16

What is the required number of those present at a board meeting to pass a resolution?

Answer 16

A majority vote of those present is required to pass a resolution.

Question 17

Can the corporation decrease the requirement for passing a resolution?

Answer 17

No - it can never do this.

Question 18

Can a corporation ever increase quorum to greater than a majority or require a supermajority to pass a resolution?

Answer 18

Yes, but in the certificate only, not the bylaws.

Question 19

What is the standard for the duty of care?

Answer 19

A director must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in like position.

Question 20

What is nonfeasance and is a director liable for breaching his duty of care when he commits nonfeasance?

Answer 20

Nonfeasance is where the director does nothing (i.e. the lazy director). The director is only liable if the breach caused a loss to the corporation.

Question 21

What is misfeasance and is the director liabgle for a breach of the duty of care if he commits it?

Answer 21

Misfeasance is where the director does something that hurts the corporation. The director will be liable only if his actions don’t meet the business judgment rule.

Question 22

What is the business judgment rule?

Answer 22

It means that the court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

Question 23

What is the standard for the duty of loyalty?

Answer 23

A director must act in good faith and with conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries. This standard is applied when the director has a conflict of interest.

Question 24

What is an interested director transaction and will the director be liable for a breach of the duty of loyalty if she conducts this transaction?

Answer 24

It is any deal between the corporation and one of its directors (or business of which its director is also a director or officer or in which he has a substantial financial interest).

Interested director transactions will be set aside unless the director shows either:

1) The deal was fair and reasonable to the corporation when approved OR
2) The material facts and her interest were disclosed or known and the deal was approved by any of the following:
a) Shareholder action;
b) Board approval by sufficient votes, not counting the votes of the interested directors;
c) Unanimous vote of disinterested directors, if those disinterested directors are insufficient for corporate action/board action.

NOTE: Interested directors can count toward a quorum and they can participate in the meeting, they just can’t vote.

Question 25

Can the board set compensation of directors?

Answer 25

Yes, but compensation must be reasonable and in good faith. If excessive, it is a waste of corporate assets.

Question 26

What happens if a director has a competing venture?

Answer 26

A director cannot compete directly with the corporation - this would be a breach of the duty of loyalty. If this happens, the corporation gets a constructive trust on the director's profits from the competing venture. The director must account for her profit and the corporation may recover damages if the competition hurt it.

Question 27

What happens if a director takes a corporate opportunity for himself?

Answer 27

A director cannot **usurp** a corporate opportunity - this is a breach of the duty of loyalty. The director cannot act, until he tells the board about it and waits for the board to reject it. If there is usurpation, a constructive trust is created and the director must account for his profit. The corporation may also get damages if the usurpation harmed the corporation.

Question 28

What qualifies as a corporate opportunity?

Answer 28

Something the corporation needs, has an interest or tangible expectancy in, or logically related to its business.

Question 29

What are other bases of director liability?

Answer 29

**Improper loans of corporate funds** - loans must be approved by shareholders OR the board must find that it benefits the corporation. **Improper distribution** - payments to shareholders that comes out of stated capital, lost money, is insolvent, or would become insolvent if it distributed.

Question 30

Which directors are liable when a breach of fiduciary duties or other bases of liability are found?

Answer 30

Generally, a director is presumed to have concurred with board action unless her dissent is noted *in writing* in corporate records. A director can get her dissent into writing: 1) in the minutes 2) in writing to the secretary in the meeting 3) written and sent by registered letter to the secretary promptly after adjournment. **Note:** Oral dissent is not effective by itself - dissent must be in writing. Also, director cannot dissent if he or she voted for the resolution at the meeting.

Question 31

Is a director still liable for breaches if he missed the meeting?

Answer 31

Not if he registered written dissent within a reasonable time after learning about it. He must deliver the dissent or send it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes for the meeting.

Question 32

What is the good faith reliance exception to the general rule of director liability?

Answer 32

Directors will not be found liable if they relied in good faith on information, opinions, reports, or statements by: 1. Officers or employees of the corporation whom the director or officer believes competent and reliable; 2. Lawyers of public accountants whom the director or officer believes are acting within their competence, or 3. a committee of which the person relying is not a member, as to matters within its designated authority.

Question 33

What duties do officers owe to the corporation?

Answer 33

The same duties of care and loyalty as the directors.

Question 34

Are officers agents of the corporation?

Answer 34

Yes - if they have the authority to do so, which includes inherent authority. *Inherent authority* is one that is implied in the duties and responsibilities that come with an officer's position - i.e. a president has the inherent authority to sue on behalf of the corporation and to bind the corporation to contracts entered in the ordinary course of business.

Question 35

Who selects, removes, and sets the compensation of officers?

Answer 35

It is the board, unless the certificate allows the shareholders to elect them.

Question 36

What are the three categories of reimbursement/indemnification from the corporation for directors and officers who are sued in their capacity or on behalf of the corporation?

Answer 36

**1) Prohibited:** reimbursement is prohibited if she was held liable to the corporation. **2) Of Right:** the corporation must reimburse the director or officer if she won a judgment on the merits or otherwise. However, a director is not reimbursed for a suit against the corporation in obtaining these of right indemnification for the underlying suit. **3) Permissive:** for all other cases, the corporation *may* reimburse the officer or director if: a) The director acted in good faith AND b) for a purpose reasonably believed to be in the company's best interest. Eligibility for permissive indemnification can be determined by: a) The board (quorum being non-parties), but if this does not exist - b) Shareholders or quorum of those directors who are disinterested; OR c) The board pursuant to report from independent legal counsel.

Question 37

Can the certificate eliminate director liability to the corporation or shareholders for damages for breach of a duty?

Answer 37

Yes, except when the director acted in bad faith, with intentional misconduct, received an improper financial benefit, or approved an unlawful distribution or loan.