Directors and Officers Flashcards
What are the statutory rules for directors and officers?
- Number - 1 or more (often in the articles as “or bylaws”)
- Election. Initial directors are usually named in the articles. Thereafter, who elects directors? - Shareholders at the annual meeting
- Shareholders can remove directors before their terms expire – vote of a majority of the shares entitled to vote, they can do so with or without cause, but if it is a staggered board than it is for cause only If there is a staggered board this is the issue
- there’s a vacancy on the board (e.g., a director resigns before her term is up) generally the board or the shareholders will selects the person who will serve as director for the rest of the term (if the shareholders created the vacancy generally they must fill the vacancy)
- The board of directors may only act in one of two ways:
i. - Unanimous agreement in writing or
ii. - At a meeting (which has to satisfy the quorum and voting requirements)
What are the requirements for notice for meetings?
- Conference Call may suffice
- For regular meetings notice is not required (the members of the board should know of those meetings they are “regular”)
- For special meetings notice is required and must state the time and place, does not have to state the purpose
- Failure to give required notice voids whatever happened at the meeting, unless the directors not notified waive the notice defect. They can do this in writing anytime or by attending the meeting without objecting.
- Directors may not send proxies to vote in their stead (*Note: The rule is different for Shareholder voting)
How may the board fulfill the requirements of actin at a meeting satisfying the quorum and voting requirements?
- Quorum for meetings of the board — must have a majority of all directors to do business (unless a different percentage is set in bylaws)
i. - If a quorum is present at a meeting, passing a resolution (which is how the board takes an act at a meeting) requires only a majority vote of those present.
e. g. So, if there are 9 directors, at least 5 directors must attend the meeting to constitute a quorum. If 5 directors attend, at least 3 must vote for a resolution for it to pass
ii. - Quorum of the board can be lost (“broken”) if people leave. Once a quorum is no longer present, Board cannot take an act at that meeting (*Note: This is different with shareholder voting)
What is the role of the directors?
- Generally, the board of directors manages the business of corporation. So it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
- The board can delegate to a committee of one or more directors. But a committee cannot:
i. Declare dividends
ii. Set Director Compensation
iii. Fill a board vacancy
* But it can make recommendations
What is the duty of care standard for board directors (have this memorized for the bar)?
(Burden on the plaintiff) Duty of care standard: A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
What are 2 ways to breach the duty of care of standard?
- Nonfeasance - Lazy, the director does nothing
2. Misfeasance - The board does something that hurts the corporation – so in these cases, causation is clear
Justin Timberlake, a director of C Corp., fails to attend any of the board of directors’ meetings or to keep abreast of the company business in any way. Will he be held liable for breach of the duty of care?
State the duty of care standard. A prudent person would attend some meetings and do some work. Justin never did anything, so he has breached the duty of care. BUT HE IS LIABLE ONLY IF: A prudent person would attend some meetings and Justin has not, so he has breached, but he is only liable if that breach has caused a lost to the corporation
-Hard to win these cases, co loses money anyway
The directors of Hedonists’ Hot Tubs, Inc., vote to start a new line of hot tubs with built-in wine coolers and video cameras. The idea is a disaster and the corporation loses money. Are the directors liable for breach of the duty of care?
State the duty of care standard. Here, the directors’ action caused a loss to the corporation. BUT, a director is not liable if she meets the business judgment rule (“BJR”). BJR - Largely important - i. Prudent People do Appropriate Homework; ii. Made in good faith, it was informed and had a rational basis; iii. Look to the facts, did they deliberate, did they analyze (that is what prudent people do)
*A court will not second guess a good faith attempt under the BJR - A DIRECTOR IS NOT A GUARANTOR OF SUCCESS - Put this in my answer
What is the duty of loyalty standard for a director?
(Burden on the Defendant) Duty of loyalty standard. A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest. - No BJR defense (Because it never applies when the Director has a conflict of interest; If there is a conflict of interest it is duty of loyalty and BJR does not apply)
What is an interested director transaction?
This is any deal between the corporation and one of its directors (or a close relative of a director) or another business of the director’s. *Hint - Look for the director to have an important role on both sides of the transaction
Duty of Loyalty Hypo: Martha is a director of XYZ, Inc. If she sells wreaths to XYZ, Inc., it is an interested director transaction?
(Remember the burden is on the def. so Martha must prove that she is not interested) - State the duty of loyalty standard. Interested director transaction will be set aside (or the director liable in damages) UNLESS the director shows either: (1) the deal was fair to the corporation when entered, OR (2) her interest and the relevant facts were disclosed or known and the deal was approved by either of these: 1. Majority of disinterested directors or 2. majority of disinterested shares (this is the right way to say it).
What is the special quorum rule?
In many states, interested directors count toward a quorum; Even if the deal is approved by an appropriate group, say this; Some courts also require a showing of fairness
May directors breach the duty of loyalty by setting their compensation too high?
YES - Directors can set their own compensation as directors or officers, but it must be reasonable and in good faith. If excessive, it’s waste of corporate assets, and a breach of the duty of loyalty.
Duty of loyalty and competing ventures: Sharon is a director of Ozzie’s Music Co. She can also serve on the board of directors of Home Depot because it does not compete with Ozzie’s. But can Sharon start her own music company?
First, State the duty of loyalty standard, and then explain: Director cannot compete directly with her corporation
She is a fiduciary to Ozzie’s
Duty of loyalty and corporate opportunity (expectancy): Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?
State the duty of loyalty standard. Director cannot USURP a corporate opportunity. That means the director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity.
What is a corporate opportunity? Some say it’s something in the corporation’s business line. There are other tests to throw in:
-Business line
-1. Something the co. has an interest or expectancy in
-2. That it was found on co. time or with co. resources
*Remedy: If Cheatem still has it, he must sell it to the corporation at his cost. If Cheatem has sold it at a profit, the corporation gets the profit. (Constructive trust).
