Directors and Officers

Question 1

Number of Directors

Answer 1

Must have at least 1.

Articles and bylaws may require as many as desired though, with no limitation

Must be ADULT NATURAL PERSONS (not young, not corporations)

Question 2

Election of directors

Answer 2

elected at each annual SH meeting, unless otherwise provided

Initial directors are named in the articles

Entire board is elected each year, unless a staggered baord

Question 3

Staggered board

Answer 3

If there are at least NINE directors, board can be into halves or thirds, with that portion being elected every year

Question 4

Removal of directors

Answer 4

May be removed by SH WITH OR WITHOUT cause.

Majority of SH entitled to vote

NOTE: director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election

NOTE: director elected by a voting group can only be removed by that class

Question 5

Director Vacancies

Answer 5

Generally, board or SH will select replacement

NOTE; if SH created vacancy by removal, SH generally must select the replacement

Question 6

Two ways Directors can generally act

Answer 6

(1) Unanimous written agreement; or (2) at a meeting that has a quorum

Individual acts by directors are generally void unless ratified later; UWC: or actual authority given beforehand at a director’s meeting

Question 7

Notice in board meetings

Answer 7

usually set in bylaws

REGULAR MEETINGS: no notice required. you’er supposed to know!

SPECIAL MEETINGS: two days notice is required and MUST state time & place. No need to state a purpose for meeting, however.

NOTE: failure to provide notice voids whatever happened at the meeting, unless if notice is waived

Question 8

Waiver of notice

Answer 8

Attendance waives notice at a special meeting unless if attending solely to protect lack of notice

Question 9

Board Committees

Answer 9

Unless otherwise provided, board may create committees with AT LEAST two board members

Question 10

Director proxies and voting agreements

Answer 10

VOID

Want director’s independent judgment. Can’t delegate by voting agreement or proxy as directors

Question 11

Quorum for board

Answer 11

majority of BoD constitutes a quorum for the meeting, unless otherwise provided

NOTE: can never be fewer than 1/3 of the BoD

NOTE: quorum may be “broken” if people leave

Question 12

Approval of action at a meeting

Answer 12

If quorum present, passing MAJORITY of those present is required to pass a resolution

Majority of majority is the least possible, generally

Question 13

Director’s right to inspect

Answer 13

directors have a right to inspect books and records

Question 14

Duty of care

Answer 14

“Directors owe the CORPORATION a duty of care. She must act in GOOD FAITH and do what a PRUDENT PERSON IN A LIKE POSITION would do under similar circumstances.”

Question 15

Directors role generally

Answer 15

Directors role is to MANAGE the business of the corporation

Question 16

Breach of duty of care

Answer 16

BURDEN ON PLAINTIFF. Must show breach CAUSED a loss to the corporation

Negligence essentially

Question 17

Business Judgment Rule

Answer 17

A court will not second guess a business decision if it (1) was informed; (2) made in good faith; (3) made without COI; and (4) had a rational basis

court WILL NOT second guess a board’s decision just because it turns out poorly

ESSAY: always mention and apply, especially if there is misfeasance (maybe not for nonfeasance)

Question 18

Reliance on reports

Answer 18

director’s reliance on reports may constitute reasonably informed and fall under BJR protection

Entitled to rely on reports prepared by (1) reliable corporate officers or employees; (2) legal counsel, accountants, or other third persons that reasonably have professional competence; or (3) board committees

Question 19

Duty to disclose

Answer 19

Board has a duty to disclose material corporate info to other members of the board

Question 20

Duty of loyalty

Answer 20

“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”

BJR does not apply b/c of conflicts

Question 21

Interested director transaction

Answer 21

conflict exits if director or a closely related person either (1) is a party to the transaction; (2) has a beneficial financial interest or is closely linked to the transaction and that interest is reasonably expected to influence the director’s judgment; or (3) is a director or officer, or employee of the other entity and it would be in the normal course of business to bring it before the board

Violates DoL unless DIRECTOR shows EITHER that: (1) transaction was approved by a majority of disinterested directors (but at least 2) after all material facts were disclosed to the board; (2) transaction was approved by a majority of disinterested SHs after all material facts were disclosed to the SH; or (3) the transaction was fair to the corporation at the time of commitment

Material: whether an ordinarily prudent person would consider it important in deciding whether or not to proceed with the transaction

Question 22

competing ventures

Answer 22

State loyalty standard. Then state that Directors CANNOT compete with the corporation

REMEDY: constructive trust on the profits from the corporation

Question 23

Corporate Opportunity Doctrine

Answer 23

State loyalty standard. Then say “Director cannot usurp a corporate opportunity. Director must wait until he (1) tells the board about the opportunity and (2) waits for the board to reject the opportunity”

NOTE: company’s financial inability to make use of the opportunity is NOT a defense

REMEDY: if usurped, must sell it to corporation at D’s cost or, if made profit, constructive trust gives profits to company

Question 24

What constitutes “corporate opportunity”

Answer 24

Generally, same line of business

Also may include something the company has an INTEREST OR EXPECTANCY in

Also may include something the director found on COMPANY TIME or with COMPANY RESOURCES

Question 25

Improper loans

Answer 25

Sarbanes Oxley generally forbids loans to executives in registered corporations

In smaller companies, loans may be allowed if reasonably expected to benefit the corporation

Question 26

Liability of other Directors

Answer 26

Director PRESUMED to concur with board action unless her dissent or abstention is noted in WRITING either (1) in the minutes; (2) delivered to an officer at the meeting.; or (3) delivered to the corporation immediately after the meeting

ORAL DISSENT NOT ENOUGH TO ABSOLVE YOUR LIABILITY

EXCEPTIONS: absent director is not liable for actions taken at the missed meeting; and BJR

Question 27

Compensation

Answer 27

unless otherwise provided, board has authority to fix director compensation

generally not a breach of DoL, but an unreasonable compensation may breach

Question 28

Officers

Answer 28

officers are AGENTS of the corporation. Thus, may bind the corporation (the principal) if they have AUTHORITY

generally owe same duties of care and loyalty as directors. Also may generally be indemnified for the same reasons.

Question 29

required officers

Answer 29

Rules do not require a corp to have specific officers, merely provides that corp shall have the officers described in its bylaws

Usually have president, secretary, and treasurer though.

One person may hold multiple positions

Question 30

Selection of officers

Answer 30

Selected by the board, and board also sets officer compensation

SH do not hire and fire officers

Question 31

Removal of officers

Answer 31

removed by the board and can be done with or without cause

May give rise to breach of K if there was an employment K, but always may remove

Question 32

Mandatory indemnification

Answer 32

Corporation MUST indemnify a director or officer who PREVAILED in defending a proceeding, on the merits or otherwise

Question 33

Discretionary Indemnification

Answer 33

Corporation MAY indemnify a director for reasonable expenses incurred in unsuccessfully defending a suit if director (1) acted in good faith; and (2) had reasonable belief that her conduct was in the best interests of the corporation

Essentially DoL

NOTE: settlement is a good example here

Question 34

No indemnification

Answer 34

Corporation MAY NOT indemnify a director who is unsuccessful in defending (1) a derivative where director is found liable to the corporation; or (2) an action charging that the director received an improper benefit

Question 35

Court ordered indemnification

Answer 35

Notwithstanding the rules, a court may order indemnification when it feels appropriate

NOTE: if found liable, indemnification must be limited to costs and attorney’s fees (not the judgment itself)

Question 36

Advances

Answer 36

Corporation can advance expenses to director to defend an action so long as director furnishes the corporation with a statement that he believes he met appropriate standards of conduct and he will repay advance if found liable

Question 37

Eliminating liability

Answer 37

Articles can eliminate director liability to the corporation for damages, but NOT for intentional misconduct or DoL

Split authority whether eliminating liability applies to officers as well