Directors and officers Flashcards
BOD statutory requirements
directors (adult natural person)
a. Only need 1 or more. Number can be set in articles or bylaws.
b. Election: initial directors may be named in articles. If not theyre elected by the incorporators at the organizational meeting. After that, shareholders elect directors
i. The entire board is elected each year unless there is a staggered or classified board. A staggered board is ivided into half or thirds, with ½ or 1/3 elected each year. Staggered board is usualy set in the articles.
ii. Say there are 9 directors, instead of electing 9 each year, can elect 3 each eyar, each one serving 3-yr terms.
c. Shareholders can remove directors before term expires
i. With or without cause
ii. But if there is a staggered board, shareholders can remove a director only with cause in many states
d. Suppose there’s a vacancy on the board (e.g. director resigns)
i. Either board or shareholders elect someone to fill out the term
ii. But if the shareholders created the vacancy by removing a director, the shareholders generally must select the replae
e. board of directors must act as a group
i. individual director is NOT an agent of the corporation
ii. no authority to speak for or bind the corporation. Must act as a group, as a board
1. unanimous agreement in writing OR
2. at a meeting (which has to satisfy the quorum and voting requirements below)
a. conference call counts as a meeting
3. If directors agree but hrough individual convos- void unless ratified by valid act
Role of directors
a. The board manages the corporation: sets policy, supervises officers, declares distributions, determines issuance, recommends fundamental corporation changes to shs etc
b. board of directors can delegate to acommittee of one or more directors. But a committee cannot
i. declare distributions.
ii. Approve a fundamental change
iii. Fill a board vacancy
c. Committee can recommne, but cannot do things by itself
Fiduciary duties owed to the corporation – generally
On bar, most important thing board member does is get sued, usually for breaching fiduciary duties
OWED TO CORPORATION
Standard: director must discharge her duties in good faith and with reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in a like position would reasonably believe appropriate under the circumstances
First sentence: duty of loyalty
Second sentence: duty of care
Duty of care
Standard: director must discharge her duties in good faith and with reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in a like position would reasonably believe appropriate under the circumstances
duty of care = 2nd sentence
2 ways: nonfeasance or misfeasance
can come up in two ways. Buren is on the π
i. Nonfeasance (a director does nothing- is lazy)
1. For ex. director fails to attend meetings or keep abreast of company business in any way. Will he be liable
2. State standard in full, then focus on the duty of care portion. A person inlike position would do some work
3. But he is liable only if this breach caused a loss to the corporation.
a. Ex of causation: Suppose director was antitrust expert and breached duty of care because never attended meeings. In his absence, board of directors approved a k that violated antitrust laws and exposed the company to liability.
i. D would be liable
ii. Misfeasence—basically, the director did something stupid that hurt the corp. here the board of directors makes a decision that hurts the business—her causation is clear
1. But not liable for just some disastorous idea that loses lots of money.
2. NOT LIABLE if director meets the business judgment rule
a. What would person in like person do?
b. Do some homework.
c. BJR is a presumption. That’s why the burden is on the π to show that the board either did not do appropriate hw or did something galactically stupid.
d. Court Will not second guess something if it was made in good faith, was informed, and had a rational basis.
i. Deliberate
ii. Analyze
iii. Etc.
e. Director is not a guarantor of success.
Duty of loyalty
Standard: director must discharge her duties in good faith and with reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in a like position would reasonably believe appropriate under the circumstances
duty of loyalty = 1st sentence
these are about conflict of interest
i. The BJR DOES NOT APPLY in duty of loyalty cases. Because it never applies when the fiduciary has a conflict of interest
ii. So the burden in these cases is on the ∆
iii. Self dealing (AKA interested director txs). This is any deal between the corporation and one of its directors or a clos relative of director, or another of the director’s business.
1. For ex. Martha is a director of XYZ, if she sells wreaths to XYZ, it’s an interested rdirector tx.
2. STATE THE STANDARD IN FULL, THEN FOCUS ON THE LOYALTY DUTY.
- Interested director transaction will be set aside UNLESS the director shows either substantive or procedural fairness:
a. The deal was fair to the corporation when entered
OR
b. Her interest and the relevant facts were disclosed or known and the deal was approved by either of: 1) majority (at least 2) of disinterested directors OR 2) majority of the disinterested shares NOT shareholders.
i. Special quorum rule: quorum is a majority (at least two) of disinterested directors
ii. Even if the deal is approved by an appropriate group, say that some courts also require the ∆ to show fairness.
c. Directors can set own compensation
i. Must be reasonable and in good faith. If excessive, waste of corporation assets and breach of duty of loyalty
iv. Competing ventures
1. Sharon is a director of ozzie’s music company. She can also serve on the board of directors of home depot because it doesn’t compete with Ozzies.
a. STATE STANARD IN FULL
b. BUT director cannot compete directly with her corporation.
c. Remedy: constructive trust on profits
v. Usurping Corporate opportunity (expectancy)
a. State the standard in full, then focus on the duty of loyalty portion. Dircetor cannot USURP a corporation opportunity. That means the director cannot take it until he
i. Tells the board of directors about it AND
ii. Waits for the board of directors to reject the opportunity
b. What is a corporation opportunity:
i. One test: something in the corporation’s business line.
ii. Other tests:
1. Something the company has an interest or an expectancy in.
2. Something found on company time or with company resources.
c. company’s financial inability to pay for the opportunity is PROBABLY NOT a defene
d. Remedy: if the officer still has it, he must sell it to the corporation at his cost. If director sold it at a profit, the corporation gets the profit
i. i.e. constructive trust
Director’s duty and loans
company can make a loan to a director if reasonably expected to benefit the corporation
i. For ex. loan to let director attend college business classes
Which directors may be liable
a. Directors may be liable to the corporation for improper distributions, improper loans, ultra vires acts (making company do stuff it has no power to do) and breaches of fiduciary duties. But which directors are liable?
b. A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporation’s records
i. In writing = in minutes, delivered in writing to presiding officer at the meeting or 3) written dissent to the corporation immediately after the meeting.
ii. Oral dissent alone is not effective
iii. Directors cannot dissent if she voted for the resolution at the meeting.
iv. Exceptions
1. Absent director is not liable for things done at meeting she missed
2. Good faith reliance on info (including financial info) presented by officer, EE or committee or professional reasonably believed competent. Reliance must be in good faith.
Officers
(owe the same duties of care and loyalty as directors)
a. Status. Officers are agents of the corporation. Corporation is the principal and officer is agent. Whether officer can bind the corporation is determined by whether she has agency authority to do so (like actual or apparent)
i. Ex: president generaly has inherint authority to bind the corporation to ks in the ordinary course of business.
b. Traditonally, corporations were required to have pres, secretary and treasurer. Can have others. One person may hold multiple offices simultaneously
c. Selection and removal of officers
i. Selected and removed by board of directors which also sets their compensation
1. But corporation may be liable for breach of k damages if they fire someone with a k.
ii. shareholders hire and fire directors. NOT officers. Officers are decided by the board.
Indemnification of D&Os
a. Someone has been sued by or on behalf of the corporation in her capacity as an officer or director. She has costs, attorney fees, fines or even a judgment or settlement. Now she seeks indemnification from the corporation.
i. Category 1: corporation CANNOT indemnify a director or officer who was held liable to the corporation or to have received an improper benefit
1. Must actually have a holding
ii. Category 2: corporation MUST indemnify a director or officer who was successful in defending on the merits or otherwise.
1. In some states, she must win the entire case to qualify, in others she is entitled to indemnification to the extent that she won
iii. Category 3: The corporation MAY indemnify (permissive indemnification) a director or officer in her litigation expenses if she shows
1. She acted in good faith
2. With reasoanbel belief she acted in best interests of the company
3. (this is basically the duty of loyalty standard)
* *or if the case settles**
- Who determines eligibility for permissive indemnification?
a. Disinterested directors, disinterested shares, or independent legal counsel.
iv. For ex: Director is sued, she then settles. This case falls into category 3, so disinterested directors, shares or independent legal counsel must decide.
b. Notwithstanding these rules, court where director or officer was sued can order reimbursement if it is justified in view of all circumstances. If she was held liable to the corporation, this is limited to costs and attorney fees (cannot include judgment).
c. Limiting directors’ personal liability
i. Articles may limit or eliminate personal liability for money damages to the shareholders for actions taken, unless
1. Director received benefit to which he was not entitled
2. Intentionally inflicted harm on the corporation or its shareholders
3. Approved unlawful distributions
4. Or intentionally commited a crime.
ii. That is, may limit liability for negligence
Articles eliminating director liability
e. The articles can eliminate director (and in some states officer) liability to the corporation for damages, but not for intentional misconduct, usurping corporation opportunities, unlawful distributions, or improper personal benefit. In some states, these can be only for directors
i. Basically can eliminate liability ONLY FOR breach of duty of care
Requirements for valid board meeting
Notice and quorum
iii. Notice: If there is a board meeting, the method for giving notice is set in the bylaws
1. Regular meetings: no notice required
2. Special meetings require notice unless bylaws say otherwise. Must give 2 days notice stating the date time and place.
3. Need not state the purpose
4. Failure to give required notice voids whatever happened at the meeting. Voidable not automatically void.
a. Unless the directors not notified waive the notice defect
b. Can do so in writing anytime or by attending the meeting without objecting
c. Directors cannot give proxies or enter voting greements
i. Against public policy
ii. Because directors owe nondelegable fiduciary duties.
d. shareholders however may vote by proxy or enter voting agreements
- Quorom for meeitngs of he board—for any meeting of the board of directors we must have a quorum. Unless bylaws say otherwise, quorum is a majority of all directors. Without a quorum, board cannot act
a. If a quorum is present at a meeting, passing a resolution (how the board acts) requires only a majority voe of those present
b. So if there are 9 directors, at least 5 must attend the meeting for a quorum. If 5 attnd, at least 3 must vote for a resolution for it to pass.
c. Quorum can be lost if people leave. Once a quorum is no longer present, board of directors cannot take an act at that meeting.
d. This rule is different for shareholder voting (see later)
