Directors and Officers Flashcards
Board of Directors
Must be 1 or more adult, humans - Number set Articles or bylaws
Election - Shareholders elect the directors at the annual meeting.
Shareholders can remove directors with or without cause. (Exception: Staggered Board)
*Directors cannot vote by proxy
Staggered Board
- The entire board is elected each year unless the articles or a shareholder adopted bylaw divided the board into half or thirds.
- Dividing it into half or thirds creates a staggered board - These board members can ONLY be removed for cause.
How Board of Directors Take Action
Board members can only act in one of two ways:
- Unanimous agreement in writing (email is okay) OR
- By passing a resolution at a meeting
Failing to meet one of these requirements will void the action!
Regular Meeting - No notice required
Special Meeting - Notice required (2 days and time/place)
Quorum
Majority”
- You must have a majority of all directors to do business (unless different percentage noted in bylaws)
If a quorum is present, resolution only needs a majority of those present to pass.
- Note: IF A DIRECTOR LEAVES, THE QUORUM IS BROKEN
Role of Board of Directors
-Manages the biz. Sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corp changes to shareholders
- Can delegate to a committee of 1 or more directors, but committee cannot
1. Fill a board vacancy
2. Amend or repeal bylaws
3. Propose fundamental corp. change to shareholders
***Directors Can’t vote by proxy
Duty of Care for Board of Directors
Burden on the plaintiff
-A director must discharge her duties in what she believes in good faith to be the best interests of the corporation AND with the care that an ordinary prudent person in like position in similar circumstances.
- Two duty of care fact patterns
- nonfeasance (director does nothing)
- misfeasance (the board does something that hurts the corporation)
Business Judgment Rule
A director is not a guarantor of success.
If the director acted:
1. with good faith (prudent people analyze and deliberate);
2. was informed (prudent people do their homework);
3. and had a rational basis,
then she will not be liable for misfeasance.
- The court will generally not substitute its judgment for the judgment of the board.
- BJR protects directors from personal liability when they act in good faith and act as reasonably prudent persons would in like position.
Duty of Loyalty
Burden on the Defendant!!!
A director must discharge her duties in what she believes in good faith to be the best interests of the corporation.
*BJR doesn’t apply because with loyalty there’s a conflict of interest.
- Use: Interested Director Transaction Test
- Competing Ventures
- Corporate Opportunity
Test for Interested Director Transaction
(State the duty of loyalty standard first)
The Test Used to determine Breach of Loyalty:
1. The corporation must enter the transaction,
2. The Director must know of the deal and of her interest,
3. The deal is between the corporation and:
a. the director OR
b. a member of the director’s household OR
c. another business of the director’s
- To not have transaction set aside, the director must show:
1. the deal was fair to the corporation when entered; OR
2. Her interest and the relevant facts were disclosed or the deal was approved by (1) a majority of all disinterested directors actually voting OR (2) a majority of all disinterested shares (not shareholders)
Competing Ventures
State Duty of Loyalty, (A director must discharge her duties in what she believes in good faith to be the best interest of the corp and with the care that an ordinarily prudent person in like position in similar circumstances would use) then:
Director cannot compete with her Corporation.
(making plans is probably okay)
Corporate Opportunity
State the standard of care of Directors FIRST
Director cannot usurp a corporate opportunity. That means the director cannot take it until he:
- tells the board AND
- waits for the board to reject the opportunity
Corporate Opportunity = A legitimate interest or expectancy in an endeavor AND the ability to afford it.
General Rule of Director Liability
A director is presumed to have concurred with board action unless she objected to transacting business or her dissent or abstention is noted in writing in corporate records.
In writing means:
- in the minutes
- delivered in writing to the presiding officer at the meeting OR
- written dissent to the corporation immediately after the meeting (email is okay)
Exceptions to general rule of director liability
- An absent director is not liable for stuff done at the meeting she missed.
- Good faith reliance on info (including financial info) presented by an officer, employee, or committee(of which director relying was not a member, or a professional reasonably believed competent.
Officers
Officers owe the same duties as directors.
Officers are agents of the corporation. They bind the corporation with whatever authority they have. They are selected and removed by the board, which also sets officer compensation.
- Shareholders hire/fire directors!
- Directors hire/fire officers!
Indemnification of Directors and Officers When Sued in Capacity as Director or Officer?
If he has incurred costs, attorney’s fees, maybe even fines, a judgment/settlement indemnification may be a way to recoup from the corporation.
- No indemnification when: She was held (requires adjudication) liable on the basis of improper financial benefit.
- Mandatory when: she was “wholly” (must be entire suit) successful in defending the suit.
- Permissive when: 1 or 2 above don’t apply and she shows acted in good faith with the reasonable belief that her actions were in the company’s best interest. Disinterested directors determine eligibility.
