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NY Corporations > Directors & Officers *** > Flashcards

Directors & Officers *** Flashcards

1
Q

Number of Directors: one or more adult natural persons.

  • How is the number set?
  • What if it isn’t set?
A

SET BY
1- bylaws, OR
2- by s/h act, OR
3- by the board if a s/h bylaw allows

If not set in any such way then we have only 1 director

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2
Q

Who elects directors?

A

Incorporators elect initial directors. After that, the s/h elect directors at the annual meeting.

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3
Q

Classified board

A

The CERT or a S/H BYLAW can establish 2, 3, or 4 classes of directors w/ one class elected per year.

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4
Q

REMOVAL OF DIRECTORS BEFORE THE EXPIRATION OF THEIR TERM:

  • can s/h remove for cause?
  • can BoD remove for cause?
  • can anyone remove w/o cause?
A
  • s/h can remove for cause
  • BoD can remove for cause ONLY if the certificate or a s/h bylaw allows
  • S/h are the only people who can remove w/o cause and they can only do so if the certificate or bylaws allow
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5
Q

FILLING A VACANCY ON THE BOARD (director dies, resigns, is removed)

  • General rule?
  • Special Rule?
A

Gen ROL- the board selects the person who will serve the remainder of the term

Special ROL- S/H select the person who will serve the remainder of the term in the rare case that they have removed a director w/o cause

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6
Q

What are the two ways that the BoD can take a valid act?

What is the effect of an invalid act?

A
  • Valid act = (1) unanimous written consent; or (2) a meeting
  • An invalid act is void unless it is ratified by a valid act
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7
Q

Notice Requirements for Board meetings

A
  • no notice required for REGULAR meetings of the board if the time and place are set in the bylaws or by the board
  • notice IS required for SPECIAL meetings of the board; must state the time and place but need not state the special purpose
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8
Q

What happens if the required notice for a special meeting is not given to a director?

A

Any action taken at the meeting is VOID, UNLESS the director not given notice waives the notice defect by either (1) signed writing at anytime; (2) attending the meeting w/o objections

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9
Q

Can a director give a proxy for director voting?

A

NO. Directors have non-deligible fiduciary duties.

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10
Q

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

A

NO. Directors cannot enter into voting agreements for how they will vote as DIRECTORS.

[But note: S/H can for how they will vote as s/h, so watch out for someone who is both a director and a s/h]

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11
Q 
Quorum for a meeting?
# required to pass a resolution?
A
  • To have a quorum/do business, we must have a majority of the ENTIRE BOARD (aka majority of the seats on the board, even if some are vacant)
  • To pass a resolution (which is how the board takes an act at a meeting), we must have a majority vote of those PRESENT.

[note: if a quorum is broken the board cannot act]

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12
Q

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

A

YES– in the CERTIFICATE or BYLAWS, BUT it can never be fewer than 1/3 of the entire board

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13
Q

Can the corporation DECREASE the requirement that passing a resolution requires a majority of the directors present?

A

NO! Never!

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14
Q

Can the corp INCREASE the amount of directors needed for a quorum?

A

YES– in the CERTIFICATE ONLY

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15
Q

Can the corp INCREASE the vote needed to pass a resolution (supermajority)

A

YES– in the CERTIFICATE ONLY

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16
Q

Delegation of Management Powers

A

If the CERT or BYLAWS allow, a majority of the ENTIRE BOARD can delegate substantial management functions to a COMMITTEE of 1+ DIRECTORS. BUT the board cannot delegate all powers and responsibilities to a committee.

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17
Q

What can a committee NOT do?

A

1- set director compensation
2- fill a board vacancy
3- submit a fundamental change to s/h
4- amend bylaws

BUT a committee can recommend any of these things for full board action.

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18
Q

** BoD’s fiduciary duty of care **

A

“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.”

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19
Q

Liability for nonfeasance

A

only liable if nonfeasance constitutes breach of the duty of care AND caused a loss to the corporation

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20
Q

Misfeasance (aka when the board does something that hurts the corporation)

A
  • state the duty of care standard
  • Here, the directors’ decision caused the corporation to lose money BUT a director is NOT LIABLE if she meets the BUSINESS JUDGMENT RULE.
  • BJR means that a court will not second-guess a business decision IF it was (i) made in GOOD FAITH; (ii) was REASONABLY INFORMED; and (iii) had a RATIONAL BASIS.
21
Q

** BoD’s fiduciary duty of loyalty **

A

“A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.”

22
Q

Does the BJR apply in duty of loyalty cases?

A

NO– BJR cannot apply when there is a conflict of interest

23
Q

Def: * INTERESTED DIRECTOR TRANSACTION *

A

Any deal btw 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.

AKA self-dealing

24
Q
  • What happens to an interested director transaction? *
A
  • state the duty of loyalty standard
  • 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 either (i) s/h action, or (ii) BoD approval by a sufficient vote NOT counting the votes of interested directors, OR (iii) unanimous vote of disinterested directors if disinterested directors are insufficient to take an act
25
Q

Do interested directors count toward a quorum of the board?

A

Yes, and they can participate in the meeting. They just can’t vote on the interested act.

26
Q

Duty of loyalty & compensation of directors?

A

The board can set the compensation of directors. BUT compensation must be REASONABLE and in GOOD FAITH. If excessive, it is waste of corporate assets and thus a breach.

27
Q

Stock options as compensation to a director or officer?

A

If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies.

If the stock is not listed on a stock exchange, this use of options must be approved by shareholders.

28
Q

COMPETING VENTURES:
Hypo- D is a directors of O Corp. She can also serve as a director for A Corp b/c it does not compete with O Corp. What if D starts her own corporation that does compete with O Corp?

A

(1) state the duty of loyalty standard- “A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries.”
(2) State- “A Director cannot compete with her corporation”
(3) If D does go into competition w/ O Corp, O Corp gets a constructive trust on Ds profit. That means, D must account to O Corp for her profit. Furthermore, O Corp may get damages if the competition hurt it.

29
Q

CORPORATE OPPORTUNITY

  • ROL?
  • What qualifies as a corporate opportunity?
A
  • duty of loyalty standard
  • ROL- under the duty of loyalty standard, a director cannot USURP a corporate opportunity. That means, he cannot take a corporate opportunity until (1) he tells the BoD a/b the opportunity; and (2) he waits for the board to reject it.
  • Corporate Opp = something the corporation needs OR has an interest or tangible expectancy in OR that is logically related to its business
30
Q

Suppose the corp could not afford the opportunity. Is that a defense for a director who usurps?

A

Probably no. As a fiduciary, he arguably should help the corporation get financing.

31
Q

What is the usual remedy for usurpation of a corporate opportunity?

A

Constructive Trust– breacher has to account for the usurpation. If he still has it, he must sell the opportunity to the corporation at his cost. If he has sold the opportunity at a profit, the corp gets the profit.

32
Q

Other Bases of Director Liability:

Can the BoD vote to lend a director corporate funds or to guarantee a director’s personal obligation?

A
  • ONLY if approved by shareholders OR if the board finds that it will benefit the corporation.
  • Sarbanes-Oxley Act (federal) restricts loans to executives in publicly-traded corporations. SOX requires the BoD of such a corp to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.
33
Q

When directors are liable, exactly which directors are liable?

A

General ROL- a director is presumed to have concurred w/ board action unless her dissent is noted in WRITING in corporate records.

NOTE: director cannot dissent if voted for the resolution at the meeting

34
Q

How does a director get her dissent into writing?

A

1- in the minutes; OR
2- in writing to the corporate secretary at the meeting; OR
3- by registered letter to the corporate secretary promptly after adjournment of the meeting.

35
Q

Suppose a director missed a meeting. Is he liable if the board approved something wrongful that day?

A

No. As an exception to the general rule, he is not liable if he registers written dissent w/in a reasonable time after learning of the action. He does this by delivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed w/ the minutes for the meeting.

36
Q

“Good faith reliance” exception to the general rule of liability for board action unless dissent.

A

Good faith reliance on information, opinions, reports, or statements by:
1- officers or employees of the corporation whom the director or officer believes competent and reliable; OR
2- lawyers or public accountants whom the director or officer believes are acting w/in their competence; OR
3- a committee of which the person relying is not a member, as to matters designated a/in its authority

NOTE: this exception is most likely in a improper distributions case

37
Q

OFFICERS:

What duties do officers owe to the corporation?

A

The same duties of care and loyalty as directors.

38
Q

Officers are agents of the corp. Can they bind the corp to acts that they take in the corps behalf?

A

YES, if they have the authority to do so

  • crosses over w/ agency & agent authority
  • example- President has the inherent authority to sue on behalf of the corporation and to bind the crop to Ks entered in the ordinary course of business
39
Q

Who selects and removes officers?

A

The board UNLESS the CERTIFICATE allows the s/h to do so.

NOTE: if the s/h elect them, only the s/h can fire them. Even then, for cause, directors can suspend an officer’s authority to act.

40
Q

GENERAL RULES:

  • who hires/fires directors?
  • who hires/fires officers?
A

(1) Shareholders

(2) BoD

41
Q

Removing an officer by judicial action– how?

A

The AG or holders of 10% of all shares may sue for judgment removing an officer FOR CAUSE. The Court can bar reappointment of a person so removed.

42
Q

Who sets compensation for officers?

A

The Board

43
Q

*REIMBURSEMENT OF DIRECTORS & OFFICERS:
1- when is reimbursement prohibited?
2- when MUST the corp reimburse as of right?
3- when MAY (permissive) the corp reimburse?

A

1- Reimbursement is prohibited if officer/director is held liable to the corporation

2- Reimbursement MUST be paid as of right if officer/director won a judgment on the merits OR OTHERWISE

3- In any case not satisfying (1) or (2), the corp MAY reimburse the officer/director SO LONG AS (i) she acted in good faith; and (2) for a purpose reasonably believed to be in the company’s best interest

44
Q

*REIMBURSEMENT OF DIRECTORS & OFFICERS:
Suppose a director or officer is successful in defending a suit against her, so she qualified for reimbursement of right from the corporation. But the corporation refuses to reimburse her. Now she sues the corporation to force it to reimburse her, and wins. Can she recover the attorney’s fees of this suit against the corporation?

A

No, she pays her own attorneys fees for that case.

45
Q

What can be reimbursed in the “permissive” category?

A

settlement amount, expenses, attorney’s fees

NOT any judgment

46
Q

Who determines eligibility for permissive reimbursement?

A

1- Tho BoD (w/ a quorum of directors being non-parties; OR, if there is no such quorum
2- S/H or a quorum of disinterested directors; OR
3- the BoD pursuant to report from independent legal counsel

47
Q

Can the court (in which the officer or director was sued) order the corporation to reimburse her for litigation expenses and attorney’s fees REGARDLESS?

A

Yes, if it finds that he is reasonably entitled to reimbursement

48
Q

Can the corp advance litigation expenses to a director or officer being sued in her capacity?

A

YES but they must be re-paid if it turns out that she is not entitled to reimbursement

49
Q

Can the certificate or bylaws eliminate director/officer liability to the corporation or shareholders?

A

The certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty EXCEPT if the director/officer acted:

  • IN BAD FAITH; or
  • W/ INTENTIONAL MISCONDUCT; or
  • RECEIVED AN IMPROPER FINANCIAL BENEFIT; or
  • APPROVED AN UNLAWFUL DISTRIBUTION OR LOAN

aka certificate may eliminate liability to corp or s/h for breach of duty EXCEPT breach of duty of loyalty

NY Corporations (6 decks)

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