Directors & Officers Flashcards
directors: role & general requirements
BOD is the group in charge of management of the corp (fiduciary duties triggered): declares distributions, sets policy, determines stock issuance, RECOMMENDS fundamental changes to shareholders
(1) adult natural persons
(2) one or more
(3) named in AOI or elected by incorporators
removal of directors
SH can hire directors AND fire directors EVEN BEFORE their terms expire
directors are removable with or without cause
BOD action: general rule & 2 methods
general rule: the BOD MUST ACT AS A GROUP (individual directors have NO independent authority)
two methods:
(1) unanimous agreement in writing (even multiple writings), OR
(2) at a meeting
BOD meeting requirements (notice, quorum, proxies)
NOTICE:
»> regular meetings - no notice required
»> special meetings: 2 days’ notice required (need not state meeting purpose)
QUORUM
»> majority of directors must ATTEND
»> to pass a resolution, you need a majority vote of those PRESENT at the meeting
PROXIES
»> cannot use proxies! you owe the corp a NON-DELEGABLE fiduciary duty
D&O fiduciary duties
ONLY VERTICAL (so only owed to the corp itself)
standard includes:
DUTY OF LOYALTY: must discharge your duties in good faith & in reasonable belief that actions are in best interest of the corp
DUTY OF CARE: must use care of a prudent person in like position under the circumstances
**IN ANALYZING EITHER, ALWAYS STATE BOTH DUTIES FIRST
breach of duty of care (2 types & BJR)
burden is on the PLAINTIFF
breach includes:
(1) nonfeasance (non-action that CAUSES injury to the corp), or
(2) misfeasance (action that hurts the business - causation will be clear here - so big thing you need to prove is INJURY)
»> it is NOT sufficient that the act, in hindsight, turned out to be erroneous
BJR protection: presumption that a director’s decision may not be challenged IF the director acted:
(1) in good faith,
(2) with the care that an ordinarily prudent person would exercise in a like position, AND
»> can rely on opinions of experts or corporate insiders, so long as that reliance is reasonable
(3) in a manner the director reasonably believed to be in the best interest of the corporation
(i. e. if he satisfied BOTH FIDUCIARY DUTIES)
breach of duty of loyalty - self dealing & exceptions
**the BJR WILL NOT APPLY b/c director has a conflict of interest - so burden is on DEFENDANT
BREACH BY SELF DEALING
»> exception: action will not be set aside if:
(1) director disclosed all material facts/they were known by the BOARD beforehand, AND approved by a majority (at least 2) of DISINTERESTED DIRECTORS, OR
»> some states also require fairness here
(2) director disclosed all material facts/they were known by the SH beforehand, AND approved by a majority (at least 2) of DISINTERESTED SHAREHOLDERS, OR
»> some states also require fairness here
(3) judged by circumstances at time corp entered into transaction, it was fair to the corp.
remedies: setting aside, damages, enjoining transaction
breach of duty of loyalty - competing ventures
**the BJR WILL NOT APPLY b/c director has a conflict of interest - so burden is on DEFENDANT
BREACH BY DIRECTLY COMPETING VENTURES
breach of duty of loyalty - corporate opportunity doctrine
**the BJR WILL NOT APPLY b/c director has a conflict of interest - so burden is on DEFENDANT
CORPORATE OPPORTUNITY DOCTRINE
- “corporate opportunity”: really a common-sense inquiry
»> something company has interest/expectancy in
»> something director found on company time/with company resources - rule: director cannot usurp a corporate opportunity: must first tell the board about it and wait a reasonable time for the board to reject that opportunity
- defense of “company couldn’t afford it anyway” is usually INVALID
- remedies: sale of opp back to company or disgorgement of profits
validity of loans to directors
corp can make loans to directors ONLY IF it is reasonably expected to benefit the corporation
BOFD or “ultra vires acts” - which directors may be liable?
(note: ultra vires means making the company do something it has no power to do)
- director is PRESUMED to concur with board action UNLESS dissent/abstention noted in writing in corp records
»> unless absent from meeting or good faith reliance on information
officers: role; selection/removal
officers are AGENTS of the corp (authority goes through agency principals) & they carry out the day to day operations
selected/removed by the BOARD (not shareholders)
indemnification of BOD/Officers (3 categories)
category 1: corp CANNOT indemnify IF D/O held liable to corp or held to have obtained improper benefit
category 2: corp MUST indemnify IF D/O is successful in defending (on merits or otherwise)
category 3 (catchall): corp MAY indemnify EVEN IF she loses IF D/O has acted in good faith and believed her actions were in the best interests of the company (i.e. satisfied DOL) >>> includes where they SETTLED
limitation of D/O liability in the AOI
the AOI CAN eliminate D/O liability to the corporation for damages, BUT NOT FOR:
> > > intentional misconduct
> > > usurping corporate opportunities
> > > unlawful distributions, or
> > > improper personal benefit
***main point: can essentially only limit liability for BODC
