Directors & Officers

Question 1

Under what conditions can shareholders remove directors?

Answer 1

SH’s may remove a director with or without cause, unless the articles require cause.

Question 2

Is an individual director an agent of the corporation?

Answer 2

No, because the board must act as a group.

Question 3

How can the board of directors take action?

Answer 3

1. Unanimous agreement in writing, or
2. At a meeting that satisfies the quorum and voting requirements.

Question 4

What notice is required for board meetings?

Answer 4

1. Regular meeting: no notice
2. Special meeting: 2+ days written notice of date/time/place

Question 5

How can a director waive notice of a special board meeting?

Answer 5

1. In a signed writing, or
2. If the director attends the meeting without objecting at the outset.

Question 6

What happens if required notice is not given for a special board meeting?

Answer 6

Whatever happens at the meetings voidable (if notice defect was not waived).

Question 7

Can directors vote by proxy or enter voting agreements?

Answer 7

No, because they owe the corporation non-delegable fiduciary duties.

Question 8

How many directors must attend a board meeting for the board to act?

Answer 8

Quorum = majority

Question 9

How many votes are required for a resolution to pass at a board meeting?

Answer 9

A majority of those present (quorum of quorum).

Question 10

What can a committee do/not do?

Answer 10

The board can delegate action to a committee, but a committee canNOT:

• Declare a distribution
• Fill a board vacancy
• Recommend a fundamental change to shareholders.

But the committee can recommend these actions to the full board.

Question 11

What is the standard for fiduciary duties owed by directors/officers?

Answer 11

Duty of loyalty: A director must discharge their duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation.

Duty of care: They must also use the care that a person in like position would reasonably believe appropriate under the circumstances.

**write both for breach of duty questions!

Question 12

What is the business judgment rule?

Answer 12

A presumption that a director’s decision may not be challenged if the director:

1. Acted in good faith,
2. With the care that an ordinarily prudent person would exercise in a like position, and
3. In a manner the director reasonably believed to be in the best interest of the corporation.

Question 13

What is nonfeasance, and when is a director liable for it?

Answer 13

Occurs when a director basically does nothing. Will be liable only if his breach causes a loss to the corporation.

Question 14

What is misfeasance, and when is a director liable for it?

Answer 14

Occurs when the board makes a decision that hurts the business. Will only be liable if the business judgment rule presumption cannot apply.

Question 15

What is a director forbidden from doing under the duty of loyalty?

Answer 15

1. Entering into conflicting interest transactions;
2. Usurping a corporate opportunity;
3. Competing with the corporation; OR
4. Trading on inside information.

Question 16

What constitutes self-dealing?

Answer 16

Any transaction between the corporation and

1. One of its directors,
2. A director’s close relative, or
3. Another business of a director’s

Question 17

When will a self-dealing transaction be upheld?

Answer 17

The director shows either:

1. The deal was fair to the corporation when entered, or
2. The director disclosed the material facts of the transaction to disinterested members of the board, who approved the transaction.

The BJR doesn’t apply to self-dealing/duty of loyalty cases.

Question 18

Can a director directly compete with the corporation?

Answer 18

No. If she does, the company can get a constructive trust on profits made from the competing venture.

Question 19

When does a director usurp a corporate opportunity?

Answer 19

When he takes a business opportunity from the corporation without first giving the corporation an opportunity to act.

Question 20

How do we know if a director agreed with board action?

Answer 20

A director is presumed to concur with board action unless her dissent or abstention is noted unwriting in the corporate records (unless good faith absence).

Question 21

How can an officer bind the corporation?

Answer 21

They are agents, so by actual/apparent authority or ratification/adoption/estoppel.

Question 22

Removal of officers

Answer 22

Officers may be removed at any time with or without cause by:

1. Board
2. An officer who appointed them (unless otherwise prohibited), or
3. Any other officer, if authorized.

Shareholders do not remove or appoint officers!!!

Question 23

When can a corporation NOT indemnify a director?

Answer 23

A director who is:

1. Held liable to the corporation, or
2. Held to have received an improper benefit.

Question 24

When MUST a corporation indemnify a director?

Answer 24

When they were successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses.

Question 25

When MAY a corporation indemnify a director?

Answer 25

For reasonable expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director:

1. Acted in good faith, and
2. Believed that her conduct was in the best interests of the corporation.

Question 26

When is a director liable for unlawful distributions?

Answer 26

When the amount distributed exceeds what could have been properly distributed.

But director not liable if distributions approved in good faith (reasonable financial statements or relying on outside advice).