Directors & Officers

Question 1

What is the minimum # of directors that a corporation can have? Where is # of directors set?

Answer 1

1 or more NATURAL (i.e. human) persons

Number (greater than 1) can be set in (i) bylaws; (ii) by SH act; OR (iii) by the BOD, if a SH bylaw allows

Question 2

Who elects the initial BOD?

Answer 2

The incorporators elect initial directors at the organizational mtg. After that, SHs elect at the annual mtg.

Question 3

What is a staggered or “classified” bd?

Answer 3

Where the entire bd is NOT re-elected each year. The certificateOR SH bylaw can establish 2, 3, or 4 classes of directors. One class is up for election each year.

Question 4

Can a director be removed before the expiration of his term?

Answer 4

“For cause”: by SHs; by the BOD, ONLY IF the certificate OR bylaws allow

For ANY reason: by SHs, ONLY IF the certificate OR bylaws allow

Question 5

How is a board seat filled on event of resignation, death or removal?

Answer 5

General rule: the BOD selects the person who will serve the remainder of the term

If director was removed by SHs, WITHOUT “cause”, then SHs fill the vacancy

Question 6

What are the ONLY 2 ways a BOD can take a valid act?

Answer 6

1) UNANIMOUS written consent; OR
2) Via a board meeting

NOTE: INDIVIDUAL bd members are NOT agents of the corporation (they have no pwr to bind in their individual capacity); they MUST act as a group.

NOTE: If a bd purports to “act” in some OTHER WAY than listed above, the action is VOID, UNLESS the action was ratified by the BOD via a valid act (e.g. a conversation among a few directors is NOT a mtg).

Question 7

What are the 4 requirements for a valid board meeting?

Answer 7

1) Notice: is NOT req’d for REGULAR meetings if the time/place is set in bylaws. Notice IS req’d for SPECIAL meetings, AND must state the time/place of the mtg (need NOT state the purpose). If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection.
2) Unrestrained voting: bd CANNOT vote by PROXY or enter VOTING AGMTS to vote in a certain way. Voting is a non-delegable fiduciary duty.
3) Quorum: to meet quorum, there must be a MAJORITY of the “entire board” present. “Entire board” = duly constituted board = the # of positions WITHOUT vacancies. Quorum CAN be “broken” (i.e. if it’s met and sufficient directors leave, then it can fall below req’d amt)
4) Majority voting: once quorum is met, passing a resolution reqs a MAJORITY of those directors present.

NOTE: The board mtg does NOT have to be in NY & a meeting CAN be via conference call

Question 8

What is necessay to raise OR lower the quorum requirement?

Answer 8

1) Lower
The quorum req CAN be less than a majority ONLY IF stated in the certificateOR bylaws NEVER can be fewer than 1/3d of the bd Increase

2) Raise
The quorum req CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 9

What is necessay to raise OR lower the board resolution voting requirement?

Answer 9

1) Lower
The corporation can NEVER decrease the resolution voting requirement below a majority

2) Raise
The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 10

When can a BOD delegate responsibility to a committee of directors?

Answer 10

A BOD can delegate certain functions IF (i) the certificate OR bylaws allow; AND (ii) a majority of the “entired board” (without vacancies) votes to delegate

Committee must be made of AT LEAST one director

A BOD CANNOT delegate all of its powers to a committee

Question 11

What is a board committee PROHIBITED from doing?

Answer 11

1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to SHs
4) Amend bylaws

NOTE: A committee CAN recommend ANY of the above for FULL board action

NOTE: Committees are used in conjunction with SH derivative suits

Question 12

What is the standard for the duty of care?

Answer 12

Std = “A director must discharge her duties in GOOD FAITH and with that degree of DILIGENCE, CARE AND SKILL that an ORDINARY PRUDENT PERSON would exercise under similar circumstances in like position”

Question 13

What is the standard for duty of loyalty?

Answer 13

Std = “A director must act in GOOD FAITH and with the CONSCIENTIOUSNESS, FAIRNESS, MORALITY and HONESTY that the law requires of fiduciaries”

BJR does NOT apply b/c the bd cannot take proper action if there is a conflict of interest

Question 14

What 3 main types of transactions can breach the duty of loyalty?

Answer 14

1) Interested Director Transactions
2) Competing Ventures
3) Corporate Opportunity

Question 15

Is a loan to a director using corporate funds OK?

Answer 15

ONLY IF (i) it’s approved by SHs; OR (ii) if the board finds that it will benefit the corporation

Question 16

How can a director dissent from a board decision?

Answer 16

General rule = a director is PRESUMED to have concurred w/ board action UNLESS her dissent is noted in WRITING in corporate records

Procedure = (i) dissent in the board minutes; (ii) in writing to the corp. secretary at the meeting; OR (iii) via registered letter to the corp. secretary PROMPLTY after adjournment

ORAL dissent is NEVER effective by itself

EXCEPTIONS: A MISSING director is not liable for meeting actions IF he dissents in WRITING to the corp secretaryw/in a reasonable time AFTER learning of the action

Question 17

When can directors rely on opinions of others?

Answer 17

ONLY when the reliance is done in GOOD FAITH

Applies to information, opinions, reports or stmts by… (i) officers or employees, (ii) lawyers or accountants, (iii) a committee’s recommendation…PROVIDED the director believes the person is competent and is working w/in scope of designated authority

Question 18

What duties do officers of a corporation have?

Answer 18

As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty

Question 19

Who may elect/remove officers?

Answer 19

The BODunless the certificate allows SHs to elect them (rare)

One person CAN hold more than one office

BOD can suspend an officer’s authority to act “for cause” (if SH elect and fire)

Question 20

Can an officer be removed via judicial action?

Answer 20

The atty general OR holders of 10% of all SHARES may sue for a judgment removing an officer “for cause”

Ct can bar reappointment of a person so removed from office

Question 21

When can a director or officer be reimbursed by the corporation for personal liability?

Answer 21

4 categories…

1) Prohibited reimbursement: if officer was held liable to the corporation (a judicial holding, not accusal)

2) Of right: the corp MUST reimburse the director/officer IF she won a judgment on the merits or otherwise
NOTE: if she files ANOTHER action to collect reimbursement, the corporation is not req’d to pay THOSE atty fees

3) Permissive: if not part of the categories above, the corp MAY reimburse, IF (i) she acted in good faith; AND (ii) for a purpose reasonably believed to be in the company’s best interest. Can include reimbursement for settlement.
4) Court order: a ct can order the corp to reimburse a director/officer for litigation expenses/atty fees.

NOTE: A corp can ADVANCE litigation expenses to a director/officer, BUT they MUST be repaid if it turns out that she’s NOT entitled to reimbursement

NOTE: A corp. can buy insurance to cover director/officer liability

Question 22

Who determines eligibility for permissive indemnification of directors OR officers?

Answer 22

1) BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum… 2) SH or a quorum of those directors who are disinterested; or… 3) BOD pursuant to report from independent legal counsel

Question 23

What is the duty of care standard for nonfeasance?

Answer 23

Nonfeasance (i.e. BOD does NOTHING - ordinarily prudent person would attend meetings) will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove)

Question 24

What is the duty of care standard for misfeasance?

Answer 24

Misfeasance (i.e. BOD does something that hurts corp)

State duty of care: 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 a like position.
Implicates the Business Judgment Rule (BJR): a ct will not second guess a business decn IF it was made in GOOD FAITH, was REASONABLY INFORMED and RATIONAL

Question 25

What is the business judgment rule?

Answer 25

A ct will not second guess a business decision if it was made in good faith, was reasonably informed and rational

NOTE: must TAKE ACTION to implicate BJR

Question 26

What is the duty of loyalty standard for self-dealing (interested director) transactions?

Answer 26

Interested director (self-dealing) trxns = when there is any deal b/t the corporation and one of its directors (or business of which the director is also a director or has subtl fin. interest)

Duty of Loyalty: a director must act in good faith and with the conscientiousness, fairness, morality and honestly that the law requires of fiduciaries.

Can be “cleansed” IF: (1) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND (2) the deal was approved by (i) SH action; (ii) BOD approval by disinterested directors; OR (iii) UNANIMOUS approval of disinterested directors if they are insuffiicent in number to take bd action

NOTE: interested directors DO count for quorum purposes; they just CANNOT vote The entire board CAN set director compensation, BUT it must be reasonable and in good faith (otherwise, it’s a waste of corp assets)
To give directors or officers options for PRIVATE stock, they must be approved by SHs

Question 27

What is the duty of loyalty standard for competing ventures?

Answer 27

Directors cannot compete with their with their own corporation

If director DOES compete, a ct would establish a CONSTRUCTIVE TRUST for the profit made from the competing venture and director would have to account for profits (corp could also get damages, if it were hurt)

Question 28

What is the duty of loyalty standard for corporate opportunity?

Answer 28

A director cannot “USURP a corporate opportunity”

A director CAN take an opportunity ONLY IF: (1) he tells the BOD abt the opportunity; AND (2) the director waits for the disinterested BOD to REJECT it

Corporate opportunity = someting the corporation NEEDS, have an EXPECTANCY INTEREST IN, OR is logically RELATED TO its business

“The corporation couldn’t afford it” is NOT a valid excuse

Remedy = constructive trust established, which accounts for any profits made

Question 29

Which directors are liable for decisions?

Answer 29

General Rule: directors are presumed to have concurred with board action unless her dissent is noted in writing in corporate records

Question 30

Who sets compensation for officers?

Answer 30

The board

Question 31

When can a director by indemnified by the certificate?

Answer 31

Exculpation: The certificate may eliminate director liability to the corporation/SHs for breach of a duty, EXCEPT if she (i) acted in bad faith; (ii) acted with intentional misconduct; (iii) received an improper fin. benefit; OR (iv) approved an unlawful distribution or loan