Directors & Officers Flashcards
Can a director be a person or entity?
No, must be human
Who elects directors after the organisational meeting?
Shareholders
When will the Board be re-elected?
Once a year, unless it’s a staggered Board.
Can a director be removed before the election period? If so, by whom?
Yes, they can be removed by a shareholder WITH or WITHOUT cause
If there is a vacancy on the Board, who can appoint the new member?
Either the Board or the Shareholders, but if the director was removed by the SH, then they must appoint.
The directors must act as a group. That means…?
Unanimous written agreement to take an action (Resolution)
OR
At a meeting that must satisfy quorum and voting requirements
If the directors agree to have the company take an act that doesn’t satisfy the formalities of making such a decision, will their decision still stand?
It’s VOID, unless ratified by one of the two proper methods.
What are the two kinds of Board meeting?
Regular meeting
Special meeting
What notice is required for regular meetings vs. special meetings?
Regular — no notice
Special — At least 2 days notice of the meeting DATE, TIME and PLACE (unless Bylaws state otherwise).
Typically, does the notice of a special meeting need to state the purpose of the meeting?
No, just date, time and place.
If notice of the meeting fails to meet the requirements, can the requirement be waived? If so, how?
Yes, the directors can waive notice defect: (1) in writing at any time; or (2) by attending the meeting without objecting at the outset of the meeting.
Can you appoint a proxy for a director?
No because they have non-delegable fiduciary duties.
Unless the Bylaws state otherwise, what is the quorum for a Board meeting?
Majority of all directors.
Passing a resolution requires what vote?
A majority vote of the directors who are present at the Board meeting (as opposed to majority of all directors).
Can a quorum be lost part way through a Board meeting?
Yes (e.g. someone leaves)
What is the role of the Board of Directors?
They manage the company
Set policy
Supervise officers
Declare distributions
Determine issuance of stock
Recommend fundamental corporate changes to SH
The Board can delegate some decision-making to a committee. However, the committee cannot make which decisions?
Declare distributions
Fill a Board vacancy
Recommend a fundamental corporate change to shareholders
But the committee can RECOMMEND all of these things to the Board.
What is the Duty of Loyalty standard you must memorise for the exam?
Directors must discharge his/her duties in GOOD FAITH
With the REASONABLE BELIEF that their actions are
In the BEST INTERESTS of the company
What is the Duty of Care standard you must memorise for the exam?
A Director must use the care that a PRUDENT PERSON in a LIKE POSITION would use under the circumstances.
Who has the burden of proof when it comes to proving the Duty of Care Standard?
Plaintiff
Broadly speaking, a director may breach the duty of care standard in which two ways?
Misfeasance (Board’s act hurts the corporation)
Nonfeasance (Director does nothing)
If the director commits nonfeasance (i.e. does nothing), what else will the plaintiff have to show to breach of duty?
Causation — D’s failure to act caused loss to the company.
Regarding a breach of duty by a director for misfeasance, what steps should you work through to analyse the exam question?
- State the duty Of care and duty of loyalty standard in full, but focus on the former.
- Business Judgment Rule / Appropriate homework presumed
- State that burden is on the plaintiff to show Board did not follow these rules
- State that court will usually uphold Board’s business decision if made in:
— GOOD FAITH,
— was INFORMED, and
— had a RATIONAL BASIS.
Under the Duty of Care Standard, what is the Business Judgement Rule?
The BJR is a presumption that when the Board took an act, they did APPROPRIATE HOMEWORK
If the Director appears to fall below the standard for duty of care, but can meet the test for BJR, will they be liable?
No.
Does the BJR apply to duty of loyalty cases and/or duty of care cases?
ONLY Duty of Care, not Duty of Loyalty cases
Who has the burden of proof for duty of loyalty cases?
Burden is on the defendant
Broadly speaking, what are the two ways that a Director could breach the Duty of Loyalty Standard?
SELF-DEALING (Any deal between the company and a director/their close family member/director-owned business)
COMPETING VENTURES (Conflict of Interest)
What steps do you need to work through on the exam if you see a self-dealing fact pattern?
- State duty of care and duty of loyalty standard in full, but focus on the latter.
- State that interested Director transactions will be set aside or the Director is liable to damages, unless:
A. Director can prove that deal was fair to the company when entered into
OR
B. Disclosed interest or interests were known about in advance AND approved by either:
— a majority of disinterested directors, OR
— majority of disinterested shares
What is the rule regarding competing ventures?
A director cannot directly compete with their company. If they breach this rule, then the company gets CONSTRUCTIVE TRUST on the profits of the venture.
What are the rules/steps you need to follow for director’s breach of corporate opportunity?
- State duty of care and duty of loyalty standard (but focus on the latter)
- State that a director cannot USURP a corporate opportunity.
—(a) State what a “Corporate Opportunity” typically entails.
- This means that they cannot take the property until they:
—(i) tell the Board about the opportunity; AN
—(ii) wait for Board to reject the opportunity for the company
- Remedy = director must sell property to corporate at cost or give the corporation the profits form the earlier sale.
What is a “corporate opportunity?
Will usually be within the company’s business line
Something the company had an interest or expectancy in
Something the director found on company time or with company resources
The company would have been unable to buy the property that the director ending up buying (contrary to the corporate’s interest). Will this be a defence to the corporate opportunity standard?
No
In what circumstances can a corporation make a loan to a company without it being a breach of the director’s fiduciary duties?
Company can make a loan to a Director if REASONABLY EXPECTED TO BENEFIT CORPORATION.
What must a director do to ensure their dissent or abstention to a Board action is formally noted?
Should be recorded in writing in the corporate records.
In writing means:
— in the minutes, OR
— delivered in writing to the presiding officer at the meeting, OR
— send written dissent to company immediately after the Board meeting.
Can the director’s be liable for decisions presented by other officers/directors?
No, provided they relied on good faith on what that person told you.
What duties do officers of a company owe?
Same as directors
What is the officer’s standing at the company?
They are an agent and the corporation is the principal.
Can an officer bind the company?
It depends on whether they have actual or apparent authority to do so.
What authority is a company President presumed to have?
Implied authority
To enter into contracts on behalf of the corporation
In the ordinary course of corporate affairs
Who selects and removes officers from their position?
The Board
What are the three categories/rules for company indemnification of officers/directors?
Category 1: the Corporation CANNOT indemnify a D/O who was held liable to the company or to have received an improper benefit.
Category 2: the Corporation MUST INDEMNIFY a D/O who prevails in the case on the merits or otherwise
Category 3: The Corporation MAY INDEMNIFY a D/O for their litigation expenses if the D/O acted in good faith, with the reasonable belief that their acts were in the company’s best interests (meet duty of loyalty standard)
Who determines the eligibility for D/O indemnification?
Either:
— Disinterested Directors
— Disinterested Shares
— Independent Legal Counsel
If a director settles their suit outside of court, which of the three categories of indemnification are they likely to fall into?
Category 3, because there is no court holding and the director doesn’t win or lose their case.
How can the articles limit director/officer liability to the company?
Can do so for damages, but not:
— intentional misconduct
— usurping corporate opportunity
— unlawful distributions
— improper personal benefit
