Directors: Requirements and Role

Question 1

Directors - Basics

Answer 1

• responsible for the management of the business + affairs of the corporation

Question 2

Statutory Reqs for Directors - Qualifications

Answer 2

• must be adult natural persons (human beings w/ legal capacity)
• need not be SHs in the corp or residents of any particular state (UNLESS articles or bylaws state otherwise)
• any qualifications for directors prescribed by the articles or bylaws must be reasonable + lawful
  -> no qualification may limit the ability of a director to discharge duties

Question 3

Statutory Reqs for Directors - Number

Answer 3

• need one or more
• number can be set in articles or bylaws -> can require as many directors as desired

Question 4

Statutory Reqs for Directors - Election

Answer 4

• initial directors may be named in the articles
• if not, they’re elected by the incorporators at the organizational meeting
• after this, SHs elect directors
  -> directors elected at each annual SH meeting, subject to contrary provisions in the articles

Question 5

Staggered Board

Answer 5

• entire board elected each yr unless there’s a “staggered” board
  -> usually set out in articles
• staggered board divided into half or thirds -> one half or one third elected each yr

Question 6

Statutory Reqs for Directors - Removal

Answer 6

• SHs can remove dirs before their terms expire
  -> can remove w/ or w/o cause (although in some states, only w/ cause if staggered bd)

Question 7

Situational Limits on SH Power to Remove Dirs

Answer 7

• dir elected by cumulative voting can’t be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of dirs
• dir elected by voting group of shares can be removed only by that class

Question 8

Statutory Reqs for Directors - Vacancies

Answer 8

• can arise (ex dir resigns)
• bd selects dir for rest of term
  -> BUT SHs do it if they created the vacancy by removing dir

Question 9

Board Action - Group Req

Answer 9

• board of directors must act as a group
• SO indiv dir is NOT an agent of the corp -> NO authority to speak for or bind the corp
  -> b/c entire board of directors must act as a group

Question 10

Potential Ways of Board Acting as Group

Answer 10

• unanimous agreement in writing (email OK, + separate docs are OK) OR
• at a meeting, which must satisfy certain voting + quorum reqs

Question 11

Ratification of Defective Corporate Actions

Answer 11

• dirs, incorporators + officers may ratify defective corporate actions (actions that are void or voidable due to failure of authorization)
• to ratify, board of directors must state the action to be ratified + nature of the failed authorization, approve the ratification + seek SH approval if necessary

Question 12

Types of Board Meetings + Notice

Answer 12

• method for notice usually specified in bylaws
• can have regular or special meetings
  -> for regular meetings, notice not required
  -> for special meetings, need at least two days’ written notice of date, time + place (notice need not state purpose though)

Question 13

Board Meetings - Failure to Give Notice

Answer 13

• if you don’t give required notice, whatever happened at the meeting is voidable (maybe even void) UNLESS the directors who weren’t notified waive the defect

Question 14

How do directors waive defect of lack of notice?

Answer 14

Those who weren’t notified can waive:
1) in writing at any time OR
2) by attending the meeting w/o objecting at the outset of the meeting

Question 15

Board Meetings - Proxies

Answer 15

• directors CANNOT give proxies or enter into voting agreements for how they will vote as directors
  -> any efforts to do so are void
• rationale: owe corp non-delegable fiduciary duties (vs. SHs actually don’t)

Question 16

Board Meetings - Quorum

Answer 16

• need quorum for any board meeting
• quorum = majority of all directors, unless the bylaws say otherwise (but can be no fewer than one third of board members)
  -> w/o quorum, board can’t act

Question 17

Board Meetings - Approval of Action

Answer 17

• if quorum present at a meeting, passing a resolution (how the board takes action at a meeting) requires only a majority vote of those present
• ex: 9 dirs, 5 attend -> only need 3 to pass resolution

Question 18

Board Meetings - Broken Quorum

Answer 18

• quorum can be lost if people leave
• once quorum no longer present, board CAN’T take action at that meeting (different from SH voting)

Question 19

Action by Unanimous Written Consent

Answer 19

• any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, without a meeting

Question 20

Exam Tip - Directors + Actual Authority

Answer 20

• q’s often test where no meeting + one dir enters into extraordinary contract w/ approval of some dirs or by calling all dirs individually
• recognize dir doesn’t have power to bind corp in K unless they have ACTUAL authority to act -> generally can arise only if:
  1) proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action OR
  2) unanimous WRITTEN consent of the directors

Question 21

Role of the Board of Directors - Overview

Answer 21

Manages corp -> includes:
- sets it policy
- supervises officers
- declares distributions
- determines when stock will be issued
- recommends fundamental corp changes to SHs

Question 22

Board - Committees

Answer 22

• unless articles or bylaws provide otherwise, board can create one or more committees, w/ one or more members + appoint members of the board of directors to serve on them
  -may act for the board, but the board remains responsible for supervision of committees
• note that board can also delegate authority to officers

Question 23

Committees - Limits on Action

Answer 23

Board CAN delegate actions to committees, BUT committee CAN’T take the following actions:
- declare a distribution
- fill a board vacancy
- recommend a fundamental change to SHs

• BUT committee CAN recommend such actions to full board for its action