Directors_Officers Flashcards
What is the minimum # of directors that a corporation can have?
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
Who elects the initial BOD?
The incorporators elect initial directors at the organizational mtg After that, SHs elect at the annual mtg
What is a staggered or “classified” bd?
Where the entire bd is NOT re-elected each year The certificateOR SH bylaw can establish 2, 3, or 4 classes of directors Each class is up for election each year
Can a director be removed before the expiration of his term?
“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
How is a board seat filled on event of resignation, death or removal?
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
What are the ONLY 2 ways a BOD can take a valid act?
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 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)
What are the 4 requirements for a valid board meeting?
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 NOTE: SHs CAN vote by proxy and enter voting agmts 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 E.g. if there are 9 director positions w/o vacancies, then you’d need at least 5 present 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 E.g. of the 5 directors present, you’d need 3 to pass a resolution NOTE: The board mtg does NOT have to be in NY A meeting CAN be via conference call
What is necessay to raise OR lower the quorum requirement?
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 The quorum req CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)
What is necessay to raise OR lower the board resolution voting requirement?
Lower: the corporation can NEVER decrease the resolution voting requirement below a majority Increase: The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)
When can a BOD delegate responsibility to a committee of directors?
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
What is a board committee PROHIBITED from doing?
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 Committees are used in conjunction with SH derivative suits
What is the standard for the duty of care?
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” Nonfeasance (i.e. BOD does NOTHING) will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove) Misfeasance (i.e. BOD does something that hurts corp) 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
What is the standard for duty of loyalty?
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
What 3 types of transactions can breach the duty of loyalty?
1) Interested director (self-dealing) trxns: occurs 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) 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 2) Competing ventures: 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 (corp could also get damages, if it were hurt) 3) Corporate opportunity: 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
Is a loan to a director using corporate funds OK?
ONLY IF (i) it’s approved by SHs; OR (ii) if the board finds that it will benefit the corporation
How can a director dissent from a board decision?
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
When can directors rely on opinions of others?
ONLY when the reliance is done in GOOD FAITH Applies to information, opinions, reports or stmts by… officers or employees lawyers or accountants a committee’s recommendation… PROVIDED the director believes the person is competent and is working w/in scope of designated authority
What duties do officers of a corporation have?
As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty
Who may elect/remove officers?
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”
Can an officer be removed via judicial action?
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
When can a director or officer be reimbursed by the corporation for personal liability?
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) Cout orderd: n/w/s the above, 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 A corp. can buy insurance to cover director/officer liability 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
Who determines eligibility for permissive indemnification of directors OR officers?
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
