Directors_Officers

Question 1

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

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

CertificateOR SH bylaw can establish 2, 3, or 4 classes of directors

Each 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

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

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

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

Question 8

What is necessary to raise OR lower the quorum requirement?

Answer 8

Lower

ONLY IF stated in the certificateOR bylaws
NEVER can be fewer than 1/3d of the bd

Increase

ONLY IF stated in the certificate (NOT bylaws)

Question 9

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

Answer 9

Lower

Can NEVER decrease the resolution voting requirement below a majority

Increase

ONLY IF stated in the certificate (NOT bylaws)

Question 10

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

Answer 10

(i) Certificate OR bylaws allow; AND
(ii) Majority of the “entire 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

Committees are used in conjunction with SH derivative suits

Question 12

What is the standard for the duty of care?

Answer 12

“A director must discharge her duties in

(i) GOOD FAITH
(ii) with that degree of DILIGENCE, CARE AND SKILL
(iii) that an ORDINARY PRUDENT PERSON would exercise under similar circumstances in like position”

Nonfeasance (i.e. BOD does NOTHING) - 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

Question 13

What is the standard for duty of loyalty?

Answer 13

“A director must act in
(i) GOOD FAITH and

(ii) with the CONSCIENTIOUSNESS, FAIRNESS, MORALITY and HONESTY
(iii) 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 types of transactions can breach the duty of loyalty?

Answer 14

1) 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)

Can be “cleansed” IF:
(a) Deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known;

AND
(b) the deal was approved by

(i) SH action;
(ii) BOD approval by disinterested directors; OR
(iii) UNANIMOUS approval of disinterested directors if they are insufficient 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

Remedy: CONSTRUCTIVE TRUST for the profit made from the competing venture (corp could also get damages, if it were hurt)

3) Corporate opportunity

Director cannot “USURP a corporate opportunity”

A director CAN take an opportunity ONLY IF:

(i) he tells the BOD abt the opportunity; AND
(ii) the director waits for the disinterested BOD to REJECT it

Corporate opportunity = something 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 15

Is a loan to a director using corporate funds OK?

Answer 15

ONLY IF
(i) Approved by SHs; OR

(ii) BD finds that it will benefit the corporation

Question 16

How can a director dissent from a board decision?

Answer 16

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
PROMPTLY 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

Power - BIND the company

Duties - (1) care AND (2) loyalty

Question 19

Who may elect/remove officers?

Answer 19

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”

Question 20

Can an officer be removed via judicial action?

Answer 20

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

1) Prohibited reimbursement

Officer held liable to the corporation (a judicial holding, not accusal)

2) Of right

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

(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 ordered:

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: 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

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