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?
Yes. SHs can remove “for cause”. The BOD can remove directors ONLY id the certificate or a SH bylaw allows.
ONLY SHs can remove a director w/out cause and ONLY if the certificate or bylaw allows
How is a board seat filled in 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 “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
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 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). Interested director trxns will be set aside UNLESS the director shows: (1) the deal was fair and reasonable to the corporation when approved OR (2) the material facts and her interest were disclosed/known; AND 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
2) Competing ventures: directors cannot compete directly 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 the competition hurt it)
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 (maybe damages if the usurpation harmed the company)
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 and a director cannot dissent if voted for the resolution at the meeting.
What duties do officers of a corporation have?
Officers owe a fiduciary duty of care AND a duty of loyalty to the corporation. Officers are agents of the corp. and can bind the corp. to acts they take on the corp’s behalf if they have the authority to do so.
Who may elect/remove officers?
The BODunless the certificate allows SHs to elect them (rare). One person CAN hold more than one office. If SHs elect officers than only SHs can fire them. BUT, BOD can still 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?
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 (i.e. case settles), 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. Reimbursement can include settlement amount, expenses and attorney’s fees (no judgement)
4) Cout orderd: n/w/s the above, a ct can order the corp to reimburse a director/officer for litigation expenses/atty fees if it finds that she is reasonably entitled to it.
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 or bylaws can provide for indemnification by resolution of board or SHs or by agmt EXCEPT if director (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
Who can set compensation for the directors?
The board BUT compensation must be reasonable and in good faith. If excessive, it will be considered a waste of corporate assets.
A corp can give a D/O/E stock options as an incentive to service. If the stock is listed on a stock exchange, such use of options must be authorized under exchange polices. If the stock is not listed on the exchange than it must be approved by the shareholders.
What are the exceptions to the general rule of holding directors liable for board action?
1) 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
2) Good faith reliance on information, opinions, reports or stmts by 1) officers or employees of the corp. whom the director or officer believes is competent and reliable, 2) lawyers or public accountants whom the director or officer believes are acting w/in their competence, or 3) a committee of which the person relying, is not a member, as to matters w/in its designated authority.
