Directors_Officers Flashcards
DIRECTORS - HOW MANY MINIMUM AND HOW IS NUMBER SET?
What is the minimum # of directors that a corporation can have?
A corporation can have 1 or more NATURAL (i.e. human) persons → Number MUST be greater than 1
HOW NUMBER OF DIRECTORS IS DETERMINED: can be set in (i) bylaws; (ii) by a SH act; OR (iii) by the BOD, if a SH bylaw allows
WHO ELECTS BOD?
Who elects the initial BOD?
The incorporators elect initial directors at the organizational mtg
After that, SHs elect at the annual mtg
STAGGERED BOARD / CLASSIFIED BOARD
What is a staggered or “classified” bd?
A staggered or Classified Board is 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
REMOVING BOARD MEMBER BEFORE EXPIRATION OF TERM
Can a director be removed before the expiration of his term?
The following rules pertain to removal of directors before the expiration of their term:
1) “For cause”:
(i) by SHs; OR
(ii) by the BOD, BUT ONLY IF the certificate OR bylaws allow
2) For ANY reason:
(i) by SHs, BUT ONLY IF the certificate OR bylaws allow
FILLING A VACANCY ON THE BOARD
How is a board seat filled on event of resignation, death or removal?
The general rule for filling a board seat on event of resignation, death or removal IS
(i) the BOD selects the person who will serve the remainder of the term
(ii) BUT If director was REMOVED by SHs, WITHOUT “CAUSE”, then SHs fill the vacancy
HOW BOD MAKES A VALID ACT
What are the ONLY 2 ways a BOD can take a valid act?
There are only two ways in which the board can take a valid act:
1) UNANIMOUS written consent; OR
2) Via a BOARD MEETING (does NOT have to be in NY)
NOTE: INDIVIDUAL bd members are NOT agents of the corporation (they have NO POWER to bind in their INDIVIDUAL capacity); they MUST act as a group
If a board purports to “act” in some OTHER WAY than listed above, the action is VOID
BUT the INVALID action CAN be made VALID IF RATIFIED by the BOD via a valid act
REQUIREMENT FOR VALID BOARD MEETING
What are the 4 requirements for a valid board meeting?
A VALID BOARD MTG INCLUDES THE FOLLOWING:
1) NOTICE:
(i) Notice is NOT req’d for REGULAR meetings IF the time/place is SET in BYLAWS
(ii) Notice IS REQUIRED for SPECIAL meetings, AND must state the time/place of the mtg (need NOT state the purpose)
NOTE: If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect EITHER:
(i) in a SIGNED WRITING, anytime; OR
(ii) by ATTENDING the meeting WITHOUT OBJECTION
2) UNRESTRAINED VOTING RQRD:
(i) The BOD CANNOT vote by PROXY
(ii) The BOD CANNOT enter into 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:
(i) 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 (NO MATTER IF THERE ARE ONLY 5 SPOTS FILLED AT THE TIME)
• Quorum CAN be “broken” (i.e. if it’s met at the beginning of the meeting and then a sufficient number of directors leave, then it can fall below req’d amt) → any action taken AFTER quorum is “broken” is VOID
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
5) LOCATION OF BOARD MTG:
(i) The board mtg does NOT have to be in NY
(ii) A meeting CAN be via conference call
RULES FOR INCREASING OR DECREASING QUORUM RQMTS
What is necessary to INCREASE OR DECREASE the quorum requirement?
TO DECREASE BoD QUORUM:
(i) The quorum req CAN be less than a majority ONLY IF stated in the CERTIFICATE OR BYLAWS
(ii) BUT can NEVER can be fewer than 1/3 of the “entire” bd
TO INCREASE BoD QUOUM:
(i) The quorum req CAN be raised to more than a majority ONLY IF stated in the CERTIFICATE ONLY (NOT bylaws)
RULES FOR INCREASING OR DECREASING BOD VOTING RQMTS
What is necessary to raise OR lower the board resolution voting requirement?
DECREASING BoD VOTING RQM:
(i) THIS IS FORBIDDEN!
(ii) the corporation can NEVER EVER decrease the resolution voting requirement below a majority
INCREASING BoD VOTING RQM:
(i) The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the CERTIFICATE (NOT bylaws)
BoD DELEGATING RESPONSIBILITY TO DIRECTOR COMMITTEE
When can a BOD delegate responsibility to a committee of directors?
A BOD can delegate certain functions to a committee of directors IF
(i) the CERTIFICATE OR BYLAWS allow; AND
(ii) a majority of the “entired board” (without vacancies) votes to delegate such duties to a committee
The Committee must be made of AT LEAST one director
A BOD CANNOT delegate all of its powers to a committee
ACTIONS THE COMMITTEE CANNOT TAKE
What is a committee PROHIBITED from doing?
THE COMMITTEE ALONE CANNOT:
1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to SHs
4) Amend bylaws
NOTE:
(i) A committee CAN recommend ANY of the above for FULL board action
(ii) Committees are used in conjunction with SH derivative suits
BoD DUTY OF CARE
What is the standard for the duty of care?
***HIGHLY TESTED MATERIAL
BoD DUTY OF CARE STANDARD =
“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) → LAZY!
Nonfeasance 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)
→ STUPID
Misfeasance implicates the Business Judgment Rule (BJR)
BJR = a ct will not second guess a business decn IF it was made in GOOD FAITH, was REASONABLY INFORMED and was RATIONAL – A Director is NOT a Guarantor of Success!
BoD DUTY OF LOYALTY
What is the standard for duty of loyalty?
***HIGHLY TESTED MATERIAL
BoD DUTY OF LOYALTY STANDARD =
“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
3 TYPES OF BREACHES OF DUTY OF LOYALTY AND HOW THE BREACH TREATED?
What 3 types of transactions can breach the duty of loyalty?
***HIGHLY TESTED MATERIAL
A director will BREACH her duty of loyalty if:
(i) She participates in self-dealing and the transaction is not cleansed;
(ii) She engages in a competing venture; OR
(iii) She Usurps a corporate opportunity
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)
HOW HANDLED: Can be “cleansed”
2) Competing ventures: directors cannot compete with their with their own corporation
HOW HANDLED: 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”
HOW HANDLED: 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
Remedy = constructive trust established, which accounts for any profits made
DIRECTOR LOANS
Is a loan to a director using corporate funds OK?
a loan to a director using corporate funds is OKAY but ONLY IF:
(i) it’s approved by SHs (2/3 of shares entitled to vote); OR
(ii) if the board finds that it will benefit the corporation
