Fact Pattern 3: Directors and Officers

Question 1

What are the statutory requirements for Directors?

Answer 1

1. Number - must be one or more;
2. Election - Initial directors may be named in the articles. After the initial directors, shareholders are allowed to elect the directors at the annual meetings;
3. Shareholders can remove the directors before their terms expire;
4. Directors must act as a group, not as individuals.

Question 2

What is staggered elections?

Answer 2

Traditionally, the entire board is elected at the same time. However, A staggered board is allowed and it divides the board into halfs or thirds. Then, each half or third is elected each year. Staggered boards must be provided for in the articles.

Question 3

When shareholders remove a director before their term expires, what are allowable reasons? Is it different if it is a staggered board?

Answer 3

It can be for cause or without cause. For a staggered board, cause is required.

Question 4

If a board member retires before the term expires, who picks the replacement? What if the shareholders remove a board member?

Answer 4

Shareholders or board. However, if the shareholders vote to remove a board member, then the shareholders choose the replacement.

Question 5

Can an individual director act as an agent of the corporation?

Answer 5

No. Individual directors have no authority to bind the corporation.

Question 6

What is required for the board to bind the corporation?

Answer 6

It must be unanimous agreement in writing or at a meeting with a quorum and satifying the voting requirements.

Question 7

For board meetings, what notice is required for the following types of meetings?

1. Regular meetings?
2. Special meetings?

Answer 7

1. No notice is necessary;
2. Notice must be given unless the articles say otherwise. Generally, 2 days notice must be given stating the date time and place, but the purpose of the meeting is not needed.

Question 8

Can the directors vote by proxy at the meetings?

Answer 8

No, void. Directors owe a non-delegable fiduciary duty to the corporation.

Question 9

What is a quorum for board meetings?

Answer 9

For any meeting of the board, a quorum is a majority of all directors. Without a quorum, the board cannot act.

Question 10

What is the role of the board of directors?

Answer 10

To manage the corporation by setting policy, supervising officers, declares distributions, determines when stock will be issued, recommends fundamental changes, etc.

Question 11

What is the standard for the fiduciary duties owed by directors to the corporation?

Answer 11

A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.

Question 12

What is the duty of loyalty a director owes the corporation?

Answer 12

A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation.

Question 13

What is the duty of care a director owes a corporation?

Answer 13

A director must use the care that a person in like position would reasonably believe appropriate under the circumstances.

Question 14

What are the two ways the duty of care can come up and who is the burden on to prove it?

Answer 14

The burden is on the plaintiff and it can come up in:

1. Nonfeasance - Director will be liable only if his breach caused a loss to the corporation.
2. Misfeasance - A director will not be liable if she meets the business judgment rule, which is a person in like position would do some sort of homework before taking the action, such as analyzing situation, investigating and deliberating, and consider possible outcomes.

Question 15

What is the business judgment rule?

Answer 15

Applies to the directors duty of care for a corporation. It is a presumption that when the board took the act, it did appropriate homework. The court will not second-guess a business decision if it was made in good faith, was informed and had a rational basis. Basically, the director is not a guarantor of success.

Question 16

What is the duty of loyalty, how does it come up, and who is the burden on?

Answer 16

The burden is on the defendant. The duty of loyalty frequently applies i cases where the defendant is:

1. Self-Dealing - Interested director transactions - A deal between the corporation and one of its directors or one of the directors businesses.
2. Competing Ventures - The director cannot compete directly with the corporation.
3. Corporate Opportunity or Expectancy - A director cannot usurp a corporate opportunity.

Question 17

What is required to prove the director did not violate the duty of loyalty due to self-dealing?

Answer 17

1. The deal was fair to the corporation; or
2. Her interest and the relevant facts were disclosed or known and the deal was approved by either:
   a. A majority (at least 2) of the disinterested directors; or
   b. A majority of the disinterested shares (not shareholders).
   However, some courts also require a showing of fairness even if 2 is fulfilled.

Question 18

What is the remedy if a director is determined to have violated the duty of loyalty by competing ventures or violation of corporate opportunity?

Answer 18

The profits are placed in a constructive trust.

Question 19

What is the standard for determining whether a director violated the duty of loyalty by participating in a corporate opportunity violation?

Answer 19

A director cannot usurp a corporations opportunity. That
means the Director cannot take the opportunity until he:
1. tells the board about it; and
2. waits for the board to reject the opportunity.

Question 20

What is a corporate opportunity as it applies to the duty of loyalty?

Answer 20

Three tests:

1. Something in the corporations business line;
2. Something the company has an interest or expectancy in; or
3. found on company time or with company resources.

Question 21

Can the corporation make a loan to a director?

Answer 21

Yes, if it is reasonably expected to benefit the corporation.

Question 22

When will a director be personally liable?

Answer 22

They may be liable to the corporation for improper distributions, improper loans, ultra vires acts (making the company do things that it does not have the power to do; and for breaches of fiduciary duties.

Question 23

A director will be presumed to agree with the board action unless what?

Answer 23

her dissent or abstention is noted in writing in the corporate records. In writing requires: 1. in the minutes; 2. delivered in writing to the presiding officer at the meeting; or 3. dissent to the corporation immediately after the meeting.
Oral dissent will not, by itself, be sufficient.
Directors also cannot dissent if they voted for the resolution at the meeting.

Question 24

Can a director be liable for information he could reasonably rely on?

Answer 24

Good faith reliance on information presented by an officer, employee, or committee, or professional reasonably competent will allow an exception to liability. However, reliance must be in good faith.

Question 25

Do officers owe the same duty of care as directors?

Answer 25

Yes.

Question 26

What is the status of officers?

Answer 26

Officers are agents of the corporation. The corporation is the principal and the officer is the agent. Whether an officer can bind a corporation is determined by whether he has agency authoirty to do so.

Question 27

Is the president of a corporation an officer or a director?

Answer 27

An officer.

Question 28

How are officers selected and removed?

Answer 28

By the board.

Question 29

When can a director or officer seek indemnification from the corporation?

Answer 29

Category 1: The corporation cannot indemnify a director or officer who was held liable to the corporation or to have received an improper benefit.
Category 2: The corporation must indemnify a director or officer who was successful in defending on the merits or otherwise. (some cases require winning whole case, others require indemnification to the extent won)
Category 3: The corporation may indemnify a director or officer her litigation expenses if she shows that she acted in good faith with the reasonable belief that she acted in the companies best interest.

Question 30

If the articles provide for it, what can the officers or directors have limited liability for?

Answer 30

The articles can eliminate director and sometimes officer liablity to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit.
Basically, can eliminate liability for breaches of the duty of care, but not for duty of loyalty.