FACT PATTERN THREE— DIRECTORS AND OFFICERS Flashcards
1
Q
DIRECTORS: REQUIREMENTS
AND ROLE
5.1 STATUTORY REQUIREMENTS
A
- Directors are responsible for management of business & affairs of corp.
2
Q
Qualifications
A
- Directors must be adult natural persons, must be human beings w/ legal capacity.
- Absent a provision otherwise in articles/bylaws, directors need not be shareholders in corp/residents of any particular state.
- Any qualifications for directors prescribed by articles /bylaws must be reasonable & lawful; no qualification
may limit ability of a director to discharge her duties.
3
Q
Number
A
- We must have one/more directors.
- The number can be set in articles/bylaws, which may require as many directors as desired.
4
Q
Election
A
- Initial directors may be named in articles.
- If not, they are elected by incorporator(s) at organizational meeting.
- After that, shareholders elect directors.
- The directors are elected at each annual shareholders’ meeting, subject to contrary provisions in the articles
5
Q
Staggered Board
A
- Entire board is elected each year unless there is a
“staggered” (or “classified”) board. - Whether there is a staggered board is usually set in the articles.
- A staggered board is divided into half/thirds, w/ one-half or one-third elected each year.
- ex. Say there are 9 directors. Instead of electing all nine each year, we could divide board into 3 classes of 3 directors each, & they would serve three-year terms.
6
Q
Removal
A
- Shareholders can remove directors before their terms expire.
- Shareholders may remove a director with/without cause.
- In some states, if there is a staggered board, shareholders can remove a director only w/ cause.
- A director elected by cumulative voting (which we’ll discuss in a later module) cannot be removed if votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors.
- Similarly, a director elected by a voting group of
shares can be removed only by that class
7
Q
Vacancies
A
- Vacancies on the board may arise, for example, when a director resigns before their term is up.
- In such instances, the board/shareholders select person who will serve as director for rest of the term
- But if shareholders created vacancy by removing a director, shareholders generally must select replacement.
8
Q
Board Action
a. Board Must Act As Group
A
- Board of directors must act as a group.
- Individual director is not an agent of corp?
- Individual directors have no authority to speak for/ bind corp.
- Directors must act as a group (even if there is only
one director). - They may act in the following ways:
(1) Unanimous agreement in writing (email is OK, & separate docs are also OK); or
(2) At a meeting, which must satisfy the quorum & voting requirements discussed below.
9
Q
Ratification of Defective Corporate Actions
A
- Directors, incorporators, & officers may ratify defective corporate actions (actions that are void/ voidable due to a failure of authorization, like those taken in absence of the requisite board resolution/ shareholder approval).
- To ratify such an action, board of directors must state the action to be ratified & nature of the failure of authorization, approve ratification, & seek shareholder approval if necessary
10
Q
Board Meetings
z Types of Meetings; Notice
A
- Board meeting: method for giving notice is set in bylaws.
- Directors may act in regular/special meetings:
(1) For regular meetings notice is not required;
(2) For special meetings at least 2 days’ written notice
of date, time, & place is required. - The notice need not state the purpose of meeting.
11
Q
Failure to Give Notice
A
- Failure to give required notice means that whatever
happened at meeting is voidable—maybe even
void—unless directors who were not notified waive notice defect. - They can do this
(1) in writing any time, or
(2) by attending meeting w/o objecting at outset of meeting.
12
Q
Proxies
A
- Directors cannot give proxies/enter voting agreements for how they will vote as directors.
- Any efforts to do so are void.
- Why? Because directors owe corp non-delegable fiduciary duties.
- Note that this is different from shareholders, who can vote by proxy & enter into voting agreements, which are discussed in Module 9.
13
Q
Quorum
A
- For any meeting of the board, we must have a quorum.
- Quorum: majority of all directors, unless bylaws say otherwise (but a quorum can be no fewer than 1/3 of the board members).
- W/o a quorum, board cannot act.
14
Q
Approval of Action
A
- If a quorum is present at a meeting, passing a resolution (which is how the board takes action at a meeting) requires only a majority vote of those present.
- So, if there are 9 directors, at least 5 directors must attend the meeting to constitute a quorum.
- If 5 directors attend, at least 3 must vote for a resolution for it to pass.
15
Q
Broken Quorum
A
- Quorum of the board can be lost (“broken”) if people
leave. - Once a quorum is no longer present, board cannot take an act at that meeting.
- Note that this rule is different for shareholder voting, which is discussed in Module 9.
