FACT PATTERN THREE— DIRECTORS AND OFFICERS

Question 1

DIRECTORS: REQUIREMENTS
AND ROLE
5.1 STATUTORY REQUIREMENTS

Answer 1

• Directors are responsible for management of business & affairs of corp.

Question 2

Qualifications

Answer 2

• 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.

Question 3

Number

Answer 3

• We must have one/more directors.
• The number can be set in articles/bylaws, which may require as many directors as desired.

Question 4

Election

Answer 4

• 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

Question 5

Staggered Board

Answer 5

• 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.

Question 6

Removal

Answer 6

• 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

Question 7

Vacancies

Answer 7

• 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.

Question 8

Board Action
a. Board Must Act As Group

Answer 8

• 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.

Question 9

Ratification of Defective Corporate Actions

Answer 9

• 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

Question 10

Board Meetings
z Types of Meetings; Notice

Answer 10

• 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.

Question 11

Failure to Give Notice

Answer 11

• 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.

Question 12

Proxies

Answer 12

• 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.

Question 13

Quorum

Answer 13

• 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.

Question 14

Approval of Action

Answer 14

• 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.

Question 15

Broken Quorum

Answer 15

• 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.

Question 16

Action by Unanimous Written Consent

Answer 16

• Remember that any action required to be taken by directors at a formal meeting may be taken by unanimous consent, in writing, w/o a meeting.

Question 17

TIP

Answer 17

The examiners often ask about formalities of directors’ meetings by setting up facts where there is no meeting. For example, facts tell you that director has entered into an extraordinary K w/ another entity on corp’s behalf, either on his own accord/ w/ approval of some directors, or w/ approval of all of directors, who were called individually. You must recognize that a director does not have the power to bind corp in K unless there is actual authority to act. Actual authority generally can arise only if: (1) proper notice was given for a directors’ meeting, a quorum was present, & a majority of directors approved action, or (2) there was unanimous written consent of directors.

Question 18

ROLE OF THE BOARD OF DIRECTORS

Answer 18

• Board manages the corp, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corp changes to shareholders, and so on.
• Unless articles/bylaws provide otherwise, board may create one/more committees, w/ one/more members, & appoint members of the board of directors to serve on them.
• The committees may act for the board, but board remains responsible for supervision of committees.
• The board may also delegate authority to officers.

Question 19

Committees Cannot Take Certain Actions

Answer 19

• While board can delegate actions to a committee, a
  committee may not take the following actions:
  (1) Declare a distribution
  (2) Fill a board vacancy
  (4) Recommend a fundamental change to shareholders
• Note, however, that a committee can recommend such actions to the full board for its action.