Fiduciary and Other Duties of Officers and Directors Flashcards
Due Care
BLL: Directors, officer, and majority shareholders must act with the reasonable care and skill that a prudent person would with respect to his own business (goes to business decision)
Standard: gross negligence (mod maj)
Due Care: Burden
Burden on Ps to show breach (absence of reasonable care and skill)
-higher standard than negligence
Due Care: types of breach
Nonfeasance: failure to act
- e.g. has material knowledge but remains silent or fails to object
- CAUSATION: must show causation; liable only if caused loss
Misfeasance: does something to cause losses
Due Care: Defense - Business Judgment Rule
BLL: A court will not second guess a director is the decision is
- in good faith; and
- informed; and
- has a rational basis
*Must always raise BJR and discuss all 3 elements
Due Care: Effect of Breach
If duty breached and BJR will not save, directors will be:
- Jointly and Severally liable
- for harm Proximately caused
Loyalty
BLL: Directors, officers, and majority shareholders must act in good faith and in the best interests of the corp without regard to personal gain (You must find and articulate a personal benefit)
Loyalty: Common Breaches
- insider trading
- interested director
- competing ventures
- corporate opportunity doctrine
- improper loans (to self, spouse, family)
- prevailing interest rate for new company is improper
Loyalty Breach: Interested Director
-self-dealing (e.g. director sells/buys property/services to or from corp)
- RULE: deal SET ASIDE unless D show either:
- the deal is fair to the corp; OR
- both
- interest is disclosed or known; AND
- approved by a majority of disinterested directors or shareholders
Remedy: damages or recission
Loyalty Breach: Competing Ventures
BLL: it is a breach of the duty of loyalty for a Director or Officer to compete directly with the corp
-e.g. interlocking director (director of two competing corps)
Remedy: damages + injunctive relief
Corporate Opportunity Doctrine
Director and officers cannot usurp a corp opportunity, unless
- full disclosure; AND
- disinterested board approves
Corp Opportunity Doctrine: 4 tests
- necessary to company
- company has interest/expectancy in thing
- in the business line
- overall fairness
Corp Opportunity Doctrine: Remedy
- damages
- constructive trust
- corp gets opportunity at cost
Liability for Passive Participants
GR: A director is presumed to have concurred with a board action unless he dissents in writing in corp records
“writing”:
- entering dissent in minutes
- registered letter to corp immediately after adjournment
Liability for Passive Participants: Exceptions
- Absent director: not liable, unless nonfeasance
- Good faith reliance on independent sources (e.g. expert, accountant)
Other Duties: Manage the Corp
Directors have the duty to manage the corp
- e.g.
- declare dividends
- select and supervise officers
- set policy
Other Duties: Personally Manage
Unlawful delegation = breach of fiduciary duty
Can:
-delegate mgmt burdens to two-person committee
Cannot
- delegate all powers and responsibilities to committee
- delegate its policy making and discretionary decisions
Other Duties: Meetings
Unless all directors consent in writing without meeting, meeting required (conference call okay if simultaneous)
Meeting Requirements
- Notice: regular meetings - bylaws; special - need notice
- Proxy: not allowed; nor are voting agreements
- Quorum: must have majority of directors to do business; majority present to pass a resolution
- if no quorum, action invalid; can lose a quorum
Other Duties
- By shareholders: with or without cause, by majority entitled to vote
- By court: for fraud or gross abuse of authority
Officer Duties: President Authority
Officers are agents of corp (principal)
- president has authority to bind corp to contracts (inherent authority)
- but president cannot release other person from contract
Officers
- President, VP, Treasurer, Secretary
- Owe same duty of care and loyalty as directors
Officers: Status (authority)
Was it a valid act?
As agents:
- actual authority: express authority to act because the board has voted or articles grant
- apparent authority: conduct which reasonably interpreted, causes 3P to believe he acts for corp
- exists where corp holds out an officer as having certain authority (inducing others)
- inherent authority: by virtue of office (implied) - trade usage (e.g. power of president)
Powers:
-president can enter contracts and act in ordinary course of business; secretary - records; treasurer - funds
Required Officers
Must have:
- president
- secretary
- treasurer
- can have others
- simultaneous okay
Officers: selection and removal
- By board
- Shareholders do not monitor
