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Corporations > Fiduciary and Other Duties of Officers and Directors > Flashcards

Fiduciary and Other Duties of Officers and Directors Flashcards

1
Q

Due Care

A

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)

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2
Q

Due Care: Burden

A

Burden on Ps to show breach (absence of reasonable care and skill)
-higher standard than negligence

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3
Q

Due Care: types of breach

A

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

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4
Q

Due Care: Defense - Business Judgment Rule

A

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

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5
Q

Due Care: Effect of Breach

A

If duty breached and BJR will not save, directors will be:

  • Jointly and Severally liable
  • for harm Proximately caused
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6
Q

Loyalty

A

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)

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7
Q

Loyalty: Common Breaches

A
  1. insider trading
  2. interested director
  3. competing ventures
  4. corporate opportunity doctrine
  5. improper loans (to self, spouse, family)
    • prevailing interest rate for new company is improper
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8
Q

Loyalty Breach: Interested Director

A

-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

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9
Q

Loyalty Breach: Competing Ventures

A

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

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10
Q

Corporate Opportunity Doctrine

A

Director and officers cannot usurp a corp opportunity, unless

  • full disclosure; AND
  • disinterested board approves
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11
Q

Corp Opportunity Doctrine: 4 tests

A
  1. necessary to company
  2. company has interest/expectancy in thing
  3. in the business line
  4. overall fairness
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12
Q

Corp Opportunity Doctrine: Remedy

A
  • damages
  • constructive trust
  • corp gets opportunity at cost
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13
Q

Liability for Passive Participants

A

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
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14
Q

Liability for Passive Participants: Exceptions

A
  • Absent director: not liable, unless nonfeasance

- Good faith reliance on independent sources (e.g. expert, accountant)

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15
Q

Other Duties: Manage the Corp

A

Directors have the duty to manage the corp

  • e.g.
    • declare dividends
    • select and supervise officers
    • set policy
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16
Q

Other Duties: Personally Manage

A

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
17
Q

Other Duties: Meetings

A

Unless all directors consent in writing without meeting, meeting required (conference call okay if simultaneous)

18
Q

Meeting Requirements

A
  1. Notice: regular meetings - bylaws; special - need notice
  2. Proxy: not allowed; nor are voting agreements
  3. Quorum: must have majority of directors to do business; majority present to pass a resolution
    • if no quorum, action invalid; can lose a quorum
19
Q

Other Duties

A
  • By shareholders: with or without cause, by majority entitled to vote
  • By court: for fraud or gross abuse of authority
20
Q

Officer Duties: President Authority

A

Officers are agents of corp (principal)

  • president has authority to bind corp to contracts (inherent authority)
  • but president cannot release other person from contract
21
Q

Officers

A
  • President, VP, Treasurer, Secretary

- Owe same duty of care and loyalty as directors

22
Q

Officers: Status (authority)

A

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

23
Q

Required Officers

A

Must have:

  • president
  • secretary
  • treasurer
  • can have others
  • simultaneous okay
24
Q

Officers: selection and removal

A
  • By board

- Shareholders do not monitor

25
Q

Indemnification

A

GR: Directors entitled to reimbursement of expenses if for corporate purpose unless excepted

26
Q

Indemnification: 3 Types

A
  1. Corp barred
    - if liable to corp or held to have received an improper personal benefit
  2. Mandatory
    - if wholly successful on the merits or otherwise defends
  3. Permissive
    - anything not in 1 or 2 (e.g. settlement)
    - standard: duty of loyalty (must show she acted in good faith with reasonable belief act was in corp’s best interest)
27
Q

Indemnification: Who determines eligibility

A
  • disinterested directors; or
  • disinterested shares; or
  • independent legal counsel
28
Q

Indemnification: notes

A
  • Articles can provide for indemnification, except:
    • breach of duty of loyalty
    • intentional misconduct
    • improper personal benefit
  • Court can order reimbursement
  • Corp can get insurance
29
Q

Lawyer as Corporate Counsel (Sarbanes-Oxley Act)

A
  • Applies only to L appearing before SEC
  • L shall go up the corporate ladder if L learns of material violation of securities law OR breach of fiduciary duty by someone acting for corp (Note: ABA/CA permits this, so no conflict)
  • L may inform SEC. Conflicting state laws and rules are expressly preempted (Note: CA does not allow this, L safer not exercising because if S/O Act overturned, then L could be disciplined for violating confidentiality)
30
Q

Actual Authority Needed for Contracts

A

-A director does not have authority to bind the corp in contract unless there is actual authority to act
-Actual authority generally can arise only if:
-meeting
-quorum
-majority approved
OR
-unanimous written consent of all directors

Corporations (6 decks)

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