III. Directors and Officers

Question 1

Statutory Requriements, Directors: Number

Answer 1

• 1 or more adult humans and number may be set in the articles or bylaws

Question 2

Statutory Requriements, Directors: Election

Answer 2

• initial directors can be named in articles or elected by shareholders
• after that, elected at ANNUAL MEETING
• Entire board elected each year unless board is STAGGERED
• STAGGERED BOARD is divided into halves or thirds where 1/2 or 1/3 elected each year

Question 3

Statutory Requriements, Directors: Removal

Answer 3

• Shareholders can remove directors before their terms expire if a majority of shares entitled to vote actually vote to remove
• On what basis can you remove:
  
  • Regular Board with or with cause unelss
  • Staggered boards require cause to remove
• Replacing a vacant seat (resignation/removal): Board or shareholders select individual to fill duration of term
  
  • if elected by certain class of stock, replaced by that class

Question 4

Statutory Requriements, Directors: Board of Directors action

Answer 4

Can act in two ways:

1. UNANIMOUS AGREEMENT in writing (email is okay) OR
2. by passing a RESOLUTION at a meeting (which has to satisfy the quorum and voting requriements)
   
   1. must actually occur at ameeting; cannot be private agreement
   2. phone call sufcieient for meeting (as long as proper with procedures)

Question 5

Statutory Requriements, Directors: Meetings

Answer 5

• NOTICE: usually set in the bylaws.
  
  • regular meetings do not require notice
  • Special meetings usually require 2 days notice that state time and place–failure to notify can void the meeting unles person not notified waives defect in writing or by attend meeting without objecting to lack of notice
• AVAILABILITY OF PROXIES: not available to directors; they have a non-degligible fiduciary duty
• QUORUM: majority of all directors to do business (varies based on bylaws)
  
  • must exist for whole meeting
• VOTING: when there is quorom, needs a majority of those shareholders that are PRESENT AT THE MEETING

Question 6

Role of the Board of Directors

Answer 6

• Manages the business
  
  • sets policy, supervises officers, declares distributions, determines stock issuance, recommends fundamental corp changes to shareholders, etc.
• Can delegate powers to a committee of one or more directors
  
  • committee CANNOT 1) fill a board vacancy; 2) amend or repal bylaws or 3) propose fundamental corporate change to shareholders

Question 7

Duty of Care: standard

Answer 7

Burdne on the plaintiff to prove

• Director must discharge her duties in what she bleieves:
  
  • in good faith
  • to be the best interests of the corporations AND
  • with the care used by
  • an ordinarly prudent person
  • in like position
  • in similar circumstances
    *

Question 8

Duty of Care: Nonfeasance

Answer 8

• Director does nothing
• simply doing nothing does not create liability; there must be a loss to the corporation caused or contributed by the nonfeasance

Question 9

Duty of Care: Misfeasance

Answer 9

• Board does something that hurts the corporation
• Will evaluate under the business judgment rule

Question 10

Business Judgment Rule

Answer 10

Court will not second guess a BUSINESS DECISION if

• it was made in GOOD FAITH
• was INFORMED
• and had a RATIONAL BASIS

Question 11

Duty of Loyalty: Standard

Answer 11

burdne on defendant

• included in the Duty of Care standard–“best interests of the corporation”
• Deals with whether the director acted in a way due to a conflict of interest
• business judgment rule does not apply

Question 12

Duty of Loyalty: Interested Director Transaction

Answer 12

(e.g. director contracts to sell items to the corporation knowingly)

Test:

1. Corp must ENTER the transactoin
2. Director must KNOW of the deal and of her interset
3. deal is BETWEEN corp and
   
   • the director OR
   • a member of the director’s household
   • OR another business of the director’s

Director will be liable in damages unless director shows

1. the deal was FAIR to the corp when entered OR
2. her interest and the relevant facts were DISCLOSED OR KNOWN and the deal was APPROVED by either a) majority of disinterested shareholders actually voting (must be at least 2) OR b) majority of all disinterested shareholders

Question 13

Duty of Loyalty: Director Compensation

Answer 13

Board can set their compensation but it must be REASONABLE

if excessive, waste of corporate assets and could be liable under breacha of duty of loyalty

Question 14

Duty of Loyalty: Competing Ventures

Answer 14

(e.g. director of music company can sit on board of Home Depot; cannot start competing music company)

• STANDARD: Director cannot compete unfairly w/ her coproration while on the board
  
  • May make plans to compete once off board
  • if does compete while on board, remedy is that corp (shareholders) can get a constructive trust on her profits made whle on board from other company

Question 15

Duty of Loyalty: Corporate Opportunity (exepctancy)

Answer 15

(e.g. Director of realty corp learns that land has been developed for the type of realty his company would like; buys it personally hoping company will buy it from him)

STANDARD: Director cannot USURP a corporate opportunity. Meaning, cannot take it util he

• 1) tells the board AND
• 2) waits for the board to have the opportunity to reject

CORP OPPORTUNITY is something the corp has a legitimate interest or expectancy in and can afford

REMEDY: he must sell it to corp at cost. If he sold it at profit to another place, he must give copr the profit (constructive trust)

Question 16

Other State Law Bases of DIrector Liability

Answer 16

• ULTRA VIRES ACT: Responsible officers and director are liable for ultra vires losses (beyond scope of article)
• IMPROPER DISTRIBUTIONS (later)

Question 17

Determining which directors are liable for any type of liability

Answer 17

• Generally: director is prsumed to have CONCURRED with board action unless she
  
  • OBJECTED to transacting business OR
  • her DISSENT OR ABSTENTION is noted IN WIRTING in corporate records
  • (In writing: 1) in minutes or 2) delivered in writing to the presiding officer at the meeting; or 3) wirtten tdissent to corp immediately after meeting–cannot dissent if you voted yes at meeting
    
    • okay in email;
    • oral dissent alone is not enough)
• EXCEPTIONS:
  
  • 1) absent director not liable for stuff done at meeting she MISSED
  • 2) Good faith RELIANCE ON INFO presented by an officer employee or comittee (which director was not a member of) or proefessional reasonably blieved competent
    
    • includes finanical info

Question 18

Officers

Answer 18

owe same duties of care and loyalty as directors

• STATUS: officers are AGENTS of the corporation. Cna bind corp by acts for which they have authority to bind it with
• One must have authority to rpepare minutes and authentica corp records
• SELECTION AND REMOVAL: done by board, which also sets compensation (usually on contractual basis)
• SUmmary: shareholders hire fire directors; direcotrs hire fire officers. shareholders, generally do not hire fire officers

Question 19

Indemnificaiton of Directors and Officers

Answer 19

• NO INDEMNIFICATION Corp barred from indemnifying if director judged liable on a basis of improper financial benefit
• MANDATORY: corp must idemnify the person if she is WHOLLY successful on the merits or otherwise in defnding a suit
• PERMISSIVE: anyhing that doesn’t fit in the two above; (e.g. case against her settled
  
  • elgibile only if she shows she acted in good faith and with the reasonable belief that her actions were in the company’s best itnerests (determined by disintered directors, shareholdrs or ind legal counsel)
• In addition, regardless of decision, court can order reimbursement limited to costs and attorney’s fees
• Corp can limit director liability for damages but not for intentional misconduct, usurping corp opportunityies, unlawful distributions or improper personal benefit
• Articles, bylaw (approved by shareholdres, or resolution ratified by majoirty of idsinterested shares entiteld to vote can indemnify a director (subject to above limits)