Part Five: Directors

Question 1

What is the general role of directors?

Answer 1

Directors are responsible for the management of the business and affairs of the corporation.

Question 2

Do directors need to be SH’s or residents of any particular state?

Answer 2

Absent a provision in articles or bylaws, no.

Question 3

What is the minimum number of directors?

Answer 3

1

Question 4

What is the maximum number of directors?

Answer 4

The articles or bylaws may require as many directors as desired, without limitation.

Question 5

How are directors chosen?

Answer 5

Absent any provision to the contrary in articles, they are elected at the ANNUAL SH’s meeting.

Question 6

When are staggered terms allowed?

Answer 6

If there are at least 9 directors, they may be divided into 2 or 3 equal classes, with terms of office expiring in staggered years from 1 -3

Question 7

How are board vacancies filled?

Answer 7

Board vacancies may generally be filled by the SH’s or the directors.

Question 8

What are the rules for removal of directors?

Answer 8

Directors may be removed by the SHAREHOLDERS with or WITHOUT CAUSE.

HOWEVER –> director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors.

ALSO –> a director elected by a voting group of shares can only be removed by that class.

Question 9

What are the two types of directors meetings?

Answer 9

There are two types of directors meetings:

1. Regular Meetings;
2. Special Meetings

Question 10

What are the rules for notice of a regular director meeting?

Answer 10

Regular meetings may be held without notice.

Question 11

What are the rules for notice of a special director meeting?

Answer 11

Special meetings require 2 days written notice of the date, time, and place of meeting.

Question 12

What are the rules regarding waiver of notice with regards to director’s meetings.

Answer 12

Attendance constitutes waiver of any required notice UNLESS attendance is made for the specific purpose of protesting notice.

Question 13

What is the general rule with regards to QUORUM of a directors meeting?

Answer 13

Quorum = a majority of the board of directors UNLESS a higher or lower number is required by the articles or bylaws.

HOWEVER –> a quorum can be no fewer than 1/3 of the board

Question 14

Can directors break QUORUM by withdrawing from a meeting?

Answer 14

Yes.

Unlike SH’s, directors can break quorum by withdrawing from a meeting.

Question 15

When is a director resolution deemed approved?

Answer 15

At a regular or special meeting, if a quorum is present, a resolution is deemed approved if it is approved by a MAJORITY of directors present.

Question 16

How can a director resolution be deemed approved if there is a no meeting?

Answer 16

Absent a director meeting, a director action is approved if made by unanimous written consent.

Question 17

What are the rules regarding delegation of authority by the board of directors?

Answer 17

Unless the articles or bylaws provide otherwise, the board can create one or more committees , with two or more members, and appoint board members to sit on them.

• The committees may act for the board, but the board must supervise them.
• the board may also delegate to officers

Question 18

What is the directors right to inspect?

Answer 18

The directors can inspect the corporate books?

Question 19

What is the rule regarding limitation of director’s personal liability for money damages?

Answer 19

The articles MAY limit or eliminate directors PERSONAL LIABILITY for month damages to the corporation or SH’s for actions taken OR for failure to take action.

HOWEVER –> the articles MAY NOT limit or eliminate liability for:

1. financial benefits recieved by director to which he is not entitled,
2. an intentionally inflicted harm on the corporation or its SH’s,
3. unlawful corporate distributions, or
4. an intentional violation of criminal law.

Question 20

What is the directors “duty of care”?

Answer 20

Directors have the duty to manage:

1. in good faith; AND
2. with care of reasonably prudent person; AND
3. in a manner the director reasonably believes is in the best interest of the corporation.

Question 21

What is the “business judgment rule”?

Answer 21

The business judgment rule is a presumption that directors who discharge their duty in good faith, with care of reasonably prudent person, and in a manner they reasonably believe is in the best interests of the corporation will not be liable for poor corporate decisions.

Question 22

What is the EFFECT of the “business judgment rule”?

Answer 22

The effect is that the challenger will have the burden of proving that the statutory standard was not met.

Question 23

To what extent can director rely on information?

Answer 23

They can rely on information from employees, lawyers accountants they reasonably believe are competent.

Question 24

What is the director’s “duty to disclose”?

Answer 24

The director has a duty to disclose material corporate information to other members of the board.

Question 25

What is the director's "duty of loyalty"?

Answer 25

The director has a duty of loyalty to the corporation.

Question 26

In what two cases do director "duty of loyalty" issues arise?

Answer 26

Directors duty of loyalty issues often arise in: 1. Conflict of interest situations; and 2. Diversion of corporate opportunity situations

Question 27

When does a "conflict of interest" arise so as to implicate a director's "duty of loyalty"?

Answer 27

A director has a conflict of interest with regards to a transaction if a director knows that he or a related person either: 1. is a party to the transaction; OR 2. has a beneficial interest in the transaction (or is so closely linked that the interest would be reasonably expected to influence the director's judgment if she were to vote on the transaction); OR 3. is a director, general partner, agent or employee of another entity with whom the corporation is transacting business and the transaction is of such importance that it would in the course of business be brought to the board.

Question 28

What is the standard for upholding a "conflict of interest" transaction?

Answer 28

A "conflict of interest" transaction will not be enjoined (or give rise to damages) If: 1. The transaction was approved by a majority of disinterested board members AFTER a all material facts have been disclosed to the board; OR 2. The transaction was approved by a majority of all votes entitled to be cast by SH's without a conflicting interest AFTER all material facts have been disclosed; OR 3. the transaction, at the time of commitment, was fair to the corporation.

Question 29

What constitutes "material fact" for the purpose of upholding a "conflict of interest" transaction?

Answer 29

A fact is considered "material" if an ordinarily prudent person would consider it important in deciding whether to proceed with the transaction.

Question 30

What is the effect of an interested director's presence at board meeting to vote on a conflicted transaction?

Answer 30

Irrelevant.

Question 31

What are the special quorum requirements for a DIRECTORS's meeting to approve a "conflict of interest" transaction?

Answer 31

A majority of disinterested directors (but no less than two).

Question 32

What are the special quorum requirements for a SHAREHOLDER's meeting to approve a "conflict of interest" transaction?

Answer 32

A majority of votes entitled to be cast, not including shares owned or controlled directly or beneficially by the director with a conflicting interest.

Question 33

What is the interaction of "conflict of interest" transactions and waste?

Answer 33

Even if conflict of interest transaction is approved, the SH may still be able to set it aside if they can prove it constitutes a WASTE of corporate assets.

Question 34

What are the potential remedies for an improper conflict of interest transaction ?

Answer 34

Enjoining the transaction, setting the transaction aside, damages and similar remedies.

Question 35

What is the rule regarding director's setting their own compensation?

Answer 35

Regardless of the conflict of interest, directors may set their own compensation, UNLESS articles or bylaws provide otherwise. EXCEPTION: Unreasonable compensation will constitute breach of fiduciary duty.

Question 36

What is "usurpation of a corporate opportunity"?

Answer 36

It is a breach of the director's DUTY OF LOYALTY to take a corporate opportunity unless certain requirements are met.

Question 37

What is the "interest or expectancy" requirement with regards to "usurpation of a corporate opportunity"?

Answer 37

- A usurpation problem only arises if the opportunity is one in which the corporation would have an "interest or expectancy." - A corporation's interest does not extend to every conceivable business opportunity, but nor is it limited to corporation's current business. - the closer the opportunity is to the corporation's line of business, the more likely it will be that a court will find usurpation.

Question 38

Is the corporation's lack of financial ability a defense to corporate usurpation by a director?

Answer 38

No. The board must decide whether to accept or reject the opportunity. It is not a defense that the corporation couldn't afford it.

Question 39

What are the remedies for usurpation of a corporate opportunity?

Answer 39

The corporation can recover the profits the director made from the transaction OR may force the director to convey the opportunity, under a constructive trust theory, for whatever consideration the director purchased the opportunity.

Question 40

May a director engage in another business?

Answer 40

Yes, but if it's a competing business, it may create a conflict of interest.

Question 41

What are the common law insider trading rules?

Answer 41

A director has no common law duty to disclose all facts relevant to a securities transaction between the director and third party. HOWEVER --> courts have found a duty to disclose where a director knows of special circumstances (for example, upcoming dividend or merger).