Pg 26

Question 1

How long does a director serve for?

Answer 1

Until his term expires or he is removed.

Question 2

If shareholders vote to reduce the size of the board, does that impact a current director’s term?

Answer 2

No

Question 3

If shareholders vote to move up the annual meeting date, does that shorten the director’s terms?

Answer 3

No

Question 4

The general rule is that directors are not liable for losses to the corporation unless what happens with regard to their supervisory role?

Answer 4

• they were reckless in putting confidence in obviously untrustworthy employees, or
• they neglected to perform their duties as a director, or
• they ignored obvious danger signs of employee wrongdoing

Question 5

What should be in place within a corporation to give senior management and directors timely information?

Answer 5

Reporting systems

Question 6

In what situation do directors incur personal liability with regard to their supervisory role?

Answer 6

If they utterly failed to implement any reporting information system or controls, or if they implemented a system but conscientiously failed to monitor or oversee its operations

Question 7

What is the American Law Institute of corporate governance project?

Answer 7

This says that public corporations should have independent directors that are active in monitoring and addressing overreaching by management and management should be replaced if they don’t meet established corporate goals, etc. This is just a suggestion for where the law should go, it is not the law.

Question 8

What does it mean to need a quorum to be present with regard to directors making a vote?

Answer 8

This usually means a simple majority of the directors need to be present. But the articles of incorporation or bylaws could set a different number. I.e.: 15 member board, you need 8 to make a quorum

Question 9

What do you need in order to pass a vote through the directors?

Answer 9

• first you need a quorum [majority of the board must be present]
  – next you need a simple majority of the vote of the directors that are present at the meeting.

Ie: 15 person board, if only 8 are present, 5 can vote in the affirmative and make a decision that binds the corporation

Question 10

If there isn’t a quorum, can the directors bind the corporation?

Answer 10

No, they must adjourn. Although if an action is taken at a meeting without a quorum, it can be later ratified at a directors’ meeting or by the shareholders

Question 11

Can a vote at a directors’ meeting be given by proxy?

Answer 11

No

Question 12

If a meeting of directors begins with a quorum, but members leave, can the meeting continue even if there isn’t a quorum later?

Answer 12

Yes

Question 13

If a corporation has 20 directors and the articles of incorporation say that a quorum is 60% of the directors and a vote is a simple majority of the quorum, how many directors do you need to make a quorum and what is the minimum amount of votes that are needed to pass something?

Answer 13

– need 12 directors for a quorum

– need a minimum of 7 votes to pass something

Question 14

What is the duty of care that only applies to directors?

Answer 14

Directors have a duty of care about the process that is used to reach decisions and he must fulfil his monitoring obligations with regard to officers.

Question 15

What are the two major duties that directors owe to the corporation?

Answer 15

Duty of care and duty of loyalty

Question 16

What is the duty of care that is required from a director to his corporation?

Answer 16

He must use the same care and diligence and devote the same time and attention as an ordinarily careful and prudent person would be reasonably expected to do under similar circumstances.

Question 17

What are the three major areas to consider under a director’s duty of care?

Answer 17

– obligation to be ATTENTIVE
– to make reasonable INQUIRY
– to have a RATIONAL BASIS for decision-making

Question 18

What is involved in the duty of care component that says that directors have a duty to be attentive to corporate business?

Answer 18

Absolute duty to:
- regularly attend corporate board meetings
– keep themselves informed about activities of the corporation, finances, and performance by monitoring affairs and policies
– read internal reports and summaries of corporate activities
– act reasonably based on information they discover through a reasonable investigation

Question 19

What does it mean that a director has an absolute duty to be attentive to corporate business?

Answer 19

If he is ill, elderly, or unable to attend a board meeting, that does not relieve him of his duty

Question 20

What is involved in the director’s duty of care that requires that he be reasonably informed on matters coming before the board?

Answer 20

He must learn more about specific matters that come before the board so he can be reasonably informed to make a decision

Question 21

If a board is considering a bid by an accounting firm to serve as the corporation’s auditors, what must each director be reasonably informed about with regard to his duty of care?

Answer 21

– whether the firm has the expertise needed to do the job

– the price that other suitably qualified firms would charge for the same thing

Question 22

What does it mean under the director duty of care to deliberate?

Answer 22

The board must actually discuss and consider issues that come before it, they cannot just automatically approve things without a debate. All of the directors should benefit from the due diligence of each director, so if one director finds important information, all of them can benefit from it.

Question 23

What is required under the director duty of care that demands that there be a rational basis for director decisions?

Answer 23

Everyone must be a rational actor that uses information available to them, and the decisions of the board must be made in good faith, based on reliable information, and there must be a rational basis for them.

Question 24

Is there a duty for the directors to be profitable in their decision making or correct in their decision making?

Answer 24

No, it is looked at from the standard of the information that was available to the directors at the time the decision was made, and as long as they had a rational basis for their decision, there is no liability even if it turns out they could’ve made more money by doing something else.

Question 25

What is involved in the duty of loyalty with regard to directors and officers for corporations?

Answer 25

They must have motives, purposes, and goals that are necessary to enjoy the protective benefits of the business judgement rule.

Question 26

Who all does the duty of loyalty apply to?

Answer 26

Directors, officers, and controlling shareholders

Question 27

What are the major requirements of the duty of loyalty?

Answer 27

• directors have a duty of confidentiality not to leak things to other people.
  – must act in good faith to serve the corporation’s interests.

Question 28

Who are the beneficiaries of the fiduciary relationship owed in relation to directors and officers?

Answer 28

The owners are the beneficiaries of the duties owed by officers and directors

Question 29

What are the most tested areas of corporations?

Answer 29

Duty of loyalty and conflict of interest

Question 30

What are the two main subsections of duty of loyalty?

Answer 30

• conflict of interest and self dealing

– misappropriation of corporate opportunities doctrine

Question 31

If a director is financially disinterested but knowingly fails to warn other directors of material facts that are relevant to a transaction, what has happened?

Answer 31

He has breached the duty of loyalty because there is an obligation for fair dealing that is involved when a director or officer is financially interested in a matter

Question 32

Is it OK for a director or an officer to contract with a corporation?

Answer 32

Yes

Question 33

Can interested directors and officers be counted toward a quorum for matters that they are interested in?

Answer 33

Yes, but then it must be approved by a majority of disinterested board members or stockholders. And the interested director or officer has the burden of showing fairness of the transaction

Question 34

What is the requirement for directors and officers under the duty of loyalty with regard to who benefits from their decision making?

Answer 34

They must make decisions to put the interests of the corporation before their own