Powers, Duties, and Liability of Corporate Management

Question 1

Power of Board of Directors

Answer 1

Subject to any limitation set forth in the articles of incorporation, the management of the corporation’s business and the exercise of corporate power must be by or under the direction of the corp.’s board of directors.

Question 2

Power of an Individual Director?

Answer 2

Unless authorized by articles or prior board decisions, individual directors do not have the power to set corporation policy or even to act as its agent when entering into Ks.

Question 3

What Constitutes Board Action?

Answer 3

An act that has the participation of a quorum (minimal portion of authorized number of directors) of the board.

Question 4

Determining if there is a Quorum (Majority Presumption)

Answer 4

Unless provided otherwise by the articles or the bylaws, a majority of the (fixed or prescribed) directors constitutes a quorum.

Question 5

Board Action in the Absence of a Meeting

Answer 5

Unless otherwise restricted by the articles or bylaws, the board can transact business in the absence of a meeting so long as there is written consent to an action that is signed by all members of the board.

Question 6

Authority of Corporate Officers

Answer 6

The powers of a corporate officer are the powers of an agent.

Question 7

Express Authority of Corporate Officers

Answer 7

A corporate officer or agent may enter into any transaction for which they have been expressly or implicitly authorized under the articles or certificate of incorporation, the bylaws, an employment K, or a board resolution.

Question 8

Implied Authority of Corporate Officers

Answer 8

Corporate officers have the implied authority to enter into transactions that are reasonably related to performing the duties for which they are responsible.

Question 9

Exam Tip: If a Corporate Officer Expands Their Actual Authority

Answer 9

See if they had apparent authority to act or whether the officer’s actions were later ratified (look to agency law)

Question 10

Limit on Corporate Power (Ultra Vires Doctrine)

Answer 10

Under the ultra vires doctrine, a corporation cannot be obliged to undertake a K or activity that is beyond the scope of its powers, as described in the articles of incorporation or bylaws.

Question 11

Fiduciary Duties of Directors and Officers

Answer 11

Include:

• Duty of Care
• Duty of Loyalty
• Indemnification

Question 12

Duty of Care

Answer 12

Directors and officers must discharge their duties:

• in good faith
• with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and
• in a manner they reasonably believe to be in the best interests of the corporation

Question 13

Duty of Care: Business Judgment Rule

Answer 13

Creates a rebuttable presumption that, when making a business decision, directors and officers have acted:

• on an informed basis
• in good faith; and
• with honest belief that their decision was in the corp.’s best interest.

Question 14

Exam Tip: What If There is an LLC?

Answer 14

Both managing members and managers of a limited liability company will have a duty of care like that owed by corporate managers. The business judgment rule also applies.

Question 15

Duty of Loyalty

Answer 15

The fiduciary duty of officers, directors, and employees requires that they be loyal to the corporation and not promote their own interests in a manner injurious to it.

Question 16

When One Violates the Duty of Loyalty

Answer 16

• Transacting business with the corporation (self-dealing)
• Usurping a corporate opportunity; or
• Directly competing with the corporation

Question 17

Conflicting Interest Transaction

Answer 17

A transaction between director or officer and the corporation, of which the director or officer had knowledge and a material financial interest. Considered a type of self-dealing.

Question 18

Req. for a Conflicting Interest Transaction

Answer 18

When a director or officer is involved in a “conflict of interest transaction” the duty of loyalty requires the director or officer to notify the other directors, officers; or shareholders of all of the material facts regarding the conflict.

Question 19

Effect of Conflicting Interest Transactions

Answer 19

Such transactions are voidable by the corporation unless the allegedly disloyal officer/director can prove that:

• the material facts of the conflict were disclosed and fully described to to the board, and the transaction was validly approved by a majority of disinterested directors; or
• a court determines the transaction was fair and reasonable to the corp.

Question 20

Factors a Court Will Look at to Interpret Fairness of a Conflicting Interest Transaction

Answer 20

• Whether the transaction price was comparable to what might have been obtained in an arm’s-length transaction; and
• Whether the process followed by the directors in reaching their decision was appropriate

Question 21

Usurping a Corporate Opportunity

Answer 21

The duty of loyalty prohibits directors and officers from usurping for their own benefit any business opportunity that properly belongs to the corporation.

Question 22

Determining Whether an Opportunity Belongs to the Corporation

Answer 22

Factors include:

• whether the business constituting the opportunity is closely related to that of the corporation
• whether the board had expressed an interest in acquiring that type of business
• whether the individual became aware of the opportunity while acting in his capacity as a director or officer
• whether individual used corporate funds or facilities in discovering or developing the opportunity.

Question 23

Determining Whether there is Usurpation

Answer 23

There is no usurpation of a corporate opportunity if after full disclosure:

• the corporation was given the opportunity to first pursue it and declined to do so; or
• was otherwise unable to take advantage of the opportunity

Question 24

Competition with a Corporation

Answer 24

-As a general rule, directors and officers may engage in independent business, but if the independent business competes with the corporation, equitable limitations will apply.

Question 25

Can Corporate Officers Compete with Corporation After Employment?

Answer 25

Generally yes and they can use the intangible knowledge and skill they acquired while employed. However, covenants not to compete will be enforced if they are reasonable as to time and are of application.

Question 26

Liability of Directors and Officers

Answer 26

Directors and officers are not personally liable for the debts and obligations of the corporation but are both liable to the corporation for damages arising from:

• the violation of their fiduciary duties; or
• their unauthorized actions, whether the action is ultra vires or otherwise outside the scope of their authority

Question 27

Remedies for Usurpation of Business Opportunity

Answer 27

Can include:

• Damages
• Order the director or officer to convey to the corporation the profit, property, or income derived from the misappropriation

Question 28

Can Liability be Limited in Articles of Incorporation?

Answer 28

Generally yes. But most states do not allow the complete elimination of duties, especially loyalty.

Question 29

Permissible Indemnification

Answer 29

A corporation may indemnify an individual who is a party to a proceeding because he is a director against liability incurred in the proceeding if:

• he conducted himself in good faith and reasonably believed that his conduct was in the best interests of the corporation (cases involving his official capacity) or that his conduct was not opposed to best interests of the corporation (in all other cases)
• he engaged in conduct for which broader indemnification is otherwise permitted or required according to the articles of incorporation

Question 30

Impermissible Indemnification

Answer 30

• A proceeding by, or in the right of, the corporation (except reasonable expenses incurred if the director has met his relevant standard of conduct); or
• Any proceeding with respect to conduct for which the director was found liable on the basis that he received a financial benefit to which he was not entitled (e.g. breach of duty of loyalty)

Question 31

Mandatory Indemnification

Answer 31

A corporation must indemnify a director who was successful, either on the merits or otherwise, in the defense of any proceeding to which he was a party because he was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding

Question 32

Court-Ordered Indemnification

Answer 32

A court will order indemnification, or an advance, if it determines that:

• the director is entitled to mandatory indemnification
• indemnification is warranted under articles of incorporation
• indemnification or an advance is fair and reasonable in view of the relevant circumstances