The Board and Officers

Question 1

What does the board do?

Answer 1

Authorizes officers and corporate employees to exercise the powers possessed by the corporation

Question 2

How many members must the board have in PA?

Answer 2

If the articles are silent, PA defaults to requiring 3 members. At a minimum, there must be one board member.

Question 3

Are there any qualifications for board members?

Answer 3

No, unless provided by the bylaws

Question 4

How long do directors serve?

Answer 4

1 year, expiring at the first annual meeting after the director’s election

Question 5

Can directors serve for longer terms?

Answer 5

Up to 4 years, but only when the terms are staggered

Question 6

Are holdover directors permissible?

Answer 6

Yes, a director may continue to serve until a replacement is selected

Question 7

How can a director resign?

Answer 7

By delivering written notice to the board, its chair, or the corporation

Question 8

How can a director be removed from the board?

Answer 8

1. Shareholders may remove with or without cause, but if elected by a voting class, only by that class (A director elected by cumulative voting cannot be removed when votes sufficient to elect the director are cast against his removal)
2. By court order, for proper cause
3. by the board, if judicially declared to be of unsound mind, convicted of an offense punishable by imprisonment for more than one year, or for cause under the bylaws

Question 9

If there is a vacancy that leaves the board without a quorum, how can the replacement be chosen?

Answer 9

By the remaining directors by majority vote

Question 10

When can directors act without a meeting?

Answer 10

When there is unanimous written consent

Question 11

What constitutes a quorum for meetings of the board?

Answer 11

A majority, unless specified by the articles or bylaws

Question 12

Do the directors have to be present at the vote?

Answer 12

Yes (unlike shareholders)

Question 13

What must a director do to avoid liability for board decisions?

Answer 13

Either:

1. Ensure the dissent is noted in the minutes of the meeting; or
2. Submit a written dissent to the secretary of the meeting before or immediately after the adjournment of the meeting

Question 14

What powers are committees of the board restricted from engaging in?

Answer 14

1. Distributions
2. recommend actions to shareholders requiring shareholder approval
3. Create or fill vacancies on the board or its committees; or
4. adopt, amend, or repeal bylaws

Question 15

What kind of committee does the Sarbanes-Oxley Act require?

Answer 15

An audit committee with independent directors

Question 16

What is a director’s duty of care?

Answer 16

To act with the care of an ordinarily prudent person in a like position under similar circumstances

Question 17

Whose opinions may the director reasonably rely on in discharging the duty of care?

Answer 17

1. Officers and employees of the corporation;
2. Outside attorneys, accountants, or other skilled or expert individuals;
3. A committee of the board of which the director is not a member

Question 18

What does the business judgment rule provide?

Answer 18

A rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation

Question 19

What is sufficient to overcome the business judgment rule?

Answer 19

It must be shown that:

1. The director was not informed to the extent the director reasonably believed necessary before making a decision;
2. There was a sustained failure to devote attention; or
3. A failure to timely investigate a material concern after being alerted to it

Question 20

What is a director’s duty of loyalty?

Answer 20

A director must act in a manner that the director reasonably believes is in the best interest of the corporation

Question 21

What are three paradigmatic violations of the duty of loyalty?

Answer 21

1. Conflicts of interest
2. Usurping corporate opportunities
3. Competing with the corporation

Question 22

What is a conflict of interest transaction?

Answer 22

Any transaction that would normally require board approval and is of such financial significance that it would be reasonably expected to influence the director’s vote

Question 23

What are the three safe harbors for a conflict of interest transaction?

Answer 23

1. Disclosure of all material facts to, and approval by, the majority of disinterested board members;
2. Disclosure of all material facts to, and approval by, the majority of disinterested shareholders entitled to vote; or
3. Fairness of the transaction to the corporation at the time of commencement

Question 24

How is the fairness of a conflict of interest transaction assessed?

Answer 24

It considers whether the corporation received something of comparable value for what it gave to the director

Question 25

What remedies are available for a conflict of interest transaction?

Answer 25

Rescission or injunctive relief

Question 26

What two tests are applied when assessing whether a director has usurped a corporate opportunity?

Answer 26

1. The “interest or expectancy” test

2. The “line of business” test

Question 27

What is the “interest or expectancy” test?

Answer 27

Does a corporation have an existing interest or expectancy from an existing right in an opportunity?

Question 28

What is the “line of business” test?

Answer 28

A broader test; does the opportunity fall within the corporation’s current or prospective line of business?

Question 29

What other factors may a court consider in assessing the usurpation of a corporate opportunity?

Answer 29

1. The relationship between the person offering the opportunity and the director;
2. How and when the director acquired knowledge of the opportunity; and
3. the relationship of the director to the corporation

Question 30

What remedies are available to a corporation for usurpation of a corporate opportunity?

Answer 30

Equitable remedies, such as the imposition of a constructive trust for the benefit of the corporation

Question 31

When is a corporation required to indemnify a director?

Answer 31

For any expense, including court costs and attorney’s fees, incurred in the successful defense of a proceeding against the director as a director

Question 32

When can a corporation never indemnify a director?

Answer 32

For any liabilities due to the receipt of an improper financial benefit

Question 33

When may a corporation indemnify a director in the unsuccessful defense of a suit?

Answer 33

1. When the director acted in good faith
2. in criminal cases, when the director did not have reasonable cause to believe that his conduct was unlawful

Permissive indemnification requires approval of a disinterested majority of directors or shareholders, or an independent attorney chosen by disinterested directors

Question 34

What officers is a Pennsylvania corporation required to have?

Answer 34

A president, secretary, and treasury, though one person may hold more than one office

Question 35

When does an officer have actual authority?

Answer 35

When the bylaws so provide, or with board approval

Question 36

When does an officer have implied authority?

Answer 36

To perform tasks necessary to carry out his duties

Question 37

When does an officer have apparent authority?

Answer 37

If the corporation holds the officer out that way to bind the corporation to third parties

Question 38

What duties do officers owe to the corporation?

Answer 38

The same as the directors

Question 39

When can a corporate officer be held liable for corporate actions?

Answer 39

Under the participation theory, when the officer engaged in malfeasance by improperly participating in the act, cooperating with another, or directing another to participate

Question 40

Are officers entitled to indemnification?

Answer 40

Yes, to the same extent as directors