The Board and Officers Flashcards
What does the board do?
Authorizes officers and corporate employees to exercise the powers possessed by the corporation
How many members must the board have in PA?
If the articles are silent, PA defaults to requiring 3 members. At a minimum, there must be one board member.
Are there any qualifications for board members?
No, unless provided by the bylaws
How long do directors serve?
1 year, expiring at the first annual meeting after the director’s election
Can directors serve for longer terms?
Up to 4 years, but only when the terms are staggered
Are holdover directors permissible?
Yes, a director may continue to serve until a replacement is selected
How can a director resign?
By delivering written notice to the board, its chair, or the corporation
How can a director be removed from the board?
- 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)
- By court order, for proper cause
- 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
If there is a vacancy that leaves the board without a quorum, how can the replacement be chosen?
By the remaining directors by majority vote
When can directors act without a meeting?
When there is unanimous written consent
What constitutes a quorum for meetings of the board?
A majority, unless specified by the articles or bylaws
Do the directors have to be present at the vote?
Yes (unlike shareholders)
What must a director do to avoid liability for board decisions?
Either:
- Ensure the dissent is noted in the minutes of the meeting; or
- Submit a written dissent to the secretary of the meeting before or immediately after the adjournment of the meeting
What powers are committees of the board restricted from engaging in?
- Distributions
- recommend actions to shareholders requiring shareholder approval
- Create or fill vacancies on the board or its committees; or
- adopt, amend, or repeal bylaws
What kind of committee does the Sarbanes-Oxley Act require?
An audit committee with independent directors
What is a director’s duty of care?
To act with the care of an ordinarily prudent person in a like position under similar circumstances
Whose opinions may the director reasonably rely on in discharging the duty of care?
- Officers and employees of the corporation;
- Outside attorneys, accountants, or other skilled or expert individuals;
- A committee of the board of which the director is not a member
What does the business judgment rule provide?
A rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation
What is sufficient to overcome the business judgment rule?
It must be shown that:
- The director was not informed to the extent the director reasonably believed necessary before making a decision;
- There was a sustained failure to devote attention; or
- A failure to timely investigate a material concern after being alerted to it
What is a director’s duty of loyalty?
A director must act in a manner that the director reasonably believes is in the best interest of the corporation
What are three paradigmatic violations of the duty of loyalty?
- Conflicts of interest
- Usurping corporate opportunities
- Competing with the corporation
What is a conflict of interest transaction?
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
What are the three safe harbors for a conflict of interest transaction?
- Disclosure of all material facts to, and approval by, the majority of disinterested board members;
- Disclosure of all material facts to, and approval by, the majority of disinterested shareholders entitled to vote; or
- Fairness of the transaction to the corporation at the time of commencement
How is the fairness of a conflict of interest transaction assessed?
It considers whether the corporation received something of comparable value for what it gave to the director
What remedies are available for a conflict of interest transaction?
Rescission or injunctive relief
What two tests are applied when assessing whether a director has usurped a corporate opportunity?
- The “interest or expectancy” test
2. The “line of business” test
What is the “interest or expectancy” test?
Does a corporation have an existing interest or expectancy from an existing right in an opportunity?
What is the “line of business” test?
A broader test; does the opportunity fall within the corporation’s current or prospective line of business?
What other factors may a court consider in assessing the usurpation of a corporate opportunity?
- The relationship between the person offering the opportunity and the director;
- How and when the director acquired knowledge of the opportunity; and
- the relationship of the director to the corporation
What remedies are available to a corporation for usurpation of a corporate opportunity?
Equitable remedies, such as the imposition of a constructive trust for the benefit of the corporation
When is a corporation required to indemnify a director?
For any expense, including court costs and attorney’s fees, incurred in the successful defense of a proceeding against the director as a director
When can a corporation never indemnify a director?
For any liabilities due to the receipt of an improper financial benefit
When may a corporation indemnify a director in the unsuccessful defense of a suit?
- When the director acted in good faith
- 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
What officers is a Pennsylvania corporation required to have?
A president, secretary, and treasury, though one person may hold more than one office
When does an officer have actual authority?
When the bylaws so provide, or with board approval
When does an officer have implied authority?
To perform tasks necessary to carry out his duties
When does an officer have apparent authority?
If the corporation holds the officer out that way to bind the corporation to third parties
What duties do officers owe to the corporation?
The same as the directors
When can a corporate officer be held liable for corporate actions?
Under the participation theory, when the officer engaged in malfeasance by improperly participating in the act, cooperating with another, or directing another to participate
Are officers entitled to indemnification?
Yes, to the same extent as directors
