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Flashcards in 3. Directors and Officers Deck (23):
1

What is the minimum # of directors that a corporation can have?

1 or more natural persons (humans) but a greater can be set in:
(i) bylaws;
(ii) by SH act; OR
(iii) by the BOD, if a SH bylaw allows

2

Who elects the initial BOD?

The incorporators elect initial directors at the organizational meeting. After that, SHs elect at the annual meeting.
 

3

What is a staggered or "classified" board?

Where the entire board is not re-elected each year. The certificate or SH bylaw can establish 2, 3, or 4 classes of directors and then each class is up for election each year

4

Can a director be removed before the expiration of his term?

"For cause":
(i) by SHs 
(ii) by the BOD, only if the certificate or bylaws allow
(iii) by vote of the class that elected her
(iv) judicial action

For ANY reason:
(i) by SHs, only if the certificate or bylaws allow

5

How is a board seat filled on event of resignation, death or removal?

General rule: the BOD selects the person who will serve the remainder of the term

Special rule: If director was removed by SHs, without cause, then SHs fill the vacancy (rare case)

6

What are the only two ways a BOD can take a valid act?

1) UNANIMOUS written consent; OR
2) Via a board meeting

NOTE: individual bd members are NOT agents of the corporation (they have no pwr to bind in their individual capacity); they MUST act as a group

NOTE: If a bd purports to "act" in some other way than listed above, the action is VOID, UNLESS the action was ratified by the BOD via a valid act (e.g. a conversation among a few directors is not a mtg)

7

What are the four requirements for a valid board meeting?

1) NOTICE:
(i) not required for regular meetings if the time/place is set in bylaws
(ii) required for special meetings, AND must state the time/place of the mtg (need not state the purpose)

Note: If notice is not proper, any action taken at the meeting is VOID unless the director not given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection

2) UNRESTRAINED VOTING: bd cannot vote by proxy or enter voting agreements to vote in a certain way. Voting is a non-delegable fiduciary duty

Note: SHs CAN vote by proxy and enter voting agreements

3) QUORUM: to meet quorum, there must be a majority of the "entire board" present (duly constituted board = the # of positions without vacancies)

E.g. if there are 9 director positions w/o vacancies, then you'd need at least 5 present

Note: Quorum can be "broken" (i.e. if it's met and sufficient directors leave, then it can fall below required amount)

4) MAJORITY VOTING: once quorum is met, passing a resolution requires a majority of those directors present

E.g. of the 5 directors present, you'd need 3 to pass a resolution

NOTE: The board mtg does NOT have to be in NY and can be via conference call

8

What is necessay to raise OR lower the quorum requirement?

LOWER: The quorum requirement can be less than a majority only if stated in the certificate or bylaws but can never be fewer than 1/3d of the bd

INCREASE: The quorum requirement can be raised to more than a majority only if stated in the certificate (not bylaws)

9

What is necessay to raise OR lower the board resolution voting requirement?

LOWER: The corporation can never decrease the resolution voting requirement below a majority

INCREASE: The resolution voting requirement can be raised to more than a majority (supermajority) only if stated in the certificate (not bylaws)

10

When can a BOD delegate responsibility to a committee of directors?

A BOD can delegate certain functions if
(i) the certificate OR bylaws allow; AND
(ii) a majority of the "entired board" (without vacancies) votes to delegate

Committee must be made of AT LEAST one director but a BOD cannot delegate all of its powers to a committee

11

What is a board committee PROHIBITED from doing?

1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to SHs
4) Amend bylaws

NOTE: A committee can recommend any of the above for full board action. Committees are used in conjunction with SH derivative suits

 

12

What is the duty of care standard for directors?
(and breaches)

A director must discharge her duties in good faith and with that degree of diligence, care and skill that an ordinary prudent person would exercise under similar circumstances in like position

NONFEASANCE (doing nothing/being lazy):
Will breach duty of care if the breach CAUSED a loss to the corporation (very hard to prove) 

MISFEASANCE (going something dumb that hurts corp):
Implicates the Business Judgment Rule (BJR): a court will not second guess a business decision if it was made in good faith, was reasonable informed and rational

13

What is the duty of loyalty standard for directors?

A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries"

Note: BJR does not apply b/c it cannot apply when director has a conflict of interest

14

What three types of transactions can breach the duty of loyalty?

1. INTERESTED DIRECTOR TRANSACTIONS:
Occurs when there is any deal between the corporation and one of its directors (or business of which the director is also a director or has substantial financial interest). Self-dealing can be "cleansed" if:
(i) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND
(i) the deal was approved by:
(a) SH action;
(b) BOD approval by disinterested directors; OR
(c) unanimous approval of disinterested directors if they are insuffiicent in number to take bd action. (NOTE: interested directors do count for quorum purposes; they just can't vote)
Note: The entire board can set director compensation, but it must be reasonable and in good faith (otherwise, it's excessive and a waste of corp assets)
Note: To give directors or officers options for stock listed on a stock exchange it must be authorized under exchange policies. If not listed, it must be approved by SHs

2. COMPETING VENTURES:
Directors cannot compete with their own corporation. If director does compete, a court would establish a constructive trust for the profit made from the competing venture (corp could also get damages, if it were hurt)

3. CORPORATE OPPORTUNITY:
A director cannot "usurp a corporate opportunity" which is something a corporation needs, has an expectancy interest in, or is logically related to its business. A director can take an opportunity:
(1) he tells the BOD about the opportunity; AND
(2) the director waits for the disinterested BOD to reject it
If he doesn't, a constructive trust is established, which accounts for any profits made.

Note: "The corporation couldn't afford it" is not a valid excuse

15

Is a loan to a director using corporate funds ok?

Only if:
(i) it's approved by SHs; or
(ii) the board finds that it will benefit the corporation

16

How can a director dissent from a board decision?

General Rule: a director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records (oral dissent is never effective by itself)
Dissent Procedure:
(i) dissent in the board minutes;  
(ii) in writing to the corp. secretary at the meeting; OR
(iii) via registered letter to the corp. secretary promptly after adjournment

EXCEPTIONS: A missing director is not liable for meeting actions if he dissents in writing to the corp secretary w/in a reasonable time after learning of the action.

17

When can directors rely on opinions of others?

Good faith reliance on information, opinions, reports or statements by:
(1) officers or employees believed to be competent and reliable
(2) lawyers or accountants believed to be competent
(3) a committee's recommendation

Note: This is likely a defense in an improper distributions action

18

What duties do officers of a corporation have?

They are agents of the corporation and can bind the company. Officers owe the same duty of care and loyalty as directors.

Note: One person can hold more than one office

19

Who may elect/remove officers?

The BOD, unless the certificate allows SHs to elect them (rare). If shareholders elect them, only the shareholders can fire them. Even then, for cause, directors can suspend an officer's authority to act.

20

Can an officer be removed via judicial action?

The atty general or holders of 10% of all shares may sue for a judgment removing an officer "for cause." Court can bar reappointment of a person so removed from office

21

When can a director or officer be reimbursed by the corporation for personal liability?
(four categories)

1. PROHIBITED: if officer was held liable to the corporation (a judicial holding, not accusation)

2. OF RIGHT: the corporation must reimburse the director/officer if she won a judgment on the merits or otherwise. Note: if she files another action to collect reimbursement, the corporation is not required to pay those atty fees

3. PERMISSIVE: if not part of the categories above, the corporation may reimburse, if
(i) she acted in good faith; AND
(ii) for a purpose reasonably believed to be in the company's best interest. Note: can include reimbursement for settlement

4. COURT ORDERED: notwithstanding the above, a court can order the corporation to reimburse a director/officer for litigation expenses/atty fees. Note: A corp can advance litigation expenses to a director/officer, but they must be repaid if it turns out that she's not entitled to reimbursement

Note: A corp. can buy insurance to cover director/officer liability


22

Who determines eligibility for permissive reimbursement of directors OR officers?

1. BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum...
2. SH or a quorum of those directors who are disinterested; or...
3. BOD pursuant to report from independent legal counsel

23

How can a director or officer being avoid liability for a breach?

Exculpation: The certificate may eliminate director liability to the corporation/SHs for breach of a duty, unless she:
(i) acted in bad faith;
(ii) acted with intentional misconduct;
(iii) received an improper fin. benefit; OR
(iv) approved an unlawful distribution or loan