Directors and Officers

Question 1

A director must be an ____________

Answer 1

adult, natural person

Question 2

Number of directors?

Answer 2

One or more

Question 3

Election of directors?

Answer 3

1) Initial directors are usually named in the articles. After that, the SHs at the annual meeting elect the directors

Question 4

Staggered Board

Answer 4

Divided into half or thirds, with one-half or one-third elected each year. Staggered board is usually in the articles.

Usually, the entire board is elected each year unless its a staggered board.

Question 5

When can SHs remove directors before their terms expire?

Answer 5

1) Generally requires a majority of the shares entitled to vote
2) SHs can remove a director with or without cause
3) But if there is a staggered board, SHs can remove a director only with cause

Question 6

If there is a vacancy on the board, who selects the person who will serve as director for the rest of the term?

Answer 6

The Board or SHs, BUT if the SHs created the vacancy by removing a director, the SHs generally must select the replacement

Question 7

The board of directors must act as a ______

Answer 7

group. It can only take an act in one of two ways:
1) Unanimous agreement in writing, OR
2) At a meeting (which has to satisfy the quorum and voting requirements)

Question 8

Is an individual director an agent of the corporation?

Answer 8

No. Has no authority to speak for or bind the corporation. Directors must act as a group

Question 9

Is an individual officer an agent of the corporation?

Answer 9

Yes.

Question 10

Notice required for board meeting

Answer 10

Method for giving notice is usually set in the bylaws

1) Regular meetings, notice is NOT required
2) Special meetings, notice is required and MUST state the time and place

Question 11

Consequence of failing to give required notice

Answer 11

Voids whatever happened at the meeting, unless the directors not notified waive the notice defect. They can do this in writing anytime or by attending the meeting without objection.

Question 12

Can directors give proxies or enter voting agreements for how they will vote as directors?

Answer 12

No, these are non-delegable duties to the corp. (but ok for SH voting)

Question 13

Quorum for Meetings of the Board

Answer 13

Unless bylaws say otherwise, a quorum is a majority of all directors. Without a quorum, a board cannot act.

If a quorum is present at a meeting, passing a resolution requires only a majority vote of those PRESENT.

Question 14

“Broken” Quorum

Answer 14

Quorum of the board can be lost or broken if people leave. Once a quorum is no longer present, board cannot take an act at that meeting.

Question 15

Role of Directors

Answer 15

1) Generally, board of directors manages the business of the corp. It sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to SHs, etc.
2) The board can delegate to a committee of one or more directors. BUT, a committee cannot do what? Declare dividends, set director compensation, fill board vacancy

Question 16

Duty of Care

Answer 16

Burden is on the plaintiff
Standard: a director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business. Liable ONLY if his breach caused a loss to the corporation (must show causation)

Question 17

Nonfeasance

Answer 17

The director does nothing

Question 18

Misfeasance

Answer 18

The board does something that hurts the corp. –> causation is clear

Question 19

Business Judgment Rule

Answer 19

A court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis. A defense to liability.

Question 20

Duty of Loyalty

Answer 20

Burden on defendant.
Standard: a director owed the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does in the corporation’s best interest.

BJR does not apply in duty of loyalty cases because it cannot apply when there is a conflict of interest.

Question 21

Breach of Duty of Loyalty: Interested Director Transaction

Answer 21

This is any deal between the corp. and one of its directors or another business of the director’s.

Question 22

Defense to Interested Director Transaction

Answer 22

Director shows: 1) the deal was fair to the corp when entered, OR 2) her interest and the relevant facts were disclosed or known and the deal was approved by either the majority of disinterested directors, or a majority of disinterested shares.

Some courts also requires a showing of fairness even if the deal is approved by an appropriate group.

Question 23

Directors can set their own compensation, but it must be:

Answer 23

reasonable and in good faith. If excessive, it’s waste of corp assets and a breach of the duty of loyalty

Question 24

Breach of Duty of Loyalty: Competing Ventures

Answer 24

Director cannot compete directly with her corp. Remedy: constructive trust on profits

Question 25

Breach of Duty of Loyalty: Corporate Opportunity (Expectancy)

Answer 25

Director cannot usurp a corp opportunity - the director cannot take it until he: 1) tells the board about it, and 2) waits for the board to reject the opportunity.

The company’s financial inability to pay for the opportunity is NO defense.

Question 26

Corporate Opportunity

Answer 26

Something in the corp’s business line, something the corp has an interest or expectancy in, OR that was found on company time or with company resources

Question 27

Other State Law Bases of Director Liability

Answer 27

1) Ultra vires acts
2) Improper distributions
3) Improper loans

Question 28

Which Directors are liable?

Answer 28

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records

Exceptions: an absent director is not liable for stuff done at the meeting she missed; good faith reliance on info presented by an officer, employee, or committee.

Question 29

What does “in writing” mean?

Answer 29

1) in the minutes, or
2) delivered in writing to the presiding officer at the meeting, or
3) written dissent to the corp immediately after the meeting

Question 30

Officer Duties

Answer 30

Officers owe the same duties of care and loyalty as directors

Question 31

Status of Officers

Answer 31

Officers are agents of the corporation. The corp is the principal.

Question 32

Selection and Removal of Officers

Answer 32

Selected and removed by the board, which also sets officer compensation.

Question 33

Three categories of indemnification of directors and officers

Answer 33

1) No indemnification allowed - when the D/O is held liable to the corp or to have received an improper personal benefit
2) Mandatory - corp must indemnify the person if D/O wins a judgment
3) Permissive - Corp may indemnify if the case against D/O settled, if D/O acted in good faith and with the reasonable belief that her actions were in the company’s interests