Board of Directors Flashcards
Composition requirements
Can have as few as one; D must be a natural person and not a C; Ds are selected at the annual SH meeting
Term
Typically one year, but may serve longer if terms are staggered; Ds can be removed by SHs with or without cause unless the articles provide otherwise; D may resign at any time with written notice to the BD, its chair, or C
Compensation
Is permitted
Meeting requirements
Ds are entitled to two days’ notice of the date, time, and place of special meetings (purpose is not required); regular meetings may be held without notice of the date, time, place, or purpose; BD can act by unanimous written consent without holding a meeting
Voting requirements
- The assent of a majority of Ds present is necessary for board approval (generally)
• To be a valid act, a quorum must have been present
• A majority of all Ds in office constitutes a quorum - Agreements between Ds as to how to vote (pooling agreements) are generally unenforceable
- Ds may not vote by proxy
Committees
May generally exercise whatever powers are granted to them by the BD, articles, or bylaws
Duties
- Duty of care
• Prudent person—a D has a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances (objective standard), and is required to use any additional knowledge and special skills he possesses when deciding how to act
• Reliance protection—a D can rely on information and opinions of Os, employees, outside experts (e.g., attorneys, accountants), or committees, if D reasonably believes them to be reliable and competent
• Business judgment rule (BJR)
o Rule—a rebuttable presumption that D reasonably believed his actions were in the best interest of C; does not apply when D engages in a conflict-of-interest transaction with C
o Overcoming the rule—it must be shown that: D did not act in good faith; D was not informed to the extent he reasonably believed was necessary; D had material interests in challenged conduct and was not objective; D failed to devote attention to C’s affairs; D failed to timely investigate matters of material concern; or D received financial benefits to which he was not entitled - Duty of loyalty—requires D to act in a manner that D reasonably believes is in the best interest of C
• Self-dealing (director’s conflicting interest transaction)
o Rule—a D who engages in a conflict-of-interest transaction with his own C violates the duty of loyalty unless the transaction is protected under the safe-harbor rules; D cannot profit at C’s expense
o Type of transaction—one that would normally require approval of BD and is of such financial significance to D that it would reasonably be expected to influence D’s vote on the transaction (also includes dealings with persons related to D); the interest must be financial and material
o Safe harbors—disclosure of all material facts and majority approval by BD or SHs without a conflicting interest; fairness (substantive and procedural) of the transaction to C at the time of commencement
• Usurpation of corporate opportunity
o Interest or expectancy test—does C have an existing interest or an expectancy arising from an existing right in the opportunity
o Line-of-business test—is the opportunity within the C’s current or prospective line of business, and how expansive is C’s line of business
o Other factors—relationship of the third party to D and of D to C; how and when D acquired knowledge of the opportunity
• Competition with C—a D who engages in a business venture that competes with C has breached the duty - Indemnity/insurance
• C is required to indemnify D for any reasonable expense incurred in the successful defense of a proceeding against the D
• C is prohibited from indemnifying D against liability due to the receipt of an improper personal benefit
• C may indemnify in an unsuccessful defense if D acted in good faith with a reasonable belief that the conduct was in C’s best interest and D did not have reasonable cause to believe the conduct was unlawful
Inspection rights
D has a right to inspect and copy C’s books and records
