DIRECTORS Flashcards
(13 cards)
Number, Election, Removal
Only ONE director is required, but bylaws may require as many as desired. Initial directors are usually named in the AOI. Thereafter, SH ELECT DIRECTORS at the annual meeting.
SH can REMOVE Directors with or without CAUSE before their term expires by a vote of the MAJORITY of the shares entitled to vote.
If there is a vacancy, generally the SH or BOD may fill the vacancy, but if the SH created the vacancy, they must generally select the replacement.
The BOD can only remove a director for cause if the AOI or SH bylaws allow it.
Management
The business of the corp is managed under the BOD. Hiring officers and employees, and setting salaries are part of the management of a corp by Directors. The board may delegate to a committee (SHD suit) of one or more directors but a committee cannot declare dividends or fill vacancies on the board. Directors are NOT agents so no power to bind unless the group acts as a whole.
Voting/Meetings
The BOD can take action by:
(1) unanimous written consent/agreement, or
(2) at a meeting.
Notice is not required if the time and place are set in the bylaws or by the BOD (AKA a “regular meeting”).
Special meetings require 2 days’ notice of the date, time, and place, but do not have to state the purpose. If notice is not provided, the action is VOID, UNLESS D waives the notice defect:
(1) in a signed writing, or
(2) by attending the meeting without objection.
Cannot use proxies or voting agreement because they are void as against public policy. If a single director tries to act, void, unless ratified by valid act.
BOD QUORUM NEEDED
A MAJORITY of the ENTIRE BOD is necessary to make a quorum and conduct business, unless the AOI/bylaws require more/less. (can’t be less than 1/3), Director CAN break the quorum by leaving. Once a quorum is established, a MAJORITY of those present must vote to take board action (AKA pass resolution), unless there are provisions stating otherwise in the AOI. In order to increase the quorum to greater than a majority or require SuperMajority, must be in the AOI. If quorum is broken, cannot act.
DUTY OF CARE – BUSINESS JUDGMENT RULE
{3} A director is a fiduciary of the corporation, and as such owes a duty of care to the corporation. They must discharge their duties in
(1) GOOD FAITH,
(2) with the care that an ordinarily prudent person would exercise under similar circumstances in a like position, and
(3) in a manner the directors reasonably believe to be in the BEST INTERESTS of the corporation. “There is a presumption that, “in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.”
A director is entitled to rely on information, opinions, reports or statements prepared or presented by corp. officers or employees, counsel, accountants, other person directors reasonably believe to be within such person’s professional or expert competence, or a committee of the board which merits confidence. (means that a ct will not second guess a business decision if it was made in GOOD FAITH, was REASONABLY informed, and had RATIONAL BASIS.) BOP is on challenger.
Breach of Duty of Care
If a D breaches this duty, they may be held personally liable to the corporation for any losses suffered as a result if it is shown that the corporation’s injury was CAUSED by Director’s breach. 2 Types of Breach.
a. Nonfeasance. Where a D does nothing and causes loss to corp. State stnd of care – BJR, only liable if breach causes loss. VERY tough to win
b. Misfeasance. Where the BOD acts in such a way that hurts the corp. CAUSATION IS CLEAR. (1) BJR standard, (2) decision caused the corp to lose money, (3) Director is not liable if they meet BJR
Buisiness Judgment Rule BJR – means that a ct will NOT second guess a bus decision IF it was made in GFAITH, was REAS informed, and had a RATIONAL BASIS
DUTY OF LOYALTY
{IS THERE A CONFLICT OF INTEREST?} Directors of a corporation owe their individual and unqualified duty of loyalty to the corporation, which means they must act in GOOD FAITH and with the honesty, fairness, and trustworthiness (morality) that the law imposes on a fiduciary.
Duty of Loyalty - USURPING A CORPORATE OPPORTUNITY
A director breaches the duty of loyalty when he usurps a corporate opportunity. A corporate opportunity is any opportunity in which the corporation has an interest or expectancy OR is in the corporation’s line of business.
The director will be liable to the corporation for damages and lost profits if he usurps a corporate opportunity, or under a theory of constructive trust, UNLESS:
(1) the director informs the BOD of the opportunity, disclosing all material facts, AND
(2) the board rejects it.
Corporation’s lack of financial ability is not a defense.
Duty of Loyalty - INTERESTED DIRECTOR
Self-dealing is prohibited and the corporation may set aside an interested director contract or transaction UNLESS the Director shows
(1) the contract was fair and reasonable to the Corp at the time it was approved, OR
(2) after full and fair disclosure of all material facts to the BOD, the transaction is approved by:
* (2a) a majority vote of the disinterested directors,
* (2b) unanimous vote of disinterested Directors if disinterested are insufficient to take BOD action, OR
* (2c) a majority vote of disinterested shareholders.
In determining fairness, courts look at factors such as adequacy of consideration, corporate need to enter into the transaction, financial position of the Corp. and available alternatives.
If a Director will benefit from a transaction, he MUST disclose this to the BOD/SH.
(Deal Bt D & Corp)
Duty of Loyalty - COMPETING VENTURE.
A director, as a fiduciary, cannot compete with the corporation as it creates a conflict of interest. If a director does compete, any profits will be placed in a constructive trust and must provide accounting. They may engage in unrelated businesses.
Duty to Disclose
Directors have duty to disclose material corporate information to other members of the board.
Director loan
Approval by Maj of SH, or some allow BOD to approve a director loan as long as the board determines that the loan is reasonably expected to benefit the corp.
Which Directors are liable?
Generally, ALL are presumed to have concurred in all board activities, UNLESS the director’s dissent or abstention is noted in the corporate record. Oral dissent not enough – must be in writing. There is an exception if the Director was absent, OR if the director reasonably relied on the good faith assertions of another director, officer, or auditor whom they reasonably believe is competent.
