Directors and Officers Flashcards
(31 cards)
Statutory Reqs. for Directors
- responsible for management of the business affairs of the corporation
- must be one or more
- must be an adult human w/ legal capacity
- don’t have to be shareholders (unless provided otherwise)
- articles/bylaws can prescribe qualifications so long as they are reasonable and lawful
Election of Directors
Initial directors can either be: (1) named in the articles; or (2) elected by incorporators at the organizational meeting.
After that, the shareholders elect directors at the annual shareholder meeting (unless there’s contrary article provisions, like a staggered board)
Removal of Directors
Shareholders may remove directors, with or without cause, before their term expires.
In some states, if there’s a staggered board, shareholder can only remove a director WITH cause.
Weird rules:
1. Director elected by cumulative voting CANNOT be removed IF the votes against her removal would be sufficient to elect her if cumulatively voted at an election
2. a director elected by a voting group of shares can ONLY BE removed by that class
3. if shareholders remove director, generally it’s the shareholders that select the replacement
Board Action
Must act as a group. Individual director is not an agent.
Board can act as a group in the following ways:
1. unanimous agreement in writing; or
2. at a meeting, which must satisfy the quorum and voting requirements
if there’s defective corporate action, that action may be ratified by the directors, incorporators, or officers.
Notice for Board Meetings
Regular Meetings: None
Special Meetings: At least two days’ written notice of date, time, and place required. No purpose stated necessary.
Note - failure to give notice makes the meeting voidable (maybe even void) unless directors who were not notified waive (you can waive by writing or attending the meeting and not objecting at the outset)
Can directors give proxies?
NO, only shareholders can. Directors owe non-delegable fiduciary duties.
For any meeting of the board, we must have a _______
QUORUM
A quorum is a majlority of all directors, unless the bylaws say otherwise (but a quorum cannot be less than 1/3 of the board). Without a quorum, board can’t act.
How do directors pass a resolution at a meeting?
After the quorum element is satisfied, directors may pass a resolution by a majority vote of the directors present.
Example: There are 9 directors total. At least five directors must attend for a quorum. If five directors attend, at least three must vote to pass the resolution.
Can a quorum be broken?
Yes - if people leave. Once a quorum is broken, the board cannot act at that meeting.
Action by Unanimous Written Consent
REMEMBER: Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, WITHOUT a meeting.
The examiners often ask about the formalities of director’s meetings by setting up facts where there is no meeting. You must recognize that a director does not have the power, by himself, to bind the corporation in a contract unless there is actual authortiy to act. Actual authority generally can arise if: (1) proper notice was given for a director’s meeting, quorum present, majority approved action; or (2) there was unanimous written consent of the directors.
Role of the Board
- Manages corporation (sets policy, supervises officers, declares distributions, determines when stocks will be issued, recommends fundamental corporation changes, etc.)
- may create committes and appoint board members to serve (unless articles say otherwise). committees may act for the board, but board has to supervise.
What types of actions can committees never take?
- declaring distributions
- filing a board vacancy
- recommending a fundamental change to shareholders
Standard of Fiduciary Duty
MEMORIZE:
A director must discharge her duties in good faith and with reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.
* the first sentence is the duty of loyalty
* second sentence is the duty of care
Duty of Care
Director owes duty of care to corporation.
- burden on challenger
- two situations where it arises: nonfeasance or misfeasance
What is nonfeasance?
Occurs when a director basically does nothing.
The key here: he’s only liable IF his breach causes a LOSS to the corporation. We need good ole causation here.
What is misfeasance?
Occurs when the board makes a decision that hurts the business.
Here, causation is clear.
Is there a defense for misfeasance?
Yes - the business judgment rule (BJR). ALWAYS INCLUDE THIS ON AN ESSAY ABOUT A DIRECTOR’S BREACH OF FIDUCIARY DUTY. But be careful - it applies ONLY to the duty of care.
The business judgment rule: presumption that when board acted, they did so in good faith, on a reasonably informed and rational basis.
What may a director rely on in keeping informed?
Director is entitled to rely on information if it’s prepared and presented by: (1) corporate officers or employees whom the director reasonably believes to be reliable and competent; (2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence; or (3) a committee of the board (in which the director is not a member) if she reasonably believes the committee merits confidence.
Duty of Loyalty
- Burden on defendant
- Common scenarios
1. conflicting transactions (self-dealing)
2. competing ventures
3. corporate opportunity doctrine
4. CL insider trading - special circumstances rule
What is a conflicting transaction? Can it be waived?
A conflicting transaction is one between the corporation and (1) one of its directors, (2) directors’ close relative; or (3) another business of the director’s
May be waived:
- if approved by majority of disinterested directors & all material information disclosed or known
- if approved by majority of disinterested shareholders entitled to vote & all material information disclosed & notice of shareholder meeting describes the transaction
- when corporation entered into transaction, it was fair to them
HOWEVER, A TRANSACTION APPROVED BY EITHER DIRECTORS/SH’S CAN STILL BE ASIDE IF THE PARTY CHALLENGING THE TRANSACTION CAN PROVE IT CONSTITUTES WASTE OF CORPORATE ASSETS. Even if deal is approved, always say this on an essay: Some courts also require a showing of fairness.
In determining whether an action is fair, courts look to factors such as adequacy of the consideration, corporate needs to enter into the transaction, financial position of the corporation, and available alternatives.
Corporate Opportunity Doctrine
Director’s fiduciary duty prohibits them from diverting a business opportunity from their corporation unto themselves without first giving the corporation an opportunity to act & providing full material disclosure. this is known as “usurpation of a corporate opportunity”
how do we tell if it’s a corporate opportunity?
- line of business test
- whether company has an expectancy or interest
Lack of financial ability on corporation’s part is not a defense. if opportunity is usurped, constructive trust may be imposed or profits can be recovered.
Common Law - Insider Trading
CL: a director has no duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction
Today: courts find a duty to disclose where director knows of special circumstances
- duty to disclose material corporate information to other directors of board
Can a director take out a loan from a corporation?
Surprisingly, yes - as long as it is reasonably expected to benefit the corporation.
Personal Liability of Director Limited
Articles can limit or eliminate a director’s personal laibility ofr money damages to the corporation or shareholders for actions taken or for failure to take action. However, they can’t limit liability for financial benefits for which the director was never entitled to, an intentionally inflicted harm on the corporation/shs, unlawful corporate distributions, or an intentional violation of criminal law.
