Directors and Officers Flashcards
(34 cards)
Directors: Requirements
- Adult, Natural Persons
- One or More
- Initial directors named in articles/elected by incorporators
- SHHs elect thereafter
- BOD elected each year unless staggered BOD; SHHs may remove directors with or without cuase before their term expires (EXCEPT: Staggered BOD - must have cause)
Staggered BOD
- 1/2 or 1/3 BOD elected each year
- usually set in the articles
- SHHs can remove directors only with cause on a staggered BOD
Vacancy on the BOD
If there is a vacancy before a term is up, BOD or SHHs may elect who fills the spot to complete the term.
BUT if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.
BOD Action
- BOD must act as a group.
- Individual Director is NOT an agent of the corp - individual directors have no authority to speak for or bind the corporation.
- Methods of BOD Action: Unanimous agreement in writing; at a meeting.
BOD Meetings
Types of Meetings
Regular Meetings
Special Meetings
BOD Meetings
Regular Meetings
No notice required
BOD Meetings
Special Meetings
- Written Notice required;
- must give at least 2 days notice of date, time, and place of meeting - no purpose needed.
BOD Meetings
Failure to Give Notice - Special Meetings
Failure to give notice of special meeting can be remedied by waiving notice defect by:
1. in writign any time, or
2. attending meeting without objecting at ouset of meeting.
BOD
Proxies
BOD cannot give prozies or enter voting agreements for how they will vote as directors. Aby efforts to do so are void.
BOD owe the corp non-delegable fiduciary duties.
NOTE: SHHs can vote by proxy and enter into voitng agreements.
BOD Meeting
Meeting Requirements
Quorum: Majority of all BOD
* No Quorum –> No BOD Act
* If ther is a Quorum –> BOD Action only requires majority of those present
* A Quorum can be lost if people leave –> No BOD Act
BOD
Role of the BOD
The BOD manages the corporation, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, etc.
BOD does big decisiosn; BOD can delegate to committee of directors, but committee cannot declare a distribution or fill a BOD vacancy or recommend fundamental change.
BOD Committee
A BOD committee may recommend, but CAN NOT:
* declare distribution
* fill a board vacancy, or
* recommend a fundamental change to shareholders
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Fiduciary Duties owed to the Corp
Directors must:
1. Discharge duties in good faith and reasonable belief that actions are in best interest of corp; (Duty of Loyalty)
2. Use care that person in like position would reasonably believe appropriate under circumstances. (Duty of Care)
Duty of Loyalty, Duty of Care
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Duty of Care
Burden is on the Plaintiff; Breach may occur through:
* nonfeasance - Director does nothing (i.e., Director is lazy)
* misfeasance - BOD makes decision that hurts business.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Business Judgement Rule
BJR - Courts will not second guess business decision if made in good faith, informed, had rational basis:
* Director is not guarantor of succes –> they promise to bring the kind of care a prudent person would in like circumstances
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
BJR: Director may relay on reports or other information
In doing their homework, a director may rely on:
* corporate officers or employees who are reliable and competent;
* professionals within their scope
* committe of BOD, that the director is not a part of.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Duty of Loyalty
Conflict of Interest Cases –> NO BJR
* Burden is on the Defendant
* Director puts herslef in a position where she has a conflic of interest with the corp –> i.e., self-dealing
* Director v. Corp
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Duty of Loyalty: Self-Dealing
Director who is self-dealing will not be liable for breach of duty of loyalty if the director shows either:
1. D’s interest was disclosed or known and the deal was approved by either (1) majority of disinterested director’s, (2) majority of disinterested shareholders, or (3) showing of fairness to the corporation.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Special Quorum Requirements for Conflicting Interest vote
For purposes of the vote on a conflicting interest transaction, at a director’s meeting, a quorum is a majority (at least 2) of disinterested directors.
MUST HAVE AT LEAST 2 DISINTERESTED DIRECTORS AT MEETING.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Factos in determining fairness
A transaction approved by the board or shareholders might still be set aside if the party challenging the transaction can prove taht it constitutes a wasste of corporate assets.
I.e., so even if the transaction is approved by teh appropriate group, some courts also require a showing of fairness.
In determining fairness, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Remedies for Conflict of Interests
Enjoining the transaction,
setting the transaction aside,
damages, and
similar remedies
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Director’s Compensation
Directors may set their own compensatin if it is reasonable and in good faith.
Directors & Officers: Fiduciary Duties, Liability, & Indemnification
Duty of Loyalty Breach: Competing Ventures
Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems.
