Directors and Officers

Question 1

What is the minimum number of directors that a corporation can have?

Answer 1

1 NATURAL person

Number can be set in

(i) bylaws; 
(ii) by shareholder act; OR 
(iii) by the board, if a shareholder bylaw allows

Question 2

Who elects the initial board of directors?

Answer 2

The incorporators elect initial directors at the organizational meeting

After that, shareholders elect at the annual meeting

Question 3

What is a classified (staggered) board?

Answer 3

Where the entire board is NOT re-elected each year

The certificateOR shareholder bylaw can establish 2, 3, or 4 classes of directors

Each class is up for election each year

Question 4

Can a director be removed before the expiration of his term?

Answer 4

For cause:

- by shareholders
- by the board, ONLY IF the certificate OR bylaws allow

For ANY reason:
- by shareholders, ONLY IF the certificate OR bylaws allow

Question 5

How is a board seat filled on event of resignation, death or removal?

Answer 5

General rule: the board selects the person who will serve the remainder of the term

If director was removed by shareholders, WITHOUT cause, then shareholders fill the vacancy

Question 6

What are the ONLY 2 ways a board of directors can take a valid act?

Answer 6

1) UNANIMOUS written consent; OR
2) Via a board meeting

NOTE: INDIVIDUAL board members are NOT agents of the corporation. They have no power to bind in their individual capacity; they MUST act as a group

If a board purports to act in some other way than listed above, the action is VOID, UNLESS the action was RATIFIED by the board via a valid act

Question 7

What are the requirements for a valid board meeting?

Answer 7

1) Notice:
Regular Meeting: not required if time/place is set in bylaws
Special Meeting: required AND must state time/place; need not state purpose

** If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect (i) in writing, anytime; OR (ii) by attending the meeting without objection

2) Unrestrained voting: board CANNOT vote by PROXY or enter VOTING AGREEMENTS to vote in a certain way
- Voting is a non-delegable fiduciary duty

** NOTE: Shareholders CAN vote by proxy and enter voting agreements

3) Quorum: to meet quorum, there must be a MAJORITY of the entire board present

• • Entire board = duly constituted board = the # of positions WITHOUT vacancies
• • Quorum CAN be broken

4) Majority voting: once quorum is met, passing a resolution requires a MAJORITY of those directors present

NOTE: The board meeting does NOT have to be in NY. A meeting CAN be via conference call

Question 8

What is necessay to raise OR lower the quorum requirement?

Answer 8

Lower

• • The quorum requirement CAN be less than a majority ONLY IF stated in the certificateOR bylaws
• • NEVER can be fewer than 1/3d of the bd

Increase
The quorum requirement CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 9

What is necessay to raise OR lower the board resolution voting requirement?

Answer 9

Lower: the corporation can NEVER decrease the resolution voting requirement below a majority

Increase: The resolution votingrequirement CAN be raised to more than a majority ONLY IF stated in the certificate (NOT bylaws)

Question 10

When can a board delegate responsibility to a committee of directors?

Answer 10

A board can delegate certain functions IF

(i) the certificate OR bylaws allow; AND 
(ii) a majority of the entire board (without vacancies) votes to delegate			

• • Committee must be made of AT LEAST one director
• • A Board CANNOT delegate all of its powers to a committee

Question 11

What is a board committee PROHIBITED from doing?

Answer 11

1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to shareholders
4) Amend bylaws

NOTE: A committee CAN recommend ANY of the above for FULL board action

** Committees are used in conjunction with shareholder derivative suits

Question 12

What is the standard for the duty of care?

Answer 12

Standard = “A director must discharge her duties in GOOD FAITH and with that degree of DILIGENCE, CARE AND SKILL that an ORDINARY PRUDENT PERSON would exercise under similar circumstances in like position”

Nonfeasance (dong NOTHING) will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove)

Misfeasance (affirmative wrong) implicates the Business Judgment Rule

BJR: a court will not second guess a business decision IF it was made in GOOD FAITH, was REASONABLY INFORMED and RATIONAL

Question 13

What is the standard for duty of loyalty?

Answer 13

Standard = “A director must act in GOOD FAITH and with the CONSCIENTIOUSNESS, FAIRNESS, MORALITY and HONESTY that the law requires of fiduciaries”

BJR does NOT apply because the board cannot take proper action if there is a conflict of interest

Question 14

What types of transactions can breach the duty of loyalty?

Answer 14

1) Interested director (self-dealing) transactions: occurs when there is any deal between the corporation and one of its directors (or business of which the director is also a director or has substantial financial interest)

Can be cleansed IF:

(1) the deal was fair and reasonable to the corporation when approved OR the material facts and her interest were disclosed/known; AND 
(2) the deal was approved by 
	(i) SH action; 
	(ii) Board approval by disinterested directors; OR 
	(iii) UNANIMOUS approval of disinterested directors if they are insuffiicent in number to take board action

** NOTE: interested directors DO count for quorum purposes; they just CANNOT vote

** The entire board CAN set director compensation, BUT it must be reasonable and in good faith (otherwise, it’s a waste of corporate assets)

** To give directors or officers options for PRIVATE stock, they must be approved by shareholders

2) Competing ventures: directors cannot compete with their with their own corporation

** If director DOES compete, a court would establish a CONSTRUCTIVE TRUST for the profit made from the competing venture (corporate could also get damages, if it were hurt)

3) Corporate opportunity: a director cannot “USURP a corporate opportunity”

A director CAN take an opportunity ONLY IF:

(1) he tells the board about the opportunity; AND 
(2) waits for the disinterested board to REJECT it

Corporate opportunity = someting the corporation NEEDS, have an EXPECTANCY INTEREST IN, OR is logically RELATED TO its business

** “The corporation couldn’t afford it” is NOT a valid excuse

Remedy = constructive trust established, which accounts for any profits made

Question 15

Is a loan to a director using corporate funds okay?

Answer 15

ONLY IF

(i) it's approved by shareholders; OR 
(ii) if the board finds that it will benefit the corporation

Question 16

How can a director dissent from a board decision?

Answer 16

General rule = a director is PRESUMED to have concurred with board action UNLESS her dissent is noted in WRITING in corporate records

Procedure =

(i) dissent in the board minutes; 
(ii) in writing to the secretary at the meeting; OR 
(iii) via registered letter to the secretary PROMPLTY after adjournment									

** ORAL dissent is NEVER effective by itself

EXCEPTIONS: A MISSING director is not liable for meeting actions IF he dissents in WRITING to the corp secretarywithin a reasonable time after learning of the action

Question 17

When can directors rely on opinions of others?

Answer 17

ONLY when the reliance is done in GOOD FAITH

Applies to information, opinions, reports or statements by…

- officers or employees
- lawyers or accountants
- a committee's recommendation...

PROVIDED the director believes the person is competent and is working within scope of designated authority

Question 18

What duties do officers of a corporation have?

Answer 18

As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty

Question 19

Who may elect/remove officers?

Answer 19

The boardunless the certificate allows shareholders to elect them (rare)

One person CAN hold more than one office

Board can suspend an officer’s authority to act “for cause”

Question 20

Can an officer be removed via judicial action?

Answer 20

The attorney general OR holders of 10% of all SHARES may sue for a judgment removing an officer “for cause”

Court can bar reappointment of a person so removed from office

Question 21

When can a director or officer be reimbursed by the corporation for personal liability?

Answer 21

4 categories…

1) Prohibited reimbursement: if officer was held liable to the corporation (a judicial holding, not accusal)
2) Of right: the corporation MUST reimburse the director/officer IF she won a judgment on the merits or otherwise

** NOTE: if she files ANOTHER action to collect reimbursement, the corporation is not required to pay THOSE attorney’s fees, unless the court deems it appropriate

3) Permissive: if not part of the categories above, the corporation MAY reimburse, IF
(i) she acted in good faith; AND
(ii) for a purpose reasonably believed to be in the company’s best interest

** Can include reimbursement for settlement

4) Cout ordered: notwithstanding the above, a court can order the corp to reimburse a director/officer for litigation expenses/attorney fees

NOTE: A corp can ADVANCE litigation expenses to a director/officer, BUT they MUST be repaid if it turns out that she’s NOT entitled to reimbursement

** A corporation can buy insurance to cover director/officer liability

• • Exculpation: The certificate may eliminate director liability to the corporation/shareholders for breach of a duty, EXCEPT if she
    (i) acted in bad faith;
    (ii) acted with intentional misconduct;
    (iii) received an improper financial benefit; OR
    (iv) approved an unlawful distribution or loan

Question 22

Who determines eligibility for permissive indemnification of directors OR officers?

Answer 22

1) Board of directors (with a quorum of directors being non-parties); or, if there is no such quorum…
2) Shareholders or a quorum of those directors who are disinterested; or…
3) Board of directors pursuant to report from independent legal counsel