Directors and Officers Flashcards
(22 cards)
What is the minimum number of directors that a corporation can have?
1 NATURAL person
Number can be set in
(i) bylaws; (ii) by shareholder act; OR (iii) by the board, if a shareholder bylaw allows
Who elects the initial board of directors?
The incorporators elect initial directors at the organizational meeting
After that, shareholders elect at the annual meeting
What is a classified (staggered) board?
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
Can a director be removed before the expiration of his term?
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
How is a board seat filled on event of resignation, death or removal?
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
What are the ONLY 2 ways a board of directors can take a valid act?
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
What are the requirements for a valid board meeting?
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
What is necessay to raise OR lower the quorum requirement?
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)
What is necessay to raise OR lower the board resolution voting requirement?
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)
When can a board delegate responsibility to a committee of directors?
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
What is a board committee PROHIBITED from doing?
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
What is the standard for the duty of care?
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
What is the standard for duty of loyalty?
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
What types of transactions can breach the duty of loyalty?
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
Is a loan to a director using corporate funds okay?
ONLY IF
(i) it's approved by shareholders; OR (ii) if the board finds that it will benefit the corporation
How can a director dissent from a board decision?
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
When can directors rely on opinions of others?
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
What duties do officers of a corporation have?
As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty
Who may elect/remove officers?
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”
Can an officer be removed via judicial action?
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
When can a director or officer be reimbursed by the corporation for personal liability?
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
- Exculpation: The certificate may eliminate director liability to the corporation/shareholders for breach of a duty, EXCEPT if she
Who determines eligibility for permissive indemnification of directors OR officers?
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
