DIRECTORS AND OFFICERS Flashcards
I. STATUTORY REQUIREMENTS—DIRECTORS A. Number B. Election C. Removal before term expires. D. there’s a vacancy on the board (e.g., a director resigns). Who selects the person who serves the remainder of that term?
A. Number—one or more adult natural persons. set in certificate or bylaws
B. Election: shareholders elect directors at the annual meeting. Bylaws can provide for “classified board,” which divides the board by half or thirds, with half or one- third elected each year.
C. Removal before term expires. (with our without cause) This is done by shareholders. They can do this by vote of a majority of the shares entitled to vote.
D. the board of SH
I. STATUTORY REQUIREMENTS—DIRECTORS
***E. The board of directors must act as a group.
What if directors agree that the corporation will do something; they agree in a series of individual conversations, without a meeting or unanimous written consent. Is that OK?
Does a conference call (simultaneous oral communication so each can hear all others) count as a meeting?
Is an individual director an agent of the corporation?
- Notice of board meetings.
- Can directors give proxies for how they will vote as directors?
- Can directors enter voting agreements for how they will vote as directors?
- There are only two ways the board can take a valid act:
a. Unanimous written consent to do something (e-mail and fax are OK) or
b. A meeting that satisfies quorum and voting requirements.
no; unless ratified by a valid act
yes
– Individual directors have no authority to speak for or bind the corporation. (Officers, on the other hand, are agents of the corporation.)
- Notice of board meetings.
only need for special meetings not regular
– Failure to give proper notice voids whatever was done at the meeting unless the defect is waived by the person not notified – either in writing anytime or by attending without objection.
method for giving notice can be set in the bylaws. email ok if directors authorizes it - Can directors give proxies for how they will vote as directors? no
- Can directors enter voting agreements for how they will vote as directors? no
II. ROLE OF DIRECTORS
A. The board manages the business. It sets policy, supervises officers, declares distributions, decides when the corporation should issue stock, recommends fundamental corporate changes to shareholders, etc.
B. Exceptions:
1. Close corporations
2. Committee of one or more directors.
If the certificate or bylaws allow, the board can appoint a committee, to which it can delegate management power. But a committee cannot: amend bylaws, select officers or recommend a fundamental corporate change to shareholders. Committee can declare dividends only if the certificate or bylaws allow.
III. DUTY OF CARE
burden?
standard?
(Burden on plaintiff)
Duty of care standard: A director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances.
2 ways of duty of care to come up
a director of C Corp., fails to attend any of the board of directors’ meetings or to keep abreast of corporate affairs in any way.
The directors vote to start a new line of product. The idea is a disaster and the company loses money. Have the directors breached the duty of care?
A. Nonfeasance (the director does nothing).
State the duty of care standard, but he is liable only if breach +causation
If D were an antitrust expert and, in his absence, the board approved a contract that violated antitrust law, there may be causation. If he had been prudent (done some work), he could have stopped the board from doing something stupid.
B. Misfeasance (the board does something that hurts the corporation – so causation is clear here)
State the duty of care standard.
BUT, director is not liable if she meets the business judgment rule (BJR): So a court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis. (prudent)
IV. DUTY OF LOYALTY burden? standard? normal case types
(Burden on defendant)
Duty of loyalty standard: A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that her act is in the corporation’s best interest.
conflict of interest; because not BJR
A. Interested Director Transaction.
B. Competing Ventures
C. Corporate Opportunity
A. Interested Director Transaction.
A. Interested Director Transaction. This is any deal between the corporation and one of its directors (or the director’s close relative or another business of which the director is a manager or has a financial interest).
State the duty of loyalty standard. Interested director transaction will be set aside UNLESS the director shows: (1) the deal was fair to the corporation when approved;
OR
(2) her interest and the material facts were disclosed or known and the deal was approved in good faith by either of these of two groups.
shareholders or majority of disinterested directors
Interested directors count toward a quorum.
– Board can set its own compensation, as long as it is reasonable. If pay is excessive, it is a waste of corporate assets, and a breach of the duty of loyalty.
B. Competing Ventures
remedy
B. Competing Ventures
State the duty of loyalty standard.
you can not compete without approval from a disinterested majority of directors
Remedy: Constructive trust on profits. So if Sharon went into competition with Ozzie’s and made a profit, Ozzie’s would get the profit.
C. Corporate Opportunity
C. Corporate Opportunity
– State the duty of loyalty standard. Director cannot USURP a corporate opportunity. That means the director cannot take it until he (1) tells the board and (2) waits for the board to reject the opportunity.
Corporate Opportunity: anything the director has reason to know the company would be interested in
remedy: If Cheatem still has it, he must sell it to the corporation at his cost. If Cheatem has sold it at a profit, the corporation gets the profit. (Constructive trust.)
Corporation can renounce opportunity in certificate of formation or by board action. That clears the way for a director to take advantage of the opportunity.
***V. OTHER BASES OF DIRECTOR LIABILITY
A. Improper loans.
board loan money to a director is ok if reasonably expected to benefit the corp (ok if support his study, not ok if drug)
– Sarbanes-Oxley Act basically prohibits loans to executives in large, publicly- traded corporations. It requires the board of such a corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.
B. Improper distributions.
C. Which directors are liable?
- General rule.
- Defenses to liability for what the board did.
- General rule. A director is presumed to have concurred with Board action unless her dissent or abstention is noted in writing in corporate records. This is done by (1) having it put in the minutes, or (2) sending a note to the corporate secretary at the meeting, or (3) sending a registered letter to the corporate secretary immediately after the meeting.
- oral dissent not effective by itself
- (Cannot dissent if voted for the resolution at the meeting.) - Defenses to liability for what the board did.
a. Not liable if you were absent from the meeting (e.g., sick that day).
b. Good faith reliance on information represented as correct by an officer or provided by a competent professional (e.g., attorney, CPA), or by an employee, or by a committee of which the director relying was not a member.
VI. OFFICERS *** A. Status. B. Selection and removal. who duties?
What remedy might fired officer have against the corporation?
(owe the same duties of care and loyalty as directors)
A. Status.
Officers are agents of the corporation. So they can bind the corporation by acts within their authority.
***watchout for crossover with agent question
– Regarding inherent authority, note that the president has authority to convey corporate real property only if Board gives her such authority. Outside that, she might have inherent authority to bind the corporation to a contract entered in the ordinary course of business
B. Selection and removal. Officers are selected by and removed by the board, which also sets officer compensation.
KEEP IN MIND: Shareholders hire and fire directors, but the board hires and fires officers. Generally, then, shareholders do NOT hire and fire officers.
damages for breach of contract
VII. INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Reimbursement prohibited.
2. Reimbursement required.
3. Reimbursement permitted.
when
Suppose D is sued in her capacity as a director or officer. She incurs costs, attorney’s fees, maybe fines, a judgment or settlement. Now she seeks reimbursement of these amounts from the corporation.
Three possible scenarios:
- If the director or officer is held liable for willful or intentional misconduct in performing a duty to the corporation. (narrow)
2, if she wins a judgment on the entire case; doesnt matter if on merits or not (dismissed)
3.
a. Situations: anything not satisfying 1. and 2. above. But if she was held liable to the corporation or to have received an improper personal benefit, she can get only expenses and attorney’s fees (not the judgment).
b. Eligibility standards: she must show that she acted in good faith and with the reasonable belief that her actions were in the corporation’s best interests. (duty of loyalty)
c. Who determines eligibility? (1) majority vote of the disinterested directors or of a disinterested committee or of disinterested shares or (2) independent legal counsel.
the court in which the director or officer is sued can order reimbursement if it finds it justified on the facts
The certificate can eliminate director and officer liability for damages, but never for willful or intentional misconduct.
The company can advance litigation expenses if the director or officer gives an affidavit of her good faith belief that she has met the duty of loyalty standard and a written undertaking to repay the expenses if it is determined that she did not.
I. STATUTORY REQUIREMENTS—DIRECTORS
***E. The board of directors must act as a group.
***5. Quorum.
Suppose there are five directors, and three show up at the meeting (so we have a quorum). If one of those three leaves, do we lose the quorum?
For any meeting of the board, we must have a quorum. Unless the certificate or bylaws say otherwise, a quorum is a majority of all directors.
– If we have a quorum, passing a resolution (which is how the Board takes an act at a meeting) requires only a majority vote of those who are present.
yes; quorum is broken and the board cant act
