Directors and Officers

Question 1

What are the requirements for directors of a corporation?

Answer 1

There must be at least one adult natural person.

Question 2

How is the number of directors determined?

Answer 2

The number can be determined by:

1. The bylaws
2. By a shareholder act
3. By the board if a shareholder bylaw allows

Question 3

Who elects the directors?

Answer 3

Initially, the incorporators at the organizational meeting.
Subsequently, shareholders at the annual meeting.
The certificate or a shareholder bylaw may establish a staggered board.

Question 4

How may a director be removed before the expiration of his term?

Answer 4

1. By shareholders for cause
2. By Board for cause, if permitted in certificate or bylaws
3. By shareholders WITHOUT cause, only if permitted in certificate or bylaws

Question 5

How is a vacancy on the Board filled?

Answer 5

Generally, the Board will select a replacement

However, when a board member is removed by SH without cause, the SH select the replacement

Question 6

What are the two ways in which the board can make a valid act?

Answer 6

1. Unanimous written consent; or
2. A meeting

All other acts are void unless ratified by a valid act

Question 7

What are the notice requirements for board meetings?

Answer 7

Regular - no notice if time and place are set in bylaws or by the board
Special - Yes, must state the time and place, but not purpose

Question 8

What is the penalty if notice is not given?

Answer 8

Any action taken during the meeting is void unless director not given notice waives by 1) written consent or 2) attending the meeting without objection

Question 9

May a director give a proxy for his vote?

Answer 9

No - A director has a non-delegable fiduciary duty

Question 10

May directors enter into voting agreements as to how they will vote as a group?

Answer 10

No

Question 11

What are the quorum requirements for a director’s meeting?

Answer 11

1. Majority of entire board must be present (and remain)

2. Passing a resolution requires a majority of those present

Question 12

What are the requirements for delegation of the duties of the Board?

Answer 12

Delegation to a committee is appropriate if one or more directors is on the committee and the certificate or bylaws allow

Question 13

What responsibilities may never be delegated to a committee?

Answer 13

1. Setting of director compensation
2. Filling a board vacancy
3. Submission of a fundamental change to shareholders; and
4. Cannot amend the bylaws
   Note: Committees may recommend the above.

Question 14

What is the standard for the duty of care?

Answer 14

A director must discharge her duties in good faith and with that degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in a like position.

Question 15

What is nonfeasance?

Answer 15

Nonfeasance occurs when a director fails to act when, under the duty of care standard, he should have acted.

Question 16

Is a director liable for nonfeasance?

Answer 16

Yes, but only if the breach caused a loss to the corporation.

Question 17

What is malfeasance?

Answer 17

Malfeasance occurs when the Board takes an action that hurts the corporation.

Question 18

What is the connection between malfeasance and the Business Judgment Rule?

Answer 18

A court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis. Director’s are not guarantor’s of success.

Question 19

Is a director liable when action satisfies the business judgment rule?

Answer 19

NO - prudent people do appropriate homework. Look for whether the board has deliberated, analyzed, etc.

Question 20

What is the standard for the Duty of Loyalty?

Answer 20

A director must act in good faith and with the consciousness, fairness, morality, and honesty that the law requires of fiduciaries.

Question 21

Interested directors transactions will be set aside unless the director can show…

Answer 21

The deal was fair and reasonable to the corporation when approved, or the material facts and the director’s interest were disclosed or known and the deal was approved by i) shareholder action, ii) Board approval by sufficient vote (without interested directors), or iii) unanimous consent of non-interested directors (if number is sufficient)

Question 22

Do interested directors count towards meeting the quorum requirement?

Answer 22

Yes, and they may participate in the meeting.

Question 23

May directors be paid in stock options?

Answer 23

If on a stock exchange, stock options must be authorized under the exchange’s policies.
If not on a stock exchange, it must be approved by shareholders.

Question 24

What is the remedy when a director competes with the corporation?

Answer 24

The corporation will get a constructive trust on the profits and may get damages if the competition harmed the corporation.

Question 25

What must a director do to comply with the Corporate Opportunity Doctrine?

Answer 25

A director cannot take a corporate opportunity until he tells the board about it and waits for the board to reject it.

Question 26

What kind of opportunity constitutes a corporate opportunity?

Answer 26

The opportunity is something the corporation needs, or has an interest or tangible expectancy in, or that is logically related to its business.

Question 27

What is the remedy for breach of the Corporate Opportunity Doctrine?

Answer 27

A constructive trust. The director must account for the opportunity and if he still possesses, he must sell to the corporation at his cost

Question 28

When may a corporation make personal loans / guarantee of obligations?

Answer 28

When approved by shareholders or if the Board finds it will benefit the corporation

Question 29

Which directors are liable when the Board acts?

Answer 29

A director is presumed to concur with board action unless he dissents in writing

Question 30

How does a director dissent in writing?

Answer 30

He may do so in the minutes, or in writing to the corporate secretary at the meeting, or by sending a registered letter to the secretary promptly after the meeting.

Question 31

What are the exceptions to the dissent requirement?

Answer 31

If a director was not present, he must register a written dissent within a reasonable time after learning of the action.

Question 32

What duties are owed by officers?

Answer 32

Same as Directors - Duties of care and loyalty

Question 33

Can officers bind the corporation?

Answer 33

Yes, if they have the authority to do so.

Question 34

What is the President inherently authorized to do?

Answer 34

Enter into contracts in the ordinary course of business and sue on behalf of the corporation

Question 35

Who selects and removes officers?

Answer 35

The Board, unless the Certificate allows the shareholders to elect. If shareholders elect, only shareholders may fire.

Question 36

When may a director or officer be reimbursed for their litigation costs?

Answer 36

When they are sued by or on behalf of the corporation in their official capacity. They may not be reimbursed if they are held liable to the corporation.

Question 37

When may an officer or director receive permissive reimbursement?

Answer 37

When they neither are found liable nor win on the merits (i.e., settlement)

Question 38

Can a corporation advance litigation expenses?

Answer 38

Yes, but they must be repaid if the director or officer ends up not being entitled to a reimbursement

Question 39

Can the corporation limit the liability of directors?

Answer 39

Yes, in the certificate, for breach of duty except when the director acted in bad faith or with intentional misconduct or received an improper financial benefit or approved of an unlawful distribution or loan. THe certificate can exculpate for the duty of care