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New York Corporations > Directors & Officers > Flashcards

Directors & Officers Flashcards

1
Q

What is the requirement for the number/qualification of directors on a board?

A

At least one adult natural person

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2
Q

How is the number of directors set? (3 ways)

A
  1. In the bylaws;
  2. By shareholder act; OR
  3. By the BOD, if a s-holder bylaw allows

IF no number of directors is set in one of these ways, then there is one director

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3
Q

What is it called when the certificate or bylaws sets out a board with different classes that get elected for terms?

A

Staggered board or Classified board

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4
Q

After the initial election by incorporators, who elects directors?

A

Shareholders, at the annual meeting

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5
Q

How can a director be removed before term expires? (3 ways)

A

If removal is FOR CAUSE,

  1. Shareholders can remove any time; AND
  2. BOD can remove if certificate or bylaws allow.

If removal is NOT for cause,

  1. Only shareholders may remove, AND only if certificate or bylaws allow
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6
Q

How are BOD vacancies filled?

A
  1. Generally, new members are selected by Board
  2. If shareholders removed Director without cause, replacement is selected by shareholders
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7
Q

What are the two ways the board can take a valid act?

A
  1. Unanimous, written consent
  2. A meeting (need not be in NY; may be by conference call)
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8
Q

If directors purport to take a corporate act in an invalid way, what happens?

A

Act is void, unless ratified by a valid act

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9
Q

What are the notice requirements for board meetings?

A

For REGULAR meetings: No notice required, provided time/place is set in bylaws or by the bd

For SPECIAL meetings: Notice must state time and place (no need for purpose)

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10
Q

What happens if notice of special meetings is defective?

A

All acts at the meeting are void, unless waived

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11
Q

How can defective notice be waived?

A
  1. Signed writing
  2. Attending the meeting without objection
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12
Q

Can a director give a proxy for director voting?

A

No

Directors owe non-delegable fiduciary duties to the corporation

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13
Q

Can directors enter voting agreements?

A

No.

Directors owe non-delegable fiduciary duties to the corporation

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14
Q

What constitutes a quorum in NY?

A

A majority of the entire board (i.e., the number if there were no vacancies) (e.g., On a 9-person board, a quorum is 5, and the number of votes needed to pass a resolution is the majority of the quorum)

(NOTE: There must be a quorum present for the entire meeting!)

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15
Q

What are the rules for decreasing the default quorum requirement?

A

May reduce by certificate or bylaws (BUT may not reduce to less than 1/3 of the entire board)

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16
Q

What is the rule for decreasing the voting requirement?

A

Cannot be reduced

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17
Q

What are the rules for increasing the default quorum requirement?

A

May increase by certificate ONLY

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18
Q

What is the rule for requiring a supermajority for decisions? (e.g. Requiring that all decisions be passed with 60% of the Directors present)

A

Allowed, but by certificate only

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19
Q

What must be done by the board, rather than a committee?

A
  1. Set director compensation
  2. Fill a board vacancy
  3. Submit a fundamental change to s/h
  4. Amend bylaws

(but may make recommendations on any of these)

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20
Q

What is a particularly important committee function?

A

Shareholder derivative suits

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21
Q

What is the NY duty of care standard?

A

Director has a duty to discharge his duties:

  1. In good faith; AND
  2. With the degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in like position
22
Q

What is the liability for breach of the duty of care through nonfeasance?

A

Liable only if breach actually caused the corporation to suffer harm

23
Q

What is the BJR?

A

(Business Judgment Rule)

A court will not second-guess a business decision if:

  1. it was made in good faith,
  2. it was reasonably informed, and
  3. it had a rational basis

(A director is not a guarantor of success, but they must do appropriate homework)

24
Q

What is the standard for the duty of loyalty?

A

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

25
Q

What are the situations that tend to implicate the duty of loyalty?

A
  1. Interested transactions
  2. Competing ventures
  3. Corporate opportunities
26
Q

What is an interested transaction?

A

Any deal between the corporation and:

  1. one of its directors;
  2. a business for which a director is also a director or officer; OR
  3. a business in which a director has a substantial financial interest
27
Q

In what two situations will an interested transaction NOT be set aside?

A
  1. the deal was fair and reasonable to the corporation when approved OR
  2. The interested Director disclosed all material facts to the Board and the Board approved by:
    (a) Shareholder action;
    (b) A majority of disinterested Directors; OR
    (c) A unanimous vote of disinterested Dirs IF that number is insufficient to take a Board action
28
Q

How can an interested transaction be approved after the interested Dir has made his necessary material disclosures to the Board? (3 ways)

A
  1. s/h action
  2. bd approval by sufficient vote NOT counting the votes of interested directors
  3. unanimous vote of disinterested directors, IF they are not sufficient to take a board act

(NOTE: interested directors DO count towards quorum, and may participate in the meeting, but their votes don’t count)

29
Q

Is board compensation an interested transaction?

A

No, but compensation must be reasonable and in good faith (if excessive, it’s waste of corporate assets)

30
Q

What is the rule for compensation with unlisted stock?

A

Must be approved by s/h (no restrictions if exchange listed)

31
Q

What happens if a director engages in a competing venture?

A

Corporation gets a constructive trust on the director’s profits in the new venture (must account to corporation for her profit)

(corporation might also recover damages if harmed by the competition)

32
Q

What must a director do before taking a corporate opportunity?

A

Must notify the bd and wait for the bd to reject the opportunity

33
Q

What is a corporate opportunity?

A

An opportunity that:

  1. The corporation needs;
  2. The corp. has an interest or tangible expectancy in; OR
  3. Is logically related to the corp’s business

(N.B. Inability of the corporation to afford the opportunity is generally not a defense!)

34
Q

What is the remedy for usurpation of a corporate opportunity?

A

Constructive trust –

Dir must account to the corp for any profits gained via usurpation by

  1. Selling the property to corp for his cost, OR
  2. Giving profits to corp if property alread sold

(N.B. Corp might also recover damages if harmed)

35
Q

What are the non-fiduciary bases for corporate liability?

A
  1. Improper loans of corporate funds
  2. Improper distributions
36
Q

When are loans of corporate funds permitted?

A
  1. approved by s/h
  2. bd finds that it will benefit the corporation
37
Q

When directors can be liable, which directors will be liable?

A

Generally, a director is presumed to have concurred with a Board action UNLESS dissent is noted in writing in the corporate records

(but see exceptions)

38
Q

How does a director get her dissent into writing?

A
  1. In the minutes
  2. In writing to the secretary at the meeting
  3. Registered letter to the secretary promptly after adjournment (can’t dissent if you vote for the resolution at the meeting)
39
Q

What are the exceptions to the general rule for which directors are liable for corporate action?

A
  1. Not liable if missed meeting and registers written dissent within a reasonable time of learning of the action (Done by: delivering dissent OR or sending by registered mail, AND ensuring that the dissent is filed with the minutes
  2. Good faith reliance on information, reports, statements, etc. from (i) officers or employees of the company, (ii) attorneys or accountants, or (iii) a Board committee of which the Director in question is not a member
40
Q

What constitutes good faith reliance for director liability?

A

Reliance on information by:

  1. officers or employees whom the director or officer believes competent and reliable;
  2. lawyers or public accountants whom the director believes are acting within their competence; OR
  3. a committee of which the director was not member, as to matters within its designated authority
41
Q

What duties do officers owe to the corporation?

A

The same duties as directors – care and loyalty

42
Q

Can officers bind the corporation?

A

Yes, if they have authority (agency law)

43
Q

Can one person hold more than one corporate office?

A

Yes

44
Q

Who selects and removes officers?

A

The bd, unless the certificate allows shareholders to elect them (If shareholders elect officers, only shareholders can fire) (also, corporation may be liable for contract breach damages)

45
Q

Who can sue for a judgment removing an officer for cause? (2 options)

A
  1. State AG; AND
  2. Holders of 10% of all shares
46
Q

Who sets officer compensation?

A

BOD

47
Q

When is reimbursement of director’s litigation costs/awards prohibited?

A

When Director is held liable to the corporation

(must be a holding, not mere accusation)

48
Q

When is reimbursement of director’s litigation costs/awards REQUIRED?

A

If Director won a judgment, on the merits or otherwise

49
Q

When is reimbursement of director litigation costs/awards permissive?

A

Any case that is not prohibited or required (e.g., settlement)

  1. Director must show good faith, AND
  2. Action was for a purpose reasonably believed to be in the corporation’s best interest

(may include settlement amounts; atty fees; expenses—no judgment though)

50
Q

Who determines eligibility for permissive reimbursement?

A
  1. The bd, if quorum of uninterested members;
  2. shareholders; OR
  3. Bd pursuant to report from independent counsel

(Ct may also order reimbursement if it finds she is reasonably entitled to it)

51
Q

Can a corporation advance litigation expenses to a director?

A

Yes, but they must be repaid if it turns out she is not entitled to reimbursement

52
Q

When can the certificate NOT eliminate director liability to the corporation or shareholders?

A

When the Director:

  1. Acted with bad faith or with intentional misconduct;
  2. Received an improper financial benefit; OR
  3. Approved an unlawful distribution or loan

New York Corporations (7 decks)

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