Directors_Officers Flashcards
(31 cards)
DIRECTORS - HOW MANY MINIMUM AND HOW IS NUMBER SET?
What is the minimum # of directors that a corporation can have?
A corporation can have 1 or more NATURAL (i.e. human) persons → Number MUST be greater than 1
HOW NUMBER OF DIRECTORS IS DETERMINED: can be set in (i) bylaws; (ii) by a SH act; OR (iii) by the BOD, if a SH bylaw allows
WHO ELECTS BOD?
Who elects the initial BOD?
The incorporators elect initial directors at the organizational mtg
After that, SHs elect at the annual mtg
STAGGERED BOARD / CLASSIFIED BOARD
What is a staggered or “classified” bd?
A staggered or Classified Board is where the entire bd is NOT re-elected each year
The certificateOR SH bylaw can establish 2, 3, or 4 classes of directors
Each class is up for election each year
REMOVING BOARD MEMBER BEFORE EXPIRATION OF TERM
Can a director be removed before the expiration of his term?
The following rules pertain to removal of directors before the expiration of their term:
1) “For cause”:
(i) by SHs; OR
(ii) by the BOD, BUT ONLY IF the certificate OR bylaws allow
2) For ANY reason:
(i) by SHs, BUT ONLY IF the certificate OR bylaws allow
FILLING A VACANCY ON THE BOARD
How is a board seat filled on event of resignation, death or removal?
The general rule for filling a board seat on event of resignation, death or removal IS
(i) the BOD selects the person who will serve the remainder of the term
(ii) BUT If director was REMOVED by SHs, WITHOUT “CAUSE”, then SHs fill the vacancy
HOW BOD MAKES A VALID ACT
What are the ONLY 2 ways a BOD can take a valid act?
There are only two ways in which the board can take a valid act:
1) UNANIMOUS written consent; OR
2) Via a BOARD MEETING (does NOT have to be in NY)
NOTE: INDIVIDUAL bd 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
BUT the INVALID action CAN be made VALID IF RATIFIED by the BOD via a valid act
REQUIREMENT FOR VALID BOARD MEETING
What are the 4 requirements for a valid board meeting?
A VALID BOARD MTG INCLUDES THE FOLLOWING:
1) NOTICE:
(i) Notice is NOT req’d for REGULAR meetings IF the time/place is SET in BYLAWS
(ii) Notice IS REQUIRED for SPECIAL meetings, AND must state the time/place of the mtg (need NOT state the purpose)
NOTE: If notice is not proper, ANY action taken at the meeting is VOID unless the director NOT given notice waives the notice defect EITHER:
(i) in a SIGNED WRITING, anytime; OR
(ii) by ATTENDING the meeting WITHOUT OBJECTION
2) UNRESTRAINED VOTING RQRD:
(i) The BOD CANNOT vote by PROXY
(ii) The BOD CANNOT enter into VOTING AGMTS to vote in a certain way
VOTING IS A NON-DELEGABLE FIDUCIARY DUTY!
NOTE: SHs CAN vote by proxy AND enter voting agmts
3) QUORUM: to meet quorum, there must be:
(i) a MAJORITY of the “entire board” present “Entire board” = duly constituted board = the # of positions WITHOUT vacancies
• E.g. if there are 9 director positions w/o vacancies, then you’d need at least 5 present (NO MATTER IF THERE ARE ONLY 5 SPOTS FILLED AT THE TIME)
• Quorum CAN be “broken” (i.e. if it’s met at the beginning of the meeting and then a sufficient number of directors leave, then it can fall below req’d amt) → any action taken AFTER quorum is “broken” is VOID
4) MAJORITY VOTING: once quorum is met, passing a resolution reqs a MAJORITY of those directors present E.g. of the 5 directors present, you’d need 3 to pass a resolution
5) LOCATION OF BOARD MTG:
(i) The board mtg does NOT have to be in NY
(ii) A meeting CAN be via conference call
RULES FOR INCREASING OR DECREASING QUORUM RQMTS
What is necessary to INCREASE OR DECREASE the quorum requirement?
TO DECREASE BoD QUORUM:
(i) The quorum req CAN be less than a majority ONLY IF stated in the CERTIFICATE OR BYLAWS
(ii) BUT can NEVER can be fewer than 1/3 of the “entire” bd
TO INCREASE BoD QUOUM:
(i) The quorum req CAN be raised to more than a majority ONLY IF stated in the CERTIFICATE ONLY (NOT bylaws)
RULES FOR INCREASING OR DECREASING BOD VOTING RQMTS
What is necessary to raise OR lower the board resolution voting requirement?
DECREASING BoD VOTING RQM:
(i) THIS IS FORBIDDEN!
(ii) the corporation can NEVER EVER decrease the resolution voting requirement below a majority
INCREASING BoD VOTING RQM:
(i) The resolution votingreq CAN be raised to more than a majority ONLY IF stated in the CERTIFICATE (NOT bylaws)
BoD DELEGATING RESPONSIBILITY TO DIRECTOR COMMITTEE
When can a BOD delegate responsibility to a committee of directors?
A BOD can delegate certain functions to a committee of directors IF
(i) the CERTIFICATE OR BYLAWS allow; AND
(ii) a majority of the “entired board” (without vacancies) votes to delegate such duties to a committee
The Committee must be made of AT LEAST one director
A BOD CANNOT delegate all of its powers to a committee
ACTIONS THE COMMITTEE CANNOT TAKE
What is a committee PROHIBITED from doing?
THE COMMITTEE ALONE CANNOT:
1) Set director compensation
2) Fill a board vacancy
3) Submit a fundamental change to SHs
4) Amend bylaws
NOTE:
(i) A committee CAN recommend ANY of the above for FULL board action
(ii) Committees are used in conjunction with SH derivative suits
BoD DUTY OF CARE
What is the standard for the duty of care?
***HIGHLY TESTED MATERIAL
BoD 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 (i.e. BOD does NOTHING) → LAZY!
Nonfeasance will breach duty of care IF the breach CAUSED a loss to the corporation (very hard to prove)
MISFEASANCE (i.e. BOD does something that hurts corp)
→ STUPID
Misfeasance implicates the Business Judgment Rule (BJR)
BJR = a ct will not second guess a business decn IF it was made in GOOD FAITH, was REASONABLY INFORMED and was RATIONAL – A Director is NOT a Guarantor of Success!
BoD DUTY OF LOYALTY
What is the standard for duty of loyalty?
***HIGHLY TESTED MATERIAL
BoD 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 b/c the bd cannot take proper action if there is a conflict of interest
3 TYPES OF BREACHES OF DUTY OF LOYALTY AND HOW THE BREACH TREATED?
What 3 types of transactions can breach the duty of loyalty?
***HIGHLY TESTED MATERIAL
A director will BREACH her duty of loyalty if:
(i) She participates in self-dealing and the transaction is not cleansed;
(ii) She engages in a competing venture; OR
(iii) She Usurps a corporate opportunity
1) Interested director (self-dealing) trxns: occurs when there is any deal b/t the corporation and one of its directors (or business of which the director is also a director or has subtl fin. interest)
HOW HANDLED: Can be “cleansed”
2) Competing ventures: directors cannot compete with their with their own corporation
HOW HANDLED: If director DOES compete, a ct would establish a CONSTRUCTIVE TRUST for the profit made from the competing venture (corp could also get damages, if it were hurt)
3) Corporate opportunity: a director cannot “USURP a corporate opportunity”
HOW HANDLED: A director CAN take an opportunity ONLY IF:
(1) he tells the BOD abt the opportunity; AND
(2) the director waits for the disinterested BOD to REJECT it
Remedy = constructive trust established, which accounts for any profits made
DIRECTOR LOANS
Is a loan to a director using corporate funds OK?
a loan to a director using corporate funds is OKAY but ONLY IF:
(i) it’s approved by SHs (2/3 of shares entitled to vote); OR
(ii) if the board finds that it will benefit the corporation
DIRECTOR LIABILITY AND DISSENTS
How can a director dissent from a board decision?
A director will be held liable along with other directors if the entire BoD is found liable UNLESS she had properly dissented
General rule = a director is PRESUMED to have concurred w/ board action UNLESS her dissent is noted in WRITING in corporate records
Procedure for a DISSENT to be IN WRITING=
(i) dissent in the board minutes;
(ii) in writing to the corp. secretary at the meeting; OR
(iii) via registered letter to the corp. secretary PROMPLTY after adjournment
NOTE: ORAL dissent is NEVER effective by itself
NOTE: A director CANNOT DISSENT IF she VOTED for the resolution at the meeting
EXCEPTIONS: A MISSING director is not liable for meeting actions IF he dissents in WRITING to the corp secretaryby registered mail w/in a reasonable time AFTER learning of the action – thus ensuring that dissent is recorded in board minutes
DIRECTOR RELIANCE on OPINION OF OTHERS
When can directors rely on opinions of others?
A director director may RELY on other’s opinions ONLY
(i) when the reliance is done in GOOD FAITH
AND
(ii) Applies ONLY to information, opinions, reports or stmts by…
officers or employees
lawyers or accountants
a committee’s recommendation…
PROVIDED the director believes the person is COMPETENT and RELIABLE and is working w/in scope of designated authority
NOTE: Reliance on a committee cannot be a committee in which the director is a member
NOTE: This defense is MOST likely to be found in a fact pattern involving IMPROPER DISTRIBUTIONS
OFFICER’S DUTIES
What duties do officers of a corporation have?
Officer Duties = Care and Loyalty
As agents that can BIND the company, officers owe BOTH a duty of care AND a duty of loyalty
(e.g. the president has the inherent authority to sue on behalf of the corporation and to bind the corporation to contracts entered in the ordinary course of business)
SELECTION AND REMOVAL OF OFFICERS
Who may elect/remove officers?
**POPULAR TEST QUESSTION
***HIGHLY TESTED MATERIAL
The BODmay SELECT and REMOVE officers UNLESS the certificate allows SHs to elect them (rare)
IF CERTIFICATE ALLOWS for Shareholders to elect officers and if the officer was elected by the Shareholders then ONLY the Shareholders my remove the officer
One person CAN hold more than one office
The BOD can SUSPEND an officer’s AUTHORITY TO ACT “for cause”
REMOVAL OF OFFICER VIA JUDICIAL ACTION
Can an officer be removed via judicial action?
***MORE LIKELY AS A MULTIPLE CHOICE QUESTION
***HIGHLY TESTED MATERIAL
Removal of an officer by judicial action requires that an authorized party sue for a judgement for their removal
PROCEDURE:
The atty general OR holders of 10% of all SHARES may sue for a judgment removing an officer “for cause”
The court can bar reappointment of a person so removed from office
REIMBURSEMENT OF DIRECTORS AND OFFICERS
When can a director or officer be reimbursed by the corporation for personal liability
***HIGHLY TESTED MATERIAL
THERE ARE 4 categories UNDER WHICH REIMBURSEMENT SCENARIOS ARISE…
1) PROHIBITED REIMBURSEMENT:
The Corp. CANNOT reimburse IF a director or officer if the person was held liable to the corporation
→ this requires an actual judicial holding, not merely an accusation
2) OF RIGHT REIMBURSEMENT:
The Corp 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 req’d to pay the atty fees ON THIS ACTION FOR PMT
3) PERMISSIVE REIMBURSEMENT:
If not part of the categories above, the Corp MAY reimburse, IF
(i) a director acted in good faith; AND
(ii) for a purpose reasonably believed to be in the company’s best interest
Note: This can include reimbursement for settlement amount, expenses and attorney’s fees (not any judgment, though)
4) COURT ORDERED REIMBURSEMENT:
n/w/s the above, a COURT can ORDER the corp to reimburse a director/officer for litigation expenses/atty fees if it finds that the director was REASONABLY ENTITLED to it
NOTE:
(i) 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
(ii) A corp. can buy insurance to cover director/officer liability
EXCULPATION: The certificate may eliminate director liability to the corporation/SHs for breach of a duty,
EXCEPT if she
(i) acted in bad faith;
(ii) acted with intentional misconduct;
(iii) received an improper fin. benefit; OR
(iv) approved an unlawful distribution or loan
EXAM HINT: ANYTIME you see a director breaching a duty, state that exculpation is possible except under the circumstances listed above
Who determines eligibility for permissive indemnification of directors OR officers?
PERMISSIVE REIMBURSEMENT IS DETERMINED BY:
1) BOD (w/ a quorum of directors being non-parties); or, if there is no such quorum…
2) SH or a quorum of those directors who are disinterested; or…
3) BOD pursuant to report from independent legal counsel
BoD GENERAL RESPONSIBILITIES
What are some of the general responsibilities of the BoD?
Generally, a BoD:
(i) manages business of corporation
(ii) It sets policy,
(iii) monitors and supervises officers,
(iv) declares dividends and other distributions,
(v) decides when the corporation
will issue stock,
(vi) recommends fundamental corporate changes, etc.
EXAM ANSWER FOR ISSUE OF DUTY OF CARE WITH NONFEASANCE
***HIGHLY TESTED MATERIAL
“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 like position.”
Nonfeasance is the term used when a directors does nothing or takes an unreasonable amount of action.
“An ordinarily prudent person would have…..”
“In this case….” so X (did) or (did not) breach the duty of care.
[IF BREACH OCCURRED]
“Nonetheless, there must be causation so it must be proven that but for X’s inaction, the corporation would not have suffered the harm that it suffered (insert exact action).”
“Here….X NOT doing Y is the reason that / is not the reason why..”
