Corporations: Directors & Officers

Front 1

Statutory Requirements

1) 1 or more adult natural persons (set in cert. or bylaws)
2) Shareholders elect directors @annual meetings
3) Removal w/or wo/o cause before term expires can be done by shareholders (majority of shares entitled to vote)

Back 1

Board or shareholders fills a vacancy on Board:
1) Unanimous written consent (e-mail/fax okay)
2) Mtg w/satisfies quorum and voting req's --> conference call counts

Notice of board action generally in bylaws- req for reg, special mtgs

Failure to give notice voids whatever done at mtg unless waived by person not notified (writing or attending w/o objection)

Front 2

-No proxies for directors
-Directors can't enter voting agreements for how they will vote

** To do business @meeting, must have majority of all directors (unless diff % required in certificate or bylaws)

Back 2

If we have a quorum, passing a resolution (how Board takes an act at a meeting) requires only a majority vote of those present

* If a quorum no longer present at a mtg, Board MIGHT no take act at meeting. But no caselaw, so some uncertainty (TX)

Front 3

Role of directors

Generally, manage corporation's business:
- sets policy, supervise officers, declare distributions, decide when corp. should issue stock, recommends fundamental corporate changes to shareholders, etc.

Back 3

Exceptions:

1) Close corporations
2) Shareholder agreement
3) Committee of 1 or more directors (delegated substantial management powers, but narrower powers)

Front 4

Director's Duty of Care (Burden on plaintiff): As fiduciaries, act in good faith; exercise ordinary care and prudence. Do what a prudent person would do in similar circumstances.

Nonfeasance (director does nothing): State duty of card standard; BUT liable only if breach caused a loss to corporation. (causation tricky)

Back 4

Misfeasance (board does something that hurts corp; clear causation)

1) State duty of care standard
2) BUT not liable if meets Business Judgment Rule (court will not second-guess decision made in good faith, was informed, had rational basis) --> Look to facts!

Front 5

Duty of Loyalty Standard

Director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.

BJR is inapplicable.

Back 5

Typical fact patterns

1) Interested Director Transaction

2) Competing Venture

3) Corporate opportunity

Front 6

Interested Director Transaction: any deal bet. corp & directors (or bus. of director)

State standard. Transaction void unless directors shows deal was fair to corp when approved OR her interest/material facts were disclosed or known and deal was approved in good faith by majority of disinterested directors OR shareholders.

Interested directors count toward quorom.

Back 6

Board can set own compensation, as long as reasonable. If excessive, it's waste of corporate assets and breaches the duty of loyalty.

Front 7

Competing Venture

Back 7

Director can't compete w/o approval by the disinterested directors.

Remedy: constructive trust on profits.

Front 8

** Corporate Opportunity: anything the director has reason to know the corporation would be interested (v. broad!)

1) State loyalty standard
2) Director can't usurp corporate opportunity. Can't take it until he tells the board AND waits for the board to reject the opportunity.

Back 8

If takes it and still has it, must sell to corporation at his cost. If sold at profit, corporation gets profit via constructive trust.

Corporation can renounce opportunity via certification of formation or by board action.

Front 9

Other bases of director liability:

1) Ultra Vires Acts
2) Improper loans (okay if board votes to lend director if reasonably expected to benefit corp); Sarbanes-Oxley prohib. loans in large, publicly traded corp
3) Improper distributions

Back 9

Generally, director presumed to have concurred w/board action unless dissent or absentention noted IN WRITING in corporate records.

Can't dissent if voted for resolution at mtg.

Exceptions:
1) Absent directors are not liable
2) Good faith reliance on info represented as correct by an officer or on info provided by a competent professional, employee, or committee of which director was not a member

Front 10

Officers owe same duties of care & loyalty as directors They are coporation's agents. Can bind corporation by acts within their authority.

Officers are selected/removed by directors-- generally NOT shareholders. Directors set officer compensation.

Back 10

President has authority to convey corporate real property only if Board gives her such authority. Outside that, she might have inherent authority to bind corporation to a contract entered in the ordinary course of business.

Must have president and a secretary. One person can hold multiple offices at same time.

Front 11

Indemnification of Directors and Officers

Reimbursement prohibited when director/officer held liable for willful or intentional misconduct in performing duty to corporation (needs holding, not just accusation).

Reimbursement required when she is wholly successful on the merits or otherwise in defending suit

Back 11

Reimbursement permitted when anything outside of previous 2; if held liable to corp or to have receive improper personal benefit, however, reimbursement limited to expenses and attorneys fees (not judgement)

Eligibility standards: show she acted in good faith & with reasonable belief that her actions were in corp's best interests.

Eigibility det. by majority vote of disinterested directors or disinterested committee or of disinterested shares OR independent legal counsel

Front 12

Court in which director/officer sued can order reimbursement if it finds justified on all circumstances.

* Certificate can limit/eliminate liability for damages, but never for willful or intentional misconduct.

Back 12

Corp can advance litigation expenses if director/officer gives an affidavit of her good faith belief that she met standard for indemnification and a written undertaking to repay expenses if it is determined that she did not.