Chapter 4 - Board of Directors

What are the duties that a director owes to the corporation:

(i) a duty of care and (ii) a duty of loyalty.

Indemnification, insurance, and immunity - When a director is involved in a legal action as a result of her role as director, she may seek indemnification for expenses incurred as well as for any judgment or award declared against her. What are the indemnification issues:

(i)mandatory indemnification, (ii) prohibited indemnification, and (iii) permissive indemnification.

A director is not personally liable for monetary damages for any statement, vote, or failure to act regarding corporate management or policy unless:

1. The director breached a duty as director; AND 2. The breach constitutes: a) A violation of criminal law (unless the director had a reasonable belief that her conduct was lawful); b) A transaction in which the director derived an improper personal benefit; c) An unlawful distribution; d) A conscious disregard for the best interests of the corporation, or willful misconduct, in a proceeding by the corporation; or e) Recklessness, bad faith, or malicious purposes exhibiting wanton and willful disregard of human rights, safety, or property in a proceeding by someone other than the corporation or a shareholder.

What are other factors that the court looks at in determining whether an opportunity belongs to the corporation.

1. The relationship between the person offering the opportunity and the director and/or corporation, 2. How and when the director acquired knowledge of the opportunity, and ( 3. The relationship of the director to the corporation.

Sarbanes Oxley Act - The board of a publicly held corporation must have

1. an audit committee, 2. a compensation committee, and 3. a nominating committee.

How many directors are required?

A board can have as few as one director, the articles of incorporation or bylaws may permit the board to vary the number of directors.

What are the powers of the committee?

A committee may generally exercise whatever powers are granted to it by the board, the articles of incorporation, or the bylaws.

When is indemnification mandatory?

A corporation is REQUIRED to indemnify a director for any reasonable expense, including court costs and attorney's fees, incurred in the successful defense of a proceeding against the director in his role as a director. ALSO - a corporation must indemnify a director when ordered by the court.

When is indemnification prohibited?

A corporation is prohibited from indemnifying a director against liability due to the receipt of an improper personal benefit.

When is indemnification permissible?

A corporation may indemnify a director in the unsuccessful defenses of a suit when: i) The director acted in good faith with the reasonable belief that her conduct was in the best interests of the corporation or that her conduct was at least not opposed to the best interests of the corporation; and ii) In the case of a criminal proceeding, the director did not have reasonable cause to believe that her conduct was unlawful. Indemnification can extend to liability as well as expenses when the action is brought by a third party, but it extends only to expenses when the action is brought by or on behalf of the corporation. The authorization for permissive indemnification requires the approval of a disinterested majority of directors or shareholders or an independent attorney chosen by disinterested directors.

How is a director removed who was elected by a voting class of stock?

A director who was elected by a voting class of stock can be removed only by that same class.

What is a holdover director?

A director whose term has expired may continue to serve until a replacement is selected.

What is a quorum?

A majority of the number of directors prescribed in the articles of incorporation or the bylaws constitutes a quorum, unless the articles of incorporation or bylaws require a different number.

Is a voting pool enforceable?

A voting pool is an agreement between directors as to how to vote (a pooling agreement) and it is is unenforceable because each director is expected to exercise independent judgment. A director may not vote by proxy.

What is a conflict of interest transaction?

Any transaction between a director and his corporation that would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director's vote on the transaction.

What must each committee have?

Each committee must have two or more members who serve at the pleasure of the board of directors.

Does a director need to be physically present at a meeting?

No - A meeting may be conducted via a conference call or any other means that allow each director participating to simultaneously hear the other directors during the meeting

Can a director engage in a business venture that competes with the corporation?

No because he has breached his duty of loyalty to the corporation. Generally, however, this type of breach is more frequently performed by corporate officers and other employees rather than by a director.

Does the board of directors need a meeting in order to act?

No! They can do so by unanimous written consent to the action signed by each director. Unless the articles of incorporation or bylaws provide otherwise, the board of directors may act without holding a meeting and Unless the consent specifies a different effective date, the action is effective when the last director signs the consent.

Can the articles of incorporation reduce the number needed for the quorum requirement?

Not if it would reduce the number needed to less than one-third of the number of directors prescribed in the articles.

What is the effect of the safe harbor provision?

Satisfaction of the safe-harbor defenses is not necessarily a complete defense, and some states instead hold that the burden of proof shifts to the party challenging the transaction to establish that the transaction was unfair to the corporation.

What is the line of business test?

The "line of business" test, the key is whether the opportunity is within the corporation's current or prospective line of business. Whether an opportunity satisfies this test frequently turns on how expansively the corporation's line of business is characterized.

Is the board of directors required to give notice of regular meetings?

The board does not need to provide notice of a regular meeting giving the date, time, place, or purpose of the meeting. Unless the articles of incorporation or bylaws provide otherwise

What is the business judgment rule?

The business-judgment rule is a rebuttable presumption that a director reasonably believed his actions were in the best interests of the corporation.

What does the duty of loyalty require?

The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interests of the corporation.

What is the "interest or expectancy" test?

Under the "interest or expectancy" test, the key is whether the corporation has an existing interest (e.g., an option to buy) or an expectancy arising from an existing right (e.g., purchase of property currently leased) in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity.

Can a corporation advance litigation expenses to a director?

Upon petition by the director, a corporation may advance litigation expenses to the director, but upon termination of the action, the director must repay such expenses if she is not entitled to indemnification for them.

Can a director engage in unrelated business that does not compete with the corporation?

YES

Director dissent - Can a director incur liability for an illegal or improper action taken by the board at a meeting when the director is present, even though the director did not vote in favor of the action

YES

Is a director required to be present at the time a vote is taken?

YES! in order to be counted for quorum purposes.

Is a director who engages in a conflict of interest transaction with his own corporation violating a duty to the corporation?

Yes it is self-dealing, and his duty of loyalty is compromised unless the transaction is protected under the safe-harbor rule and the director must not profit at the corporation's expense.

Can Directors receive Compensation?

Yes! Directors of a corporation may receive compensation for serving as directors..

Can the board of directors fix the compensation of the directors?

Yes! unless the bylaws or articles of incorporation state otherwise

Can a director serve for a longer term?

Yes, if the terms are staggered. With staggered terms, each year some directors are elected for multiyear terms. The main purpose of staggered terms is to limit the impact of cumulative voting.

How is a committee selected?

a majority of the directors must 1. vote for the creation of a committee and 2. the appointment of a director to a committee.

In order for an act be valid what needs to be present at a meeting of a board of directors?

a quorum of directors must be present at the meeting.

Is the board of directors required to give notice of special meetings?

a special meeting of the board of directors must give at least 2 days' notice of the date, time, and place of the meeting, but the notice does not need to describe the purpose of the special meeting unless required by the articles of incorporation or bylaw, but the articles of incorporation or bylaws can provide for a longer or shorter period

In discharging the duties of loyalty and care a director is required to

act in good faith.

All Florida corporations enjoy the benefit of providing immunity for a director who

acts in good faith while executing her duties While the appropriate standards of care are still applicable, immunity from personal liability is granted.

Liability Insurance - A corporation may acquire insurance to indemnify a director for actions arising from her service as a director. The insurance can cover

all awards against a director as well as expenses incurred by her, even though the corporation could not otherwise indemnify the director for such amounts.

Sarbanes Oxley Act- A corporation with stock listed on a national securities exchange or a national securities association must have

an audit committee that has direct responsibility for selecting, compensating, and overseeing the corporation's outside auditors.

Where can the board of directors hold their meetings?

anywhere, whether within Florida or out of state.

When can a director resign?

at any time

When are the directors selected?

at the annual shareholders' meeting

Qualifications of directors - A director must

be a natural person at least 18 years old. AND Unless required by the articles of incorporation or the bylaws: the director does not need to be a shareholder of the corporation and does not need to be resident of Florida. The articles of incorporation or the bylaws may impose additional requirements for directors.

The approval of a majority of the directors present at the time the vote takes place is necessary for board approval

but, the articles of incorporation or bylaws may specify a higher level of approval.

How does a director resign?

by delivering a written notice to the board, its chair, or the corporation.

How does a director breach the duty of loyalty?

by placing his own interests before those of the corporation.

How are the directors selected?

by straight or cumulative voting and by one or more classes of stock.

Aside from conflict of interest what is another way that a director may violate his duty of loyalty?

by taking a corporate opportunity without first offering the opportunity to the corporation.

How is a director removed who was elected by cumulative voting?

can only be removed if votes sufficient to elect the director are cast against the director's removal.

Board of directors can also take action through

committees

What are the actions that a committee may not engage in?

i) Authorize the issuance, sale, or reacquisition of shares, except within limits set by the board; ii) Recommend actions that require shareholder approval; iii) Fill vacancies on the board or its committees; or iv) Adopt, amend, or repeal bylaws.

Who is a director entitled to rely on for performance of the duty of care?

i) Officers/employees of the corporation; ii) Outside attorneys, accountants, or other skilled or expert individuals retained by the corporation; and iii) A committee of the board of which the director is not a member. ***as long as the director believes them to be reliable and competent.....as well as info they supply

In order for the director not to incur liability for an illegal/improper action that the rest of the members voted for but this particular director did not, the director must:

i) Promptly object to the holding of the meeting or to the transaction of specific business; or ii) Vote against or abstain from the action taken.

How can a director overcome the business judgment rule? (shady shit the director did)

i) The director did not act in good faith; ii) The director was not informed to the extent that the director reasonably believed was necessary before making a decision; iii) The director did not show objectivity or independence from the director's relation to or control by another having material interest in the challenged conduct; iv) There was a sustained failure by the director to devote attention to an ongoing oversight of the business and affairs of the corporation; v) The director failed to timely investigate a matter of significant material concern after being alerted in a manner that would have caused a reasonably attentive director to do so; or vi) The director received a financial benefit to which he was not entitled, or any other breach of his duties to the corporation.

Safe-harbor rules - There are safe harbor rules by which a conflict of interest transaction may enjoy protection:

i) There has been disclosure of all material facts to a majority of the board of directors and it was approved by them without a conflicting interest; ii) Disclosure of all material facts to a majority of the votes entitled to be cast by the shareholders and it was approved without a conflicting interest; or iii) Fairness of the transaction to the corporation at the time of commencement - fairness of the transaction is that the fairness test looks at the substance of the transaction to see if the corporation received something of comparable value in exchange for what it gave to the director.

The members of the audit committee must be

independent directors (i.e., not otherwise employed or compensated by the corporation). meaning that outside auditors cannot otherwise be employed by the corporation. Sarbanes-Oxley Act

The measure of duty of care for a director is...that the director has a duty to act

like an ordinarily prudent person in a like position and similar circumstances. As an objective standard, the director is presumed to have the knowledge and skills of an ordinarily prudent person. In addition, any additional knowledge or special skills that the director has, the director is required to use in deciding how to act.

What is the role of the board of directors?

manages and directs the management of the corporation's business and affairs authorizes the officers and other corporate employees to exercise the powers possessed by the corporation

How long does a board of director serve?

one-year term, which expires at the first annual meeting after the director's election.

What kind of meetings can the board of directors hold?

regular or special meetings, Unless the articles of incorporation or the bylaws provide otherwise, the chair of the board or the president may call a meeting of the board.

In determining whether the opportunity is one that must first be offered to the corporation, courts have applied what test?

the "interest or expectancy" test or the "line of business" test.

Conflict of interest rules can apply to transactions between

the corporation and another entity with which the director is associated, such as another corporation in which the director is a director, an employee, or an agent or a partnership in which the director is a general partner, an employee, or an agent.

Corporate dealings with persons who are related to the director are also subject to conflict of interest rules. Related individuals include:

the director's immediate family: parents, siblings, and grandchildren, including the spouses of these individuals, as well as a trust or an estate of which any of those individuals is a substantial beneficiary or the director is a fiduciary.

The quorum requirement is based on

the number of directors mandated by the articles of incorporation or the bylaws.

Inspection Rights: A director is entitled to inspect and copy corporate books, records, and other documents for any purpose related to

the performance of her duty as a director. When the corporation refuses to grant the director access to these items, the director can seek a court order to enforce this right.

What are the remedies if it is found that the safe harbor provision does not apply....

A conflict of interest transaction that is found in violation of the safe-harbor provisions may be enjoined or rescinded. The corporation may also seek damages from the director.

Can shareholders remove a director with or without cause?

The shareholders may remove a director with or without cause.

Selection of Directors - Directors are selected by

the shareholders

With respect to a quorum - If there is a vacancy on the board, what happens with the vacancy? does it eliminate that seat or is that empty seat counted?

the vacancy is counted for purposes of the quorum requirement.