Directors and Officers

Duty of Loyalty

"A director must act in good faith and with the conscientiousness, fairness, morality and honesty that the law requires of fiduciaries" Focus on conflicts of interest (not BJR) three main fact patterns: 1. interested director transactions (no self dealing) 2. competing ventures (cant run side business that competes with corp) 3.Usurping corporate opportunity (must tell the board and wait for rejection first)

Duty of Care

"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." Focus on Business Judgment Rule Can be breached by nonfeasance or malfeasance.

Director Duties are Non-Delegable

1. Cannot have a proxy vote for him 2. Cannot make agreements about how to vote in the future. [Shareholders can usually do these things, so pay attention to what hat someone is wearing when they act (one person is often a shareholder and a director)]

Absolving a Director of Liability

General rule: A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records. Ways to dissent in writing: 1. Get it in minutes 2. Written dissent to secretary at the meeting 3. Registered letter to secretary promptly after adjournment * if not in writing, the dissent is no good and director is liable! (often asked) Exceptions: 1. Not liable if director is not at the meeting, and he registers written dissent after reasonable time after learning of the action. (He does this by delivering the dissent or sending it by registered mail to the corporate secretary, ensuring that the dissent is filed with the minutes for the meeting) 2. Not liable if the director relies in good faith on information, opinions, reports, or statements by Officers, employees, lawyers, accountants, and committees the director is not a member of. (This issue almost always comes up in cases of improper distribution)

Electing and Removing Directors

How many: The number of directors on a board is determined by bylaws, a shareholder act, or the board itself (if bylaws allow), otherwise the default is 1 director. Elections: Directors are elected by shareholders at the the annual meetings. Directors may be classified ("staggered") so that only some of them are up for election each year. Removal: Shareholders can remove directors for cause and also without cause (if certificate/bylaws allow). The board can only remove fellow directors if certificate/bylaws allow. Filling Vacancies: The board usually appoints someone to replace a vacant board seat. If director is removed by shareholders without cause, shareholders replace a vacant board seat (rare).

Committee Delegation

If allowed by certificate or bylaws, the board can delegate some duties to a smaller committee of directors. Most common use of committee delegation is for shareholder derivative suits. A committee CANNOT: 1. set director compensation 2. fill a board vacancy 3. submit a fundamental change to shareholders 4. amend bylaws

Excusing Interested Director Transactions

Interested ("self dealing") director transactions will be set aside unless the interested directors show: 1. the deal was fair and reasonable to the corp when approved OR 2. Material facts and director's interest was disclosed and the deal was approved. Ways to ge the deal approved: 1. shareholder action 2. Board approval by a sufficient vote that doesn't include interested directors. 3. If too many directors are interested for the board to take action as a majority, unanimous approval from non-interested board members.

How the Board Acts

Only two ways: 1. Unanimous written consent from each board member 2. A meeting Individual conversations between board members does NOT constitute board action.

Notice Requirements for Calling a Meeting

Regular Meetings: Notice is not required if the time and place of meetings is regularly set. Special meetings: Board members must be given notice stating the time and place of the meeting (not necessarily the purpose) If there has been no notice, things decided upon at the special meeting are void unless: 1. the unotified board member waives the notice defect. 2. the unotified board member shows up at the meeting without an objection.

Director Compensation and Stock Options

The board can set the compensation of directors (It's not self dealing), BUT compensation must be reasonable and in good faith (If excessive, it is waste of corporate assets and a breach of the duty of loyalty) The board can give a director or officer or employee stock options as an incentive to service: 1. If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. 2. If the stock is not listed on a stock exchange, the options must be approved by shareholders.

Quorum for a Meeting

To hold a meeting, quorum requires a majority of the total board (total number of positions on the board regardless of vacancies) Once you have a quorum, a vote during a meeting requires a majority of present directors (those at the meeting). If quorum is broken (someone leaves) the board cannot act. Decreasing quorum-The corp can decrease quorum requirements in the certificate or bylaws (but it can never be fewer that 1/3 of the entire board). It can't decrease the majority required for voting. Increasing quorum-The corp can increase the quorum, but ONLY if its in the certificate (not the bylaws). It can increase the majority required for voting, but ONLY if its in the certificate (not the bylaws)

Reimbursement of Directors/Officers

When a person is sued in her capacity as officer or director by or on behalf of the corporation, can she get back fees, costs and judgments against her? 1. Prohibited Reimbursement: if the director or officer is held liable to the corporation 2. Reimbursement of Right: The corp MUST reimburse if the director or officer won a judgment. [side note: in a suit against the corp for failure to reimburse as of right, plantiff still pays own fees!] 3. Permissive Reimbursement: Applies in any other situation (usually a settlement). Director must show they acted in good faith and for a purpose reasonably believed to be in the companies best interest. Notwithstanding the categories above, the court can order the corp to pay reimbursements if they say so. The corp can advance reimbursement (prepaying for legal fees), but the advance must be prepaid if it turns out she's not entitled to reimbursement.