BLAW 441 4/17/17 Roles, Duties, and Liabilities of Directors and Officers

May not take a business opportunity if:

1. The corp. is financially able to exploit the opportunity 2. The opportunity is within the corporation's line of business 3. The corporation has an interest or expectancy in the opportunity 4. By taking the opportunity, the corporate fiduciary will be placed in conflict with duties owed to the corporation.

May take a business opportunity if:

1. The opportunity is presented to corporation fiduciary in his individual and not in his corporation capacity 2. The opportunity is not essential to the corporation 3. The corporation holds no interest or expectancy in the opportunity 4. The officer or director has not wrongfully employed the resources of the corp. in pursuing the opportunity

1. participate 2. inspect 3. compensation 4. indemnification

A director has the right to: 1. ___ in corporate decisions 2. ___ corporate books and records 3. Receive ___ (usually a nominal sum); and 4. Obtain ___ if s/he is sued for actions as director.

business judgement rule

A director or officer is not liable to the corporation or its shareholders for honest mistakes in judgement or poor business decisions.

No - No individual director can act as an agent to bind the corporation - as a group, directors collectively control the corporation in a way that no agent is able to control a principal

Are directors agents?

Yes

Can a director be a shareholder?

Yes only if there is cause

Can the board of the directors terminate officers or executive employees without liability?

1. competition with the corporation 2. Taking advantage of a corporate opportunity 3. conflict of interests 4. engaging in insider trading 5. authorizing a corporate transaction that is detrimental to minority shareholders 6. selling control over the corporation

Cases dealing with the duty of loyalty typically involve one or more of the following: 1. 2. 3. 4. 5. 6.

Example of duty to exercise reasonable supervision under duty of care

Dale, a corporate bank director, has not attended a board of directors' meetings for 5 years. In addition, Dale never inspects any of the corporate books or records and generally fails to supervise the efforts of the bank president and the loan committee. Meanwhile, Brennan, the bank president, makes various improper loans and permits large overdrafts. In this situation, Dale can be held liable to the corporation for losses resulting from the unsupervised actions of the bank president and the loan committee

Example of breach of duty of loyalty Guth v. Loft, Inc.

Did Guth violate his duty of loyalty to Loft Inc., by acquiring the Pepsi-Cola trademark and formula for himself without the knowledge of Loft's board of directors? Yes. The DE supreme court upheld the judgement of the lower court. The state supreme court was "convinced that the opportunity to acquire the Pepsi-Cola trademark and formula, goodwill and business belonged to Loft, and that Guth, as its president, had no right to appropriate the opportunity to himself." The court pointed out that the officers and directors of a corporation stand in a fiduciary relationship to that corporation and to its shareholders. Corporate officers and directors must protect the corporation's interest at all times. They must also "refrain from doing anything that works injury to the corporation." In other words, corporate officers and directors must provide undivided and unselfish loyalty to the corporation, and "there should be no conflict between the duty and self interest." Whenever an opportunity is presented to the corporation, officers and directors with knowledge of that opportunity cannot seize its for themselves. "the corporation may elect to claim all the benefits of the transaction for itself, and the law will impress a trust in favor of the corporation upon the property, interest, and profits required." Guth clearly created a conflict between his self interest and his duty to Loft - the corporation of which he was president and director. Guth illegally appropriated the Pepsi-Cola opportunity for himself and thereby placed himself in the position of competing with the company for which he worked.

Yes

Do all members of committees need to be directors?

board of directors

Every corporation is governed by a ___.

- the incorporators appoint the first board of directors at the time the corporation is created - the initial board serves until the first annual shareholders' meeting - subsequent directors are elected by a majority vote of the shareholders - directors usually serve 1 year

For how long do directors generally serve?

- They are often paid at least nominal sums and may receive more substantial compensation in large corporations because of the time, work, effort, and especially the risk involved - most states permit the corporate articles or bylaws to authorize compensation for directors - In fact, the RMBCA states that unless the articles or bylaws provide otherwise, the board of directors itself may set directors' compensation - In many corporations, directors are also chief corporate officers and receive compensation in their managerial positions

How are directors compensated?

- a directors can be removed for cause - that is, for failing to perform a required duty - either as specified in the articles or bylaws or by shareholder action EX: fiduciary duty, gross management, theft, conflicts of interest

How can directors be removed from the board?

As a group

How can the directors bind the corporation?

- register with corporate secretary - must make sure recorded with secretary

How does a director disagree with actions under consideration by the board?

1. make informed and reasonable decisions - may rely on competent consultants and experts 2. duty to exercise reasonable supervision

How is duty of care applied?

one vote

How many votes does each director have?

- should be held at least quarterly -articles of corporation set a minimum amount of meetings, if want to increase include in bylaws

How often do they hold regular meetings?

No

If personal liable, does a director have a right to indemnification?

closely held companies

In ___, directors are generally the incorporators and/or shareholders.

- rarely held liable - ones that dissented in Enron were not personally liable

Is a dissenting director held individually liable for mis-management of corporate affairs?

directors are not allowed to transfer vote to another director

May director vote by proxy?

contract law and employment law

Officer or executive employees employment relationships are generally governed by __ law and __ law.

board of directors

Officers and executive employees serve at the pleasure of the ___.

Duty of loyalty

Requires the directors and officers to subordinate their personal interests to the welfare of the corporation

Example of proper disclosure of conflicts of interest

Southwood Corporation needs office space. Lambert Alden, one of its 5 directors, owns the building adjoining the corporation's main office building. He negotiates a lease with Southwood for the space, making a full disclosure to Southwood and the other 4 directors. The lease agreement is fair and reasonable, and it is unanimously approved by the 4 other directors. In this situation, Alden has not breached his duty of loyalty to the corporation, and thus the contract is valid. If it were otherwise, directors would be prevented from ever transacting business with the corporations they serve

board of directors

The ___ is the ultimate authority in every corporation

board

The ___ selects and removes corporate officers, determines the capital structure of the corporation, and declares dividends

super agent

The board of directors can act as a "___" and bind the corporation.

Board of directors' meetings

The board of directors conducts business by holding formal meetings with recorded minutes.

1. took reasonable steps to become informed about the matter 2. had a rational basis for his or her decision 3. did not have conflict of interest between his or her personal interest and that of the corporation

The business judgment rule applies as long as the director or officer did the following: 1. 2. 3.

1. executive committee 2. audit committee

What are 2 of the most common types of committees?

1. executive committee - it is limited to making decisions about ordinary business matters and does not have the power to declare dividends, amend the bylaws, or authorize the issuance of stock 2. audit committee 3. nominating committee 4. litigation committee 5. x

What are some of the committees commonly created?

- convened by board of directors prior to regular meetings - usually an emergency vote that can't wait for next meeting - Ex: issuing new shares, mergers, etc.

What are special meetings?

1. declaring and paying corporate dividends 2. authorizing major policy decisions 3. hiring and firing of corporate officers and executive employees 4. making financial decisions

What are the 4 directors' responsibilities to the corporation?

Directors and officers owe ethical and legal duties to the corporation and shareholders: 1. duty of care 2. duty of loyalty

What are the fiduciary duties of directors and officers?

1. dividends 2. anything with shareholder approval 3. amending the bylaws 4. authorizing new shares

What aspects of board of directors can't be delegated?

negligence

What can the directors and officers be held accountable for if they fail to exercise due care which results in harm to the corporation or its shareholders?

shareholders can challenge the election in court

What happens if the board tries to manipulate the election of the board?

- how the vacancy is filled depends on state law or provisions of the bylaws - Usually, the shareholder or the board itself can fill the vacant position by an election - the board cannot attempt to manipulate the election in order to reduce the shareholders' influence

What happens when a vacancy occurs or a new position is created? How is position filled?

1 member

What is the smallest board that a corporation may have?

- when director engages in fraud, dishonesty, or other intentional or reckless misconduct - does not apply if not attending board meetings, not supervising, and not staying informed - does not apply if no duty of care

When does the business judgement rule not apply?

in the articles or bylaws or by board resolution, and ordinarily no further notice is required

Where are regular meeting dates usually mention?

corporation's articles or bylaws

Where is the number of directors stated?

Directors

___ have responsibility for all policymaking decisions necessary to the management of corporate affairs

outside director

a person on the board of directors who does not hold a management position at the corporation

inside director

a person on the board of directors who is also an officer of the corporation

duty of care

expected to act in good faith, act prudently, and the best interests of the corporation

duty of loyalty

must subordinate their personal interests to the welfare of the corporation

Henrichs v. Chugach Alaska Corp. Example of business judgement rule does not apply

o The board of directors of the CAC voted to remove sheri Buretta as the chair and install Robert Henrichs. During his term, Henrichs acted without board approval, made decisions with only his supporters present, retaliated against directors who challenged his decisions, and ignored board rules for conducting meetings. Henrichs refused to comply with bylaws that required a special shareholders' meeting in response to a shareholder petition and personally mistreated directors, shareholders, and employees. After 6 months, the board voted to reinstall Buretta. CAC filed a suit in an Alaska state court against Henrichs, alleging a breach of fiduciary duty. A jury found Henrichs liable, and the court barred him from serving on CAC's board for 5 years. The appellate court affirmed. Given the nature and seriousness of Henrich's misconduct, the business judgement rule did not protect him.

quorum

the number of members of a decision-making body that must be present before business may be transacted - usually 1/3 of board must be present

Disclosure of conflicts of interest

• Their fiduciary duty requires directors to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction • Sometimes, a corporation enters into a contract or engages in a transaction in which an officer or director has a personal interest • The director or officer must make a full disclosure of that interest and must abstain from voting on the proposed transaction