Corporations 3. Directors and Officers
when director starts a competing venture
[duty of loyalty] -director cannot compete with her corporation -if director goes into competition: 1) corporation gets a constructive trust on competitor's profit 2) corporation may get damages if competition hurts it
if there is usurpation, what is the usual remedy?
corporation gets constructive trust 1) if director still has it (opportunity), must sell it to corporation at cost 2) if director sold it at a profit, corporation gets the profit
Misfeasance
director is liable for misfeasance IF: 1. she breached duty of care 2. breach caused company harm 3. business decisions was: (a) NOT made in good faith, (b) NOT reasonably informed, OR (c) did not have a rational basis a director is NOT a guarantor of success
Number of directors (statutory minimum and how sets)
minimum = 1 adult natural person number set by: 1) bylaws 2) shareholder act, OR 3) set by board IF shareholder bylaw allows default if no number set = 1
Nonfeasance
not doing something example: not attending board meetings or keeping abreast of the business director is liable for nonfeasance ONLY IF his breach caused a loss to the corporation -i.e. director who was an expert in anti-trust law fails to attend board meetings would be liable if board passes something that violated antitrust law
what duties do officers owe to the corporation?
same duties as directors: fiduciary duty and duty of loyalty
who sets compensation of officers
the board
can one person hold multiple offices simultaneously
yes
Quorum required for valid board action meeting
1) majority of directors must be present at meeting 2) majority of those present must approve a resolution (while there are still a majority of members present)
**only 2 ways in which board can take a valid act
1) unanimous written consent OR 2) a meeting (held anywhere, can be by conference call) If the director purports to take an act in some other way (i.e. individual conversation), this is void UNLESS ratified by a valid act
rule on directors and corporate opportunities
Director cannot USURP a corporate opportunity UNTIL 1) he tells board about it 2) waits for the board to reject it
corporation giving director stock options
Sometimes a corporation may want to give a director or officer or employee stock options as an incentive to service. If the stock is listed on a stock exchange, such use of options must be authorized under exchange policies. if the stock is NOT listed on the stock exchange, the use of options must be approved by shareholders
Who may sue for a judgment removing an officer for cause?
The attorney general or holders of 10 percent of all shares may sue for a judgment removing an officer for cause. Court can bar reappointment of a person so removed from office.
setting compensation of directors
The board can set the compensation of directors. BUT compensation must be reasonable and in good faith. If excessive, it is waste of corporate assets.
Business Judgment Rule
a court will not second-guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis ONLY APPLIES to breach of duty of care, NOT duty of loyalty
effect of failure to give adequate required notice
any action taken about meeting is void UNLESS director w/o notice waives the notice defect - two ways: 1) in writing, signed, anytime, OR 2) by attending the meeting without objection
***Interested Director Transactions - DEFINITION
any deal between the corporation and: 1) one of its directors 2) business of which its director is also a director or officer or in which he has a substantial financial interest).
Director's duty to corporation
duty of fiduciary duty of loyalty 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.
can directors enter voting agreements on how they will vote as directors?
no
can a director give a proxy for director voting?
no - they have nondelegable ficudicary duties
officers and agency
officers are agents of the corporation
who elects directors
shareholders at the annual meeting do not have to elect new directors each year if you have classified board
generally who hires and fires directors/officers
shareholders hire and fire directors the board hires and fires officers
corporate opportunity definition
something: 1) the corporation needs, or 2) the corporation has an interest or tangible expectancy in, OR 3) that is logically related to it's business
who select and removes officers
the board UNLESS certificate allows shareholders to elect them (If the shareholders elect them, only the shareholders can fire them. Even then, for cause, directors can suspend an officer's authority to act.)
classified board
the certificate or a shareholder bylaw establishes 2, 3, or 4 classes of directors, with one class elected each year
President has the inherent authority to:
to sue on behalf of the corporation and to bind the corporation to contracts entered in the ordinary course of business.
X Corp has nine directors. Five of them are interested in an interested director transaction. All nine attend the meeting to consider approving the deal. After appropriate disclosure, what vote could approve the deal?
unanimous vote of all 4 disinterested directors
when is a director liable even where director missed meeting approving resolution?
when he learns of action and fails to register written dissent w/in a reasonable time after learning of the action --(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.)
Do interested directors count toward a quorum of the board?
yes and they can participate in the meeting but their vote does not count
Can the corporation advance litigation expenses to the director or officer?
yes but they must be repaid if it turns out she is not entitled to reimbursement
can officers bind the corporation to acts they take on corporation's behalf?
yes if they have authority to do so - watch for a cross-over w/ agency
Rule on loans of corporate funds to director
OK ONLY IF: 1) approved by shareholders OR 2) the board finds it will benefit the corporation
**Notice requirements for board meetings
REGULAR MEETINGS: notice NOT required IF the time and place are set in the bylaws or by the board SPECIAL MEETINGS: notice is required and MUST state time and place but not the purpose
Sarbanes-Oxley on loans
Sarbanes-Oxley Act (federal law) restricts loans to executives in registered (publicly-traded) corporations. It requires the board of such a large corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.
**are individual directors agents of the corporation?
NO - they have no power to bind the corporation to anything. Instead, the directors must act as a group.
John stamos?
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can corporation change rules on quorum required at meeting or to vote?
-can decrease a quorum to less than a majority of directors in the certificate or bylaws but it can never be set at fewer than 1/3 of the entire board -CANNOT decrease requirement that passing resolution requires majority of directors present -CAN INCREASE quorum to greater than a majority of directors but only in certificate -CAN INCREASE required percent vote to a super majority only in the certificate
Ineffective dissents by directors
-oral dissent is NEVER effective -dissent after voting to approve resolution
Good faith reliance on information, opinions, reports, or statements by (1) officers or employees of the corporation whom the director or officer believes competent and reliable, (2) lawyers or public accountants whom the director or officer believes are acting within their competence, or (3) a committee of which the person relying is not a member, as to matters within its designated authority.
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Rules on voting of directors (proxy, agreement)
1) director may NOT have a proxy vote for him 2) directors may NOT make agreement on how they will vote as directors for people wearing multiple hats pay attention to whether they are voting as director or shareholder
the certificate may eliminate director liability to the corporation or shareholders for damages for breach of duty EXCEPT
1) if she acted in bad faith 2) with intentional conduct 3) received an improper financial benefit OR 4) approved an unlawful distribution or loan what this means - certificate can exculpate director for breach of duty of care
Removal of Directors before the expiration of their term
1. Shareholder may remove director (a) for cause (b) without cause ONLY if certificate or bylaws allow 2. board may only remove director for cause if the certificate or the shareholder bylaw allows
how corporation may authorize/effect reimbursement
1. The certificate or bylaws can provide for indemnification by resolution of board or shareholders or by agreement, unless the director or officer acted in bad faith, was deliberate and dishonest in a way material to the case or wrongfully profited. 2. corporation can buy insurance to cover director and officer liability.
Reimbursement of litigation fees if officer or director is sued
1. reimbursement is PROHIBITED if (a) if the director or officer was held liable to the corporation (b) when a director or officer acts in bad faith (c) in a criminal case when D or O had no reason to believe his actions were lawful 2. corp MUST reimburse director or officer if she won a judgment on the merits or otherwise -EXCEPT expense from suit to recover reimbursement where she had a right but corp refused 3. corp MAY reimburse director or officer in any other case (i.e. settlement) where she acted: (a) in good faith AND (b) for a purpose reasonably believed in the company's best interest (c) determined by: - (i). The Board (with a quorum of directors being non-parties); or, if there is no such quorum, - (ii). Shareholders or a quorum of those directors who are disinterested; or - (iii) The Board pursuant to report from independent legal counsel. 4. Notwithstanding the categories above, the court (in which the officer or director was sued) MAY order the corporation to reimburse her for litigation expenses and attorney's fees IF: (a)????
if 1 director is liable which other directors are liable?
A director is presumed to have concurred with board action unless her dissent is noted in writing in corporate records: 1) in the minutes OR 2) in writing to the corporate secretary at the meeting OR 3) registered letter to the secretary promptly after adjournment
***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.
what does the board of directors do?
Generally, board of directors manages business of corporation. It sets policy, monitors and supervises officers, declares dividends and other distributions, decides when the corporation will issue stock, recommends fundamental corporate changes, etc.
Filling a vacancy on the board
Generally, the board selects the person who will serve the remainder of the term UNLESS director was removed w/o cause --> in that case shareholders must appoint replacement
Committees - when authorized, what they cannot do
If the certificate or bylaws allow, a majority of the "entire board" can delegate substantial management functions to a committee of ONE or more directors. But, the board cannot delegate all powers and responsibilities to a committee. committee can NOT: 1) set director compensation 2) fill a board vacancy 3) submit a fundamental change to shareholders 4) amend the bylaws
***Interested Director Transactions - RULE
Interested director transactions will be set aside UNLESS the director shows either (1) the deal was fair and reasonable to the corporation when approved OR (2) (a) the material facts and her interest were disclosed or known AND (b) the deal was approved by: - (i) the shareholders - (ii) board approval by a sufficient vote NOT counting the votes of interested directors OR - (iii) if disinterested directors are insufficient to take a board act, unanimous vote of disinterested directors
is it a defense to corporate usurpation that corporation could not afford a remedy?
NO - director should have helped corporation get financing
