c)Delegation of Authority--the board has the power to appoint committees of its own members to act for it either in particular matters or to handle day-to-day management between board meetings. Typically, these committees cannot amend the articles or bylaws, adopt or recommend major corporate changes (e.g., merger), recommend dissolution, declare a dividend, or authorize issuance of stock unless permitted by the articles or bylaws. Note that while the board may delegate operation of the business to an officer or management company, the ultimate control must be retained by the board.
d)Provisional Directors--some statutes allow them to be appointed by court if the board is deadlocked and corporate business is endangered. a provisional dir serves until the deadlock is broken or until removed by a court order or by majority of shs.
e)Voting Agreements--an agreement in advance among dirs as to how they will vote is void as contrary to public policy. There are certain exceptions for statutory close corps.
4.COMPENSATION--dirs are NOT entitled to compensation unless they render extraordinary services or such compensation is otherwise provided for. Officers are entitled to reasonable compensation for services.
5.DIRECTORS’ RIGHTS, DUTIES, AND LIABILITIES
a)Right to Inspect Corporate Records--if done in good faith for purposes germane to his position as dir, this right is absolute.
b)Duty of Care--dirs must exercise the care of an ordinarily prudent and diligent person in a like position, under similar circumstances. There is no liability (absent a conflict of interest, bad faith, illegality, or gross negligence) for errors of judgment (business judgment rule--the rebuttable presumption that action was taken on an informed basis, in good faith and exercising reasonable care), but the dir must have been reasonably diligent before the rule can be invoked (Shlensky)
1)The duty of care requires:
I)Education--a dir should acquire at least a rudimentary understanding of the business of the corporation;
ii)Information--a dir is under a continuing obligation to keep informed about the activities of the corp;
iii)Participation--dirs must “generally monitor” corporate affairs, but need NOT involve themselves in the day-to-day operations; (i.e. they should attend board of dirs meetings with reasonable regularity).
iiii)Inquiry--a dir has a duty to inquire when circumstances would alert a reasonable person for the need of inquiry.
iiiii)Action--where wrongdoing is revealed, a dir should object, correct, or resign. Object to the course of conduct, steer toward correction, and resign if it isn’t corrected.
2)Extent of liability--dirs are personally liable for corporate losses directly resulting from their breach of duty or negligence in falling to discover wrongdoing. a director may seek to avoid being held personally liable for acts of the board by recording his dissent.
I)Many statutes permit the articles to abolish or limit dir’s liability for breach of the duty of care absent bad faith, intentional misconduct, or knowing violation of law.
3)Defenses to liability--these include good faith reliance on management or expert’s reports. Disabilities may be considered in determining whether the dir has met the standard of care.
c)Duty of Loyalty--a catch-all duty designed to prevent unfairness--the duty to act in good faith (BJR applies). Application:
1)Self-dealing transactions
I)Common Law:
(1)early absolute prohibition against self-dealing renders transactions void or voidable;
(2)permissive self-dealing: dirs and officers may contract with the corp if (a)done in “strictest good faith.”; (b)with full disclosure; and (c)consent of “all concerned.”
[1]--burden of proof is on the dir to establish good faith, honesty & fairness;
[2]--courts weigh self-dealing transactions with “closest scrutiny”
(3)self-dealing prohibition also applies to intercorporate transactions where dirs are common.
ii)Statutory (example):
(1)quasi-safe harbor approach (Iowa statute)--transaction is not void or voidable because of dirs’ interest, if either:
[1]--interest is disclosed and approval is made without counting the vote of the interested dir.
[2]--interest is disclosed to shs and shs authorize
[3]--transaction is fair and reasonable
(2)Note--dir must still establish that he acted in good faith, honesty, and fairness
2)Domination of subsidiary by parent--courts look at the transaction to see if self-dealing has occurred. Example (Sinclair Oil):
I)declaration of dividends shared pro rata was NOT self-dealing; BJR applies
ii)contract between parent and sub was self-dealing; apply intrinsic fairness test
3)Manager’s compensation:
I)Ordinary corporations--conflicts are inevitable but all firms need to set compensation. The burden of proof is placed on challengers as a matter of convenience.
ii)Close corporations--the income generated by the firm may be diverted to salaries, so there is an option for self-dealing by the parties in control to take tax-advantaged compensation in the form of salaries (taxed once) as opposed to dividends (taxed twice).
d)Statutory Duties and Liabilities--in addition to general duty of care, federal and state laws also impose certain duties and liabilities, e.g., registration requirements under the Securities Act of 1933, liability for rule 10b-5 violations, liability for illegal dividends. Some statutes also impose criminal liability on corporate managers for unlawful corporate actions.
C.OFFICERS
1.ELECTION--officers are usually elected by the board of dirs. Some statutes permit election of officers by shs.
2.AUTHORITY OF CORPORATE OFFICERS (liability of corp to outsiders)--only authorized officers can bind the corp. Authority may be: actual (expressed in bylaws or by valid board resolution), apparent (corp gives third parties reason to believe authority exists), or power of position (inherent to position). If ratified by the board, even unauthorized acts can bind the corp.
a)Authority of President--the majority rule is that the president has the power to bind the corp in transactions arising in regular course of business.
3.DUTIES OF CORPORATE OFFICERS--the duty of care owed by a officer is similar to that owed by dirs ( and sometimes higher).
D.CONFLICTS OF INTEREST IN CORPORATE TRANSACTIONS.
1.DUTY OF LOYALTY--because of their fiduciary relationship with the corp, officers and dirs have the duty to promote the interests of the corp without regard for personal gain.
2.BUSINESS DEALINGS WITH THE CORPORATION--conflict of interest issues arise when a corp transacts business with one of its officers or dirs, or with a company in which an officer or dir is financially interested.
a)Effect of Self-Interest on Right to Participate in Meeting--most statutes permit an “interested” dir to be counted toward quorum, and interested dir’s transactions are NOT automatically voidable by the corp because the interested dir’s vote was necessary for approval.
b)Voidability Because of Director’s Self-Interest--today, such transactions are voidable only if unfair to the corporation. The burden of establishing fairness is on the interested director. Note that a dir’s failure to fully disclose material facts may be per se unfair.
1)Unanimous shareholder ratification--if, after full disclosure, shareholder ratification is unanimous, the corp will be estopped from challenging the transaction with the interested dir (except at to creditors).
I)Less-than-unanimous ratification--courts then will look at whether the majority shares were owned or controlled by the interested director. Courts are more likely to uphold ratification by a disinterested majority so as to preclude the transaction from being attacked by the corp or by a sh in a derivative suit.
2)Statutes--most statutes provide that such transactions are NOT voidable if: (1)approved, after full disclosure, by a disinterested board majority or by majority of shs, or (2)the transaction is fair to the corp notwithstanding disclosure.
I)”Interested”--an “interested” dir or officer is one who has a business, financial, or familial relationship with a party to the transaction that would reasonably affect the person’s judgment so as to adversely affect the corp.
c)Remedies--the corp may rescind, or affirm and sue for damages.
3.INTERLOCKING DIRECTORATES--generally, transactions between corps with common dirs are subject to the same rules of interested director transactions. There is no conflict of interest if one corp is the wholly owned subsidiary of the other. However, a question of fairness arises where the parent owns only a majority of the subsidiary’s shares.
4.CORPORATE OPPORTUNITY DOCTRINE (Also see duty of loyalty)
a)Definition--COD bars dirs from taking any business opportunity belonging to the corp without first offering it to the corp.. If the corp is unwilling to pursue an opportunity (after an independent board is fully informed of the opportunity), then the dir may pursue it.
