Corporate Board of Directors

Duties

—board manages or directs corporation’s business affairs and authorizes officers and employees to exercise corporation powers

Composition requirements

1. Number of directors—default is one or more members; COI or bylaws can alter

2. Director qualifications—natural person (not another corporation); generally not required to be stockholder

Selection of directors

Selection of directors—selected by stockholders at annual stockholders’ meeting by straight or cumulative voting and by one or more stock classes; Unocal standard used to address situations in which directors make decisions that have clear implication for their continued control

Term of directors - Term

Term—directors (usually) serve one-year term; may serve longer than one year if terms are staggard; limits impact of cumulative voting

Holdover director

Holdover director—director whose term has expired but continues to serve until replacement selected

Director resignation

Director resignation—directors may resign at any time by delivering written notice to board, its chair or corporation

Director removal

Director removal—director may be removed (no cause required) by majority of shares entitled to vote at director elections unless (1) board is classified (requires cause) or (2) only part of board is being removed and votes against removal would be enough to elect that director (cumulative voting only)

Replacement or new director

Replacement or new director—majority vote of directors in office may fill vacancy

Compensation of directors

—compensation allowed for serving on board; amount fixed by board unless COI says otherwise; when directors make decisions about own compensation, decisions generally reviewed as self-dealing transaction under entire fairness standard

Meeting requirements - Meeting types

Meeting types—directors may hold regular and special meetings; no notice required for regular meetings; required notice of special meeting may be dictated by COI; notice may be waived by signed written waiver or by attendance (unless director promptly objects to lack of notice)

Meeting requirements - Presence

Presence—physical presence not required if meeting conducted through conference call or any means allowing each director to hear others

Action without meeting

Action without meeting—board may act without meeting by unanimous written consent

Voting requirements - Quorum required

• Number of directors—majority of total number of directors is default quorum; interested directors may be counted toward quorum

• Director presence—director must be present when vote occurs to be counted toward quorum; directors cannot vote by proxy

Voting requirements - Passage

—majority of directors present at time of vote (generally)

Voting requirements - Director dissent

Director dissent—may be jointly and severally liable for illegal or improper dividend, even if not present at meeting or did not vote for action; to avoid liability, director must: (1) if present, enter dissent into meeting minutes or (2) if absent, enter dissent into books immediately after notice of the action.

• If liable, director may seek contribution from other directors who voted for or concurred

Voting requirements - Deadlock

—Court of Chancery may appoint custodian to resolve deadlocks

Committees—board may act through one or more committees

1. Composition—two or more directors

2. Member selection—majority of directors for creation of and appointment to committee

3. Committee powers

4. Independent and disinterested

3. Committee powers

—all powers of board to extent permitted by bylaws or board resolution; committee may not (1) approve, adopt, recommend to stockholders any action or matter (excepting election or removal of directors) expressly required to be submitted to stockholders for approval or (2) adopt, amend, or repeal bylaws

Independent and disinterested—members should be independent or disinterested concerning transaction

• Disinterested: not party to transaction, no material interest in transaction, and no material relationship with someone having material interest

• Material interest: any actual or potential benefit that may impair director’s objective judgment

• Material relationship: familial, financial, professional, employment, or other relationship that may impair director’s objective judgment

• Plaintiff must prove director lacks independence and is interested

Duty of care—refrain from gross negligence (extreme departure from ordinary care)

• Gross negligence—reckless indifference or gross abuse of discretion; generally requires failure to fully inform themselves in a deliberate manner

• Board liability—directors must have breached duty of care individually and board collectively must have failed to inform themselves fully and in a deliberate manner before voting on a significant transaction.

• Business judgment rule (BJR) - see definition next

Business judgment rule (BJR)

• Business judgment rule (BJR)—rebuttable presumption that directors acted in good faith and with honest belief that actions were in corporation’s best interests

o To overcome BJR, plaintiff must show director breached duty of care, good faith, or loyalty

o If overcome, burden shifts to defendants to show action was fair to corporation and shareholders

Duty of good faith

—encompasses all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders

• Board or committee members fully protected when performing duties if acting in good faith and relying on reasonably reliable information (e.g., reports, expert opinions);

• Good-faith presumption overcome if challenger shows fraud, dereliction of duty, condoning illegal conduct, or a conflict of interest

Bad Faith

—(1) subjective bad faith (conduct motivated by intent to harm), (2) fiduciary action constituting gross negligence, or (3) intentional dereliction of duty (conscious disregard for responsibilities)

COI exculpatory provisions

COI exculpatory provisions—may eliminate or limit director or officer liability, but cannot eliminate or limit liability for (1) breach of loyalty, (2) acts not in good faith, intentional misconduct, or knowing violation of law, (3) unlawful payment of dividend, stock purchase, or redemption, (4) deriving personal benefit from transaction, or (5) an officer in an action by or for the corporation

Duty of loyalty

—undivided and unselfish loyalty to the corporation and no conflict between duty and self-interests

• Self-dealing

• Conflict of interest transaction

Self-dealing

Self-dealing—director engages in conflict-of-interest transaction with own corporation or profits at corporation’s expense; violates duty of loyalty unless protected by safeharbor rule; BJR does not apply

Conflict-of-interest transaction

Conflict-of-interest transaction—a transaction (not including controlling shareholder) involving corporation or subsidiary on one side, and on the other side (1) director or officer, or (2) any other entity in which the director or officer is involved financially

Safe-harbors for conflict-of-interest transactions:

o (1) Disclosure of material facts—director or officer relationship to transaction; majority of disinterested directors or committee must approve in good faith and without gross negligence

o (2) Ratification—by informed, uncoerced, affirmative vote of majority of votes cast by disinterested stockholders

o (3) Fairness—to corporation and stockholders; consistent with entire fairness test

o Effect of defense—directors and officers are not subject to claims for equitable relief or damages

Controlling stockholder transactions

Controlling stockholder transactions—between corporation and controlling stockholder or from which controlling stockholder receives special benefit

• Safe-harbors depend on whether a going private transaction is involved:

  • No going private transaction

  • Going private transaction

Safe-harbors - No going private transaction

No going private transaction—cleansed if: (1) disclosure of all material facts and approval by disinterested directors, (2) conditioned on approval and receives approval by informed, uncoerced, majority of votes by disinterested stockholders, or (3) transaction is fair to corporation and stockholders

Safe-harbors - Going private transaction

Going private transaction—cleansed if: (1) approved by committee and disinterested stockholders, or (2) transaction is fair to corporation and stockholders

Usurpation of corporate opportunity

—duty violated by not offering opportunity to corporation first; director or officer (i.e., fiduciary) may:

• Not take opportunity

• Take opportunity

• Take opportunity is corporation has rejected it

Not take opportunity

if: (1) corporation financially able to take opportunity, (2) opportunity is within corporation’s line of business, (3) corporation has interest or expectancy in opportunity, and (4) taking opportunity puts fiduciary in position adverse to personal corporate duties

Take opportunity

if: (1) presented to director or officer in her individual (not corporate) capacity, (2) not essential to corporation, (3) corporation holds no interest or expectancy in opportunity, and (4) fiduciary has not wrongfully employed corporation resources in pursuing or exploiting opportunity

Duty to disclose - Material information

Material information—fact is material if substantial likelihood that reasonable stockholder would consider it important in deciding how to vote exists

Duty to disclose - Breach of duty

Breach of duty—board breaches by making materially false statements, omitting material facts, or making partial disclosures that are materially misleading

Duty to disclose - Confidential agreements (privately held corporations)

Confidential agreements (privately held corporations)—reasonable for execution of confidentiality agreements to be prerequisite for disclosure of confidential information to stockholders

Duty not to commit waste

—plaintiffs must show exchange was so one-sided that no business person of ordinary, sound judgment could conclude corporation received adequate consideration

Duty of oversight (Caremark)

—directors must act in good faith to oversee company operations; plaintiff must show:

• Directors failed to set up any systems to monitor business or legal risks; or

• Systems were in place but directors knowingly failed to monitor them leaving them unaware of risks or issues requiring attention

Fiduciary duties to preferred stockholders

—none owed when considering whether corporate action might impact contractual rights; but are owed when special contractual rights are not involved and right at issues is equally shared with common stock

Breach of fiduciary duties

• Standard of conduct—what directors are expected to do; defined by duties of loyalty and care

• Standard of review—test applied to evaluate whether directors met standard of conduct; review tiers: (1) BJR, (2) enhanced scrutiny, and (3) entire fairness

• BJR (default standard)—can be rebutted by plaintiff showing board was interested or lacked independence

Enhanced scrutiny (intermediate standard)

—applies to specific, recurring, and readily identifiable situation involving potential conflicts of interest where decision making of independent or disinterested directors could be undermined

o Defendants must show their motivations were proper (not selfish) and actions were reasonable in relation to legitimate objective

Entire fairness (highest standard)

—applies when BJR presumption has been rebutted; transaction must be objectively fair regardless of board beliefs

Whether entire fairness test applies

whether enough sufficiently informed, disinterested individuals (acting in good faith) comprised board majority when action taken (director-by-director review):

• If board not comprised of majority of disinterested or independent board members, entire fairness standard used, but

• If (1) directors’ conflicting interests known and (2) committee of directors consisting of two or more disinterested directors approve action (with no gross negligence), BJR applies instead

When entire fairness test applies:

• Defendants (generally)—must show that transaction was product of fair dealing and fair price

• Plaintiffs—bear burden of showing unfairness if transaction approved by committee of independent or disinterested directors

Fair dealing factors

—(1) when transaction timed, (2) how transaction initiated, structured, negotiated, disclosed to directors, and (3) how board and stockholder approvals obtained

Fair price factors

—(1) action’s economic and financial considerations (e.g., assets, market value) and (2) any other element that impacts company’s stock value

Indemnification and insurance

—directors or officers may seek expense or adverse award indemnification from corporation if involved in legal action caused by role as director

Mandatory Indemnification

—required to indemnify director for any reasonable expense actually incurred in successful defense of proceeding against director in corporate role

Permissive indemnification

—may indemnify director in unsuccessful defense of suit when (1) director acted in good faith with reasonable belief that conduct was in (or at least not opposed to) corporation’s best interests or (2) in criminal proceeding, director did not have reasonable cause to believe his conduct unlawful

Actions brought by or on corporation‘s behalf

—corporation may indemnify director, officer, employee, or agent for expenses actually and reasonably incurred in certain circumstances

Indemnification of others

—corporation may indemnify any other person (who is not present or former director or officer) against expenses actually and reasonably incurred to extent person has been successful on case merits, defense; person must have met applicable standard of conduct.

Inspection rights of directors

—directors entitled to inspect and copy corporate books, records, and other documents for any purpose related to performance of duty as director