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Business associations \english\

the articles or bylaws to require more than simple majority or less than that.

                 3)Voting--absent a contrary provision, an affirmative vote of a majority of those present, not a majority of those voting, is required for board action.

              b)Effect of Noncompliance With Formalities--today, most courts hold that informal but unanimous approval of a transaction is effective, as is a matter receiving the explicit approval by a majority of dirs without a meeting, plus acquiescence by the remaining dirs.

              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