8.STATUTORY CLOSE CORPORATION STATUS--the basic requirements to qualify for special treatment under the statutes are that, in its cert of incorpn, a statutory close corp must identify itself as such, and must include certain limitations as to the number of shs, transferability of shares, or both.
a)Functioning As a Close Corporation--there may be sh agreements relating to any phase of the corp affairs.
1.APPOINTMENT OF DIRECTORS--initial dirs are either designated in the articles of incorporation or elected at a meeting of incorporators. Subsequent elections are by shs at their annual meetings. The number of dirs is usually set by the articles or bylaws.
a)Qualifications--absent a contrary provision in the articles or bylaws, dirs need not be shs of the corp or residents of the state of incorporation.
b)Vacancies--statutes vary, but under Model Act, a vacancy may be filled by either the shs or dirs.
1)Compare--removal: some statutes require that vacancies created by removal of a dir be filled by the shs unless the articles or bylaws provide otherwise.
2.TENURE OF OFFICE
a)Term of Appointment--under most statutes, office is held until the next meeting, although on a classified board, dirs may serve staggered multi year terms.
b)Power to Bind Corporation Beyond Term--unless limited by the articles, the board has the power to make contracts biding the corp beyond the dirs term of office.
c)Removal of Director During Term--at common law, shs can remove a dir for cause (e.g., fraud, incompetence, dishonesty) unless an article or bylaw provision permits removal without cause. a dir being removed for cause is entitled to a hearing by shs before a vote to remove. a number of statutes permit removal without cause.
1)Removal by Board--board can NEVER remove a dir unless authorized by statute;
2)Removal by Court--there is a split authority as to whether a court can remove a dir for cause.
I)Statutes--some statutes permit courts to remove a dir for specified reasons. Usually, a petition for removal can be brought only by a certain percentage of shs or the attorney general.
3.FUNCTIONING OF BOARD
a)Meetings--absent a statute, dirs can act only at a duly convened meeting consisting of a quorum. In most jurisdictions, a meeting can be conducted by telephone or other means whereby participants can hear each other simultaneously. Most statutes also allow board action by unanimous written consent without a meeting.
1)Notice--although formal notice is unnecessary for a regular meeting, special meetings require notice to every dir of date, time, and place. Usually, notice can be waived in writing before or after a meeting. Attendance waives notice unless the dir attends only to protest the meeting.
2)Quorum--a majority of the authorized number of dirs constitutes a quorum. Many statutes permit 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 isnt 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 dirs 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 experts 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)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.
--burden of proof is on the dir to establish good faith, honesty & fairness;
--courts weigh self-dealing transactions with closest scrutiny
(3)self-dealing prohibition also applies to intercorporate transactions where dirs are common.
(1)quasi-safe harbor approach (Iowa statute)--transaction is not void or voidable because of dirs interest, if either:
--interest is disclosed and approval is made without counting the vote of the interested dir.
--interest is disclosed to shs and shs authorize
--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 pr