BOARD STRUCTURES, BYLAWS AND MEETINGS

1
BOARD STRUCTURES, BYLAWS AND MEETINGS

• ADDRESSING THE CHALLENGES
• by
• Heman A. Marshall, III, Principal
• Woods Rogers PLC
• September 2, 2009

2
Limitations on the Materials and Discussion

• Each state has different corporate laws the
  state of incorporation controls
• The outline and discussion are based on the Model
  Business Corporations Act
• Each participant must carefully consider its own
  controlling statues before drafting final
  documents or taking any action

3

• The materials and discussion are merely to
  familiarize participants with certain basic
  concepts typically consistent in all statutes and
  highlight issues where further consideration of
  state statutes may be required.

4
To Use or Not to Use a Corporation

• Advantages of corporate structure
• Alternatives to corporate structure
• Limited liability companies
• Partnerships
• Contractual affiliations
• Focus of this discussion assumes the use of a
  non-stock, not-for-profit corporation.

5
So You Want to Form a Corporation -Requirements
of Creation

• Corporate name
• Corporate purpose
• Registered office and registered agent
• Initial directors
• Preparation and filing of the Articles of
  Incorporation.

6
Membership or Non-Membership

• Membership status is created in the Articles and
  refined in the Articles or Bylaws
• Members are the analog of shareholders in the
  for-profit world
• Qualifications of members must be defined
• Right and powers of members must be defined.

7
Members Meetings

• Annual Meeting
• Election of directors (if voting members)
• Other business for the members to consider
• Special Meetings
• At the call of the Board, a percentage of members
  or as set forth in the Articles and Bylaws

8
Notice of Members Meetings

• Time, date and place of annual and special
  meetings must be provided
• Purposes of the meeting may not be required in
  the case of annual meetings, but typically is
  required for special meetings
• Timing requirements for notice of meeting
• Record date of annual and other meetings.

9
Waiver of Notice

• In writing
• By attendance without objection
• By voting on an issue

10
Aspects of the Conduct of Meetings

• Actions without a meeting
• Quorum requirements
• Attendance by conference phone and similar means
• Voting by proxy
• Voting by electronic transmission.

11
Confirming Membership Status

• The identity of voting members at any given time
  is critical
• Establish written documentation of
  election/qualification as a member
• Establish written documentation of termination of
  membership status.

12
Board of Directors

• A Board of Directors is typically required at
  least one director
• Directors are typically required to be natural
  persons
• Directors exercise all corporate powers and
  manage the business affairs of the corporation
• The number of directors established in the
  Articles or Bylaw may be a range.

13
Directors Terms

• Generally, serve annual or multiple year terms
• A decrease in the number will not shorten
  incumbent directors terms
• A director appointed to fill a vacancy serves
  only during the remaining term of the vacating
  director.

14
Directors Staggered Terms - Considerations

• Directors may be elected to serve staggered
  terms
• Initially, directors are divided into classes and
  elected for initial staggered terms, i.e., one
  year, two years and three years
• Thereafter, only one class is elected annually
• Advantage maintains continuity of experience
  and expertise.

15
Meetings of Directors

• Regular and special meetings
• Directors may participate by conference call or
  other means
• Directors typically may not vote by proxy
• Directors may take action without a meeting
  pursuant to unanimous consent.
• Notice
• Notice of regular meetings may not be required
• Notice of special meetings is usually set by
  Bylaws with a default timing provision in the
  statutes.

16
Board Committees

• Standing versus Special Committees
• Appointment of members
• Notice and conduct of meetings
• Powers
• Per Articles
• Per Bylaws
• Per Enabling Resolution

17
Executive Committee

• In some states it may exercise essentially all
  the powers of the Board between regular or
  special meetings of the Board
• May facilitate corporate operations, particularly
  if full Board is large
• Should be specifically addressed in Bylaws or by
  resolution of the full Board outlining powers.

18
Standards of Conduct for the Board

• Must act in good faith and in a manner
  reasonably believed to be in the best interest
  of the corporation
• Must discharge their duties with the care that a
  person in a like position would reasonably
  believe appropriate under similar circumstances

19

• Must use care, skill and vigilance as would an
  ordinary person in directing his own business and
  financial affairs.
• May rely, if no knowledge to the contrary, on
  officers, employees, legal counsel, CPAs and
  other persons

20

• May rely, if no knowledge to the contrary, on
  committees of the Board reasonably believed to
  merit confidence and on information, opinions,
  reports and statements, including financial
  statements and other date prepared by such
  persons or committees.

21
Conflicts of Interest

• A direct or indirect interest in a transaction
  involving the corporation where so closely linked
  and of such significance that it could reasonably
  be expected to exert an influence on the
  directors judgment.
• Disclosure of a conflict and all known facts
  respecting the subject matter of the transaction
  ordinarily deemed material is typically required.

22

• Actions by a majority of the disinterested
  directors, based on a disclosed conflict, will
  not be considered invalid corporate action
• Presence of, comments made by or vote by an
  interested director may not affect the validity
  of the action if it is otherwise authorized,
  approved or ratified by a majority of
  disinterested directors.

23
Officers

• Typically, at least a president and secretary are
  required other officers may be specified or
  created from time to time as necessary by the
  Board.
• One person may hold more than one office
  simultaneously.

24

• Officers generally have the authority to perform
  such duties as are set forth in the Bylaws or to
  the extent consistent with the Bylaws as
  prescribed by resolution of the Board.
• Bylaws should describe essential officers and the
  scope of their duties.

25
Officers Standard of Conduct

• Generally, officers are required to act in good
  faith with the care that a person in a like
  position would reasonably exercise under similar
  circumstances and in a manner believed to be in
  the best interest of the corporation.

26

• Officers may rely, where no knowledge that it is
  unwarranted, on other employees believed reliable
  and competent and on information, opinion,
  reports and statements, including financial
  statements and other data prepared by employees,
  legal counsel, CPAs or others.

27
Resignation and Removal of Officers

• Officers may resign by delivering written notice
  to the corporation.
• Officers may be removed at any time with or
  without cause by the Board, the officer
  appointment them or otherwise as provided in the
  Bylaws.
• Removal is typically without prejudice to any
  contract rights of the officer.

28

• A majority of states provide that an election or
  appointment of an officer does not, in and of
  itself, create contractual rights akin to
  employment.

29
Indemnification of Officers and Directors

• Statutes typically authorize corporations to
  provide financial protection for officers and
  directors against expenses and liabilities
  incurred in performing their duties.
• Typically allowed where the director conducts
  himself in good faith and reasonably believes the
  conduct to be in the best interest of the
  corporation (or at least not opposed to the best
  interests of the corporation).

30

• In a criminal proceeding, the standard often
  requires the officer/director have no reasonable
  cause to believe the conduct was unlawful.
• Most statutes permit monetary advances to the
  officer/director for expenses incurred.

31

• A specific determination is usually required
  regarding appropriateness of indemnification by a
  committee of disinterested directors or special
  counsel.
• Indemnification typically must be set out in the
  Articles or Bylaws.

32
Statutory Limitations on Directors Liabilities

• For non-stock, non-profit entities (sometimes
  limited to 501(c)(3) entities) many statutes
  limit directors financial liabilities in actions
  by or on behalf of the corporation or others.
• Liability is sometimes limited to the amount the
  director receives as compensation annually, if
  any.

33

• Provision should be carefully reviewed in light
  of decisions to purchase DO insurance and in
  fashioning indemnification provisions.