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The Board of Directors (No. 63-2nd)

Product Code: CPOR01
$195.00 Print
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Corporate Practice Series Portfolio No. 63-2nd, The Board of Directors, provides an overview of the problems and responsibilities facing the modern corporate board. It sets forth the duties of directors and examines the question of to whom those duties are owed, looking at both the traditional model, which held the directors responsible only to shareholders, and more recent theories that directors on occasion owe duties to non-shareholders. The portfolio then considers the size and composition of the board, and the roles of committees in its functioning. It explains the duties and liabilities of individual board members, considering such matters as dealing with “interested” transactions, reliance upon experts, changes in corporate control, and proxy contests. It also describes the business judgment rule and potential liabilities under environmental laws. The portfolio then explains the protections available to directors through indemnification, exculpation, and liability insurance. The portfolio concludes by discussing the special duties and responsibilities of directors that arise in the context of derivative lawsuits and managing financially troubled companies.


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Portfolio 63-2nd: The Board of Directors

Portfolio 63-3rd: The Board of Directors

I. Introduction

II. The Role of the Board in Corporate Governance 1

    . Introductory Material
    A. What Duties Does a Director Owe?
    B. To Whom Does a Director Owe Duties?
    C. The Traditional Model and the Rush to Other Constituencies
    D. The Closely Held Corporation

II. The Role of the Board in Corporate Governance
    . Introductory Material
    A. What Duties Does a Director Owe?
    B. To Whom Does a Director Owe Duties?
    C. The Traditional Model and the Rush to Other Constituencies
    D. The Closely Held Corporation

III. Structure of the Board
    A. Introduction
    B. Sarbanes-Oxley Act of 2002
         1. Bans on loans to executive officers and directors
         2. Audit committees
    C. Election of Directors
         1. Voting standard in the election of directors
         2. Shareholder proposals and proxy statements
         3. Elimination of discretionary voting by brokers in director elections
    D. Size of the Board and the Terms of Its Members
    E. Composition of the Board
         1. Corporate governance guidelines regarding board composition
         2. Director independence
         3. The lead director
    F. Committees
         1. Permissible scope of committee activity
         2. Reliance on committee actions and recommendations
         3. The audit committee
         4. The compensation committee
         5. The nominating committee
         6. The executive committee
    G. Board and Director Evaluations

III. Structure of the Board
    A. Introduction
    B. The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
         1. Bans on loans to executive officers and directors
         2. Audit committees
         3. Compensation committees
         4. Whistleblowers
    C. Election of Directors
         1. Voting standard in the election of directors
         2. Shareholder proposals and proxy statements
         3. Elimination of discretionary voting by brokers in director elections
    D. Size of the Board and the Terms of Its Members
    E. Composition of the Board
         1. Corporate governance guidelines regarding board composition
         2. Director independence
         3. The lead director
    F. Committees
         1. Permissible scope of committee activity
         2. Reliance on committee actions and recommendations
         3. The audit committee
         4. The compensation committee
         5. The nominating committee
         6. The executive committee
    G. Board and Director Evaluations

IV. Duties and Liabilities of Individual Board Members
    A. Duties of Board Members
         1. Duty of loyalty and ‘interested’ transactions
              a. Duty of loyalty
              b. ‘Interested’ transactions
              c. Use of independent committees in interested transactions
              d. Usurpation of corporate opportunities
         2. Duty of care and reliance upon experts
              a. Duty of care
              b. Reliance upon experts
         3. Duty of full and fair disclosure
         4. Duties in exceptional circumstances
              a. Duties in the face of a takeover proposal
                   (1). Does the bid present a ‘danger to corporate policy and effectiveness’?
                   (2). Is the board’s response ‘reasonable in relation to the threat posed’?
              b. Duties in connection with the sale of the company
                   (1). The directors’ duties in the sale of control
                   (2). The discharge of the directors’ duties when the sale of the company is inevitable
              c. Auctions
                   (1). The openness of the auction
                   (2). The auction's rules
                   (3). Ending the auction: ‘lock-up’ and ‘no-shop’ provisions
              d. Selling control other than through an auction
              e. Duties during the conduct of a proxy fight or written consent contest
    B. The Business Judgment Rule
         1. The nature of the rule
         2. The prerequisites for invoking the rule
              a. Action by the board
              b. Disinterestedness of the directors
              c. Due care
              d. The requirement of good faith
         3. The Delaware modification of the rule and other approaches to business judgment in the takeover context
    C. Statutory Liabilities of Directors; Risks of Liability Under the Environmental Laws

IV. Duties and Liabilities of Individual Board Members
    A. Duties of Board Members
         1. Duty of loyalty and ‘interested’ transactions
              a. Duty of loyalty
              b. ‘Interested’ transactions
              c. Use of independent committees in interested transactions
              d. Usurpation of corporate opportunities
         2. Duty of care and reliance upon experts
              a. Duty of care
              b. Reliance upon experts
         3. Duty of full and fair disclosure
         4. Duties in exceptional circumstances
              a. Duties in the face of a takeover proposal
                  (1). Does the bid present a ‘danger to corporate policy and effectiveness’?
                  (2). Is the board's response ‘reasonable in relation to the threat posed’?
              b. Duties in connection with the sale of the company
                  (1). The directors' duties in the sale of control
                  (2). The discharge of the directors' duties when the sale of the company is inevitable
              c. Auctions
                  (1). The openness of the auction
                  (2). The auction's rules
                  (3). Ending the auction: ‘lock-up’ and ‘no-shop’ provisions
              d. Selling control other than through an auction
              e. Duties during the conduct of a proxy fight or written consent contest
    B. The Business Judgment Rule
         1. The nature of the rule
         2. The prerequisites for invoking the rule
              a. Action by the board
              b. Disinterestedness of the directors
              c. Due care
              d. The requirement of good faith
         3. The Delaware modification of the rule and other approaches to business judgment in the takeover context

    C. Statutory Liabilities of Directors; Risks of Liability Under the Environmental Laws

    
V. Indemnification, Exculpation, and Liability Insurance
    . Introductory Material
    A. Statutory Indemnification
         1. Delaware law
              a. Mandatory indemnification
              b. Permissive indemnification
                   (1). Director or officer status
                   (2). `Good faith'
                   (3). `Reasonable belief'
              c. Advancement of expenses
              d. Exclusivity
         2. Model Business Corporation Act
         3. Status suits
         4. Public policy
    B. Contractual Indemnification
         1. Independent legal ground
         2. Public policy
         3. Typical provisions
    C. Exculpation
         1. Statutory provisions
         2. Limitations
    D. Directors’ and Officers’ Insurance
         1. The need for insurance
         2. Typical policy, exclusions, and other common limitations
         3. Practical considerations

V. Indemnification, Exculpation, and Liability Insurance
    . Introductory Material
    A. Statutory Indemnification
         1. Delaware law
              a. Mandatory indemnification
              b. Permissive indemnification
                  (1). Director or officer status
                  (2). `Good faith'
                  (3). `Reasonable belief'
              c. Advancement of expenses
              d. Exclusivity
         2. Model Business Corporation Act
         3. Status suits
         4. Public policy
    B. Contractual Indemnification
         1. Independent legal ground
         2. Public policy
         3. Typical provisions
    C. Exculpation
         1. Statutory provisions
         2. Limitations
    D. Directors’ and Officers’ Insurance
         1. The need for insurance
         2. Typical policy, exclusions, and other common limitations
         3. Practical considerations

VI. Derivative Litigation: Managing a Unique Corporate Asset
    . Introductory Material
    A. The Nature of Derivative Litigation
    B. The Demand Requirement
         1. Demands excused as ‘futile’
              a. Interestedness and lack of independence of directors
              b. Valid business judgment
         2. ‘Wrongfulness’ of the board’s refusal to litigate
    C. The Role of the Pre-Suit Investigation Committee
         1. The task and composition of the committee
         2. The work of the committee
         3. The role of the full board
    D. The Role of the Post-Filing or Zapata Committee
         1. Context and legal analysis
         2. The work of the committee
              a. The merits of the claim
              b. The injury to the corporation
              c. The costs of prosecution
              d. The effect on operations
              e. Cost-benefit analysis
              f. Knowledge and motivation of the directors
              g. The effect of remedial action
    E. Consequences and Pitfalls of Using the Committee Process
         1. ‘Structural bias’—skeptical views of the committee process
         2. Scope of the authority delegated to the special committee
         3. Uncovering wrongdoing during the investigation
         4. Waiver of the attorney-client privilege
    F. The Burden of Proof and Permissible Discovery on Motions to Dismiss by a Special Litigation Committee
    G. Discovery in Demand-Refused Cases

VI. Derivative Litigation: Managing a Unique Corporate Asset
    . Introductory Material
    A. The Nature of Derivative Litigation
    B. The Demand Requirement
         1. Demands excused as ‘futile’
              a. Interestedness and lack of independence of directors
              b. Valid business judgment
         2. ‘Wrongfulness’ of the board’s refusal to litigate
    C. The Role of the Pre-Suit Investigation Committee
         1. The task and composition of the committee
         2. The work of the committee
         3. The role of the full board
    D. The Role of the Post-Filing or Zapata Committee
         1. Context and legal analysis
         2. The work of the committee
             a. The merits of the claim
             b. The injury to the corporation
             c. The costs of prosecution
             d. The effect on operations
             e. Cost-benefit analysis
             f. Knowledge and motivation of the directors
             g. The effect of remedial action
    E. Consequences and Pitfalls of Using the Committee Process
        1. ‘Structural bias’—skeptical views of the committee process
        2. Scope of the authority delegated to the special committee
        3. Uncovering wrongdoing during the investigation
        4. Waiver of the attorney-client privilege
    F. The Burden of Proof and Permissible Discovery on Motions to Dismiss by a Special Litigation Committee
    G. Discovery in Demand-Refused Cases

VII. Corporate Governance of the ‘Troubled’ Company 1
    . Introductory Material
    A. Duties of Directors of a Solvent Company
    B. Fiduciary Duties of Directors of a Financially Troubled Company
         1. Duty of loyalty: To stockholders or creditors?
              a. To whom are fiduciary duties owed?
                   (i). The roots of the ‘trust fund' doctrine and its application in New York
                   (ii). Delaware law and the trust fund doctrine
              b. The relevance of the ‘vicinity or zone of insolvency'
              c. Balancing competing interests of the various constituencies
         2. Determination of insolvency and vicinity of insolvency
              a. ‘Vicinity or zone of insolvency'
              b. ‘Insolvency in fact'
         3. The business judgment rule
         4. Exculpation
         5. The doctrine of ‘deepening insolvency'
    C. Governance in Bankruptcy
         1. Formulating the plan of reorganization
         2. Operating the debtor in possession
         3. Recovering the assets of the estate
    D. Fights for Control of a Bankrupt Company
         1. Proxy fights
         2. Takeover of a bankrupt company
    E. Restructuring Corporate Governance Pursuant to a Reorganization Planl

VII. Corporate Governance of the ‘Troubled’ Company 1
    . Introductory Material
    A. Duties of Directors of a Solvent Company
    B. Fiduciary Duties of Directors of a Financially Troubled Company
         1. Duty of loyalty: to stockholders or creditors?
              a. To whom are fiduciary duties owed?
                  (1). The roots of the ‘trust fund' doctrine and its application in New York
                  (2). Delaware law and the trust fund doctrine
              b. The relevance of the ‘vicinity or zone of insolvency'
              c. Balancing competing interests of the various constituencies
         2. Determination of insolvency and vicinity of insolvency
              a. ‘Vicinity or zone of insolvency'
              b. ‘Insolvency in fact'
         3. The business judgment rule
         4. Exculpation
         5. The doctrine of ‘deepening insolvency'
    C. Governance in Bankruptcy
         1. Formulating the plan of reorganization
         2. Operating the debtor in possession
         3. Recovering the assets of the estate
    D. Fights for Control of a Bankrupt Company
         1. Proxy fights
         2. Takeover of a bankrupt company
    E. Restructuring Corporate Governance Pursuant to a Reorganization Plan

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Portfolio 63-2nd: The Board of Directors

Wks. 1 Certificate of Incorporation

Wks. 2 Shareholders' Agreement to Organize Close Corporation

Wks. 3 Bylaw Provision Relating to Number of Directors and Quorum Requirements

Wks. 4 Bylaw Fixing Number of Directors

Wks. 5 Resolution Creating Compensation Committee

Wks. 6 Resolution Appointing Nominating Committee

Wks. 7 Resolution Appointing Executive Committee

Wks. 8 Resolution Appointing Independent Investigation Committee

Wks. 9 Resolution Delegating Authority to Litigation Committee

Wks. 10 General Motors Company Amended and Restated Bylaws

Wks. 11 Council of Institutional Investors' Corporate Governance Policies

Wks. 12 Excerpts from the California Public Employees' Retirement System Global Principles of Accountable Corporate Governance *

Wks. 13 Teachers Insurance and Annuity Association-College Retirement Equities Fund Policy Statement on Corporate Governance

Wks. 14 ABA Committee on Ethics and Professional Responsibility, Excerpts From Formal Opinion 410 (1998)

Wks. 14A Separating the Roles of Chief Executive Officer and Chairman of the Board

Wks. 14B Term Limits

Wks. 14C Mandatory Retirement of Directors

Wks. 14D Multiple Directorships

Wks. 15 Resolution Fixing Directors' Compensation

Wks. 16 Resolution Authorizing Indemnification of Director's Expenses After Settlement of Derivative Suit

Wks. 17 Notice of Regular Meeting of the Board of Directors

Wks. 18 Notice of Special Meeting of the Board of Directors

Wks. 19 Waiver of Notice of Special Meeting of the Board of Directors

Wks. 20 Minutes of Meeting of Directors

Wks. 21 Minutes of Meeting of Stockholders

Wks. 22 Consent of Directors of Corporation in Lieu of a Meeting

Wks. 23 Written Consent of Stockholders in Lieu of a Meeting

Wks. 24 Resolution Approving Appointment of Corporation's Outside Auditors for Stockholders' Approval

Wks. 25 Resolution Adopting Report of Committee and Sending Copy to Stockholders

Wks. 26 Resolution Declaring Cash Dividend

Wks. 27 Resolution Declaring a Stock Dividend

Wks. 28 State Statutes Relating to Director Liability

Wks. 29 Sample Proxy Statement Soliciting Approval of Director Limitation of Liability Charter Provision (Coca-Cola Co.)

Wks. 30 Sample Proxy Statement Soliciting Approval of Director Limitation of Liability and Indemnification Charter Provisions (Exxon Corp.)

Wks. 31 Survey of Board of Directors Evaluation Questionnaire

Wks. 32 Director Self/Peer Review EvaluationfBuy The Board of Directors (No. 63-2nd) now.

Mackenzie K. Phillips
Winston & Strawn LLP
Chicago, Illinois

Bruce A. Toth
Winston & Strawn LLP
Chicago, Illinois

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