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, CPA’s 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 director’s 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, CPA’s 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 D&O insurance and in fashioning indemnification provisions.