Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/mbiz/busi4t.asc

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/* We continue with part 4 of 8 of the Model Business
Corporations Act. */

(2) a majority vote of a committee consisting of two or more
independent directors appointed by majority vote of independent
directors present at a meeting of the board of directors, whether
or not such independent directors constituted a quorum.

(c) None of the following shall by itself cause a director to be
considered not independent for purposes of this section:

(1) the nomination or election of the director by persons who are
defendants in the derivative proceeding or against whom action is
demanded;

(2) the naming of the director as a defendant in the derivative
proceeding or as a person against whom action is demanded or

(3) the approval by the director of the act being challenged in
the derivative proceeding or demand if the act resulted in no
personal benefit to the director.

(d) If a derivative proceeding is commenced after a determination
has been made rejecting a demand by a shareholder, the complaint
shall allege with particularity facts establishing either (1)
that a majority of the board of directors did not consist of
independent directors at the time the determination was made or
(2) that the requirements of subsection (a) have not been met.

(e) If a majority of the board of directors does not consist of
independent directors at the time the determination is made, the
corporation shall have the burden of proving that the
requirements of subsection (a) have been met.  If a majority of
the board of directors consists of independent directors at the
time the determination is made, the plaintiff shall have the
burden of proving that the requirements of subsection (a) have
not been met.

(f) The court may appoint a panel of one or more independent
persons upon motion by the corporation to make a determination
whether the maintenance of the derivative proceeding is in the
best interests of the corporation.  In such case, the plaintiff
shall have the burden of proving that the requirements of
subsection (a) have not been met.

/* Interestingly enough the Court is allowed to enforce democracy
within the corporation. */


Official Comment.

1. The Persons Making the Determination

Section 7.44(b) prescribes the persons by whom the determination
in subsection (a) may be made.  The subsection provides that the

determination may be made by a majority vote of independent
directors if there is a quorum of independent directors, or by a
committee of independent directors.  These provisions parallel
the mechanics for determining entitlement to indemnification in
section 8.55 of the Model Act except that clause (2) provides
that the committee of independent directors shall be appointed by
a vote of the independent directors only, rather than the entire
board. In this respect this clause is an exception to section
8.25 of the Model Act which requires the approval of at least a
majority of all the directors in office to create a committee and
appoint members.  This approach has been taken to respond to the
criticism expressed in a few cases that special litigation
committees suffer from a structural bias because of their
appointment by vote of non-independent directors. See Hasan v.
CleveTrust Realty Investors, 729 F.2d 372, 37677 (6th Cir.1984).

The decisions which have examined the qualifications of directors
making the determination have required that they be both
"disinterested" in the sense of not having a personal interest in
the transaction being challenged as opposed to a benefit which
devolves upon the corporation or all shareholders generally, and
"independent" in the sense of not being influenced in favor of
the defendants by reason of personal or other relationships.
See, e.g., Aronson v. Lewis, 473 A.2d 805, 812-16 (Del.1984).
Only the word "independent" has been used in section 7.44(b)
because it is believed that this word necessarily also includes
the requirement that a person have no interest in the
transaction.  The concept of an independent director is not
intended to be limited to non-officer or "outside" directors but
may in appropriate circumstances include directors who are also
officers.

Many of the special litigation committees involved in the
reported cases consisted of directors who were elected after the
alleged wrongful acts by the directors who were named as
defendants in the action.  Subsection (c)(1) makes it clear that
the participation of non-independent directors or shareholders in
the nomination or election of a new director shall not prevent
the new director from being considered independent. This sentence
therefore rejects the concept that the mere appointment of new
directors by the non-independent directors makes the new
directors not independent in making the necessary determination
because of an inherent structural bias.  Clauses (2) and (3) also
confirm the decisions by a number of courts that the mere fact
that a director has been named as a defendant or approved the
action being challenged does not cause the director to be
considered not independent.  See Aronson v. Lewis, 473 A.2d 805,
816 (Del.1984); Lewis v.  Graves. 701 F.2d 245 (2d Cir.1983).  It
is believed that a court will be able to assess any actual bias
in deciding whether the director is independent without any
presumption arising out of the method of the director's
appointment, the mere naming of the director as a defendant or
the director's approval of the act where the director received no
personal benefit from the transaction.

2. Standard to Be Applied

Section 7.44(a) requires that the determination be made by the
appropriate persons in good faith after conducting a reasonable
inquiry upon which their conclusions are based.  The word
"inquiry" rather than "investigation" has been used to make it
clear that the scope of the inquiry will depend upon the issues
raised and the knowledge of the group making the determination
with respect to the issues.  In some cases, the issues may be so
simple or the knowledge of the group so extensive that little
additional inquiry is required. In other cases, the group may
need to engage counsel and other professionals to make an
investigation and assist the group in its evaluation of the
issues.

The phrase "in good faith" modifies both the determination and
the inquiry.  The test, which is also included in sections 8.30
(general standards of conduct for directors) and 8.51 (authority
to indemnify), is a subjective one, meaning "honestly or in an
honest manner." The Corporate Director's Guidebook, 33 Bus.Law.
1595, 1601 (1978).  As stated in Abella v. Universal Leaf Tobacco
Co., 546 F.Supp. 795, 800 (E.D.Va.1982), "the inquiry intended by
this phrase goes to the spirit and sincerity with which the
investigation was conducted, rather than the reasonableness of
its procedures or basis for conclusions."

The phrase "upon which its conclusions are based" requires that
the inquiry and the conclusions follow logically. This provision
authorizes the court to examine the determination to ensure that
it has some support in the findings of the inquiry.  The burden
of convincing the court about this issue lies with whichever
party has the burden under section 7.44(e).  This phrase does not
require the persons making the determination to prepare a written
report that sets forth their determination and the bases
therefor, since circumstances will vary as to the need for such a
report. There may, however, be many instances where good
corporate practice will commend such a procedure.

Section 7.44 is not intended to modify the general standards of
conduct for directors set forth in section 8.30 of the Model Act,
but rather to make those standards somewhat more explicit in the
derivative proceeding context.  In this regard, the independent
directors making the determination would be entitled to rely on
information and reports from other persons in accordance with
section 8.30(b).

Section 7.44 is similar in several respects and differs in
certain other respects from the law as it has developed in
Delaware and been followed in a number of other states.  Under
the Delaware cases, the role of the court in reviewing the
board's determination varies depending upon whether the plaintiff
is in a demand required or demand excused situation.  Demand is
excused only if the plaintiff pleads particularized facts that
create a reasonable doubt that a majority of directors at the
time demand would be made are independent or disinterested, or
alternatively, that the challenged transaction was the product of
a valid exercise of business judgment by the approving board.
Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984); Pogostin v.
Rice, 480 A.2d 619, 624 (Del.1984). If the plaintiff fails to
make either of these two showings, demand is required. Since the
Aronson requirements are difficult to satisfy, the plaintiff
normally must make demand on the board.

In the unusual case where the plaintiff's demand is excused under
either of the Aronson tests, the plaintiff has standing to bring
the derivative suit. If the corporation seeks to reassert its
right to control the litigation. the corporation will form a
special litigation committee to determine if the litigation is in
the best interests of the corporation.  If the corporation files
a motion to dismiss the litigation based upon the recommendation
of the special committee, Delaware law requires the corporation
to bear the burden of proving the independence of the committee,
the reasonableness of its investigation, and the reasonableness
of the bases of its decision reflected in the motion. Zapata
Corp. v.  Maldonado, 430 A.2d 779 (Del.1981). Zapata also permits
the court a discretionary second step to review the special
committee's decision by invoking the court's "independent
business judgment." Id. at 789.

In the usual scenario where demand is not excused, the
shareholder must demand that the board take action and the Zapata
principles do not apply. The board or special committee of
independent directors decides whether the corporation should take
the action the shareholder requests or respond in some other way.
As in the case of all board decisions, the board's response to
the shareholder's demand is presumptively protected by the
traditional business judgment rule. Allison v.  General Motors
Corp., 604 F.Supp. 1106, 1122 (D.Del.1985). As a result, the
shareholder in filing suit bears the normal burden of creating by
particularized pleadings a reasonable doubt that the board's
response to the demand was wrongful.  Levine v. Smith, C.A. No.
8833, n. 5 (Del.Ch. Nov. 27, 1989) (available on LEXIS). The
plaintiff must allege with particularity a lack of good faith,
care, independence or disinterestedness by the directors in
responding to the demand.

In contrast to Delaware's approach, some jurisdictions have
adopted uniform tests to judge both demand required and demand
excused situations. For example, in New York judicial review is
always limited to an analysis of the independence and good faith
of the board or committee and the reasonableness of its
investigation; the court does not examine the reasonableness of
the bases for the board's decision, nor does the court have the
discretionary authority to use its independent business judgment.
Auerbach v. Bennett, 47 N.Y.2d 619, 63-34, 419 N.Y.S.2d 920
92-29, 393 N.E.2d 994, 10024)3 (1979). In contrast, the North
Carolina Supreme Court has interpreted that state's statutory
provisions on derivative actions as requiring the application of
the Zapata criteria in both demand required and demand excused
cases.  Alford v. Shaw, [320 N.C. 465], 358 S.E.2d 323, 327
(1987).

Since section 7.42 requires demand in all cases, the distinction
between demand excused and demand required cases does not apply.
Subsections (d) and (e) of section 7.44 carry forward the
distinction, however, by establishing pleading rules and
allocating the burden of proof depending on whether there is a
majority of independent directors. Subsection (d), like Delaware
law, assigns the plaintiff the threshold burden of alleging facts
establishing that a majority of the board is not independent.  If
there is an independent majority, the burden remains with the
plaintiff to plead and establish that the requirements of section
7.44(a) have not been met.  If there is no independent majority
the burden is on the corporation on the issues delineated in
section 7.44(a).  In this case, the corporation must prove both
the independence of the decisionmakers and the propriety of the
inquiry and determination.

Subsections (d) and (e) of section 7.44 thus follow the first
Aronson standard in allocating the burden of proof depending on
whether the majority of the board is independent. The Committee
decided, however, not to adopt the second Aronson standard for
excusing demand (and thus shifting the burden to the corporation)
based on whether the decision of the board that decided the
challenged transaction is protected by the business judgment
rule.  The Committee believes that the only appropriate concern
in the context of derivative litigation is whether the board
considering the demand has a disabling conflict.

See Starrels v. First Nat'l Bank, 870 F.2d 1168, 1172-76 (7th
Cir.1989) (Easterbrook, J., concurring).

Thus, the burden of proving that the requirements of 7.44(a) have
not been met will remain with the plaintiff in several
situations. First, in subsection )b)( 1), the burden of proof
will generally remain with the plaintiff since the subsection
requires a quorum of independent directors and a quorum is
normally a majority.  See 8.24.  The burden will also remain with
the plaintiff if there is a majority of independent directors
which appoints the committee under subsection (b)(2). Under
section 7.44(f), the burden of proof also remains with the
plaintiff in the case of a determination by a panel appointed by
the court.

The burden of proof will shift to the corporation, however, where
a majority of directors is not independent, and the determination
is made by the group specified in subsection (b)(2). It can be
argued that, if the directors making the determination under
subsection (b)(2) are independent and have been delegated full
responsibility for making the decision, the composition of the
entire board is irrelevant. This argument is buttressed by the
section's method of appointing the group specified in subsection
(b)(2) since subsection (b)(2) departs from the general method of
appointing committees and allows only independent directors,
rather than a majority of the entire board, to appoint the
committee which will make the determination.  Nevertheless,
despite the argument that the composition of the board is
irrelevant in these circumstances, the Committee adopted the
provisions of subsections (b)(2) and e) of section 7.44 to
respond to concerns of structural bias.

Finally, section 7.44 does not authorize the court to review the
reasonableness of the determination. As discussed above, the
phrase in section 7.44(a) "upon which its conclusions are based"
limits judicial review to whether the determination has some
support in the findings of the inquiry.

3. Pleading

Former section 7.40(b) provided that the complaint in a
derivative proceeding must allege with particularity whether
demand has been made on the board of directors and the board's
response or why demand was excused.  This requirement is similar
to rule 23.1 of the Federal Rules of Civil Procedure.  Since
demand is now required in all cases, this provision is no longer
necessary.

Subsection (d) sets forth a modified pleading rule to cover the
typical situation where plaintiff makes demand on the board, the
board rejects that demand. and the plaintiff commences an action.
In that scenario, in order to state a cause of action, subsection
(d) requires the complaint to allege facts with particularity
demonstrating either (1) that no majority of independent
directors exists or (2) why the determination does not meet the
standards in subsection (a).  Discovery is available to the
plaintiff only after the plaintiff has successfully stated a
cause of action by making either of these two showings.

7.45 Discontinuance or Settlement

A derivative proceeding may not be discontinued or settled
without the court's approval. If the court determines that a
proposed discontinuance or settlement will substantially affect
the interests of the corporation's shareholders or a class of
shareholders, the court shall direct that notice be given to the
shareholders affected.

Official Comment.

Unlike the statutes of some states, section 7.45 does not address
the issue of which party should bear the cost of giving this
notice. That is a matter left to the discretion of the court
reviewing the proposed settlement.

7.46 Payment of Expenses

On termination of the derivative proceeding the court may:

(1) order the corporation to pay the plaintiff's reasonable
expenses including counsel fees) incurred in the proceeding if it
finds that the proceeding has resulted in a substantial benefit
to the corporation;

(2) order the plaintiff to pay any defendant's reasonable
expenses (including counsel fees) incurred in defending the
proceeding if it finds that the proceeding was commenced or
maintained without reasonable cause or for an improper purpose;
or

(3) order a party to pay an opposing party's reasonable expenses
(including counsel fees) incurred because of the filing of a
pleading, motion or other paper, if it finds that the pleading,
motion or other paper was not well grounded in fact, after
reasonable inquiry, or warranted by existing law or a good faith
argument for the extension, modification or reversal of existing
law and was interposed for an improper purpose, such as to harass
or to cause unnecessary delay or needless increase in the cost of
litigation.

7.47 Applicability to Foreign Corporations

In any derivative proceeding in the right of a foreign
corporation, the matters covered by this subchapter shall be
governed by the laws of the jurisdiction of incorporation of the
foreign corporation except for sections 7.43, 7.45, and 7.46.

Chapter 8

DIRECTORS AND OFFICERS

Subchapter A

Board of Directors

8.01 Requirement for and Duties of Board of Directors

(a) Except as provided in subsection (c), each corporation must
have a board of directors.

(b) All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation
managed under the direction of, its board of directors, subject
to any limitation set forth in the articles of incorporation.

(c) A corporation having 50 or fewer shareholders may dispense
with or limit the authority of a board of directors by describing
in its articles of incorporation who will perform some or all of
the duties of a board of directors.

/* In extremely small corporations, it may make more sense for
the shareholders to run the corporation's affiars themselves. */

8.02 Qualifications of Directors

The articles of incorporation or bylaws may prescribe
qualifications for directors.  A director need not be a resident
of this state or a shareholder of the corporation unless the
articles of incorporation or bylaws so prescribe.


8.03 Number and Election of Directors

(a) A board of directors must consist of one or more individuals,
with the number specified in or fixed in accordance with the
articles of incorporation or bylaws.

(b) If a board of directors has power to fix or change the number
of directors, the board may increase or decrease by 30 percent or
less the number of directors last approved by the shareholders,
but only the shareholders may increase or decrease by more than
30 percent the number of directors last approved by the
shareholders.

(c) The articles of incorporation or bylaws may establish a
variable range for the size of the board of directors by fixing a
minimum and maximum number of directors.  If a variable range is
established, the number of directors may be fixed or changed from
time to time, within the minimum and maximum, by the shareholders
or the board of directors. After shares are issued, only the
shareholders may change the range for the size of the board or
change from a fixed to a variable-range size board or vice versa.

(d) Directors are elected at the first annual shareholders'
meeting and at each annual meeting thereafter unless their terms
are staggered under section 8.06.


8.04 Election of Directors by Certain Classes of Shareholders

If the articles of incorporation authorize dividing the shares
into classes, the articles may also authorize the election of all
or a specified number of directors by the holders of one or more
authorized classes of shares.  A class (or classes) of shares
entitled to elect one or more directors is a separate voting
group for purposes of the election of directors.

Official Comment

Section 8.04 makes explicit that the articles of incorporation
may provide that a specified number (or all) of the directors may
be elected by the holders of one or more classes of shares. This
approach is widely used in closely held corporations to effect an
agreed upon allocation of control, for example, to ensure
minority representation on the board of directors by issuing to
that minority a class of shares entitled to elect one or more
directors.  A class (or classes) of shares entitled to elect
separately one or more directors constitutes a separate voting
group for purposes of the election of directors; within each
voting group directors are elected by a plurality of votes and
quorum and voting requirements must be separately met by each
voting group. See sections 7.25, 7.26, and 7.28.


8.05 Terms of Directors Generally

(a) The terms of the initial directors of a corporation expire at
the first shareholders' meeting at which directors are elected.

(b) The terms of all other directors expire at the next annual
shareholders' meeting following their election unless their terms
are staggered under section 8.06.

(c) A decrease in the number of directors does not shorten an
incumbent director's term.

(d) The term of a director elected to fill a vacancy expires at
the next shareholders' meeting at which directors are elected.

(e) Despite the expiration of a director's term, he continues to
serve until his successor is elected and qualifies or until there
is a decrease in the number of directors.

8.06 Staggered Terms for Directors

If there are nine or more directors, the articles of
incorporation may provide for staggering their terms by dividing
the total number of directors into two or three groups, with each
group containing one half or one-third of the total, as near as
may be. In that event, the terms of directors in the first group
expire at the first annual shareholders' meeting after their
election, the terms of the second group expire at the second
annual shareholders' meeting after their election, and the terms
of the third group, if any, expire at the third annual
shareholders' meeting after their election.  At each annual
shareholders' meeting held thereafter, directors shall be chosen
for a term of two years or three years, as the case may be, to
succeed those whose terms expire.

8.07 Resignation of Directors

(a)  A director may resign at any time by delivering written
notice to the board of directors, its chairman, or to the
corporation.

(b) A resignation is effective when the notice is delivered
unless the notice specifies a later effective date.


8.08 Removal of Directors by Shareholders

(a) The shareholders may remove one or more directors with or
without cause unless the articles of incorporation provide that
directors may be removed only for cause.

(b) If a director is elected by a voting group of shareholders,
only the shareholders of that voting group may participate in the
vote to remove him.

(c) If cumulative voting is authorized, a director may not be
removed if the number of votes sufficient to elect him under
cumulative voting is voted against his removal. If cumulative
voting is not authorized, a director may be removed only if the
number of votes cast to remove him exceeds the number of votes
cast not to remove him.

(d) A director may be removed by the shareholders only at a
meeting called for the purpose of removing him and the meeting
notice must state that the purpose, or one of the purposes, of
the meeting is removal of the director.

8.09 Removal of Directors by Judicial Proceeding

(a) The [name or describe] court of the county where a
corporation's principal office (or, if none in this state, its
registered office) is located may remove a director of the
corporation from office in a proceeding commenced either by the
corporation or by its shareholders holding at least 10 percent of
the outstanding shares of any class if the court finds that (1)
the director engaged in fraudulent or dishonest conduct, or gross
abuse of authority or discretion, with respect to the corporation
and (2) removal is in the best interest of the corporation.

(b) The court that removes a director may bar the director from
reelection for a period prescribed by the court.

(c) If shareholders commence a proceeding under subsection (a),
they shall make the corporation a party defendant.

Official Comment

Section 8.09 authorizes the removal of a director who is found in
a judicial proceeding to have engaged in fraudulent or dishonest
conduct or gross abuse of office.  For example, a judicial
proceeding (as contrasted with removal under section 8.08) may be
necessary or appropriate in the following situations:

1) In a closely held corporation, the director charged with
misconduct is elected by voting group or cumulative voting, and
the shareholders with power to prevent his removal exercise that
power despite the existence of fraudulent or dishonest conduct.
The classic example is where the director charged with misconduct
himself possesses sufficient votes to prevent his own removal and
exercises his voting power to that end.

(2) In a publicly held corporation, the director charged with
misconduct declines to resign, though urged to do so, and because
of the large number of widely scattered shareholders, a special
shareholders' meeting can be held only after a period of delay
and at considerable expense.

A shareholder who owns less than 10 percent of the outstanding
shares of the corporation may bring suit derivatively in the name
of the corporation under this section upon compliance with the
requirements of section 7.40.  A shareholder who owns at least 10
percent of the outstanding shares of the corporation may maintain
suit in his own name and in his own right without compliance with
section 7.40. The corporation, however, must be made a party to
the proceeding.  See section 8.09(c).

The purpose of section 8.09 is to permit the prompt and efficient
elimination of dishonest directors. It is not intended to permit
judicial resolution of internal corporate struggles for control
except in those cases in which a court finds that the director
has been guilty of wrongful conduct of the type described.


8.10 Vacancy on Board

(a) Unless the articles of incorporation provide otherwise, if a
vacancy occurs on a board of directors, including a vacancy
resulting from an increase in the number of directors:

(1) the shareholders may fill the vacancy;

(2) the board of directors may fill the vacancy; or

(3) if the directors remaining in office constitute fewer than a
quorum of the board, they may fill the vacancy by the affirmative
vote of a majority of all the directors remaining in office.

(b) If the vacant office was held by a director elected by a
voting group of shareholders, only the holders of shares of that
voting group are entitled to vote to fill the vacancy if it is
filled by the shareholders.

(c) A vacancy that will occur at a specific later date (by reason
of a resignation effective at a later date under section 8.07(b)
or otherwise) may be filled before the vacancy occurs but the new
director may not take office until the vacancy occurs.

Official Comment

Section 8.10(a)(3) allows the directors remaining in office to
fill vacancies even though they are fewer than a quorum. The test
for the exercise of this power is whether the directors remaining
in office are fewer than a quorum, not whether the directors
seeking to act are fewer than a quorum. For example, on a board
of six directors where a quorum is four, if there are two
vacancies, they may not be filled under section 8.10(a)(3) at a
"meeting" attended by only three directors. Even though the three
directors are fewer than a quorum, section 8.10(a)(3) is not
applicable because the number of directors remaining in
office-four-is not fewer than a quorum.

8.11 Compensation of Directors

Unless the articles of incorporation or bylaws provide otherwise,
the board of directors may fix the compensation of directors.

Subchapter B

Meetings and Action of the Board

8.20 Meetings

(a) The board of directors may hold regular or special meetings
in or out of this state.

(b) Unless the articles of incorporation or bylaws provide
otherwise, the board of directors may permit any or all directors
to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which
all directors participating may simultaneously hear each other
during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.

8.21 Action Without Meeting

(a) Unless the articles of incorporation or bylaws provide
otherwise, action required or permitted by this Act to be taken
at a board of directors' meeting may be taken without a meeting
if the action is taken by all members of the board. The action
must be evidenced by one or more written consents describing the
action taken, signed by each director, and included in the
minutes or filed with the corporate records reflecting the action
taken.

(b) Action taken under this section is effective when the last
director signs the consent, unless the consent specifies a
different effective date.

(c) A consent signed under this section has the effect of a
meeting vote and may be described as such in any document.

Official Comment

The power of the board of directors to act unanimously without a
meeting is based on the pragmatic consideration that in many
situations a formal meeting is a waste of time.  For example, in
a closely held corporation there will often be informal
discussion by the manager-owners of the venture before a decision
is made. And, of course, if there is only a single director (as
is permitted by section 8.03), a written consent is the natural
method of signifying director action.  Consent may be signified
on one or more documents if desirable.

In publicly held corporations, formal meetings of the board of
directors may be appropriate for many actions. But there will
always be situations where prompt action is necessary and the
decision noncontroversial, so that approval without a formal
meeting may be appropriate.

Under section 8.21 the requirement of unanimous consent precludes
the possibility of stifling or ignoring opposing argument.  A
director opposed to an action that is proposed to be taken by
unanimous consent, or uncertain about the desirability of that
action, may compel the holding of a directors meeting to discuss
the matter simply by withholding his consent.


8.22 Notice of Meeting

(a) Unless the articles of incorporation or bylaws provide
otherwise, regular meetings of the board of directors may be held
without notice of the date, time, place, or purpose of the
meeting.

(b) Unless the articles of incorporation or bylaws provide for a
longer or shorter period, special meetings of the board of
directors must be preceded by at least two days' notice of the
date, time, and place of the meeting.  The notice need not
describe the purpose of the special meeting unless required by
the articles of incorporation or bylaws.

8.23 Waiver of Notice

(a) A director may waive any notice required by this Act, the
articles of incorporation, or bylaws before or after the date and
time stated in the notice.  Except as provided by subsection (b),
the waiver must be in writing, signed by the director entitled to
the notice, and filed with the minutes or corporate records.

(b) A director's attendance at or participation in a meeting
waives any required notice to him of the meeting unless the
director at the beginning of the meeting (or promptly upon his
arrival) objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to
action taken at the meeting.

8.24 Quorum and Voting

(a) Unless the articles of incorporation or bylaws require a
greater number, a quorum of a board of directors consists of:

(1) a majority of the fixed number of directors if the
corporation has a fixed board size; or

(2) a majority of the number of directors prescribed, or if no
number is prescribed the number in office immediately before the
meeting begins, if the corporation has a variable-range size
board.

(b) The articles of incorporation or bylaws may authorize a
quorum of a board of directors to consist of no fewer than
one-third of the fixed or prescribed number of directors
determined under subsection (a).

(c) If a quorum is present when a vote is taken, the affirmative
vote of a majority of directors present is the act of the board
of directors unless the articles of incorporation or bylaws
require the vote of a greater number of directors.

(d) A director who is present at a meeting of the board of
directors or a committee of the board of directors when corporate
action is taken is deemed to have assented to the action taken
unless: (1) he objects at the beginning of the meeting (or
promptly upon his arrival) to holding it or transacting business
at the meeting; (2) his dissent or abstention from the action
taken is entered in the minutes of the meeting; or (3) he
delivers written notice of his dissent or abstention to the
presiding officer of the meeting before its adjournment or to the
corporation immediately after adjournment of the meeting.  The
right of dissent or abstention is not available to a director who
votes in favor of the action taken.

8.25 Committees

(a) Unless the articles of incorporation or bylaws provide
otherwise, a board of directors may create one or more committees
and appoint members of the board of directors to serve on them.
Each committee must have two or more members, who serve at the
pleasure of the board of directors.

/* Modern larger corporations usually divide all major functions
between committees. In fact, the Fortune 500 usually even have a
committee which does most of the real work. Acutal operation of
the corporation will usually be delegated to an "operating
committee." */

(b) The creation of a committee and appointment of members to it
must be approved by the greater of (1) a majority of all the
directors in office when the action is taken or (2) the number of
directors required by the articles of incorporation or bylaws to
take action under section 8.24.

(c) Sections 8.20 through 8.24, which govern meetings, action
without meetings, notice and waiver of notice, and quorum and
voting requirements of the board of directors, apply to
committees and their members as well.

(d) To the extent specified by the board of directors or in the
articles of incorporation or bylaws, each committee may exercise
the authority of the board of directors under section 8.01.

(e) A committee may not, however:

(1) authorize distributions;

(2) approve or propose to shareholders action that this Act
requires be approved by shareholders;

(3) fill vacancies on the board of directors or on any of its
committees;

(4) amend articles of incorporation pursuant to section 10.02;

(5) adopt, amend, or repeal bylaws;

(6) approve a plan of merger not requiring shareholder approval;

(7) authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the board of
directors; or

(8) authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares,
except that the board of directors may authorize a committee (or
a senior executive officer of the corporation) to do so within
limits specifically prescribed by the board of directors.

(f) The creation of, delegation of authority to, or action by a
committee does not alone constitute compliance by a director with
the standards of conduct described in section 8.30.

Official Comment

Section 8.25 makes explicit the common law power of a board of
directors to act through committees of directors and specifies
the powers of the board of directors that are nondelegable, that
is, powers that only the full board of directors may exercise.
Section 8.25 deals only with committees of the board of directors
exercising the functions of the board of directors; the board of
directors or management, independently of section 8.25, may
establish nonboard committees composed of directors, employees,
or others to deal with corporate powers not required to be
exercised by the board of directors.

Section 8.25(b) provides that a committee of the board of
directors may be created only by the affirmative vote of a
majority of the board of directors then in office, or, if
greater, by the number of directors required to take action by
the articles of incorporation or the bylaws.  This supermajority
requirement reflects the importance of the decision to invest
board committees with power to act under section 8.25.

Committees of the board of directors are assuming increasingly
important roles in the governance of publicly held corporations.
See "The Corporate Director's Guidebook," 33 Bus.Law. 1591(1978);
"The Overview Committees of the Board of Directors," 35 Bus.Law.
1335 (1980). Executive committees have long provided guidance to
management between meetings of the full board of directors.
Audit committees also have a long history of performing essential
review and control functions on behalf of the board of directors.
In recent years nominating and compensation committees, composed
primarily or entirely of nonmanagement directors, have also
become more widely used by publicly held corporations.

Section 8.25 establishes the desirable and appropriate role of
director committees in light of competing considerations: on the
one hand, it seems clear that appropriate board committee action
is not only desirable but also is likely to improve the
functioning of larger and more diffuse boards of directors; on
the other hand, wholesale delegation of authority to a board
committee, to the point of abdication of director responsibility
as a board of directors, is manifestly inappropriate and
undesirable. Overbroad delegation also increases the potential,
where the board of directors is divided, for usurpation of basic
board functions by means of delegation to a committee dominated
by one faction.

Section 8.25(e) prohibits delegation of authority with respect to
most mergers, sales of substantially all the assets, amendments
to articles of incorporation and voluntary dissolution under
section 8.25(e)(2) since these require shareholder action. On the
other hand, under section 8.25(e) many actions of a material
nature, such as the authorization of long-term debt and capital
investment or the pricing of shares, may properly be made the
subject of committee delegation.

The statutes of several states make nondelegable certain powers
not listed in section 8.25(e) for example, the power to change
the principal corporate office, to appoint or remove officers, to
fix director compensation, or to remove agents. These are not
prohibited by section 8.25(e) since the whole board of directors
may reverse or rescind the committee action taken, if it should
wish to do so, without undue risk that implementation of the
committee action might be irrevocable or irreversible.

Section 8.25(f) makes clear that although the board of directors
may delegate to a committee the authority to take action, the
designation of the committee, the delegation of authority to it,
and action by the committee will not alone constitute compliance
by a noncommittee board member with his responsibility under
section 8.30. On the other hand, a noncommittee director also
will not automatically incur liability should the action of the
particular committee fail to meet the standard of care set out in
section 8.30. The noncommittee member's liability in these cases
will depend upon whether he failed to comply with section
8.30(b)(3).  Factors to be considered in this regard will include
the care used in the delegation to and supervision over the
committee, and the amount of knowledge regarding the particular
matter which the noncommittee director has available to him. Care
in delegation and supervision include appraisal of the
capabilities and diligence of the committee directors in light of
the subject and its relative importance and may be facilitated,
in the usual case, by review of minutes and receipt of other
reports concerning committee activities.  The enumeration of
these factors is intended to emphasize that directors may not
abdicate their responsibilities and secure exoneration from
liability simply by delegating authority to board committees.
Rather a director against whom liability is asserted based upon
acts of a committee of which he is not a member avoids liability
if the standards contained in section 8.30 are met.

Section 8.25(f) has no application to a member of the committee
itself. The standard applicable to a committee member is set
forth in section 8.30(a).

Subchapter C


Standards of Conduct


8.30 General Standards for Directors

(a) A director shall discharge his duties as a director,
including his duties as a member of a committee:

(1) in good faith;

(2) with the care an ordinarily prudent person in a like position
would exercise under similar circumstances; and

(3) in a manner he reasonably believes to be in the best
interests of the corporation.

(b) In discharging his duties a director is entitled to rely on
information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or
presented by:

(1) one or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the
matters presented;

(2) legal counsel, public accountants, or other persons as to
matters the director reasonably believes are within the person's
professional or expert competence; or

(3) a committee of the board of directors of which he is not a
member if the director reasonably believes the committee merits
confidence.

(c) A director is not acting in good faith if he has knowledge
concerning the matter in question that makes reliance otherwise
permitted by subsection (b) unwarranted.

(d) A director is not liable for any action taken as a director,
or any failure to take any action, if he performed the duties of
his office in compliance with this section.

Official Comment

Section 8.30 defines the general standard of conduct for
directors.  It sets forth the standard by focusing on the manner
in which the director performs his duties, not the correctness of
his decisions.  Section 8.30(a) thus requires a director to
perform his duties in good faith, with the care of an ordinarily
prudent person in a like position and in a manner he believes to
be in the best interests of the corporation.

Even before statutory formulations of directors' duty of care,
courts sometimes invoked the business judgment rule in
determining whether to impose liability in a particular case. In
doing so, courts have sometimes used language similar to the
standards set forth in section 8.30(a).  The elements of the
business judgment rule and the circumstances for its application
are continuing to be developed by the courts.  In view of that
continuing judicial development, section 8.30 does not try to
codify the business judgment rule or to delineate the
differences, if any, between that rule and the standards of
director conduct set forth in this section.  That is a task left
to the courts and possibly to later revisions of this Model Act.

I. Section 8.30(a)

Section 8.30(a) establishes a general standard of care for all
directors. It requires a director to exercise "the care an
ordinarily prudent person in a like position would exercise."
Some state statutes use the words "diligence," "care," and
"skill" to define this duty.  E.g., N.C.Gen.Stat.Ann. 55-35
(1975). There is very little authority as to what "skill" and
"diligence," as distinguished from "care," can be required or
properly expected of corporate directors in the performance of
their duties.  `Skill," in the sense of technical competence in a
particular field, should not be a qualification for the office of
director.  The concept of "diligence" is sufficiently subsumed
within the concept of "care." Accordingly, the words "diligence"
and "skill" were omitted from the standard adopted.

Likewise, section 8.30 does not use the term "fiduciary" in the
standard for directors' conduct, because that term could be
confused with the unique attributes and obligations of a
fiduciary imposed by the law of trusts, some of which are not
appropriate for directors of a corporation.

Several of the phrases chosen to define the general standard of
care in section 8.30(a) deserve specific mention.

(1) The reference to "ordinarily prudent person" embodies long
traditions of the common law, in contrast to suggested standards
that might call for some undefined degree of expertise, like
"ordinarily prudent businessman." The phrase recognizes the need
for innovation, essential to profit orientation, and focuses on
the basic director attributes of common sense, practical wisdom,
and informed judgment.

(2) The phrase "in a like position" recognizes that the "care"
under consideration is that which would be used by the
"ordinarily prudent person if he were a director of the
particular corporation.

(3) The combined phrase "in a like position under similar
circumstances is intended to recognize that (a) the nature and
extent of responsibilities will vary, depending upon such factors
as the size, complexity, urgency, and location of activities
carried on by the particular corporation, (b) decisions must be
made on the basis of the information known to the directors
without the benefit of hindsight, and (c) the special background,
qualifications, and management responsibilities of a particular
director may be relevant in evaluating his compliance with the
standard of care. Even though the quoted phrase takes into
account the special background, qualifications and management
responsibilities of a particular director. it does not excuse a
director lacking business experience or particular expertise from
exercising the common sense, practical wisdom, and informed
judgment of an "ordinarily prudent person.

The process by which a director informs himself will vary but the
duty of care requires every director to take steps to become
informed about the background facts and circumstances before
taking action on the matter at hand. In relying upon the
performance by management of delegated or assigned duties
pursuant to section 8.01 (including, for example, matters of law
and legal compliance), the director may depend upon the
presumption of regularity, absent knowledge or notice to the
contrary. A director may also rely on information, opinions,
reports, and statements prepared or presented by others as set
forth in section 8.30(b). Furthermore, a director should not be
expected to anticipate the problems which the corporation may
face except in those circumstances where something has occurred
to make it obvious to the director that the corporation should be
addressing a particular problem.

2. Section 8.30(b)

A director complying with the standards expressed in section
8.30(a) is entitled to rely upon information, opinions, reports
or statements, including financial statements and other financial
data, prepared or presented by the persons or committees
described in section 8.30(b). The right to rely under this
section applies to the entire range of matters for which the
board of directors is responsible.  Under section 8.30(c),
however, a director so relying must be without knowledge
concerning the matter in question that would cause his reliance
to be unwarranted.  Also inherent in the concept of good faith is
the requirement that, in order to be entitled to rely on a
report, statement, opinion, or other matter, the director must
have read the report or statement in question, or have been
present at a meeting at which it was orally presented, or have
taken other steps to become generally familiar with its contents.
In short, the director must comply with the general standard of
care of section 8.30(a) in making a judgment as to the
reliability and competence of the source of information upon
which he proposes to rely.

Section 8.30(b) permits reliance upon outside advisers, including
not only those in the professional disciplines customarily
supervised by state authorities, such as lawyers, accountants,
and engineers, but also those in other fields involving special
experience and skills, such as investment bankers, geologists,
management consultants, actuaries, and real estate appraisers.
The concept of "expert competence" in section 8.30(b)(2) embraces
a wide variety of qualifications and is not limited to the more
precise and narrower recognition of experts under the Securities
Act of 1933. In this respect section 8.30(b) goes beyond any
existing state business corporation act, although several state
statutes permit reliance on reports of appraisers selected with
reasonable care by the board of directors and deal with the scope
and nature of corporate reports and records generally.

Section 8.30(b) permits reliance upon a committee of the board of
directors when performing a supervisory or other functions in
instances where neither the full board of directors nor the
committee takes dispositive action. For example, there may be
reliance upon an investigation undertaken by a board committee
and reported to the full board of directors, which forms the
basis for action by the board of directors itself. Another
example is reliance upon a committee of the board of directors,
such as a corporate audit committee, with respect to the ongoing
role of oversight of the accounting and auditing functions of the
corporation.

In conditioning reliance upon reasonable belief that the board
committee merits the director's "confidence," section 8.30(b)(3)
recognizes a difference between a board committee and an expert.
In sections 8.30(b)(1) and (2) the reference is to "competence of
an expert," which recognizes the expectation of experience and in
most instances technical skills on the part of those upon whom
the director may rely.  In section 8.30(b)(3), the concept of
"confidence" is substituted for "competence" in order to avoid
any inference that technical skills are a prerequisite.


3. Section 8.30(c)

Section 8.30(c) expressly prevents a director from "hiding his
head in the sand" and relying on information, opinions, reports,
or statements when he has actual knowledge which makes reliance
unwarranted.


4. Section 8.30(d)

Section 8.30(d) makes clear that the section will apply whether
or not affirmative action was in fact taken. If the board of
directors or a committee considers an issue (such as a
recommendation of independent auditors concerning the
corporation's internal accounting controls) and determines not to
take action, the determination not to act is protected by section
8.30.  Similarly, if the board of directors or committee
delegates responsibility for handling a matter to subordinates,
the delegation constitutes "action" under section 8.30.  Section
8.30(d) applies (assuming its requirements are satisfied) to any
conscious consideration of matters involving the affairs of the
corporation.  It also applies to the determination by the board
of directors of which matters to address and which not to
address. Section 8.30(d) does not apply only when the director
has failed to consider taking action which under the
circumstances he is obliged to consider taking.


5. Application to Officers

Section 8.30 generally deals only with directors. Section 8.42
and its Official Comment explain the extent to which the
provisions of section 8.30 apply to officers.