Question 1

What fiduciary duties do directors and officers owe to the company?

Accepted Answer

Directors and officers owe fiduciary duties of care and loyalty to the corporation. The duty of care requires making informed decisions after reasonable inquiry and deliberation. The duty of loyalty requires acting in good faith in the corporation's best interests, avoiding self-dealing and conflicts of interest. Officers and directors must not usurp corporate opportunities for personal gain. Breach of these duties can result in personal liability. The business judgment rule generally protects decisions made in good faith, with reasonable care, and without conflicts of interest, even if the decision ultimately proves unsuccessful.

Question 2

How can a company protect its directors from personal liability?

Accepted Answer

Several mechanisms protect directors from personal liability. Corporate bylaws can include indemnification provisions requiring the company to cover defense costs and judgments. Directors and Officers (D&O) insurance provides additional protection for claims the company cannot or will not indemnify. Many states permit charter provisions eliminating director liability for monetary damages in certain breach of duty claims. Following proper governance procedures, documenting decisions, and seeking legal advice on significant matters also reduces liability risk. However, no protection covers intentional misconduct, bad faith, or knowing violations of law.

Question 3

What securities laws apply when raising capital for a business?

Accepted Answer

Both federal and state securities laws regulate capital raising. The Securities Act of 1933 requires registration of securities offerings unless an exemption applies. Common exemptions include Regulation D private placements, Regulation A offerings, and crowdfunding under Regulation CF. State 'blue sky' laws impose additional requirements. Securities laws prohibit fraud and require disclosure of material information to investors. Violations can result in SEC enforcement, state actions, and private lawsuits by investors. Working with experienced counsel ensures compliance and proper documentation of exemptions.

Question 4

What constitutes insider trading and how can I avoid violations?

Accepted Answer

Insider trading involves buying or selling securities based on material, nonpublic information in breach of a duty of trust or confidence. This includes trading by corporate insiders with access to confidential information, as well as 'tipping' information to others who then trade. Companies should implement insider trading policies, establish trading windows, require pre-clearance for insider trades, and provide regular compliance training. Penalties for violations are severe, including civil penalties, disgorgement of profits, and criminal prosecution. When in doubt about whether information is material or public, refrain from trading and seek legal counsel.

Question 5

What governance best practices should a company's board follow?

Accepted Answer

Effective boards establish clear processes for decision-making, information flow, and oversight. Best practices include regular meetings with proper notice and minutes, diverse board composition with relevant expertise, independent directors, functioning committees (audit, compensation, governance), robust conflict of interest policies, regular executive sessions without management, annual board and committee evaluations, and ongoing director education. The board should receive timely, accurate information from management and have access to independent advisors when needed. Documentation of deliberations and decisions protects against later challenges.

Question 6

What are the disclosure requirements for public companies?

Accepted Answer

Public companies must file periodic reports with the SEC including annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports for significant events (Form 8-K). These filings require disclosure of financial statements, risk factors, management discussion, executive compensation, related party transactions, and other material information. Companies must also comply with proxy rules for shareholder meetings and beneficial ownership reporting requirements. SOX requires CEO/CFO certifications of financial statements and disclosure controls. Failure to make accurate, timely disclosures can result in SEC enforcement, delisting, and shareholder litigation.

Question 7

How should a board handle a conflict of interest situation?

Accepted Answer

When conflicts arise, the conflicted director should promptly disclose the conflict fully to the board. The conflicted director should recuse themselves from deliberations and voting on the matter. The remaining directors should carefully evaluate the transaction, considering whether it's fair to the company and on terms comparable to arm's length deals. Document the disclosure, recusal, and independent deliberation process thoroughly. For significant transactions with insiders, consider obtaining independent valuations, forming a special committee of disinterested directors, or seeking shareholder approval. Proper process provides protection if the transaction is later challenged.

Corporate Law, Governance, and Securities Law

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