Corporate leadershipi Board structure and practices
The board of directors must consist of at least one member, and all members must be natural persons.Term of office
Under Section 141(b) of the DGCL, each director holds office until the director's successor is elected and qualified, or until the director's earlier resignation or removal. Typically, the term of each director is one year unless the board has been structured as classified. Pursuant to Section 141(d) of the DGCL, the certificate of incorporation, the initial by-laws of the company or a by-law adopted by the shareholders may divide the board into a maximum of three classes of directors who serve staggered terms. If three classes of directors are created, then only one class of directors stands for election each year.Qualifications
The DGCL does not specify any qualifications for directors other than that they be natural persons. However, pursuant to Section 141(b) of the DGCL and the common law, the certificate of incorporation and by-laws may prescribe reasonable director qualifications. The Delaware courts are likely to enforce qualifications that are reasonably related to the corporation's business. Valid qualifications might include a minimum ownership requirement or experience in a certain field of business.Board action
Directors act collectively, and all directors possess equivalent voting rights unless the certificate of incorporation otherwise provides. Any action may be taken by vote of a majority of the directors present at a meeting at which a quorum is present unless the certificate of incorporation or by-laws provide for a supermajority vote. Unless directors are restricted by the certificate of incorporation or by-laws, directors may act without a meeting by unanimous written or electronic consent, including email transmissions.Committees
Certain managerial duties may be delegated by the board of directors to committees of the board consisting of one or more directors. Generally, a properly constituted board committee may exercise the full powers of the board of directors in the management of the business and affairs of the corporation with two significant exceptions:
- a board committee cannot approve, adopt or recommend to shareholders any action or matter expressly required by the DGCL to be submitted to shareholders for a vote (other than the election or removal of directors); and
- a board committee cannot adopt, amend or repeal any by-law.
Advisory committees of the corporation may include members who are not directors, but any such committee's function must be purely advisory in nature.Officers
Corporations must have such officers as established by the by-laws or by resolution of the board of directors. A court will generally uphold a delegation of authority to officers by a corporation's board of directors unless the delegation is of a task specifically assigned by the DGCL to the board. However, if the delegation conflicts with some overriding public policy or provision of a corporation's certificate of incorporation, it will not be upheld. Unauthorised acts of officers may be validated by ratification by the board of directors unless the acts are beyond the authority of the corporation.Compensation
The board of directors may fix director compensation in the absence of restrictions in the certificate of incorporation or by-laws. The directors' self-interested decision will be entitled to the protection afforded by the business judgement rule if the compensation plan has been approved by the corporation's shareholders and contains well-defined, specific limits on potential self-dealing. Otherwise, if challenged, the board will have to show that the compensation arrangements are fair to the corporation by demonstrating that services of value are actually being rendered, and that the level of compensation for these services is similar to either industry standards or compensation at corporations of similar size and profitability. Shareholders' approval may not guarantee judicial deference to business judgement when the shareholders only approve an upper limit and the directors are given discretion to determine compensation up to that limit. The board should also approve the compensation of executive officers of the corporation. As a matter of customary practice, most corporations delegate the responsibility for fixing executive compensation to outside directors. At a minimum, directors do not participate in the discussion of, or vote upon, their own compensation as officers or employees to minimise the appearance of self-dealing. Executive compensation decisions made by disinterested directors are generally upheld in the absence of waste.Takeover practice
The responsibility for responding to takeovers is generally held to reside with the board of directors pursuant to the managerial authority provided in Section 141(a) of the DGCL. The board of directors has a fiduciary responsibility to advance the best interests of the corporation's shareholders in responding to takeovers.ii DirectorsFiduciary duties
All directors of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation and its shareholders. The courts have also recognised that directors have fiduciary duties of disclosure and good faith, which are not separate duties, but rather specific applications of the fiduciary duties of care and loyalty. These duties are owed by all directors to the corporation and shareholder body as a whole without regard to whether any director is an inside or outside director or was elected by a particular class of shareholders.Duty of care
The duty of care requires that directors inform themselves using all material information reasonably available to them before making a business decision. This duty extends to the board's delegation functions. However, directors are not expected to oversee every detail of day-to-day corporate activities, and may rely in good faith upon the records of the corporation and upon information, reports, opinions and statements of corporate officers and employees.Duty of loyalty
Directors also owe a duty of loyalty to the corporation. The duty of loyalty mandates that a director cannot consider or represent interests other than the best interests of the corporation and its shareholders in making a business decision. Where a director has an interest in a decision that is different from or in addition to the interests of the corporation and shareholders generally, the director is said to be an interested director. Interested directors should disclose the interest to the other members of the board and, if the interest is material, consider abstaining from any board vote on the matter.
The duty of loyalty also encompasses cases where the director fails to act in good faith. Bad faith may be shown where the director's conduct is motivated by an actual intent to do harm, or where the director intentionally acts with a purpose other than that of advancing the best interests of the corporation or with the intent to violate applicable law. Bad faith is also demonstrated where the director intentionally fails to act in the face of a known duty to act, thereby demonstrating a conscious disregard for his or her duties.Liability of directors
Directors may be found to be personally liable for monetary damages if they breach their fiduciary duties of loyalty and care. Directors may be exculpated from paying monetary damages for liability arising from breach of the fiduciary duty of care if the corporation's certificate of incorporation contains an exculpatory provision authorised by Section 102(b)(7) of the DGCL. Whether a director will be found liable for breach of fiduciary duty depends largely on the standard of review applicable to the challenged action or decision of the director. However, the Delaware Supreme Court recently clarified that regardless of what standard of review applies, a plaintiff seeking only monetary damages against a director protected by an exculpatory provision must plead claims for breach of the duty of loyalty to survive a motion to dismiss.Standards of review
Delaware has three standards of review for evaluating director decision-making: the business judgement rule, entire fairness and intermediate scrutiny.The business judgement rule
The business judgement rule is the default standard of review. In general, the business judgement rule is a presumption that, in making a business decision on behalf of the corporation, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. When a court finds that the business judgement rule applies, the business decisions of disinterested directors will not be disturbed if they can be attributed to any rational business purpose.Entire fairness
If the business judgement rule's presumption is rebutted, the burden generally shifts to the defendant directors to show the entire fairness of the transaction. The entire fairness standard is the most exacting standard of review applied by Delaware courts when reviewing a challenged transaction and has two elements: fair price and fair dealing. Fair price relates to the economic and financial considerations of a transaction. Fair dealing requires a review of when the transaction was timed, how it was initiated, structured, negotiated and disclosed to the directors, and how the approvals of the directors and the shareholders were obtained.Intermediate scrutinyUnocal
A Delaware court will apply an intermediate level of scrutiny in reviewing a board's responses to takeovers that are defensive in nature under the Unocal enhanced scrutiny test. If this test applies, directors must show that they had 'reasonable grounds for believing that a danger to corporate policy and effectiveness existed' and that their action was 'reasonable in relation to the threat posed'. If the defensive action was neither preclusive nor coercive, the court will determine whether the directors have met their burden of showing that the response was within a range of reasonableness considering the threat posed.Revlon
Intermediate scrutiny will also be applied to review a board's actions in the context of transactions involving a change in control or a break-up of the corporation under Revlon. To meet this standard, the directors must focus on one primary objective – to secure the best value reasonably available for the shareholders. The Delaware courts have recognised that there is no single blueprint to follow in reaching the ultimate goal of maximising shareholder value. Thus, under Revlon, directors are generally free to select the path to value maximisation so long as they choose a reasonable route. For example, in C&J Energy Services, Inc. v. City of Miami General Employees, the Delaware Supreme Court reversed a Chancery Court decision that held that a board must conduct a pre-signing active solicitation process to satisfy its duties under Revlon. The Court found that so long as any bidder interested in paying more for the target company had a reasonable opportunity to do so, the company was not required to actively shop itself.Procedural protections may modify the standard of review
In certain situations, the use of specific procedural protections will warrant the application of a more deferential standard of review. For example, transactions involving a conflicted controlling shareholder are generally subject to entire fairness. However, the business judgement standard of review will apply to such a transaction if, and only if, the transaction is conditioned on the approval of both an independent special committee of the board and a minority shareholder vote, and:
- the special committee is empowered to freely select its own advisers and to say no definitively;
- the special committee meets its duty of care in negotiating a fair price;
- the vote of the minority is informed; and
- there is no coercion of the minority.
Additionally, the business judgement standard of review will irrebuttably apply to a post-closing challenge of a transaction generally subject to enhanced scrutiny if a majority of disinterested, uncoerced and fully informed shareholders approved the transaction. Similarly, a transaction that involves a conflicted board of directors that would generally be subject to entire fairness will be subject to the irrebuttable application of the business judgement standard of review if a majority of disinterested, uncoerced and fully informed shareholders approved the transaction. If the challenged transaction involves a conflicted controlling shareholder, however, the shareholder vote will not result in the irrebuttable application of the business judgement standard of review. In transactions involving a conflicted controlling shareholder, the shareholder vote will merely shift the burden of persuasion from the controlling shareholder to the minority shareholders.Indemnification
Under Section 145 of the DGCL, a director may be indemnified for expenses incurred in defending derivative claims, and for expenses, judgements, fines and amounts paid in settlement incurred in connection with defending direct actions. However, if the director has been successful on the merits or otherwise in the defence of the proceeding, he or she is entitled to mandatory indemnification for expenses actually and reasonably incurred. To be indemnified in criminal actions or proceedings, the director must also have had no reason to believe that the challenged conduct was unlawful. Advancement of expenses to a director prior to the final disposition is also permitted if the director executes an undertaking to repay the monies advanced if it is ultimately determined that he or she is not entitled to indemnification. These rights cannot be eliminated by a corporation after a director's period of service ends unless the individual knows at the time he or she chooses to serve that his or her rights will terminate or can be eliminated at a later time. Notably, indemnification and advancement rights apply only where the director has been sued 'by reason of the fact' that the director is or was a director of the corporation. This standard cannot be modified by contract.Election of directors
An annual meeting of shareholders of a Delaware corporation is mandated to elect directors. To permit an orderly period of solicitation of shareholder nominations prior to a meeting, many corporations have adopted provisions in their certificates of incorporation or by-laws to provide for advance notice of the nomination of directors by shareholders. Such provisions typically require that the shareholder making the nomination be a shareholder of record. The nominating shareholder must also submit specific information within a specified window to the corporation about himself or herself; the beneficial owner, if any, on whose behalf the nomination is being made; and about each of his or her director nominees. The information required typically includes all information about the nominee that would be required to be disclosed under federal securities laws and whether the nominating shareholder or the beneficial owner, if any, intends to solicit proxies from other shareholders. By-law provisions requiring advance notice of nominations have been found inequitable in specific factual circumstances.