Powers and Duties of Directors and Officers of a Corporation

Summer 2018 Article

Powers and Duties of Directors and Officers of a Corporation

In the event you decide to form a U.S. corporation, the equivalent of an Italian società per azioni, it is important to understand: 1) who are the key persons for a correct management of the corporation, and 2) what are their powers and duties. Please note that the purpose of this article is to give the reader a general overview of the organizational structure of a U.S. corporation and does not take into account the provisions of each state.

1.      Introduction.

Generally, a U.S. corporation is made up of three constituencies: stockholders, directors and officers. Stockholders are the owners of the corporation and, even though they appoint the directors (and the board of directors), they do not directly manage the corporation[1], which is delegated to directors and officers. The directors, acting through the board of directors (“board”), are responsible for the management of the corporation and take strategic decisions. And, the officers, appointed by the board of directors, are responsible for the day-to-day operations. Finally, in the event you decide to form a U.S. corporation, please keep in mind that U.S. law does not require directors and officers to be U.S. citizens or that they reside in the U.S.[2]

2.      Powers and duties of the board of directors.

Generally, a director cannot act individually to bind the corporation, unless authorized by the board. In other words, a director cannot sign agreements on behalf of the corporation; an officer may do so. Indeed, a corporation is bound only by actions taken by the board (as a whole) at a duly authorized meeting. At a minimum, the board should act at least annually and these actions can be taken by written consent of all the members of the board or by meeting. The board annual meetings are required for corporate compliance purposes and, generally, the board, by meeting in person or by unanimous written consent, approves the financial statements of the previous year, confirms or appoints the officers, and ratifies extraordinary transactions that took place in the prior year. Also, a corporation is required to hold annual meetings of the stockholders in order to confirm or appoint directors, approve the financial statements, and any major transactions that require the stockholder’s ratification. Finally, as mentioned above, the By-laws may allow decisions to be taken either at the meeting or by written consents of all members of the board and by all the stockholders.

That being said, the powers of the directors are provided by the law of the state where the corporation is formed, by the Articles of Incorporation, and the By-laws. In addition to the management of the corporation, the board may exercise the following powers:

a)      Appoint and remove the officers;

b)      Propose certain fundamental changes such as mergers, acquisitions, sale of the assets of the corporation, dissolution, and amendments to the articles of incorporation[3]; and

c)      Declare dividends and issue shares, or if other financing and capital changes should be made.

Furthermore, the directors, in order to comply with their fiduciary duties, have the right to access confidential documents, examine corporate books, and receive all other information reasonably necessary to carry out their duties and responsibilities.

3.      Powers and duties of the officers.

As mentioned in paragraph 1, the officers are responsible for the day-to-day business of the corporation and are appointed by the board, which gives them specific instruction on how to operate (certain powers and duties may be provided in the By-laws) and oversees their actions. The actions an officer can take, among others, are: i) execution of contracts; ii) supervision the employees; and iii) setting up bank account for the corporation.

Most states in the U.S. require a corporation to appoint at least three officers: a President, a Treasurer and a Secretary. Each of them has the following powers and duties:

A.    President: The President is an officer similar to the Italian Amministratore Delegato. The President has the authority to supervise and control the business and affairs of the corporation and has also the power to execute contracts and other corporate instruments. Please note that the board may impose limits on the powers of the President.

B.     Treasurer: has the custody of, and is responsible for, the funds and securities of the corporation. Generally, the Treasurer's responsibilities are: i) oversee and present budgets, accounts and financial statements of the corporation; ii) manage corporation's bank accounts and set up appropriate systems for book-keeping and record-keeping of the activities; and iii) ensure proper records of the assets and stock are kept, and ensure required insurances are in place.

C.     Secretary: is responsible for keeping the minutes of the proceedings of both the board and the shareholders. She is also responsible as custodian of the corporate records and of the corporate seal.

4.      Fiduciary Duties.

Directors and officers are held to certain fiduciary duties in order to prevent potential personal liabilities. These fiduciary duties are:

A. Duty of Care. The duty of care requires officers and directors to act in a manner that he or she reasonably believes to be in the best interests of the corporation.  Directors and officers must perform their duties and responsibilities in good faith and with a degree of care that an ordinarily prudent person in a similar position would use under the circumstances. The duty of care mainly requires directors and officers to: i) stay informed about the corporation and its business, and ii) make informed business and management decisions.

For example, directors have been found to have breached their duty of care when they take substantially no action to inform themselves about a major transaction such as a merger, or when they have ample notice of safety violations but fail to act on such notice. However, if the directors act in compliance with the duty of care, they may not be held liable for bad business decisions (so called, Business Judgment Rule).
 

B. Duty of Loyalty. The duty of loyalty that a director or officer owes to the corporation requires him or her to act in good faith and avoid personal and financial conflict with the corporation.  Specifically, corporate directors and officers must put the interests of the corporation before their own.  Directors and officers who believe in good faith that their actions are in the best interests of the corporation will generally satisfy the duty of loyalty.  Finally, all opportunities that may be of interest to the corporation must first be fully and fairly disclosed to the corporation and an officer or director may only pursue the opportunity in his or her personal capacity if the corporation rejects that opportunity.

5.      Limiting Liability; Indemnification and “Piercing the Corporate Veil”.

The Articles of Incorporation and the By-laws may contain provisions pursuant to which the corporation will limit its directors' and officers' liabilities for actions taken or omissions made in good faith while such director or officer was providing services to the corporation. Also, the corporation may decide to indemnify its directors or officers in certain circumstances, including the event the lawsuit is dismissed.

Corporations are separate and distinct entities from their owners. In fact, one of the advantages of incorporating a legal entity is that the corporation is a separate entity and as such its stockholders and people who run it cannot be held personally liable for the corporation’s debts. However, even though the directors and stockholders are generally protected from, and are not responsible for, the liability or debts of the corporation, a court could set aside the limited liability and hold them personally liable for the corporation’s actions or debts under the legal doctrine known as “piercing the corporate veil”. While the law varies by state, generally courts require corporations to engage in certain particular actions in order to justify piercing the corporate veil, including commingling corporation’s and personal’s assets or having undercapitalization at the time of incorporation.

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Requests for information or insights on the issue discussed in this article may be addressed to luca.molinari@vallalaw.com. This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between preparer and reader. You should not act on the information contained in this article without first seeking the advice of an attorney.


[1] The shareholders vote on major decisions such as mergers and acquisitions, sale of business unit.

[2] It is advisable that you consult your Italian CPA for esterovestizione issues in case directors and officers of the corporation are Italian citizens residing in Italy.

[3] Please note that these actions are subject to the stockholders' approval.