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Habitat Magazine October 2020 free digital issue

HABITAT

ARCHIVE ARTICLE

Removal of Directors

Removing directors is a serious problem for a board. The issue is complicated because often the corporation’s governing documents – its articles of incorporation, bylaws, and board resolutions – don’t properly address the issue, either because they’re too specific or, more commonly, because they lack direction.

You should have your lawyer review your bylaws on a regular basis for updates and improvements because one of the great problems with co-ops is that they often don’t address situations until they become problems. The removal of directors is an excellent example of how a little prevention will save you a lot of cure.

For example, one of my co-op clients chose to remove a director without consulting us. That resulted in a substantial lawsuit, which luckily avoided any serious consequences because the other side failed to plead damages and only tried to get the director back on the board. But given the board’s action, it could have been exposed to serious liability that would not have been covered by its directors-and-officers insurance because it was a specific act.

That said, removing directors is a right shareholders always have, and the board should remember that it serves at the pleasure of shareholders. After that, it really becomes an issue of what your governing documents state and what procedures you need to follow. Many of my clients have no language in their bylaws about removal. When they come to us to review their bylaws, one of the first things I always say is: “What do you do with a renegade board member?”

The problem that tends to be most acute is a board member who discloses confidential information to outside parties. It could concern shareholders or, in a case I have to deal with, one of the bidders on a very substantial contract. The bylaws did not have a provision for removing the director, so we had to rely on Section 706 of the Business Corporation Law, which governs the removal of directors. It’s not an efficient tool. You have to call a shareholders’ meeting, you have to have a quorum, and there has to be a vote.

Dealing with this issue preemptively will save you headaches. One of the things you have to consider is exactly who should have that power. If the board can remove directors, that can be problematic. You end up with a dicey situation in which a bare majority can, in essence, threaten the minority. Any removal provision by directors should include a supermajority of no less than two-thirds of the board. This way you’re sure that there is an honest and cohesive reason for removing a director, which is a serious act.

If you have a problematic director, I strongly advise you to speak to the co-op’s legal counsel, then have counsel review your documents and map out the procedure for you to follow. The normal procedure should be to generate a paper trail so you can show that the director is acting improperly. This serves as your grounds for terminating the directorship.

Second, you have to follow the notification provisions in your rules and regulations, as well as basic due process. In fairness, you cannot ambush the director. The director can’t show up at a meeting and have someone say, “Oh, by the way, we’re removing you tonight.” This item has to be on the agenda, and the director has to have time to appeal to the board and defend him or herself.

Even if it’s a foregone conclusion that the directors are going to vote this person off, he or she still has the right to speak. And vote. My advice is to let the board member vote, and at least express his or her point of view. If you have the majority required, the individual’s vote is irrelevant.

Again, proper prior planning prevents poor performance. Removing a director requires a thorough review of your governing documents and the law, and you have to build a case. It’s not a step to take lightly, but it’s often necessary when dealing with a renegade director.

Dean Roberts is a member of Norris McLaughlin.

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