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REMOVAL OF DIRECTORS

Removal of Directors

Oct 05, 2018

Dean M. Roberts, Member, Norris McLaughlin

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 any direction.

 

You should have your law firm review your bylaws on a regular basis for updates and improvements because one of the great problems with co-ops is they often don't address some 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.

 

Removal of Directors 

Any or all of the directors may be removed for cause by vote of the shareholders. The certificate of incorporation or the specific provisions of a bylaw adopted by the shareholders may provide for such removal by action of the board. (Business Corporation Law, Sec. 706)

 

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 back on the board. But given the board's action, they could have been exposed to serious problems that would not have been covered by their 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 they serve 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 be other 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. We therefore 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, there has to be a vote, you have to have a quorum.

 

Again, preemptively dealing with this issue will save you a great many 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 where a small majority can, in essence, threaten the minority. Any removal provision by directors should include a super-majority 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, have him review your documents, and have him map out the procedure for you to follow. The normal procedure should be to generate a paper trail so you can show what the director is doing that is improper. This serves as your grounds for terminating his 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. He can't show up at a meeting and have someone say, “Oh by the way, we’re removing you tonight.” It has to be on written notice that this item is 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 still has the right to speak. And vote. He has a conflict, but his vote won't matter. My advice is to let him vote so he or she can 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 is a serious matter. It 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.

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