Key Takeaways

  • A company removal of a director for cause is a formal process grounded in the bylaws and state law.
  • Common causes for removal include breach of fiduciary duty, misconduct, or creating a dysfunctional board environment.
  • The removal process should include proper documentation, adherence to procedure, and legal consultation.
  • Shareholders often play a key role in approving removals, either alone or with board approval.
  • Companies must also follow state regulations and may need to update filings with the secretary of state.

A director removal for cause happens when the board and the shareholders of a corporation decide to remove a director from his or her position on the board of directors for a specific reason.

What Is a Board of Directors?

The board of directors is an essential part of any corporation. State laws require corporations to have a board and for that board to meet regularly to manage the business. A corporation's success relies heavily on a board of directors that truly acts in the best interest of a company and its employees and shareholders.

The shareholders elect the directors on a corporation's board to their positions. Their main role is ensuring that the corporation follows all the state and federal requirements to keep the business in a status of good standing. They should also keep the long-term goals of the business in mind through all decisions made.

A corporate board of directors manages requirements and demands from any of the following at any given moment:

  • Government agencies
  • Shareholders
  • Employees
  • Customers/clients
  • Suppliers
  • Lenders
  • Competitors.

Corporate structure calls for a few different levels of management in the company. The management of regular business activities falls to the officers, which include:

  • CEO (Chief Executive Officer)
  • COO (Chief Operations Officer)
  • CFO (Chief Financial Officer).

The chairman of the board is in charge of making sure all board operations run smoothly and maintaining healthy communication between all the members of management. Boards can form committees to handle particular projects for the business.

Why a Well-Functioning Board Is Important

Not only does a corporate board of directors need to act together, but it also must be effective. To be a well-functioning board, the directors need to maintain a healthy working environment. This means being open to:

  • Change
  • Different perspectives
  • New ideas.

They should be able to discuss various viewpoints and consider all their options.

Just because directors disagree, they don't need to argue. Disagreements can actually lead to fresh ideas and healthy compromises. Being able to discuss all sides of an issue before coming to a decision will lead to careful and thoughtful decision making, which is always a good thing.

Unfortunately, corporate boards do not always welcome new ideas or other perspectives. When the dynamics of a boardroom become unhealthy, the board cannot function well and conflict will ensue. A conflicting and dysfunctional board will cause its corporation to suffer.

When one director in particular is the cause of this negative business environment, it may be necessary to remove him or her from the position.

How to Handle the Removal of a Director

The shareholders of a corporation have voting power when it comes to managing the directors. A strong board of directors means a strong corporation, and a strong corporation benefits its shareholders. This means that it is in the best interest of the shareholders to take their voting rights seriously.

Removing a director from the board is a delicate process that should be spelled out clearly in the corporation's bylaws. These are the documents that govern the corporation's major business decisions and operations, such as an LLC's operating agreement.

Company Removal Process and Legal Considerations

When handling a company removal of a director, it is crucial to follow a structured legal process. Failure to do so can result in reputational damage or legal disputes, especially if the removed director challenges the decision. The removal process generally includes:

  1. Review the Corporation's Bylaws: These documents typically outline the process for removing a director for cause, including what constitutes "cause" and the necessary voting threshold.
  2. Document the Grounds for Removal: Clear documentation of the misconduct or breach is critical. This can include meeting minutes, written complaints, or formal warnings.
  3. Consult Legal Counsel: Because wrongful removal can lead to legal consequences, it’s wise to involve an attorney early in the process.
  4. Hold a Formal Vote: The bylaws or state law may require a shareholder vote, a board vote, or both. Quorum rules must be satisfied.
  5. Notify the Director and Update Records: The removed director should be notified in writing. Companies may need to file amendments with the Secretary of State or update corporate records.

In some jurisdictions, the removed director may have the right to object or appeal the removal. For example, if the company is being involuntarily dissolved or removed from the corporate register, other shareholders may also object to that company removal within a specific timeframe.

Reasons to Remove a Director

It is not uncommon for the board of directors of a corporation to have disagreements from time to time. Certain issues may come up with specific directors here and there. However, the decision to remove a director should be well-founded, as it is a big deal.

Some common reasons for director removal include:

  • Frequently missed board meetings or committee meetings.
  • Causing problems with the CEO or other executive officers by micromanaging or otherwise.
  • Disclosing confidential or sensitive information about the corporation to unauthorized persons.
  • Becoming involved with a competitor of the corporation.
  • Using the corporation for his or her own personal gain.
  • Violating the policies of the corporation by serving on another corporation's board of directors.
  • Taking part in illegal activities regarding the corporation's securities.
  • Violating the corporation's code of ethics or any other written agreements the business has among the directors.
  • Creating an unhealthy or dysfunctional boardroom through inappropriate behavior or disrespecting the other members of the corporation.

Basically, the removal of a director should only be done when absolutely necessary. However, the reasons for doing so are up to the corporation's other directors and shareholders. If a director has failed his or her fiduciary duty in some way, then he or she should be removed from the board.

How to Avoid Unjust Company Removal

While company removal of a director for cause may be necessary, improper removal can trigger lawsuits for defamation, breach of contract, or lack of due process. To minimize risk:

  • Ensure Cause Is Well-Defined: Use language from corporate documents and statutes to support the removal.
  • Maintain Transparency: Where possible, communicate concerns clearly and offer an opportunity for the director to respond.
  • Avoid Retaliatory Actions: Removal should never be based on whistleblowing, lawful dissent, or protected class status.
  • Follow All Procedures: Procedural missteps can void the removal and open the company to liability.

In some cases, the company may offer the director the option to resign voluntarily to avoid public proceedings. This can help preserve reputations while still addressing governance concerns.

Frequently Asked Questions

1. What does “removal for cause” mean in a company?It means removing a director due to misconduct, breach of duty, or actions that harm the company or violate its rules.

2. Who has the authority to remove a director?Generally, shareholders have the authority, often in coordination with the board of directors and as defined in the bylaws.

3. Can a company remove a director without cause?Yes, but removal without cause usually requires a different procedure and can be more legally sensitive, depending on state law and corporate documents.

4. What happens if a removed director objects?They may be able to challenge the removal in court, especially if due process wasn’t followed or if the reasons were not substantiated.

5. How does company removal differ from company dissolution?Company removal of a director refers to ousting a board member, while dissolution involves shutting down the entire company and deregistering it from the state.

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