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Corporations have three key positions:
Since the Board of Directors controls the appointing of the officers, the Board can also remove officers as deemed necessary, but must respect any employment contracts that may validly exist when doing so. However, how does the company change or alter the Board of Directors? The process by which directors are appointed and removed in the context of a private company is offered in this post.
In short, Delaware’s General Corporation Law (the “DGCL”) provides that shareholders are ultimately responsible for the appointment and removal of directors, through the mechanics and processes relating to the vote, and ordinarily set forth in the corporation’s by-laws.
The appointment and removal of one or more directors of a Delaware corporation is an internal corporate governance matter that does not require a filing with the Delaware Division of Corporations or a public disclosure of the change in Directors. A corporation must report the names and addresses of its directors to the State of Delaware on the corporation's Annual Report by March 1 of every year. This report is a snapshot as of that date, however, and need not show intra-year changes.
The DGCL requires that a change in directors be made only by obtaining a vote, or by the consent of shareholders holding more than fifty percent of the outstanding stock and entitled to vote on the matter under the Certificate of Incorporation. Neither a corporation’s Certificate of Incorporation nor its by-laws may take this fundamental power from shareholders. Attempts to vary the requirements or limit shareholders’ removal powers are generally invalid, although, as noted above, the mechanics and timing of any replacement vote may vary with the terms of the by-laws.
“A “staggered” or “classified” board is one instance in which removal by shareholders during a director’s term can be limited to “for cause” removal. A staggered board is a hostile takeover defense where directors’ terms do not end at the same time; instead, the terms expire over a period of years, a few directors at a time. Of course, the director must be re-elected or replaced by shareholders at the end of the director’s term, which, in the case of a staggered/classified board cannot exceed three years.”
Excepting the above, Delaware courts have consistently held that a corporation’s governing documents cannot increase the percentage vote required to remove a director, provide the directors with the ability to remove one of their peers, or, except in very limited circumstances, limit the shareholders’ discretion by requiring that any removal of a director be “for cause.”
Unless prohibited by its Certificate of Incorporation, a corporation is not traditionally required to call a meeting of shareholders and take a formal vote to remove a director. Calling a meeting and obtaining the necessary responses, as well as gathering shareholders enough to constitute a quorum to take action, can be difficult and unnecessary. Instead of a meeting, a corporate board can seek out the specific written consent for removal of a director from shareholders holding the sufficient majority of voting shares.
As noted above, however, a corporation’s Certificate of Incorporation can forbid action by written consent or may limit the types of actions that may be approved in such a manner. While not typical, this is worth considering. In any event, after an action is taken by written consent, the corporation must provide prompt notice of the action by written consent to those shareholders who did not consent or whose consent was not solicited.
This is a summary of the general rules and processes governing removal of directors. Corporations’ by-laws can vary greatly in terms of the details of taking a vote or obtaining written consent of shareholders. Anyone with specific questions regarding removal under specific terms of governing documents should consult an attorney for a full analysis of the situation.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such sourceâ€™s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.