Filling Vacancies/Removal of Directors

Discussion

Shareholder ability to remove directors, with or without cause, is prescribed by a state's business corporation law, an individual company's articles of incorporation, or its bylaws. The designation process begins with the state's business corporation law, which can-but is not required to-specify how companies within that state may remove directors. If the state law does not specify removal procedures, it is then left to the company to determine that process. If the company's bylaws do not specify terms for removal, it should be assumed that directors may be removed without cause. If removal of directors only for cause is specified either by the state or by the company, removal usually requires proof of self-dealing, fraud, or misappropriation of corporate assets. Removal without cause requires no such showing, which would allow shareholders to remove through a majority vote any director before his or her term expires.

Many companies have sought shareholder approval for charter or bylaw amendments that would prohibit the removal of directors except for cause, thus ensuring that directors would retain their directorship for their full term unless found (through due process) guilty of self-dealing, fraud, or misappropriation of company assets. By requiring that "cause" be demonstrated through due process, management insulates the directors from removal by shareholders even if the director has been performing poorly, not attending meetings, or not acting in the best interest of shareholders. Proposals that would provide that directors be removed only "for cause" are usually bundled with other antitakeover measures (such as classified board proposals) that are designed to thwart hostile takeover bids.

Bundled proposals often contain provisions specifying that if a board vacancy exists, only the continuing directors may appoint new directors to fill the vacancies. This would further insulate the board by allowing directors to fill a vacancy of a board member removed by shareholders. In a takeover situation, the effect of these proposals is to limit the rights of acquirers to fill positions of directors who have been removed or who have resigned. Shareholders should be able to remove directors with or without cause by a majority vote and should also have the ability to nominate their own director candidates to fill vacancies as they arise.