Corporations are required to have a board of directors, which is selected by the shareholders. The board of directors helps govern the corporation, provides advice and counsel, conducts high-level management, elects officers, votes on key decisions, and protects shareholders' interests.
Corporate directors' service on the board may be subject to term limits, however, a director may decide to resign from the board before their term is over. While directors are generally free to step down at any time, a resignation may amount to a breach of fiduciary responsibilities under certain circumstances. In addition, director resignations must comply with state statutory notice requirements, as well as organizational documents like the corporate bylaws.
Why Directors Resign
Directors choose to resign for a variety of personal and professional reasons. The following are some of the most common reasons:
- The board is no longer a good professional fit
- The director is overcommitted and unable to serve the board to the best of their abilities
- Family issues
- The director disagrees with the company's direction
- The company is unwilling (or unable) to provide Directors & Officers (D&O) liability insurance
- Financial trouble at the company
- Corporate scandal
- The director has knowledge that the company is engaged in wrongdoing, including criminal conduct
Legal Considerations for a Director's Resignation
Harvard Business Review's “The President and the Board of Directors” notes that state corporation laws typically provide that the corporation “shall be managed by a board of at least three directors.” However, these statutes often do not clearly define the meaning of “shall be managed.” The corporate bylaws usually outline internal management policy as well as the policies and responsibilities of a company's directors, officers, and shareholders. Contracts or agreements that board members have signed may impose additional requirements.
Company Resignation Policies
Corporate bylaws may include a process for resigning. Bylaws usually contain a notice requirement stating how and when a director is allowed to step down. These bylaws may vary based on state corporate laws.
For example, under section 7224 of the California Corporate Code, a director can resign at any time and set the effective date and time of their resignation. The director remains in office and continues to carry out their duties until the resignation is effective. Directors may participate in the selection of a replacement if the selection takes place before the effective date of resignation.
Some corporate bylaws require the board to vote on and approve the resignation of a fellow board member. Bylaws might also require resigning board members to return board documents and property in a specified manner.
Resignation and Fiduciary Duties
Directors typically have the right to resign whenever they want. But when problems exist within the company, resigning could constitute a breach of fiduciary duty. Directors have a legal obligation to place the organization's interests above their own. Although a director may want to resign if they discover corporate malfeasance, doing so, as a matter of law, could be a violation of the director's fiduciary duty to stay on and help rectify the issue.
Delaware courts have ruled that a director who resigns from a troubled company could potentially face personal liability for corporate misconduct. This is not necessarily true in all cases and is largely determined by the facts and circumstances of the particular case.
Documents Needed for Resignation
An oral resignation is insufficient. A director should submit a written resignation letter that notes the effective date of their departure. The board will then need to formally accept the resignation at a board meeting. The formal acceptance should be documented in the meeting minutes.
When the director of a public company resigns, a Form 8-K must be filed with the Securities and Exchange Commission (SEC). An 8-K filing, known as a “current report,” must generally be filed within four business days of a departing director's notice of resignation.
Finally, the company should make sure it has a signed copy of the resigning director's indemnity agreement. Any lawsuit concerning the director's actions while on the board is covered by D&O insurance—even after a director leaves the board.
Our firm helps corporations navigate the complexities associated with developing board procedures and complying with state requirements. Call our office to schedule a time to speak with one of our experienced attorneys today.