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Dismissing a Member of a Corporate Board of Directors

Many types of disagreements can slowly surface between members of a corporate board of directors. Possible long-term conflicts can erupt regarding such issues as: the sale of certain assets, concerns about the CEO’s performance, whether large dividends should be declared – or even about ongoing shareholder demands. If these types of disagreements can’t be tactfully addressed, the board members may no longer be able to work effectively with one another.  When such conflicts escalate, it may be time to try and remove a truly obstinate board member. Should this person resist requests to simply resign, a company may try to do what American Apparel recently did when it forced out its founder, Dov Charney, who was still serving as the company’s chairman of the board of directors.                                   

According to one news report, Charney was told he was being “fired as president and chairman [and had just] 30 days [left] under the terms of [his] contract.” The company said it took this step following accusations of “alleged misconduct” by Charney.                              

The following list indicates some of the various ways companies can try to remove a troublesome member of its board of directors.

Possible Ways Directors Can Be Forced Out or Asked to Leave

  • Shareholders have the power to vote them out based on “cause.” Upon casting a majority vote, shareholders can always force director to leave “for cause.” This means their votes must be based on claims of gross incompetence, fraud or a serious breach of loyalty to the corporation;

  • Sometimes, a vote can still force a director to leave without cause. Depending on the provisions of a company's bylaws or corporate charter, it may be possible for shareholders to cast a majority vote to force a director to leave – even when there are no stated grounds for doing so;

  • A court can remove a director under certain circumstances. Most modern state statutes allow a court to remove a director if the corporation’s officers, shareholders or other directors have documented that the questionable director has displayed dishonest, fraudulent or seriously disloyal conduct;

  • Under the terms of the board member’s own contract. As already referenced above, this is apparently what took place in the case of Dov Charney, who had been running his Los Angeles-based company American Apparel. (Note: In general, the other directors cannot force one of their own to leave -- unless the company’s articles of incorporation or bylaws expressly state that a majority of the board can vote to do so).

A strong argument can be made that many highly creative men and women with strong personalities often find it difficult to get along smoothly when working within large corporations. (Even the computer guru Steve Jobs was once fired by Apple, for specific reasons only recently disclosed long after his death.)                                                                                          

Given the rather demanding tasks often required of corporate executives and board members, it’s often wise for all corporations to clearly state in their bylaws or articles of incorporation exactly how this type of powerful person can be removed from his/her position.

 

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia