Today, I thought I’d write a few notes about the removal of sitting directors. The ability of a director to stay for the duration of his or her term is often important not only to directors, and executives under their direction, but also to shareholders, especially in a takeover context.
The General Rule
The general rule, under both Delaware law (DGCL section 141(k)), and the Model Business Corporation Act (MBCA section 8.08(a)), is that corporate directors may be removed with or without cause by a vote of the majority of the shareholders. Note that only shareholders, and not directors, can remove a director. In contrast, under UK law, directors can be removed by an ordinary resolution supported by a majority of the board.
A note on terminology: in discussions of director removal you will sometimes hear the word amotion, which is a term for shareholders’ power to remove a director during his or her term. Amotion can also be used as a verb: the shareholders elected to amote that director.
Exceptions to the Rule
Under the DGCL default rule, directors of a staggered board can only be removed for cause. A staggered board has different classes of directors that are elected in different years. Typically there are three classes of directors and each director has a three year term. From the company’s perspective a staggered board is beneficial because it provides protection from takeovers. A corporate raider would only be able to remove directors for cause, and absent cause, the raider would have to wait for three full years to be able to remove all of the sitting directors.
Both the DGCL and the MBCA provide that directors elected to a classified board can only be removed by the same set of directors that elected them. A classified board is one where the different classes of stock are entitled to elect different directors. Under the DGCL, directors of a classified board may only be removed for cause.
This isn’t so much of an exception, as it is a technicality, but both the DGCL and the MBCA provide that if a corporation allows for cumulative voting, the number of votes necessary to amote must be greater than the number of votes required to elect a director.
Recent Delaware Supreme Court Case on Removal of Directors
In February of 2011 the Delaware Supreme Court Airgas opinion upheld and strengthened the rule that directors of a staggered board can only be removed for cause. Specifically, the Airgas court found that a bylaw amendment which accelerated the corporation’s annual meeting to just four months after prior annual meeting was invalid because it impermissibly shortened the directors’ three year staggered terms, and because it amounted to a de facto removal without cause.