So how do you get rid of one or more of your corporation’s directors, when they no longer should be on your Board?
Likewise, how do you add another director?
Who does this?
How quickly can it be done?
What makes this legal?
What must be filed with my state?
We get these questions all the time. Here are the answers…
01 Board of Directors 101
The following definition comes from http://www.smallbiz.com/bizterms/Director:
02 What is a director?
A director or directors manage or direct the affairs of the corporation. Per state law, all regular corporations must have at least one director & most non-profit corporations must have three or more directors.
03 Where do directors come from?
When a corporation is first formed, the director(s) is/are usually named in the articles of incorporation. If not, the incorporator(s) can either appoint or hold a meeting to elect one or more directors. After this, the directors are elected by the shareholders,
The director(s) serve(s) a term of usually one year or more or until the next annual meeting of shareholders. The corporation’s bylaws describe the required number, term, authority, manner of election or removal and so on.
04 It’s a matter of timing
Filing an S Election must be done in a timely manner. This is because the IRS has set up strict guidelines for when the election can become effective and when you must apply. Essentially, you have 75 days from the election effective date to get your application (or S Election) into the IRS.
05 What do directors do?
Director(s) elect the officers of the corporation. At the initial directors meeting, director(s) elect the officers, adopt bylaws and authorize issuance of stock.
Typically, the directors make only major business decisions and monitor the activities of the corporate officers. Again, their authority is more defined in the corporation’s bylaws.
06 Getting Rid of Directors
So how do you get rid of a director? There’s an easy way and a hard way to do this. First the easy way…
They’re willing to go
Of course the easiest way to remove a director is to have them resign. This can be as easy as an email or a letter, which says, “Effective immediately, I resign my position on the Board of Directors for XYZ, Corporation…. Respectfully, [signature of Ex-Director]”
They’re unwilling to go
Let’s say you have a director that is digging in their heels and will not leave, or is viewed to be toxic to the rest of the board. This situation is more prickly, but easily solved by… the shareholders.
Each year, the shareholders get together mainly to vote on one thing: the directors. At this Annual Shareholder Meeting, you could have the shareholders resolve to “remove a director” and/or just vote on a different slate of directors, which doesn’t include the director you are removing.
What if you don’t want to wait for the annual shareholders meeting? Call a Special Shareholders Meeting. And there you can have the shareholders remove the board member.
Note: These actions are subject to your state’s rules (often called “Statutes”) and the corporation’s bylaws. Check both of these first before you take adverse action against one of your board members. In other words, do everything to get the director to resign first.
07 Adding Directors
As you did with removing one or more of your corporation’s board of directors, you can follow the same process to add board members: at annual shareholders meeting or at a special shareholders meeting.
Note: Again check on your state’s statutes and your corporation’s bylaws to see what (if any) limitations and/or requirements you must follow to do this correctly.
08 What Makes it Legal?
The process of formally removing and/or electing new directors by the shareholders is how this is done legally. But as with any corporate action, you’ll want to document this in your corporate minutes.
09 Making Other Changes To Board of Directors
Any other changes to the directors are done in the same fashion: this might include formally changing the name of record, if a director’s legal name had changed; adding or changing compensation for serving; changing the term of service of each board member (i.e., staggering the terms so that not all board members service expires at the same time).
10 What Must Be Filed With The State?
This is truly unique with each state. Some states do not require you to report this information, although most have some reporting requirements. So in general, you can report changes to your Board by…
Filing Your Annual Report
Most states have an annual reporting requirement, whereby each year you’ll pay a fee and report the most current information about your corporation, such as the company’s address, the registered agent, and the directors. Every state is different, in what is reported, when a report is due, how it is filed (many are online), and the annual fee.
So if your directors have changed, and your state has an annual reporting requirement, you’d wait to file your annual report, reporting what is the current situation at the time of the report. But what if the annual report filing date is several months away and you need to update your director information publicly before this?
This might actually happen because of a bank loan, or as part of an agreement to remove a director, or for some other reason. If the annual report is not due for a while, you could always file an Amended Annual Report. This usually involves filing the same report, as previous, but with different information. You’d also need to pay the state’s fee, though in some cases (i.e., California), there’s no cost or it is reduced to make a change.
So what if director information is not part of the annual report? Then your only option is…
Filing an Amendment to Articles of Incorporation
Assuming the initial directors were named in the articles of incorporation, you could file an amendment to the articles, changing the name(s) of the director(s). Again, this is a public reporting of a change that has already taken place. And with most states, this is NOT required because the named director(s) is/are “Initial Director(s).” These are the corporation’s 1st director(s) who are there until the first shareholder meeting, where a board is elected. So the state recognizes that the board of directors may change from time to time, and they certainly don’t expect you to file an amendment each and every time you make a change.
Finally, as a reminder, filing an amendment does not change the director(s) (that’s done at the annual shareholders meeting, special shareholders meeting and/or as described in the corporation’s bylaws). This filing only updates the public record.