Q: An officer resigned from our corporation. Please let us know how to proceed.
Thank you to a client in California for that great question! In our client’s case, the officer voluntarily resigned, so the process of officially removing the officer from the corporation is fairly straightforward. The shareholders of the corporation will need to vote to amend the corporate bylaws, and the business will need to inform the state government of the change in officers on the annual report. Removing a corporate officer due to misconduct or poor performance typically requires you to prove “just cause” for removing the officer. We’ll explain how to remove a corporate officer in both situations.
Step 1. Consult your corporation’s bylaws
The first step is to consult your corporate bylaws and review your corporation’s policy for removing an officer. Bylaws are legally binding, so it’s important to follow your own corporate policies to avoid legal trouble down the road. You should also review the officer’s contract and your state’s corporation laws related to removing an officer.
Step 2. Submit charges to the corporate secretary
In most cases, one or more directors will submit written charges to remove an officer to the secretary of the corporation, but a shareholder can also submit charges. The written charges usually need to be accompanied by a petition signed by at least 5% of the corporation’s members. (Again, consult your corporate bylaws and state laws for the specific procedure to follow.)
Unless your bylaws and the officer’s contract state that the officer can be removed with or without cause, you will need to be able to prove in your written charges that you have just cause for removing the officer.
What is considered just cause for removing a corporate officer?
To prove just cause, you must demonstrate that the officer is not fulfilling his or her duty to act in good faith or to make prudent decisions for the corporation. Here are examples of actions that are considered just cause for removal:
- Misconduct
- Losing money for the business
- Neglecting responsibilities
- Bad business decisions
- Self-dealing (Acting in self-interest rather than in the interest of the business)
Step 3. Hold a vote
Next, the shareholders will need to vote to remove the officer. The vote can be held at a special meeting or a regularly scheduled board meeting. You should follow the voting procedures in your corporate bylaws.
Step 4. Inform the officer in writing
Next, you should inform the officer in writing that he or she is being removed. If just cause is needed, you should explain the cause of the removal and give the officer the opportunity to defend him or herself at a formal meeting, where the officer may be represented by legal counsel and call witnesses.
Step 5. Inform the Secretary of State (or equivalent)
This step won’t be necessary in all jurisdictions. Some states require you to report the names and addresses of your corporate officers, whereas others don’t. If your state does require this information, you will need to inform the government agency that formed your corporation (usually the Secretary of State’s office) that an officer has changed. The most common place to report this information is on your annual report.
Learn how to file an annual report in your state.
Step 6. Amend your corporate bylaws
You will also need to update your corporate bylaws and other internal records that contain information about your officers. Your bylaws should contain a policy for how they can be amended.