When Can a Court Remove a Director?team
A corporation’s shareholders elect its board of directors at shareholder meetings. Once selected, the directors make important decisions for the corporation. These decisions include the general direction of the business, appointing its corporate officers, and deciding corporate policy.
Directors are responsible for managing the company’s business and affairs. They are the trusted guiding hands and minds for what the corporation does. Directors are expected to act in good faith and in the corporation’s best interests.
Shareholders may lose confidence in a director or want to make a change in a company’s leadership for other reasons. The shareholders can usually remove a director by majority vote at a special meeting of shareholders, subject to the articles of the corporation, its by-laws, and any relevant terms of shareholder agreements.
What if a shareholder does not have enough votes to remove a director? If there is a “tie” or deadlock of votes what are the available options? What happens if the directors themselves who are causing problems for the corporation are the majority shareholders? If this sounds familiar, you should know that you can still ask a Court to grant an order to remove a director.
In this article, you will learn what duties a director owes to a corporation. When a Court may remove a director for breaching these duties or engaging in other misconduct. How to start a commercial lawsuit to remove directors. You will also learn how a commercial litigation lawyer can help.
What Duties Do Directors Owe to a Corporation?
Directors for Ontario and federally incorporated companies have 2 main statutory duties while managing a corporation’s business and affairs:
- Duty of Loyalty or Fiduciary Duty: A director must act honestly, in good faith and in the corporation’s best interests.
- Duty of Care: The corporate directors must exercise the diligence, care, and skill that a reasonable person would exercise in similar circumstances.
However, a director may owe other legal obligations to the corporation or its stakeholders depending on the unique facts in each case.
What Justifies a Director’s Removal from a Corporation?
When a director breaches their legal duties or obligations in a way that significantly impacts the rights of specific shareholders and/or the corporation’s best interests, complainants can commence legal proceedings with an application or a statement of claim to remove them.
A Court’s removal of a director is an extreme remedy available in extraordinary circumstances. The Court typically exercises its authority to remove directors as a last resort.
In most cases, shareholders seek the removal of a director when the director’s actions or omissions:
- Unreasonably and unduly affect a specific shareholder or group of shareholders
- Are contrary to the best interests of the corporation.
Some examples of misconduct warranting the director’s possible removal include but are not limited to:
- Disclosing a corporation’s confidential information;
- Failing to disclose a conflict of interest and acting on the conflict for personal gain;
- Opening a business competing with the corporation’s;
- Stealing, embezzling or otherwise personally benefiting from the corporation’s funds or assets;
- Abusing the office of director to engage in unlawful conduct, including fraud;
- Making unreasonable and negligent decisions that harm the corporation;
- Using majority shares in a corporation to maintain absolute control as director while engaging in behavior that would ordinarily result in a majority shareholder vote to remove them;
- Refusing to communicate with shareholders and comply with corporate statutes; and
- Unduly interfering with business operations in a way that harms the reasonable interests of the corporation’s shareholders or the corporation’s best interests overall.
Under the Business Judgement Rule, the Courts presume they have limited business expertise. Therefore, should not be involved in the governance of a corporation as much as possible. It’s unlikely that a Court will order a director’s removal if their actions and decisions in the circumstances were reasonable.
In a commercial lawsuit for an order to remove a director, the Court will likely evaluate the reasonableness of the director’s decision-making. This will be based on a variety of factors, including but not limited to:
- Whether the director acted independently and without a conflict of interest;
- Whether the director acted in good faith and on a reasonably informed basis;
- The information available to the director at the time; and
- Whether the director’s actions fell within a reasonable range of options for that specific time.
A shareholder or non-majority group of shareholders who are simply not happy with a director’s service or business-related choices should not resort to the Courts to do indirectly what they could not do directly through the normal election process.
A Court’s order to remove a director is meant to address situations where voting them out normally may not be possible. It is also the most just and reasonable remedy for oppression and/or for harm to the corporation’s best interests.
How to Sue for a Director’s Removal
A shareholder, group of shareholders, or other interested parties may bring legal action to remove a director. Most common are legal claims for shareholder oppression and derivative actions under the Ontario Business Corporations Act (“OBCA”) and the federal Canada Business Corporations Act (“CBCA”).
Oppression typically occurs when a party uses their corporate or shareholder power to oppress, unfairly prejudice, or unfairly disregard the interests of a shareholder, director, officer, or other interested party. This is an individual legal action you can bring if your reasonable interests as a complainant are uniquely violated by a director’s behavior.
A derivative action is taking legal action on behalf of a corporation, with explicit permission from the Court. In other words, it is a way for one or more persons acting in the best interests of the corporation, not their own reasonable interests as shareholders, to start a legal claim through the corporation for the removal of a director.
A claim for oppression and application for leave to commence a derivative action are both technical and complex. Even with leave, the complainant seeking removal of a director through a derivative action must still convince the Court on the corporation’s behalf the director’s conduct warrants their removal.
It may be confusing whether to pursue removal of a director through the oppression remedy or a derivative action. Every scenario is unique and what might violate the reasonable interests of a single shareholder or harm the corporation’s best interests is not always easy to determine.
Failure to plead the necessary facts, make the right legal arguments, and comply with a Court’s procedures in your commercial lawsuit can cause delay and lead to dismissal of the action.
How a Commercial Litigation Lawyer Can Help
Many corporations appoint a chief legal officer or general counsel to head their legal department. The CLO’s job description requires them to:
- Supervise the company’s in-house legal team
- Advise a company’s board of directors and
- Provide guidance to senior management regarding their legal obligations.
The CLO reports to the company’s chief executive officer and is responsible to its board of directors, but strictly acts as the corporation’s lawyer. A corporation’s CLO or lawyers usually cannot provide any specific directors or shareholders legal representation for internal corporate disputes due to a potential conflict of interest.
For this reason, an aggrieved person who seeks the removal of a company’s director through legal action should consult and retain an independent commercial litigation lawyer to represent their interests.
A commercial litigation lawyer can help you navigate the lawsuit against a director to maximize your chances of success for removing them. If you have a dispute with a director, it’s best to gather your documents and consult with a lawyer. They will explore your legal options and determine best practices moving forward.
Normally, a commercial litigation lawyer would recommend negotiation before commencing legal proceedings. In some cases, a lawyer can help you request a temporary order from the Court. This is done to prevent further misconduct against you as a shareholder and/or irreparable harm to the corporation pending the hearing of your legal claim to remove the director.
A commercial litigation lawyer knows the law and commercial litigation process. They can assist you in all stages of suing for the removal of a director, including conducting an initial assessment of your case, collecting evidence regarding the director’s misconduct, drafting pleadings, and representing you in Court.
Legal claims like oppression and derivative actions are ways to ask a Court to remove a director of a corporation. Courts will usually only remove directors as a remedy of last resort where no other relief could address the director’s acts or omissions resulting in oppression and/or harm to the corporation’s best interests.
While you can commence legal proceedings yourself, a commercial litigation lawyer can help you navigate the legal process and maximize your chances of success.
If you are a shareholder of a corporation and want to know more about removing corporate directors, our skilled, knowledgeable, and experienced corporate and commercial litigation lawyers at Achkar Law can help. Contact us by phone toll-free at +1 (800) 771-7882 or email us at [email protected], and we will be happy to assist.
If you are a small or medium-sized company looking for full-service support, check out our Chief Legal Officer (CLO) program page for our strategic solutions.