how to remove a director from a corporation
Date: October 12, 2024

How to Remove a Director from a Corporation

In any corporation, directors hold a crucial role in steering the business. Elected by shareholders, they are responsible for managing the company’s affairs, setting its general direction, appointing corporate officers, and making critical business decisions. However, there may be situations where shareholders lose confidence in a director’s leadership or wish to make changes in the company’s governance. When this happens, removing a director becomes an option.

In this article, we will outline the steps involved in removing a director from a corporation, explain the circumstances that justify such removal, and offer insights into how a business litigation lawyer can help in this process.

Duties of a Director

Directors of corporations in Ontario and across Canada have two primary statutory duties:

  1. Fiduciary Duty: Directors must act honestly, in good faith, and the best interests of the corporation.
  2. Duty of Care: Directors must exercise the diligence, care, and skill that a reasonably prudent person would in similar circumstances.

Directors are expected to make decisions that benefit the corporation as a whole, and a failure to fulfill these duties can lead to legal consequences, including removal from their position.

How Can a Director Be Removed?

Shareholders typically have the right to remove directors by passing a resolution at a shareholder meeting. This process generally requires a majority vote, but the corporation’s articles of incorporation, by-laws, or shareholder agreements may impose specific conditions or higher thresholds.

When shareholders cannot secure the votes needed for removal, or if the director in question holds majority shares or is entrenched in the leadership structure, shareholders may seek court intervention.

When Can a Director Be Removed by Court Order?

While shareholders may vote to remove a director, there are cases where a court order is necessary. Courts treat the removal of a director as an extraordinary remedy, typically used when there is significant misconduct or a breach of fiduciary duty. Some reasons for court-ordered removal include:

  • Misuse of confidential corporate information.
  • Failing to disclose or acting on conflicts of interest.
  • Fraud, embezzlement, or misappropriation of company assets.
  • Engaging in competing business ventures without permission.
  • Abuse of director powers, such as controlling shareholder votes to remain in office while acting against the company’s interests.
  • Unreasonable interference with business operations or failure to comply with corporate governance laws.

Under these circumstances, shareholders can file a claim in court to remove the director if their actions have harmed the corporation or specific shareholders.

Legal Remedies to Remove a Director

Shareholders can pursue legal actions to remove a director using the oppression remedy or by seeking permission from the court for a derivative action under the Ontario Business Corporations Act (OBCA) or the Canada Business Corporations Act (CBCA).

  1. Oppression Remedy: This action is brought by a shareholder who believes their interests have been unfairly disregarded, prejudiced, or oppressed by the director’s conduct. The shareholder must demonstrate that the director’s actions have caused harm or violated their reasonable expectations.
  2. Derivative Action: In a derivative action, a shareholder seeks to bring a lawsuit on behalf of the corporation to remove the director. This action is generally pursued when the director’s misconduct has harmed the corporation as a whole, and the corporation itself is unlikely to take action.

Both remedies are complex and require detailed legal arguments. The success of these claims hinges on the ability to show how the director’s misconduct violates corporate statutes or their legal duties to the corporation.

Steps to Remove a Director Through Legal Action

If shareholders or interested parties wish to pursue legal action to remove a director, several steps must be followed:

  1. Consult a Business Litigation Lawyer: Given the legal complexities, it is essential to consult a business litigation lawyer who can assess the case and recommend the most appropriate legal remedy.
  2. File Legal Documents: Depending on the type of claim—oppression or derivative action—appropriate pleadings and supporting evidence must be filed with the court.
  3. Discovery Process: This involves exchanging evidence and gathering information related to the director’s conduct, business decisions, and any potential harm caused to the corporation or shareholders.
  4. Court Proceedings: If the case does not settle through negotiation or mediation, it will proceed to trial, where the court will determine if the director’s removal is justified based on the evidence presented.

How a Business Litigation Lawyer Can Help

A business litigation lawyer is instrumental in addressing the complexities of removing a director. They can:

  • Provide legal counsel based on an initial case assessment.
  • Develop a litigation strategy tailored to the specific facts of the case.
  • Draft, file, and serve legal documents such as statements of claim or defence.
  • Assist in negotiations, alternative dispute resolution processes, and court appearances.
  • Ensure that all procedures comply with Ontario or federal corporate laws and are handled professionally.

Conclusion

Removing a director from a corporation, whether through shareholder vote or legal action, is a serious and often challenging process. Shareholders seeking to remove a director must be prepared to present clear evidence of misconduct or failure to fulfill the director’s duties. A business litigation lawyer can help guide you through this complex process, ensuring that your case is handled with expertise and care.

If you are considering removing a director from a corporation, contact Achkar Law. Our experienced business litigation lawyers can provide the legal guidance and representation you need to protect your interests and achieve a successful outcome.

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