Yes, Board Members Can Always Resign … Except When They Can’t

Excerpts,

D&O Notebook by Priya Cherian Huskins, Esq. January 20, 2016

Being appointed to a board – public or private – is an honor and a privilege. It’s also a lot of work (one study found an average of 278 hours devoted per year per seat), and carries with it tremendous responsibility.

Deciding to resign from your role as an independent director can be a tough decision even in normal circumstances, but it can usually be done. In some rare cases, however, the act of resigning may be a breach of your fiduciary duty – or at least open you up to such an accusation.

Situation 3: Financial Woes

Sometimes a board member wants to resign because the company is in dire financial straits– possibly even facing corporate bankruptcy – and is no longer willing or able to provide D&O liability insurance for its directors.

A company’s unwillingness or inability to provide D&O liability insurance is actually a common reason for directors getting off a board. Most directors do not want to continue serving if the company is no longer able to provide the protection board members expect.

On the other hand, some board members may feel that they should stay on a company’s board even through a corporate bankruptcy. They may feel that they have a responsibility to stay when the going gets tough. Their view may be that doing so is consistent with the reason they were chosen to serve on the board in the first place: to help guide the company and protect shareholders.

These situations require a lot of work. The board members who stay must roll up their sleeves and carefully explore all the options to get the corporation back on track before deciding to file for bankruptcy.

Moreover, as I have discussed in some earlier blogs, resigning is not always the best course for someone on the board of a financially troubled company.

Situation 3: Financial Woes

Sometimes a board member wants to resign because the company is in dire financial straits– possibly even facing corporate bankruptcy – and is no longer willing or able to provide D&O liability insurance for its directors.

A company’s unwillingness or inability to provide D&O liability insurance is actually a common reason for directors getting off a board. Most directors do not want to continue serving if the company is no longer able to provide the protection board members expect.

On the other hand, some board members may feel that they should stay on a company’s board even through a corporate bankruptcy. They may feel that they have a responsibility to stay when the going gets tough. Their view may be that doing so is consistent with the reason they were chosen to serve on the board in the first place: to help guide the company and protect shareholders.

These situations require a lot of work. The board members who stay must roll up their sleeves and carefully explore all the options to get the corporation back on track before deciding to file for bankruptcy.

Moreover, as I have discussed in some earlier blogs, resigning is not always the best course for someone on the board of a financially troubled company.

Situation 4: Company Wrongdoings

This is the trickiest situation of all.

What happens when a board member becomes aware that there is a problem at the company, even to the extent of criminal activity? And what if that board member attempted to right the wrongs but simply could not?

Is it ok to resign from the board?

This brings to mind two cases – In re Puda Coal Stockholders’ Litigation and Rich v. Chong (Fuqi) – where suits were filed against company directors due to corporate wrongdoings. Ahead of these suits, some of the company directors had resigned as a result of discovering the wrongdoings.

The independent directors in both cases filed for a motion to dismiss but were denied by the Delaware court. In both instances, the Court denied the directors’ motions to dismiss because the Court could not conclude that, as a matter of law, the directors’ resignation wasn’t a violation of their fiduciary duties.

In Puda Coal, the CEO allegedly stole assets from the company. It’s reported that the independent directors attempted to pursue a lawsuit but were stonewalled, and so they resigned.

According to then-Chancellor Leo E. Strine (now the Chief Justice of the Delaware Supreme Court), who denied the motion to dismiss, the independent directors had left the scene at a critical time.

Chancellor Strine pointed out that their resignation left the company “under the sole dominion of a person [the CEO] they believe has pervasively breached his fiduciary duty of loyalty,” and that may be a breach of fiduciary duty in itself. In his words from the bench:

here are some circumstances in which running away does not immunize you. It in fact involves a breach of duty.

It’s worth mentioning that these situations are exactly why you want to have excellent D&O liability insurance and indemnification agreements in place. Even as you are doing the right thing, for example, staying on a board to correct newly discovered wrong-doing, you may face litigation filed against you personally. You’ll want to have strong protections in place to help you defend yourself.

So can board members resign when they want to? The answer is yes – except when they can’t.

In the worst-case situation where you know something is happening that hurts your shareholders, you are duty bound to protect your shareholders and not abandon them– at least that’s what the Delaware court opinions suggest.