How Do You Know It Is Time to Resign as Ceo in a Private Equity Owned Company
Being appointed to a board is an laurels and a privilege. It's too a lot of work and carries with information technology tremendous responsibility.
Even in normal times, deciding to resign from your role as an independent managing director can be a tough decision, but information technology can usually exist done. In some rare cases, nonetheless, the act of resigning may be a breach of your fiduciary duty or at least open you up to such an allegation.
Let'due south look closer at v resignation scenarios.
Situation 1: Personal or Professional Reasons
Board members may make up one's mind to resign from a board for a variety of reasons. Some of these reasons may be perfectly beneficial.
It might be a affair of professional preference. Maybe the board in question is not a practiced fit anymore. Or perhaps there are personal reasons similar family issues, disease, or simply being overcommitted.
These situations are specific to the lath member and have zilch to do with the company itself. In these cases, it is normally acceptable to stride down, assuming you've made a tidy exit. This includes giving the rest of the lath plenty of discover and a gamble to find and even empanel your replacement.
Of course, if you have been leading a special projection or something similar, you will also desire to bring that project to a natural end (or pause, equally the case may be).
With any resignation, you will desire to offer your resignation in a alphabetic character in which you lot identify the exact date of your separation. The last thing you want is to be held responsible for an activeness taken by the board after y'all think yous had resigned. Without a alphabetic character, the date of your separation may exist ambiguous.
Finally, call up that the resignation of a public company director triggers a required 8-K filing. Rather than leaving your company to scramble, it'due south a skillful idea to hash out the possibility of your separating proactively with your chairman and general counsel before y'all actually resign. This gives all parties time to prepare the advisable filing.
Situation 2: Not Rowing in the Aforementioned Direction
Some other reason a board member might decide to resign is if the member disagrees with the strategic direction the company is taking.
Of form, we expect that lath members might vigorously argue the important business issues that face a company, and seasoned business people will not always agree with i another. Nonetheless, after the debate is done and a decision has been made, everyone has to pull in the same direction.
In some cases, information technology could be that a particular board member will find themselves unable to support an extremely consequential decision the rest of the board has made. That board member might then exist out of synch with the rest of the board in a mode that is no longer productive.
As this article points out on the Columbia Police Schoolhouse blog, when contemplating an exit, a director should consider "whether he or she can exist an constructive voice on the board or if he or she no longer is serving the interests of shareholders by beingness a dissenting board member."
Situation 3: Financial Woes
Sometimes a board member wants to resign because the company is no longer willing or able to provide D&O liability insurance for its directors. This sometimes happens when a company is in peculiarly dire financial straits, possibly even facing corporate bankruptcy.
A visitor's unwillingness or inability to provide D&O liability insurance is actually a common reason for directors getting off a board. Most directors exercise not want to continue serving if the company is no longer able to provide the protection lath members expect.
On the other hand, some lath members may feel that they should stay on a company'southward board even through corporate defalcation.
They may feel that they take a responsibility to stay when the going gets tough. Their view may be that doing and then is consequent with the reason they were called to serve on the board in the first place: to help guide the company and protect shareholders.
For more on this topic, see my guide for directors and officers facing defalcation due to COVID-19.
Situation four: Corporate Scandal
Sometimes board members resign equally a manner to assistance a company put a scandal backside it. This was arguably the example when 2 Wells Fargo board members resigned in March 2020.
Information technology'due south no underground that Wells Fargo has endured a series of scandals in the past few years. This has included the naming and shaming of board members by the federal reserve, the settlement of a derivative breach of fiduciary duty adapt for $240 meg, and numerous other fines, penalties, and settlements for billions of dollars.
The two board members who resigned in March 2020 had been called to give testimony to the House Fiscal Services Committee, something that would take no doubt kept Wells Fargo in the spotlight for less-than-favorable reasons.
(Note that the two lath members still testified, merely they did and so as onetime board members rather than every bit board members with ongoing responsibilities to the shareholders of Wells Fargo.)
The reasons the two directors gave for their resignations were typical in this type of situation:
Out of connected loyalty to Wells Fargo and ongoing delivery to serve our customers and employees, we recommended to our colleagues on the Board that we step downward from our leadership roles and they have accepted our resignation from the Board. We believe that our conclusion will facilitate the bank's and the new CEO'south ability to turn the page and avoid lark that could impede the banking concern's future progress.
It can certainly be the case that board members of a company with too many scandals volition no longer be seen by shareholders and regulators as having the credibility to reform a company. In such a situation, resignation may indeed be the best path forrad, peculiarly if there are fresh directors untainted by scandal who are already empaneled on the board.
Information technology'due south worth noting here that resigning from the board doesn't mean a board fellow member loses the protection of the D&O insurance policy since these are typically written to encompass erstwhile directors in add-on to current directors. A well-written indemnification agreement will also continue to respond on behalf of a managing director even if that director resigns from the board.
Situation 5: Intentional Wrongdoings
This is the trickiest state of affairs of all.
What happens when a board member becomes aware that a company may secretly be engaging in intentional wrongdoing, fifty-fifty to the extent of criminal action? And what if that lath member attempted to right the wrongs simply simply could not? Is it OK to resign?
This brings to mind 2 cases: re Puda Coal Stockholders' Litigation and Rich five. 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 event of discovering the wrongdoings.
The independent directors in both cases filed for a move 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, equally a matter of law, the directors' resignation wasn't a violation of their fiduciary duties.
In Puda Coal, the CEO allegedly stole avails from the company. Information technology's reported that the contained directors attempted to pursue a lawsuit simply were stonewalled and and then they resigned.
Co-ordinate to and so-Chancellor Leo E. Strine, who denied the move to dismiss, the independent directors had left the scene at a disquisitional time.
Chancellor Strine pointed out that their resignation left the company "nether the sole rule of a person [the CEO] they believe has pervasively breached his fiduciary duty of loyalty," and that may exist a breach of fiduciary duty in itself.
In his words from the bench:
[T]hither are some circumstances in which running away does non immunize yous. Information technology in fact involves a breach of duty.
In Fuqi, the company transferred more than $100,000,000 to third parties in Cathay at the direction of the chairman of the board. The company was subsequently unable to produce fiscal statements that proved the funds had been repaid in full. An audit investigation commenced.
During the investigation, the visitor failed to pay the parties involved in the audit. Iv independent directors resigned over the course of about ii years; two of them resigned in protest.
Vice Chancellor Sam Glasscock pointed out that the independent directors "who could have conducted a meaningful investigation on behalf of the company, resigned from their posts," and that made matters worse.
To exist sure, losing a motion to dismiss is non the same as beingness found to have breached i'due south fiduciary duties.
Still, these cases and their lengthy discussions about fiduciary duties ship a clear message: The Delaware Chancery Court sees lath resignations in the wrong circumstance as peradventure existence a breach of the directors' fiduciary duties owed to a company's shareholders.
The Resignation Litmus Test
If you're an independent director considering a resignation, the disquisitional question to ponder is this:
When has the situation of the company reached a place where the act of resigning from the board is itself a alienation of one's fiduciary duty to shareholders?
For public company lath members, the stakes are even higher. Case in point: "noisy withdrawal." As pointed out in the Columbia Constabulary School article linked to earlier:
When a director resigns in protest, whatsoever resignation letter to the company is required to be filed as an showroom to the company's Form 8-K announcing the resignation. A managing director faced with intractable corporate malfeasance must consider whether a noisy resignation will damage the company more than it helps. Resigning noisily is a style of calling public attention to the company'southward problems—which may indeed be an constructive fashion to bring the malfeasors to account for their actions—but also can harm the visitor and its various constituencies in the brusque- and long-term.
If you are resigning because of a disagreement, yous are obligated under the law to make that disclosure. And sometimes board members don't want to do that.
In this case, the board fellow member might have to remain on the lath until they have resolved the state of affairs that has precipitated the want to resign.
Why Liability Coverage Is Central Every bit You're Making These Decisions
These situations are exactly why you desire to accept splendid D&O liability insurance and indemnification agreements in place.
Even as you are doing the correct matter, for example, staying on a board to correct newly discovered wrongdoings, you may face litigation filed confronting you personally. Yous'll want to have strong protections in place to aid you defend yourself.
Of course, if the company's troubles are financial, the indemnification agreement won't be that helpful. In this state of affairs, you want to have already secured an splendid D&O insurance program that was placed by a broker familiar with and skilled when information technology comes to helping a company get through bankruptcy.
Unfortunately, though, this is something that y'all want to call up about before the trouble hits. Every bit I have written about recently:
When a visitor is financially troubled, it can be difficult to secure a skilful renewal. Carriers may fifty-fifty effort to put defalcation exclusions on the D&O insurance policy of a visitor that has to renew its insurance when the visitor is on the verge of filing bankruptcy.
Information technology could even be the case that the visitor is and then far gone that information technology does non have the cash to pay for the renewal. You tin can choose to go on the board of a company that has poor prospects for its D&O insurance, but when you do and then you are exposing your personal assets if you are sued.
And so can board members resign when they desire to? The answer is yes—except when they tin't.
In the worst-example situation where yous know something is happening that hurts your shareholders, you lot are duty-bound to protect your shareholders and not abandon them… at least that's what the Delaware court opinions suggest.
Source: https://woodruffsawyer.com/do-notebook/yes-board-members-can-always-resign-except-when-they-cant/
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