Can Directors Overrule Shareholders?

In most situations, directors and the board can overrule the wishes of the shareholders. A shareholder is an individual who owns shares of stock in a company. Shares are units of ownership that represent fractional parts, or percentages, of a company. Ownership gives shareholders the right to vote on certain matters such as electing directors and changes in corporate bylaws, but they generally are not involved in the day-to-day management of the company. 

Directors, on the other hand, are not owners of the company, but managers. However, it is common for directors to also own shares in the business as well as serving on the board of directors. The board is an elected or appointed body that oversees the management of a company and is responsible for everyday tasks such as setting goals and objectives, providing guidance on strategic matters, reviewing financial performance, monitoring risks and opportunities for the organization, and appointing officers.

Given the board’s role in the company, they are generally given broad discretion when it comes to making decisions for the business. This means in most situations, they can overrule the wishes of the shareholders. However, some decisions will require shareholder approval, such as:

  • Appointment of directors
  • Appointment of auditors
  • Removal of a director or auditor
  • Modification of the articles of association
  • Declaration of dividends
  • Adoption of annual accounts

Can a Director Sue a Shareholder?

In most situations, a director cannot sue a shareholder for issues regarding the business, as shareholders generally are not involved in the management of the company and do not owe legal duties to the company or its directors.

However, a shareholder may be able to sue a director for specific harm the shareholder suffered because of the director’s actions. Typically, the harm is personal only to the shareholder filing the lawsuit, but in some cases, a single shareholder can be appointed to represent other shareholders who were harmed in the same way by the director’s actions. 

Reasons a shareholder might file a direct lawsuit against a director include:

  • The director infringed on their ownership rights or the right to vote.
  • The director failed to honor their preemptive rights or other contractual rights.
  • The director denied the shareholder the right to inspect the business’ books.
  • The director failed to pay promised dividends.

Can Shareholders Remove Directors?

Yes, shareholders can remove directors.

When a corporation is formed, the incorporators can appoint the members of the initial board directors. However, after the initial board has been selected, shareholders are generally responsible for appointing or reappointing directors. The process for electing board members is established by the company’s bylaws, which are the rules of conduct the corporation must follow.

Directors are usually elected at the annual shareholders’ meeting, which must be held at the time and place required by the bylaws. However, shareholders can also call a special meeting when they want to remove directors before the term has ended. 

Cause is not required to remove directors from the board unless the corporation’s articles of incorporation or bylaws require a “staggered” board. With a staggered board, board members have 2-to-3 year terms, with only a fraction of board members being up for election each year. This means that shareholders must have cause to remove a member of a staggered board.

In any situation, the majority of the voting shareholders must be present for a vote to occur. This is known as a “quorum.” Then, a majority of the shareholders who are present must vote to remove the director. This will usually be done by voting for a different director instead of the director they want to remove. 

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