Uh Oh – You wake up and open the newspaper and find out that the president of your company has been arrested or committed a terrible act. What do you do?
What happens when a closely-held corporation faces the need to terminate its president who is also a significant shareholder, because he or she acted improperly (like what the Weinstein Company is now dealing with regarding the scandal-scarred Harvey Weinstein)?
The first question to ask is whether the president (or any other significant officer) is covered by an employment agreement.
If the answer is yes, the next question is whether the employment agreement includes a provision defining what constitutes a termination for “cause.” While almost every employment agreement has this type of clause, the actual definition of cause will vary from agreement to agreement. Typically, if the officer had a strong negotiating position at the time the employment agreement was negotiated the more favorable the clause will be to him, i.e. making “cause” more difficult to prove.
If, based on the particular facts involved, “cause” does exist, the board of directors could, and should, proceed with a vote to terminate. The procedure for calling a meeting depends on the company’s specific by-laws.
“In states that do not allow “at-will” employment, the board must provide specific reasons for terminating the president that must withstand legal scrutiny if the president challenges the decision in court.”
The board must carefully follow the bylaws regarding the notice of the meeting, including the time and location, as well as any required details of the agenda.
Board members must decide several procedural issues, such as whether to record the meeting, (by video or audio) or rely on written minutes or just a resolution after a vote is taken. There are many factors which go into this decision. There are other substantive issues such as to whether the president, who is also typically a board member, can vote on his or her own dismissal.
With a smaller board, a deadlock is more likely to occur. What happens when there are only two board members, one of whom has been accused of misconduct and that person refuses to vote in favor of his dismissal? The right to vote in those circumstances is often times governed by the agreement and each state’s respective business law.
If the board has the votes to pass a resolution terminating the president, it must then turn its attention to the immediate consequences, including the all-important procedural next steps.
The company will need to prevent the terminated president from further physical access to offices, computers and email. Many times, the preservation of the officer’s email is essential to proving that “cause” exists. Procedures might also involve a plan for physical security. This requires quickly coordinating logistics with onsite security personnel, IT staff and others. These issues are most easily resolved if planned for in advance.
The next issue is what impact this termination has, if any, on the president’s equity interest in the company.
If there is a mandatory provision requiring the president to sell his or her shares in the company in the event his employment is terminated? If so, will firing the president for cause reduce the value of his shares on redemption. This often occurs by reason of a specific term in the employment agreement or stockholder/operating agreement.
In the Weinstein case, for example, there was no automatic trigger of his obligation to sell his equity. This has caused serious problems for the company, since there is no easy way for them to rid themselves of this cancer. By continuing to own equity, Weinstein can continue to exert significant influence over the company, which is never a desirable result. The absence of such a clause is indicative of Weinstein’s powerful negotiating position.
All of these factors should be considered when determining whether to fire the president.
If the president does not have an employment contract, there are several issues for the board of directors to resolve:
Does the state where the president works (or which governs the company’s actions) follow the doctrine of “at-will” employment? If so, a majority of the board can simply vote to remove the president.
Even in this situation there can be complications. Most obviously, does the board have enough votes for termination? And what happens when a stalemate occurs, a not-uncommon issue in a company where two partners each own half the company and each has one vote on the board. When a deadlock has been reached, the partner alleging misconduct might need to petition a court for removal of an officer.
In states that do not allow “at-will” employment, the board must provide specific reasons for terminating the president that must withstand legal scrutiny if the president challenges the decision in court.
Finally, in every state, the board must be careful that its reasons for termination do not violate any local, state, or federal anti-discrimination laws.