The individuals charged with making important strategic and financial decisions for a corporation must act based on the information available at the time. Sometimes, an appointed officer does not live up to the expectations of the board of directors and his removal is necessary. Understanding the protocol for removal -- and the strategic roles that company bylaws and shareholder voting play in the process -- can help you determine whether a corporate structure is right for your business. Those who run a small or closely held corporation face additional considerations if shareholders take on a director or officer role or if only a few individuals hold the majority of shares.
Overview of Corporate Structure
Corporations are a type of business structure formed according to state law. You must register a corporation with the state -- and it's considered an independent legal entity, wholly distinct from the shareholders who own the company. The board of directors, elected by the shareholders according to the procedure outlined in the corporate bylaws, is responsible for business operations. Because the board is in charge of making major strategic and financial decisions, they meet collectively and appoint officers and hire executives.
Rights of Shareholders and the Board
State law specifies the voting rights of shareholders in a corporation. The weight given to a shareholder's vote is based entirely on the number of shares owned. For example, if the corporation were holding an election for filling a vacancy on the board of directors, the vote of a shareholder who owns 80 percent of the shares would carry 80 percent of the weight in the election. A duly elected board then has the authority to adopt corporate bylaws that spell out how the board will operate and how management decisions will be made.
Read More: How to Change the Shareholders' Percentage in an S-Corporation
Removing an Officer
The day-to-day operations of the company are delegated to the officers. Officer positions might include a president, vice president, secretary and financial officer. The board is in control of both the nomination of officers and their removal. While removal can be based on a majority vote, the bylaws might require a different proportion, such as unanimous, super-majority or two-thirds approval. For this reason, it's essential that bylaws are drafted with care and that the board fully understands them, as they must observe every rule.
Removal of an Officer/Shareholder
Sometimes, a person nominated by the board to serve as an officer of a corporation is also a shareholder. This occurs more frequently in S corporations, which are limited in size and, in some instances, can allow a shareholder to be on the board and serve as an officer at the same time. If the officer is removed by the board according to the bylaws, but also owns shares in the company, her removal does not affect either her shares or the weight of her vote. This means that a removed officer with a large proportion of shares could affect the composition of the board up to the time she sells her shares.
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