TheCorporateCounsel.net

This Public Chatter blog from Perkins Coie discusses something you’ll likely encounter (or have encountered) at some point in your career — a non-executive director has a personal matter that may make it difficult for them to continue in their role. The blog gives examples of a director needing a medical procedure or taking time to care for a family member. Directors are people and, as the blog says, “life happens.” What options are open to the company and the director in this case?

As the blog notes, the availability of virtual attendance has allowed directors unable to travel to continue to attend meetings and fulfill their fiduciary duties, and happily, it’s no longer unusual for directors to attend virtually, even if most of the board is together in one room.

When the director’s circumstances involve more than just an inability to travel, the concept of a director leave of absence may arise. Here’s what the blog says on that:

State Law Allows a Director to be “In” or “Out”: No Middle Ground. You’ll be looking to state law – in the state in which your company is incorporated – and when you look, I doubt a leave of absence would be allowed under state law since directors are elected and then remain on until the end of their term (or until resignation).  A director isn’t like an employee who could take a paid or unpaid leave.  Instead, a director has fiduciary responsibilities from the moment of election or appointment, until the moment of resignation.

So don’t think you could give a director a valid leave of absence under state law that would relieve the director of fiduciary duties during the leave.  And taking a “leave” would in effect prevent the director from actively fulfilling those duties.

It’s also not possible to get around this with a sort of temporary resignation:

Directors Can’t Resign With a Promise to Renominate Them. If a director is going to be totally unavailable for a year, they should resign and stay in touch if they want to – but with no promise of nomination a year later.

When that director says they are ready to rejoin the board, the nominating committee must evaluate the board’s needs at that time. Because of the importance of creating a board whose members, as a whole, match the challenges that the corporation is then facing, the former director’s skills and background would need to be reassessed at that future date.  Or perhaps the board size is such that there simply isn’t a need to enlarge the board by one at that time. It is what it is.

Proxy disclosure is an important consideration when determining whether the director’s circumstances permit continued meaningful participation virtually or whether a resignation is more appropriate. The blog says that any directors faced with personal issues that may make it challenging to attend even virtual meetings should be reminded of the obligation to disclose attendance of less than 75% of the meetings of the board and each applicable committee in the year. If the resignation route is pursued and the board may consider a future renomination, the blog suggests that the company may want to note that in the resignation 8-K.

– Meredith Ervine