Bank Directors Seminar, Coeur d'Alene, ID, September 15-17, 2019

could cause additional harm to the company that would need to be weighed.

zz Refusal to re-nominate . Generally, the board is always free, absent a shareholders’ agreement to the contrary, not to re-nominate a director. Practically speaking, this option is of little help when a director is behaving badly mid-term, especially on a classified board where it could be several years before his term is up. zz Request for resignation . A board may request that a director resign. The board cannot, however, force a director to resign. In these situations, a board should review with counsel the potential merits and risks of instituting contractual means of requiring director resignation. Some have suggested that a board could insist that all director candidates provide an irrevocable contingent letter of resignation that would become effective should a board find that the director intentionally breached board or company policies or a fiduciary duty. Under Delaware law, while irrevocable contingent resignations may be used in the context of majority voting policies, it is unclear how courts would view the use of irrevocable contingent resignations to address intentional director misconduct. zz Reprimand. As noted above, a board may pass a resolution to reprimand or censure a director. This reprimand can be done publicly; however, such disclosure would be highly unusual and the potential for harm to the company would need to be weighed. Taking this unusual action would likely be reserved for a situation where a director has engaged in serious misconduct, the misconduct is continuing and likely to harm the company, the director refuses to resign and will serve on the board for some time before his term ends, and/or there is a need to publicly signal that the misconduct is not condoned or authorized by the board. While a public reprimand or a court action to seek removal is a tool that is very rarely if ever used, its availability may influence some misbehaving directors to resign. zz Isolation . If a director will not resign and refuses to abide by acceptable standards of director behavior, one option available to the board is to isolate him to some degree from key board deliberations and decision-making. For example, the board may form a committee to undertake those board actions that are not reserved by law to the board as a whole. Of course, care needs to be taken to assure that the director continues to have access to appropriate information. Having candid discussions about the desired culture that the board seeks to maintain and how individual director behavior supports that culture—and what the options are when a director makes a mis-step—may assist the board to coalesce around a plan of action for the rare times when a director goes rogue. Boards and their counsel should anticipate in advance how they might handle this situation and discuss expectations about director conduct and potential remedies for directors acting badly. © Copyright 2019 by the National Association of Corporate Directors All rights reserved. Except as permitted under the US Copyright Act of 1976, no part of this publication may be reproduced, modified, or distributed in any form or by any means, including, but not limited to, scanning and digitization, without prior written permission from NACD. This publication is designed to provide authoritative commentary in regard to the subject matter covered. It is provided with the understand- ing that neither the authors nor the publisher, the National Association of Corporate Directors, is engaged in rendering legal, accounting, or other professional services through this publication. If legal advice or expert assistance is required, the services of a qualified and competent professional should be sought.

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