Judicial Removal of Directors: Denial of Directors' License to Steal or Shareholders' Freedom to Vote?

Abstract

The article examines a new corporate law remedy: the ability of courts to remove directors of business corporations for misconduct. In recent years, a majority of the states has followed the Model Business Corporations Act in adopting the judicial removal remedy. The disparity in approach of different authorities and the confusion with respect to the remedy are remarkable, as highlighted by recent cases. No theory reconciling the conflicting approaches to the removal remedy has yet been developed by legislators, judges or academics. To develop such a theory, the article examines two opposing fundamental principles of corporate law implicated by the remedy. The first principle, shareholder prerogative to elect and remove directors, precludes judicial removal. However, the second principle, protecting the best interests of the corporation, may validate judicial removal of directors for misconduct in disregard of shareholder prerogative. To reconcile these two principles, the article introduces the concept of impairment to the shareholder vote. The court?s intervention to uphold the interests of the corporation by removing a director should be permitted where the shareholders? exercise of their voting rights is impaired either because removal is unduly blocked by an interested shareholder who controls the voting or because the voting mechanism is procedurally impeded. The article identifies the inadequacies of existing tests employed by courts and proposes a new test that finds a balance between these two principles.