Article Archives >> Lead Stories >> October 1-31, 2007

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Bylaw Provision to Remove Trustees
For Unexcused Absence Is Ineffective
After three years of litigation, Court says
plaintiffs failed to prove absences were “unexcused”

An appellate court in North Carolina has ruled that a bylaw provision providing for removal of trustees for unexcused absences has not caused the removal of absent trustees.

The bylaws provide that “absence from two consecutive regular meetings [of the board of trustees], without reasonable excuse approved by a majority of the entire board membership, shall be construed as a resignation from the Board.” The Court ruled that it does not effectuate a removal from the Board when there is no evidence that a Board ever construed absences as resignations.  (State ex rel. Newton v. Scarborough, Ct. of App. No. COA07-111, 10/16/07.)

The ruling came more than three years after the start of litigation over control of the Board of Trustees of the Daisy E. Scarborough Home, a community service nonprofit in Durham County.  A group claiming to be the rightful trustees sought a court order confirming their position against another group that had been previously in office.  The appellate court’s opinion does not explain in any detail the source of the dispute, but reviews and affirms the trial court’s decision in favor of the defendants.

The bylaws of the organization, which were approved in 1938 and then “misplaced for many years,” provided that trustees would serve for an unlimited term or until they were removed by a majority of the entire board, removed by the authority that appointed them, or they resigned.  The trial court ruled that none of those events had occurred.

The North Carolina Corporation Act provides that bylaws may provide that directors shall be removed automatically for missing a specified number of meetings. But the appellate court said the statute only allows the bylaws to so provide; it does not, by itself, provide for automatic removal.

The Court rejected the insurgent faction’s argument that the existing bylaw provision “does not give discretion to board members to passively waive the bylaw provision.”  That argument “misses the point that absences must be ‘unexcused’ for the provision to apply,” the Court said.

YOU NEED TO KNOW

This case shows the inanity of this type of bylaw provision that seems be an automatic way to get rid of those directors who don’t participate but really isn’t.  This provision had the advantage of at least saying that the Board had to determine whether the absences were excused.  Most just refer to “unexcused” absence without saying whether it is determined by the Board, the Board Chair, or ultimately a court.  Some are totally arbitrary, terminating a director for missing a certain number of meetings no matter how excusable the cause.

In practice, these provisions are regularly ignored, or are the basis for favoritism and unequal treatment, especially if the absent director’s name is Gates, or Rockefeller, or Gotrocks.  Instead of increasing certainty, they create a basis for litigation. 

In our opinion, it is important for a Board to establish expectations about participation, but to avoid the simplistic – and ineffective – bylaw provision of the type involved in this case. It is far better to provide a method to remove any director, with or without cause, when the Board deems it appropriate after allowing the director to be heard at a meeting at which removal is being considered.  (See Ready Reference Page:  “Bylaws Function as 'Constitution' of Nonprofit Corporations.”)  Boards seldom exercise this power, but when they do, they do it consciously, clearly, and in a way that is much less likely to lead to litigation.

Article Archives >> Lead Stories >> October 1-31, 2007