By Chris Gelwicks, Esq.
From time to time we receive questions regarding the resignation of directors, term expiration and what to do in the event of a mass resignation by the existing board. The North Carolina Planning Community Act, Condominium Act, and the Non-Profit Corporation Act address certain issues with regard to directors’ terms and how to fill vacancies. Generally, the remaining board members appoint a replacement to serve out a resigning director’s term. But what happens when directors resign and do not appoint their successors, or when there are not enough remaining directors left to appoint replacements?
Section 55A-08-05(d) of the North Carolina Non-Profit Corporations Act provides that when the term of a director expires, that director continues to serve until his or her successor is appointed or elected and takes office. This seems to be in contrast with Section 55A-08-07 which indicates that a director’s resignation is effective upon communication of that resignation to the board (unless the resignation sets forth another effective date). The key difference between the two statutes are the terms “expire” and “resign”. Normally, in either case, the remaining directors would appoint someone to fill the empty seat unless the bylaws indicate differently. The board could also choose to hold an election for the empty seat(s).
Where we run into problems is where an entire board resigns at once and no successors are appointed. Pursuant to Section 55A-08-30, directors on boards have a duty to act in good faith, with reasonable care, and in a manner that is in the best interest of the association. Such fiduciary duties include that directors enforce the declaration of covenants, collect assessments, and ensure that the association is run and continues to be run effectively. It is a reasonable conclusion that if an entire board resigns at once and appoints no successors to fill vacancies, then the association cannot be effectively run. Those directors who resigned en masse potentially subject themselves to liability by not finding and appointing replacements; those directors, by basically abandoning their posts, could be construed to have violated their fiduciary duties.
The same could also apply if so many directors resign that the board can no longer reach a quorum to make a decision on appointing replacement directors. Keep in mind that the bylaws of your homeowners association ultimately control and can provide a different procedure than these North Carolina state statutes. If you are reading this and are on the board of your association, you may wish to review your bylaws to determine what they say in these situations and whether changes might be necessary to provide better procedures, such as stating that even board members who resign also continue to serve until their successors take office.
The bottom line is this: Resignations, vacancies and the like are not to be taken lightly. Directors who resign should always find a successor if at all possible and submit those names to the remaining board members. If an entire board intends to resign – which is an extremely bad idea to begin with and should be avoided at all costs – they should do so in a manner that allows successors to be appointed and the association to continue to function. For example, the resignations may be staged over time to allow replacements to come aboard. And remember that, at least in North Carolina, board members whose terms expire continue to serve, and continue to have fiduciary duties to the association and the members, until their replacements take office.
Failure to appoint successors in a way that results in a dysfunctional board can result in personal liability to the resigning directors for breach of fiduciary duty. As always, don’t hesitate to contact us to discuss strategies, procedures and potential liabilities when dealing with board matters.
Click here for another of our blog posts regarding board of directors matters.
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