Legalities For Change of Director, Shareholder, and UBO in The US

There could be a number of reasons why a company makes changes to its management. Sometimes these alterations range from the removal of directors and buying shares of major shareholders to changing the UBO details. Unfortunately, there is no easy way of doing it because such actions are subject to specific legal procedures. For example, in a country like the US, altering management requires complying with complicated legal procedures. So, without wasting time, let’s see what they are and how you can attempt them within the purview of state laws.

What Governs the Change of a Director, Shareholder, or UBO in the US?

In the US, there is no federal law that governs changing a director. Instead, companies seeking to make such an alteration refer to respective state laws, such as the New York Business Corporation Law (NYBCL), the Delaware General Corporation Law (DGCL), and so on.

In the case of shareholders, there is no way a company can voluntarily remove a shareholder unless the latter is found guilty of a criminal offence. The only viable arrangement is the share transfer agreement to which both parties, i.e., the company and the shareholder, must agree upon.

Upon successful execution of this agreement, the shareholders’ shares will transfer to the concerned party, extinguishing the previous shareholder’s voting and decision-making rights.

In case of UBOs, their status changes with a change of ownership, given that these changes comply with the Corporate Transparency Act (CTA). Any attempts made to change the UBO outside this legislation will be deemed void. Additionally, the company must also notify relevant authorities like FinCen within 30 days of making the change. A prescribed form, namely a BOI, is an ideal tool for issuing such notifications.

Who Can Change the Director of a Company?

When it comes to changes in directors, companies in the US usually refer to norms cited in the state law because there is no unified federal legislation.

First of all, shareholders with a significant shareholding have the right to remove or appoint a director in the general meeting via votes. Although this may also happen through unanimous consent, voting is the most preferred option because it alleviates legal disputes and prejudice.

If a majority of shareholders cast votes in favor of retaining the director, their removal becomes impractical.  Alternatively, if the director’s luck goes sideways, meaning they fail to procure enough votes, they must vacate their position.

That’s how the voting system works in general. But there is a catch! It is the company’s bylaws that determine what voting threshold would decide the director’s fate in the company.

Every company has a distinct approach to it, meaning the voting threshold can vary drastically between companies. It is important to note, if the court of law finds a director guilty of unlawful conduct, it can override the company bylaws and dismiss the director from their position.

Legalities To Consider for the Removal of a Director

Scenario 1: Removal of Director by Shareholders

(a) The shareholders can remove the directors with or without cause, provided the article of incorporation permits the removal by shareholders.

(b) The decision to remove the director cannot take place other than at the board meeting and through a voting system. The notification regarding such changes should be made in advance, clearly outlining the purpose of the meeting.

(c) If cumulative voting is allowed and a majority of votes are against their removal, the director retains their position. In the absence of cumulative voting, a director must vacate their position if a larger share of votes is cast in favor of their removal.

Scenario 2: Removal of Directors by Judicial Proceeding

(a) A Superior Court can remove the director on behalf of the company in a legal hearing if:

• The director is convicted or accused of
  • Unlawful conduct
  • Misusing their position
  • Harming the organization’s reputation in any way
• The removal is in the best interests of the company.

Legal Documents Required to Change Directors

As per the Company law, the following documents come into play when navigating management changes:

1. Board Resolutions

Board resolution is a legal document wherein the consent of board members and key shareholders is cited to approve specific business matters.

2. Shareholder Resolutions

In C-corp and S-corp, shareholders, through a resolution, can decide on appointing or removing a director.

3. Meeting Minutes

These act as proof of any decisions made during the meeting about the appointment or dismissal of a director.  For compliance and record-keeping reasons, it is crucial to preserve this document.

Note: ​​Under a respective state’s company laws, lack of record-keeping can trigger serious consequences ranging from monetary fines to cancellation of good standing.

Obligations Outgoing and Incoming Directors Must Fulfill

1. Outgoing Directors

• The outgoing director must submit the resignation letter in advance or within the timeline stipulated by the company.   The letter must entail the effective date of resignation.
• The director must return all the company’s assets before quitting the position.
• The director must hand over relevant information to the incoming director, ensuring a smooth transition.

2. Incoming Directors

• The income director is obligated to make decisions in the company’s interest.
• The director must resolve conflicts and promote harmony among the company’s officials, reinforcing a holistic environment.
• The director must contribute to governance activities and partake in board meetings as needed.

Legal Process to Change the Shareholder

As such, there is no dedicated legislation in the US that governs the changes of shareholders. Usually, a private contract can serve such a purpose. Here is the breakdown of the key steps involved in changing a shareholder:

1. Review Governing Documents

Examine the charter documents, which may include the operating agreements, shareholders' agreements, or bylaws. These documents specify the terms that control the removal of a shareholder and under what conditions it can occur.

2. Establish Legal Grounds (if needed)

In the absence of a removal clause, you must pinpoint the legitimate ground for removal. Some standard grounds include

• Misconduct
• Violation of fiduciary duties
• Criminal conduct
• Breach of contractual obligations

If none of the above applies, you can leverage a voluntary buyout option.

3. Make a Buyout Offer

Notify the shareholder about the buyout offer. The offer must be fair, preferably within the purview of the agreement, in order to avoid disputes. Make sure the agreement reflects key details, including.

• The purchase price
• The timeline for the buyout
• The payment method

4. Execute Share Transfer

If both parties agree to the terms, draft a Share Purchase Agreement, entailing relevant clauses and the signatures of the interested parties.

5. Update Company Records

Upon the successful transfers of shares, update the company’s records, such as the share register, to ensure compliance. Additionally, update the shareholders' list in internal reports to reflect the change.

Process of Changing The Ultimate Beneficial Ownership (UBO)

The process for changing the Ultimate Beneficial Ownership (UBO) is given below:

Step 1: Initiate Legal Ownership Transfer

Based on the company structure, a UBO must transfer their shares via a stock transfer agreement. In case of an LLC, the UBO needs to acquire membership interest via an Assignment of Interest form. However, before attempting any of these options, navigate the clauses in the charter documents governing the share transfer.

Step 2: Record the Change Internally

Upon completing the first step, update crucial paperwork to maintain compliance. These include

• Stock Ledger (for corporations)
• Register of Members (for LLCs)

Besides, there is a need to draft and sign the board resolution and meeting minutes, acknowledging the ownership change.

Step 3: Notify Financial Institutions

Inform your company’s bank(s) or payment processor regarding the ownership change. Also, submit key documents such as updated beneficial ownership certificates, the new UBO's ID, and so on.

Step 4: File UBO Change with FinCEN

Under the Corporate Transparency Act (CTA), it is mandatory to file the updated BOI, i.e., Beneficial Ownership Information report, on the Financial Crimes Enforcement Network (FinCEN) portal. Make sure to file BOI within 30 days of the ownership change. Failing to do so can result in monetary fines and criminal penalties.

Step 5: Notify Tax Authorities or Foreign Regulators (If Applicable)

If the company is operating internationally, it is mandatory to file the prescribed form and update FATCA/CRS disclosures with the Internal Revenue Service (IRS) or the overseas competent authority.

Who is not required to file UBO changes?

As per the FinCen, the following entities are exempted from reporting UBO changes.

• Large operating companies
• Insurance companies
• Banks
• Pooled investment vehicles
• Subsidiary of certain exempt entities
• Securities reporting issuer
• Inactive entities
• State-licensed insurance producers
• Venture capital fund advisors
• Financial market utilities
• Depository institution holding companies
• Public utilities
• Money services businesses
• Entities assisting tax-exempt entities
• Tax-exempt entities
• Other Exchange Act-registered entities
• Brokers or dealers in securities
• Accounting firms
• Securities exchange or clearing agencies
• Entities registered with the Commodity Exchange Act
• Government authorities
• Credit unions
• Investment companies or investment advisors

It is evident that making changes to the company’s management is a matter of following specific legal routes and ensuring error-free record-keeping. Failing to do so could result in harsh penalties, leading to reputational damage. With that being said, if you have any doubts regarding this subject matter, feel free to contact BSW. Business Setup Worldwide (BSW) is a trusted platform for those seeking expertise in various areas like company formation, compliance management, bank account opening, tax fulfillment, and so on.