Board Authority and Shareholder Approval: A Case Study in Director Removal and Invalid Bylaw Amendments

By: Jeffrey M. Haber

Under Section 706(a) of the New York Business Corporation Law (“BCL”), a director may be removed for cause either by shareholder vote or, where authorized by shareholder-adopted bylaws, by action of the board. In addition, where a corporation’s governing bylaws leave “cause” undefined, the board retains broad discretion to determine whether sufficient grounds for removal exist, subject to the business judgment rule, which requires judicial deference absent well-pleaded allegations of bad faith, self-dealing, or other tortious conduct. Where a shareholder believes that management or the board engages in wrongful conduct, he or she has the right to inspect the corporation’s books and records under BCL § 624. That right, however, is limited in scope and does not extend to expansive or unsupported document demands.

Applying these principles, we examine Kaye v. Merchant Factors Corp., 2026 N.Y. Slip Op. 03732 (1st Dept. June 11, 2026), a case arising from plaintiff’s removal from the board of directors of Merchant Factors Corp. and his subsequent claims for declaratory and inspection relief. In Faye, the Appellate Division, First Department, affirmed the dismissal of plaintiff’s amended complaint, concluding that although the board referenced unapproved amended bylaws for its action, under the original bylaws in force and effect, the board was authorized to remove plaintiff for cause by board action. The Court further found that the notice of the special meeting adequately set forth grounds constituting cause and that the board’s determination was entitled to deference under the business judgment rule in the absence of allegations of bad faith or misconduct. Finally, the Court held that plaintiff’s demand for corporate books and records exceeded the scope of rights afforded to shareholders under BCL § 624 and could not be sustained based on his former status as a director.

Kaye v. Merchant Factors Corp.

Plaintiff is an 11.8% shareholder of defendant Merchant Factors Corp. and served as a member of its board of directors from 2007 until March 2024. By notice of a special meeting of the board of directors dated March 13, 2024, the board sought to remove plaintiff as a director pursuant to Article III, Section 4 of the corporation’s amended bylaws, citing alleged “inappropriate, abusive and destructive behavior.” At that special meeting, the board voted to remove plaintiff from his position as a director. Plaintiff remained a shareholder of the corporation.

Separately, in or about May 2023, prior to his removal as a director, plaintiff sought to inspect certain corporate books and records, including correspondence from 2016 onward among stockholders, directors, insiders, and the corporation’s advisors relating to indebtedness involving insiders or their affiliates.

Plaintiff commenced the action seeking, among other relief, a judgment declaring that the notice of the special meeting and Article III, Section 4 of the amended bylaws were ultra vires and void and requesting reinstatement to the board. Plaintiff also asserted a claim seeking access to the corporation’s books and records. Plaintiff did not allege that the board’s actions were taken in bad faith or constituted tortious conduct.

Defendants moved to dismiss the amended complaint pursuant to CPLR 3211(a)(1) and (a)(7). Supreme Court granted the motion and the First Department unanimously affirmed.

The Court held that Supreme Court properly concluded that plaintiff’s removal was authorized under the corporation’s original bylaws, which remained in effect notwithstanding the board’s reliance on unapproved amended bylaws.[1] The Court pointed to Article III, Section 5 of the original bylaws, which expressly permitted the removal of directors for cause “by vote of the shareholders or by action of the board.”[2] That provision, noted the Court, was “consistent with Business Corporation Law § 706(a), which likewise authorizes removal for cause by either shareholders or, where provided by a shareholder-adopted bylaw, by the board.”[3] Although defendants purported to act under amended bylaws, those provisions never became effective because their text expressly conditioned effectiveness on shareholder approval, and no such vote occurred.[4] Accordingly, as Supreme Court concluded, the failure to obtain shareholder approval rendered the amended bylaws inoperative and left the original bylaws controlling, thereby permitting plaintiff’s removal for cause by board action.[5]

The Court also held, as did Supreme Court, that the reference in the notice of special meeting to the amended bylaws, rather than the original bylaws, did not render plaintiff’s removal improper.[6] Although the notice cited the amended bylaws, it set forth multiple specific examples of plaintiff’s alleged objectionable conduct forming the basis for removal for “cause.”[7] Under the original bylaws, “cause” was not defined, leaving its scope broad and encompassing a wider range of conduct than the more narrowly defined standard contained in the unapproved amended bylaws.[8] Because the notice articulated the grounds for removal, said the Court, those stated reasons satisfied the more expansive “for cause” standard under Article III, Section 5 of the original bylaws.[9] “Thus,” concluded the Court, “because the cause for plaintiff’s removal [was] clearly stated in the notice of special meeting, Supreme Court correctly found that removal under the original by-laws was proper.”[10]

“Furthermore,” said the Court, “the gravity of the ‘cause’ here [fell] within the corporation’s business judgment, requiring judicial deference in the absence of bad faith or tortious conduct by the board.”[11]  The Court found that “the notice of special meeting provide[d] ample allegations, supported by emails, reflecting the reasons justifying plaintiff’s removal.”[12] Significantly, observed the Court, “[p]laintiff did not specifically plead any bad faith acts or tortious conduct by defendants, and there [was] no basis to infer bad faith on defendants’ part based on plaintiff’s documented conduct.”[13]

Further, the Court held that “Supreme Court … properly dismissed plaintiff’s cause of action for examination of the corporate books and records.”[14] 

Shareholders “have a qualified right to examine the books and records” of corporations[15] under BCL § 624(b), which allows examination of “minutes of the proceedings of its shareholders and record of shareholders,” and BCL § 624(e), which allows examination of “an annual balance sheet and profit and loss statement for the preceding fiscal year, and, if any interim balance sheet or profit and loss statement has been distributed to its shareholders or otherwise made available to the public, the most recent such interim balance sheet or profit and loss statement.”

The Court noted that “before he was removed as director, plaintiff sought to review correspondence from 2016 onward ‘between or among any of the stockholders, directors or other insiders and the Company’s counsel, accountants and/or any member of management regarding the creation or repayment of any indebtedness of the Company with stockholders, directors or other insiders and/or their affiliates.’”[16] When the amended complaint was filed in May 2024, however, plaintiff had been removed as a director of the corporation but remained a shareholder. “Although as a shareholder his right to examine books and records is ‘to be liberally construed’,[17] said the Court, “the eight years of correspondence sought by plaintiff [fell] outside of the parameters of the Business Corporation Law.”[18] 

Finally, the Court held that “plaintiff’s request to review the books and records in the capacity of a director fail[ed] because his claim for reinstatement as a director was properly dismissed.”[19]

Takeaway

The decision in Kaye v. Merchant Factors Corp. underscores several core principles of New York corporate law governing director removal and shareholder rights. At its foundation, Kaye reaffirms that a board’s authority to remove a director for cause derives from both statute and the corporation’s governing bylaws. Under BCL § 706(a), that authority may be exercised by the board itself where, as in Kaye, valid, shareholder-adopted bylaws expressly permit such action. Even where a board mistakenly purports to act under amended bylaws, the failure of those amendments to become effective, due to the absence of required shareholder approval, does not invalidate the board’s action if the original bylaws remain operative and independently authorize the removal.

Kaye also illustrates the flexibility afforded to boards when bylaws do not define removal for “cause.” In such circumstances, the concept of cause was construed broadly, allowing the board to assess a wide range of conduct in determining whether removal is justified. Consistent with this expansive approach, the Court declined to elevate form over substance in evaluating the notice of the special meeting. Although the notice referenced the wrong set of bylaws, it nevertheless detailed specific instances of alleged misconduct, which the Court found sufficient to support removal under the broader, undefined “for cause” standard of the original bylaws.

Critically, the Court emphasized the role of the business judgment rule in insulating board determinations from judicial second-guessing. Where a board’s decision falls within its managerial authority, courts will defer to that judgment unless the plaintiff pleads particularized facts demonstrating bad faith, self-dealing, or other wrongful conduct. The absence of such allegations in Kaye proved dispositive, as the Court found no basis to infer improper motive or misconduct from the record.

Finally, Kaye addresses the limits of shareholder inspection rights under BCL § 624. While those rights are to be construed liberally, they remain confined to specified categories of corporate records and do not permit sweeping demands for years of internal correspondence. Moreover, the Court made clear that a plaintiff cannot expand those statutory rights by invoking a former role as a director, particularly where, as in Kaye, claims to reinstatement have been dismissed.

Taken together, Kaye reflects a judicial preference for upholding board authority, enforcing governing corporate documents as written, and limiting judicial intervention to cases involving clear evidence of wrongdoing.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm.

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[1] Slip Op. at *1.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id. at *2.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id., citing Matter of In re Kenneth Cole Prods., Inc. Shareholder Litig., 27 N.Y.3d 268, 274 (2016).

[12] Id.

[13] Id., citing Barbour v. Knecht, 296 A.D.2d 218, 225 (1st Dept. 2002).

[14] Id.

[15] Derfner Mgt., Inc. v. Lenhill Realty Corp., 90 A.D.3d 434, 435 (1st Dept. 2011).

[16] Slip Op. at *2.

[17] Derfner Mgt., 90 A.D.3d at 435.

[18] Slip Op. at *3.

[19] Id.