Directors of public companies serve on a given company’s board of directors for a limited duration. Director departures are expected from time to time. It is the responsibility of the company’s counsel to ensure the proper procedures are followed when a director departs from the company’s board.

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As the company’s counsel, it is also part of your job to keep the departing director informed of his or her rights and obligations in connection with leaving the board. For example, the departing director may be entitled to accelerated vesting of equity awards. The departing director will also be obligated to destroy confidential board materials and other sensitive company information in his or her possession.

This article will highlight key the administrative procedures, the treatment of equity awards, the SEC and securities exchange requirements, and the other legal obligations that in-house counsel should keep in mind when directors leave the company’s board.

Administrative Procedures

In order to initiate the process of leaving a public company board, a director will typically submit a written resignation letter to the company’s board. The board of directors should then formally accept the resignation and make a note of this in the board minutes.

The in-house lawyers should make sure that the departing director is cut off from accessing any electronic portal used for posting board materials. The company’s counsel should also get confirmation that the departing director destroyed sensitive company materials in his or her possession. The company’s website should be updated to reflect the change in board composition.

Treatment of Equity Awards

A key issue that arises when a director of a public company resigns is the timing for vesting of outstanding equity awards. While the terms of an equity award often provide that the award will not vest if the director ceases to be a director before the vesting date, the company’s equity award plan may carve out certain exceptions. Sometimes the company’s equity award plan permits accelerated vesting with approval by the company’s board of director.

Options awards for directors typically must be exercised within 90 days of the director’s departure. Sometimes the company’s equity award plan allows this deadline to be extended. Extending the deadline is usually within the discretion of the board of directors.

SEC Filing Obligations

A Form 8-K must be filed within four days of the director providing notice of resignation. The disclosure in the Form 8-K must be provided under Item 5.02, which is titled “Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.” The Form 8-K that is filed with the SEC must describe the date of departure and any board committee memberships of the director.

Under Section 16 of the Securities Exchange Act of 1934, certain company insiders are required to report changes to their beneficial ownership of the company’s equity securities on a Form 4. A company’s directors and executive officers are considered Section 16 insiders.

There is no general obligation to file an “exit Form 4” solely to report that the individual is leaving the company’s board of directors. However, the departing director may be required to file a Form 4 to report vesting of equity awards. Additionally, under the short-swing profit liability rule under Section 16(b), a departing director may be obligated to report a transaction that is the opposite of a transaction reported within six months before when he or she was a Section 16 insider.

Securities Exchange Requirements

The notification rules for when a director leaves a public company board differ for the New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange (Nasdaq). For companies listed on the NYSE, they must provide the exchange with prompt notice by submitting a written affirmation of the director’s intended departure.

Unlike NYSE, Nasdaq does not have an official notification requirement for the departure of directors. However, it is good practice as the company’s counsel to inform Nasdaq of the changing board competition. Nasdaq only has a notification requirement with respective to changes in executive officers, but not directors.

Other Legal Obligations

The company’s counsel should remind the departing director that he or she will have continuing obligations under insider trading laws. Even after the director leaves the company’s board, he or she may have material nonpublic information, or MNPI, about the company that would prohibit trading the securities. Violations of insider trading restrictions can result in severe penalties. You should also remind the departing director about short-swing profit liability under Section 16(b) of the Securities Exchange Act of 1934.