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Removal of Directors

A director’s role in a company is to promote the success and enhance the efficiency of the company. Included within this is ensuring that day to day business is conducted within all applicable laws and regulations. It is therefore of great importance that the director of a company does not underperform or fail to comply with the strategies the company has adopted which could harm its performance. In such a circumstance there may be a need to remove the director in question.

 

In most companies the Articles of Association (the ‘Articles’) provides for methods for the board of directors or shareholders to remove a director. However, even if this is not the case, or if the Articles contain a clause to secure the directors position, under the Companies Act 2006 (the ‘Act’) the shareholder always retains a right to remove a director. This is irrespective of what may be contained in the director’s contract of employment.

 

In order to remove a director under this statutory procedure, it is necessary to follow the steps set out by the Act. Any error or oversight can make the removal unlawful, which is why it is always advisable to seek legal advice on removing a director, or if you are one, to see if the members of the company have acted lawfully against you.

 

The following steps should be taken to remove a director:

 

• The shareholder proposing the removal must give 28 days notice to the board that he wishes for the director to be removed.
• This notice must then be sent to the director to be removed to give him the opportunity to make written representations to the other members.
• Notice to convene a meeting must then be sent out along with any written representations by the director in question.
• At the meeting the director to be removed must be given a chance to make representations to the members should he wish, or to have his written representations read out, if they had not been circulated prior to the meeting.
• A resolution to remove the director must be made by a majority vote.

 

It should be noted that since the shareholders will be trying to remove a member of the board of directors, the board themselves may not be willing to co-operate. Aside from being able to circulate their own representations before the meeting either for or against the proposed removal, the directors could refuse to convene a general meeting. This would force the shareholders to have to request that the board convene a meeting. In order to do this these shareholders must hold at least 5% of the shares, either singularly or collectively.

 

Another potential pitfall under company law is when a director is also a shareholder. This may not seem to be a problem especially if he is only a minority shareholder. However it is usual that in situations such as these the company’s Articles of Association may provide for his enhanced voting rights. This would mean that when a vote is being taken to remove him, his vote would hold more weight than it normally would. This needs to be considered before embarking on the procedure to remove him, as it may turn out that there is not the requisite majority to remove the director.

 

Even though the shareholders can remove the director regardless of any clauses in their employment contract, such a removal does not stop them from being able to claim damages or compensation for unfair or wrongful dismissal. Furthermore, if the director remains a shareholder after his removal he may cause difficulty by trying to block certain measures that the rest of the shareholders would like to implement. The ability to do this will depend on the quantity of his shareholding, however it can create a major problem for the company. In most circumstances the only solution is to negotiate the purchase of his shares.

 

The result is that the financial implications of removing a director must be taken into account before making the final decision. Overall it is usually more advisable to persuade the director in question to resign, rather than using the procedure under the Companies Act to remove them.

 

Aside from the methods mentioned above there are two additional ways to remove a director from his position:

 

1. Under certain circumstances prescribed in the Company’s Articles of Association; and
2. Disqualification by the Court under company law.

 

Most Articles of Association, especially if utilising the Model Articles as set out in the Companies Act, provide for situations where the director shall automatically cease to hold office. These include situations where the director becomes bankrupt, or has become physically or mentally incapable of acting.

 

The Court has the power to disqualify someone from holding the office of director for any period of time. Generally such orders would be made where the director is guilty of general misconduct in relation to the running of the company, such as where they have been found guilty of a criminal offence by actions they have done whilst running the company, or because they have persistently failed to comply with the filing requirements of the company.

 

Whatever the situation we are able to advise both shareholders and directors of their position including advising on:

 

• The viability of removing a director should he have enhanced voting rights.
• The procedure necessary to follow to remove a director.
• The rights as shareholders if the board refuse to convene a meeting.
• The Articles of Association and what it says in relation to situations where the director is automatically removed.
• The Directors employment contract and the possible financial implications of removing him.
• Your rights as a Director both during and after a procedure to remove you from office.

What is an assignment ?

An assignment is the legal word for transferring a legal right from one person to another. One form of assignment is the assignment of a contract. The benefit but not the burden (transferring of a burden is known as novation in legal terms) of a contract can be assigned, although in practical terms the assignee (transferee) and the 3^rd party who originally contracted with the assignor (transferor) tend to co-operate to make the contract work, since both parties to a contract will generally have benefits and burdens.

What is the effect of  a contractual assignment ?

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. It is important to note that an assignment only transfers existing rights and does not create any new rights. Additionally, the assignee will take over the contract as it was at the time of assignment and thus any benefits obtained will be subject to any pre-existing reduction of possible contractual benefits. A good example might be the assignment of a debt where the debtor has a claim for a set-off against that debt.

As regards the assignor’s position on a contract, it is very important to understand that he/she/they will remain liable after the assignment to perform any obligations in the contract that remain to be fulfilled. In practice, the assignee generally deals with such tasks but nevertheless the assignor should be aware of potential liabilities and perhaps specifically obtain a release for the other contracting party or at the very least to seek a full indemnity from the assignee in relation to any breach of contract or failure to perform by the assignee.

For general legal advice, it is always important to get solid advice from good solicitors.