Newbury Business Today

The director’s cut

12th January 2012

Email: richard.maynard@newburynews.co.uk

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with Peter Billyard, of Charles Lucas & Marshall

If you are either a shareholder or a director of a company there’s a good chance you might at some point become involved in a director’s exit from a company. It pays to be prepared, says Peter Billyard, a corporate services lawyer with Charles Lucas & Marshall.

The removal of a director is invariably carried out in a less than harmonious atmosphere.
The way in which this may be done is set out in the Companies Act 2006 (‘the Act’).  All that is necessary is for a shareholder to propose an ordinary resolution to remove a director at the next general meeting of the company. This will require a simple majority of votes (ie more than 50 per cent) cast at the meeting for it to be passed.
However, should the directors refuse to call a general meeting, shareholders who own more than 10 per cent of the company’s shares have the power to require the directors to call a general meeting.
If a company receives such a resolution, the Act states that the company should send a copy to the director concerned ‘forthwith’. The Act also requires that ‘special notice’ must be given in relation to the resolution to remove a director. This means that the shareholders’ meeting at which the resolution will be considered must take place more than 28 days after notice of the meeting has been given.
The director concerned has a right, under the Act, to be heard at the meeting at which the resolution is considered.
He can also present his case in writing to the company.
The removal of a director under the Act is simple in principle. However, in practice it is a rather a cumbersome process.
Employee vs director
It is important to be aware of the distinction between an executive director’s office and their employment.
The termination of the employment role does not automatically affect that individual’s position as a director. In contrast it is not uncommon to find that a director’s service contract provides for his employment to end immediately after he resigns as a director.
The negotiation of an agreement between a departing employee and the company can be a difficult process. For instance, the director might wish to remain a director during these negotiations as in order to strengthen his bargaining position. Companies should remember that a director will continue to be entitled to attend board meetings and have access to board papers including accounting information.
Any attempt to sideline a director by failing to give notice of meetings may affect the validity of any board decisions taken in that director’s absence.
Departing directors who also own shares in the company
There are further potential complications where a departing director is also a shareholder. In this case it is necessary to check the terms of any shareholders’ agreement that might exist. These frequently contain provisions in relation to the removal of a shareholder/director which make the process of removal more difficult. One simple example of this could be by increasing the percentage of votes required to pass a resolution to remove a director.
The subject of the buyback of shares from a departing director is another issue to be considered. One common sticking point is  the price of the shares. Many shareholders’ agreements provide for different prices of shares according to the reason for their sale. Typically, a higher price is paid if the sale is for reason of redundancy or ill health (called a ‘good’ leaver); a lower price is paid if the director is dismissed or simply resigns (called a ‘bad’ leaver).
n For further information contact Peter Billyard on (01635) 521212 or peter.billyard@clmlaw.co.uk

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