7.7 Directors' appointments and removal Flashcards
What role do directors have in a company?
Directors are legally responsible for running the company and ensuring that the company accounts and reports are properly prepared. Must be 16 or over and not disqualified from being a director.
How are directors remunerated?
Board of directors has authority under the Model Articles to decide on directors’ remuneration.
If the contract gives security of tenure for longer than 2 years, shareholder approval of the service contract must be given. OR required
How can the company appoint new directors?
An appointment can be made by ordinary resolution of the members or by a majority decision of the directors (OR or BR)
[Common law: If MAs make no provision for the appointment of directors, shareholders have an inherent power to appoint directors by ordinary resolution].
Successive directors of public companies are elected by shareholders in a general meeting.
How can directorship be terminated?
Directors may resign or retire but comply with the terms of their contractual agreement.
Appointment will also terminate on the director’s death.
Directorship will be terminated automatically on bankruptcy and mental illness.
Can the board of directors remove a director?
The board may dismiss a director by majority vote but only in a public limited company.
NOTE: Only in public companies - no such power in Model Articles for private companies.
How can a private limited company remove a director?
Shareholders can remove a director before the expiration of their service contract, by calling a general meeting at which shareholders pass an ordinary resolution.
A written resolution is not allowed. Detailed procedural requirements (Companies Act ss168-169). Does not deprive the director of compensation for loss of office or damages for termination of the directorship.
What is the procedure for removing a director in a private limited company?
1) A shareholder gives a s312 SPECIAL NOTICE to the board at least 28 clear days before the meeting.
2) The board agrees to call the general meeting (GM).
3) On receipt of notice of the intended resolution, a copy is sent to the director concerned.
4) The company gives shareholders notice of the proposed ordinary resolution with notice of the meeting (14 clear days notice).
5) A general meeting is held at which the ordinary resolution is debated.
6)The director threatened with removal makes representations to the meeting.
7) The ordinary resolution is passed.
8) The directors hold a board meeting to complete any business from the general meeting.
Majority (over 50%) of shareholder votes cast at meeting are required to pass resolution and remove director. If threshold is not reached, the director remains in office.
What are the main rights afforded to directors during the removal process?
- Board must ensure a copy of special notice for director removal is sent to the director concerned immediately.
- Director has the right to make written representations to the company and the company must circulate them to the shareholders.
- Director has the right to speak at the meeting and make a case, regardless of whether they are also a shareholder.
What are the main sources of protection for directors?
(1) Bushell v faith clause
(2) Shareholders’ agreement (not to vote against specified directors on motion to remove)
(3) Director’s outstanding loan to a company may be repayable if removed
(4) Director’s service contract and compensation payable for breach of contract
What can the shareholders do if the board refuses to call a meeting to remove a director?
Step 1: If the board of directors refuse to call a general meeting, then one or more shareholders with more than 5% of the paid-up share capital can insist on a meeting.
Effect: Board must call a general meeting within 21 days of the shareholders’ request. Meeting must be held within 28 days of the notice (given to shareholders) calling the meeting.
Step 2: If the board is still uncooperative after the request, the shareholders who made the request can hold a general meeting themselves within 3 weeks of the initial request. 14 clear days’ notice required.
Effect: They may then vote on an ordinary resolution (requiring a simple majority of votes cast) to remove the director.
What is a Bushell v Faith clause?
Weighted voting rights - shareholder (who is also a director) benefits from this clause which gives them weighted votes should their removal as a director be voted on at a general meeting. E.g. each share has 4 votes for this shareholder. Will only work if the director is also a shareholder.
What can shareholders do to counteract a Bushell v Faith clause and remove a director?
Other shareholders should check whether it is possible to remove the weighted voting rights clause by passing a special resolution.
What are the administrative requirements when a director is removed from office?
When a director is removed, the company must notify the Registrar of Companies so that the register can be amended.
What powers does the court have to remove a director?
CDD (Company Directors Disqualification) Act: A court has the discretionary power to disqualify a person from promoting, forming or taking part in the management of a company without permission from the court.
Period of disqualification can range from 2 - 15 years.
What are the possible grounds for CDD Act disqualification?
Conviction of an indictable offence / persistent breaches of the Companies legislation / fraudulent or wrongful trading.
Director is expected to have a prudent businessperson’s sense of reality and ignorance is not a defence.
What factors are considered when deciding whether a director is ‘unfit’ to act?
- Voidable transactions
- Failure to comply with Companies Act provisions
- Insolvency
- Failure to support goods which have been paid for (in full or in part)
- Preferences or transactions at undervalue
Can a director ask for permission to act as a director during their period of disqualification?
Yes. A disqualified director may apply for permission from the court to act as a director during their period of disqualification. If granted:
→ Someone on the board who is professionally qualified, e.g accountant, is required to keep an eye on the director;
→ The director must accept personal liability for the debts of the company
What is a voluntary disqualification undertaking?
Speeds up the disqualification process. Director may get a shorter disqualification period and avoid court costs.
What are the sanctions for contravening a disqualification order?
This is a criminal offence - person will be personally liable for all the relevant debts of the company they are managing.
How many directors are required in a public limited company?
** Public company: Must have a minimum of 2 directors
How many directors are required in a private limited company?
** Private company: Must have at least 1 director
