Directors Disputes – When Things Go Wrong
Disputes between directors or disputes between the directors and shareholders give rise to a complex mix of legal rights and remedies.
You may be a shareholder who believes that the management of the company will prejudice your interests as a shareholder. For example, the board may be voting to give the directors large bonuses instead of declaring a dividend.
Alternatively you may be a director trying to do your best for the company but the rest of the board or the members have lost faith in you.
The complex mix of legal issues arises from the different positions the director may have. In addition to being a director, he may also be a shareholder and an employee. When considering how to deal with a boardroom dispute, each of these positions must be considered and dealt with. Ideally an overall strategy should be put into place to deal with all three as quickly as possible.
Removing a director from the board
Removing a director from the board is not difficult providing the correct process has been undertaken and there is an appropriate majority of shareholders who agree that the delinquent director should be removed.
It has to be accepted that many directors will not simply resign. Why should they? Many directors are also shareholders and will feel that if they cannot continue to serve on the board their interests as shareholders may be prejudiced.
To force a director from the board it is necessary to call a shareholders’ meeting. It is the decision of the members not the board whether
someone continues to serve as a director.
Notice of the meeting must be given to all members and the director who it is desired to remove from the board. The notice must clearly state that it is proposed to pass a resolution to remove the director in question.
Any shareholder or group of shareholders with greater than 10% of the issued share capital can require the company to call a meeting.
21 days’ notice of the meeting is required and for the resolution to be passed it must be carried by members having collectively more than 50% of the issued share capital in the company after the director has had the opportunity to provide his or her reasoning for not being removed.
Terminating the director’s employment
So, you have managed to remove the director from the board, but he may still be an employee and may still hold shares in the company. These also have to be addressed.
As an employee the director has all the employment rights and protection that any other employee would have. As a senior person he may also have enhanced rights embedded in his service contract.
Simply because the members have resolved to remove the director from the board, he cannot simply be sacked as an employee, or at least not without the company facing potentially substantial claims for wrongful and unfair dismissal.
If the director has done something that would entitle the company to dismiss the director, the company’s disciplinary procedure must be followed. This will require the following steps to be undertaken:
1. Suspension on full pay pending investigation. A detailed letter must be given to the director stating the matters under investigation, that he will be suspended while the investigation is pending and that he may be required to attend a disciplinary hearing if the investigation gives reason to conclude that there is a case to answer.
2. Disciplinary hearing.
3. Sanction. This may include dismissal.
Getting this process correct is vital and should be undertaken only after obtaining professional advice. Getting this part of the process wrong will be costly to the company in terms of claims for unfair dismissal or wrongful dismissal, but may also give the director ground to launch a claim as an unfairly prejudiced shareholder under section 994 of the Companies Act 2006
Getting this process correct is vital and should be undertaken only after obtaining professional advice. Getting this part of the process wrong will be costly to the company in terms of claims for unfair dismissal or wrongful dismissal, but may also give the director ground to launch a claim as an unfairly prejudiced shareholder under the Companies Act 2014.
Getting the director’s shares back
Though he may have been removed from the board and had his contract of employment brought to an end, the director will still have his shares.
As mentioned in the previous sections the director will have separate rights and causes of action simply for being a shareholder. Such a shareholder may have the ability to stir up trouble for the board and majority shareholders. In any event, why would the remaining board members and majority shareholders wish to drive the company forward and create shareholder wealth if the person that everyone else has fallen out with will share the benefit? This may not matter, but in most cases it does.
Getting the shares back may be difficult. Unless there is provision in a service contract or shareholder’s agreement dealing with what should happen to someone’s shares when he or she leaves the company, it is not possible to force the shares to be relinquished.
The first thing to consider is whether there is a shareholders’ agreement or service contract that deals with this point. A well drafted shareholders’ agreement should always deal with the shares of a leaver.
The contractual formula for valuing and transferring a leaver’s shares is binding on all members who are a party to the shareholders’ agreement. In the absence of any contractual provision, getting the leaving director’s shares back will be a question of negotiation.
Corporate Governance : The Companies Act 2014
A key innovation for Irish company law is that where a company’s constitution is silent on an issue, the provisions in the Act apply by default. Many of the existing “Table A” provisions now apply as requirements of law. This should reduce the need to have detailed provisions set out in company constitutions of the type previously required to be set out in the articles of association. Companies, however, may prefer to include some of the provisions contained in the Act, for consistency with their existing rules of operation contained in their articles of association and so that the company’s governance rules are all contained in a single document, without having to cross-refer to the Act.
Directors’ common law fiduciary duties have been codified in the Act. These exist alongside the many existing statutory duties of directors
(contained in the Act and in other legislation) which continue to apply.
The Act requires the directors of (i) all PLCs; and (ii) certain large private companies which reach prescribed thresholds to prepare a statement of compliance with company and tax law to be included in the directors’ report in the annual accounts, and to ensure that the company adopts appropriate compliance measures.
Disclosure of interests in shares and share options
The Act contains a new exemption from what is a disclosable interest in a case where the shares or share options held by a director (aggregated with those of connected persons) amount to an interest in less than 1% in nominal value of the company’s issued share capital of a class of shares carrying voting rights. This should substantially reduce and, in many cases, eliminate the disclosure obligations for directors and secretaries.
Directors’ residential addresses
The Minister for Jobs, Enterprise and Innovation has introduced regulations which allow for the non-publication of a director’s usual residential address in the Companies Registration Office or on company registers in cases where that director’s personal safety or security are at stake.
Under the Act, the company’s directors are required to ensure that the company secretary has either the skills or the resources necessary to
discharge his or her statutory and other legal duties. The obligation on company secretaries to ensure compliance with companies legislation has been removed.
Annual general meeting
AGMs have become optional for LTDs and single member DACs, PLCs, CLGs and unlimited companies under the new regime as they are entitled to
adopt written procedures instead. This involves shareholders signing a written resolution acknowledging receipt of financial statements, resolving all matters as would be required to be resolved at the AGM and confirming that there is to be no change to the auditor.
Majority written resolutions
The Act introduces new decision-making mechanisms for shareholders. Majority written resolutions can be passed as ordinary resolutions (50%
or more of total voting rights) or special resolutions (75% or more of total voting rights) and take effect 7 and 21 days, respectively, after the last member has signed. This is in addition to the old system where written shareholder resolutions must be unanimous and take immediate effect which option is still available to companies.
Serious loss of capital
Under the new system, there is no requirement for private companies to convene an extraordinary general meeting on a serious loss of capital. The requirement remains in the case of PLCs.