Here is a method of how you can discharge a director. Read this blog to get an idea about the whole process.
When a director is also an employee and shareholder, firing them can be perilous. Furthermore, the couple that has decided to separate is likely to be known to the individual as friends or long-time work colleagues.
Here, we look at what companies need to keep in mind to help a departing director leave in a smooth and timely fashion.
Terminating an employee with the help of human resources requires a distinct approach to the termination process and any subsequent conversations. As a result, there are more legal issues to consider and more potential pitfalls for the unwary to fall into.
The Board of Directors
The board of directors is the group of individuals elected to represent stockholders in establishing management policies and making decisions on a publicly listed firm. In general, directors make decisions that benefit shareholders, set the company’s strategic direction, endorse management initiatives, and ensure adequate resources are in place.
Board members will be held liable for their acts. Since the impact of any individual shareholder is usually relatively minimal, many shareholders choose to delegate their voting rights to members of the board of directors instead.
Stockholder representatives reportedly determine management policies and significant decisions. Every business that takes in customers from the general public and seeks to maximize profits has a board of directors. A committee of directors governs many public and non-profit organizations.
What Are The Potential Pitfalls?
All members should be kept up to date on company happenings. The Washington Post reports that in 2017 half of GE’s board was removed. The company’s stock price had cratered.
The board has been downsized from 18 to 12 members, and the company has made it clear that it wants to bring in fresh perspectives from the outside. The process of changing a board member can take months.
The staggered terms of board members are one of the most reliable safeguards boards use to protect themselves from liability. According to an article in the Washington Post, many companies are reluctant to remove many board members at once for fear of losing too much institutional knowledge.
How Does One Serve?
Typically, a person’s engagement in a company can be broken down into three categories:
- Director
- employee
- shareholder
The means of dissolving a relationship and the rights and duties that come with it change based on the type of partnership at issue.
In most cases, the individual’s responsibilities as director and employee/consultant must be dissolved in a mutual agreement. Many private companies, especially those just getting started, have additional directors who would like to sever ties with “shareholders” simultaneously.
Successfully transitioning out of all three roles is more likely if you can identify and address each relationship from the outset.
How to Remove a Company’s Board of Directors?
Before a director is removed from the board of directors, it is essential to check the articles of association, any shareholders’ agreement, and the director’s employment contract (also called a “service agreement”) or consultancy agreement (if any of these exist).
Creating a formal organization with guiding rules called bylaws. Ordinarily, a director will be considered to resign under the circumstances outlined in the company’s articles of incorporation, such as statutory disqualification, insolvency, mental illness, or an extended term of absence. Similarly, many companies’ bylaws will include a provision allowing the Board to removal of director without cause, provided a majority of the Board agrees to the removal.
Whether the director is a shareholder, it is essential to check the agreement to see if any provisions apply, such as a right to veto the proposed termination unless certain conditions are met or a right to nominate the individual as a director again.
Service or advisory agreement contract. Look for the resignation of directorship clause if the director in question is bound by a service or consultancy agreement; this could contain crucial provisions like:
Include a requirement that the individual relinquish their position as a director upon the termination of their employment; and
The company must bind the director’s signature to the resignation letter and other legal documents in the absence of the director.
Whether a director refuses to stand down from their position, you should consult these resources to see if there is a way to do so; if not, you should look to the Companies Act.
Section 168 of the Companies Act of 2006
A director may be removed from office by a simple majority vote of shareholders by Section 168 of the Companies Act 2006. This paragraph shall be applicable regardless of any conflicting provisions in any other agreement. A minimum of 28 days notice must be given for the shareholders’ meeting, and the director in question may be allowed to present reasons in person. For this reason, dismissing a director may not always be appropriate, such as when an immediate exit is desired. It’s essential to look into the company’s bylaws to discover if the director at issue (if they hold shares) is afforded any special protections against being removed from office.
Alternatives to Refusing to Accept
The director’s role as an officer of the company is distinct from the director’s potential personal interests in the company.
Directors are often also employees of the firm. As such, they are entitled to all the rights accorded to employees, including the right to be safeguarded against arbitrary dismissal (which occurs after two years of service).
Changing a Board Member
Even though shareholders have always had the theoretical right to fire anyone from the board or the CEO, shareholder activists have long argued that panels act like the board and the CEO are in command.
The CEO or the board often removes a single board member. The board member’s legal standing rests on the terms of their contract. When a board member is let go, it is usually because they have failed to fulfill the duties outlined in their agreement or have broken the rules and regulations they agreed upon joining the board.
Well-drafted contracts will specify who can terminate an employee’s employment and how that termination will occur. However, many director contracts do not include a mechanism for removing the director’s service.
The High Growth Handbook suggests that you buy out some of the board members. A director may be required to liquidate some of their holdings as part of their severance package if they leave the board. The High-Growth Handbook suggests keeping calm and bringing relevant documentation into what could be a heated discussion.
Section 217 of the Companies Act of 2006
Finally, please be aware that section 217 of the Companies Act requires shareholder approval before any director may be paid compensation for loss of office. This is not generally affected by payments made in good faith to settle an existing legal obligation or compensate for damages resulting from a breach of contract. Thus, we believe that pay should be justified without the need for shareholder approval under section 217 when it has been agreed upon in advance in the service contract, such as in the event of a golden parachute.
Conclusion
It’s likely that you now have adequate reasons to have the shareholder director removed. In any case, before taking any concrete steps, you should determine whether or not Section 994 of the Companies Act applies. If you are looking for any help, you can contact Vakilsearch.
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