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A director is one of the most important officers in any company because he or she performs a lot of organizational, legal, and managing actions. In addition, he or she controls financial, labor, legal, and other relations inside and outside the company. In this regard, the question of the appointment and replacement of a director is of vital importance.
From the legal point of view, a director is an officer of a corporation of the highest level, who is elected or appointed to perform duties in the sphere of management, and business. Any incorporated enterprise must have at least one director. This rule applies to any jurisdiction in the world. From the point of view of company law, this shows the importance of this role in the company.
Previously we have already covered the subject of appointing a director to the company and the reasons, types, and means of doing so. Today, we will discuss the legal aspects of this officer’s removal from the company.
Removal of a company director is a special procedure that can be described in the company’s statutory documents or it can be regulated directly by law. This procedure allows the appointment of a director to be cancelled by the registry. The entry in the register of the cancellation of the appointment of the director is the point at which the officer is removed.
It is important to note that the procedure for removing may differ. It is depending on the type of management of the firm and its size. For example:
- The simplest option applicable to small businesses is that the company director and the company owner are the same person. In this case, the procedure for his or her changing or excluding a implies the sale or closure of the company.
- The most common variant – the director of the firm was elected by the general meeting of shareholders. By the decision of this body, the officer is excluded. In such a case, one or more members must submit a resolution at the enterprise meeting.
- A rather problematic case is that the director of the company is also a shareholder who has a say in the decision-making process. In such cases, companies can operate based on legal possibilities. In these cases, sufficient reasons have not been provided for in the statutory documents.
A chief can be excluded for absolutely different reasons. It is ranging from the personal wishes of the officer himself to the exclusion by general company boards for inefficiency or specific offenses.
Possible grounds for removing a director of a company
It is most convenient to divide the reasons according to the conditions under which the principal is excluded. There are three groups:
Removal based on the statutory documents
The most popular reason is the removal based on an agreement between the members of the company. It may be called by different names in different jurisdictions (Memorandum, Articles of Association, etc.)
Using this document the shareholders can exclude a director based on the terms agreed at the formation of the company. Accordingly, different reasons for excluding may be described:
- “Just reasonable case”. It is a generalised reason to remove director of a firm. It allows members of the company to change directors when a set of problems arise. when there is a lack of confidence in him or her or his performance, in other cases. It is a tool for shareholders to ensure effective management of the firm.
- “Misconduct, gross negligence, or dereliction of the director’s duties”. The reasons are in most cases described in the articles of association. They act as valid reasons for the excluding.
As the categories described above are rather estimable, the question arises as to whether they can be proved. But at the same time, the very category of director and principles of a legal entity indicates next. A “majority” in the general meetings of the company is required to change the head and remove him or her from office. Therefore, the methods and means by which certain facts will be proved are chosen by the participants.
- Frequently missed board meetings or committee meetings — this is a technical reason. In other words, an officer can perform his/her duties correctly and without complaints. But he or she still violates the articles of association or firm regulations. It could be related to attendance at company meetings, work schedules in general, and some other duties. In such a case, the executive may also be removed if the members deem such a decision necessary.
- Disclosing confidential or sensitive information. Obviously, there are consequences for disclosing enterprise information. In this case, it is a very strong reason to remove the executive.
- Negative relationships with other directors or CEOs, members of the firm. However personal relationships are also important in the company and can influence the exclusion.
- Director has become physically incapable of carrying out their duties. Such facts can affect the management of the company, so excluding an officer for this reason also happens.
Thus, the removal of an executive using a statutory instrument is one of the most viable options. This is because the Articles of Association may have additional important conditions relating to the removal of a director which is not provided for by law.
This provides an opportunity to go slightly beyond the framework set by the state in regulating legal entities and add the factors that will affect the operation of the company.
Removal based on the law
It is relevant to note that the laws of different countries regulate the removal of a director from the firm in different ways. It may therefore be used differently in different jurisdictions. But we will describe the main points based on which the process to exclude a company chief can be initiated.
To summarise, from the government’s point of view, a director is bound to be excluded if he has been involved in serious offences that are directly or indirectly related to the business activities of the firm he heads. In fact, these are crimes.
These may be directly related to the company, fraud, offences related to trading in securities, unfair competition, driving the firm into bankruptcy, or similar causes.
In such a case, the relevant authorities must prove that they have been involved in serious misconduct or are otherwise unsuitable to continue serving in their role.
Director resignation at his own request
An executive may also wish to resign from the enterprise. In such a case, he or she will decide whether to resign and submit the decision to a meeting of the company’s members.
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Procedure for removing a director of a company
The procedure for resignation of a director from office differs in terms of the different types of legal entities and terms of the method of removal. In addition, different jurisdictions impose different statutory restrictions on the change of executive, so the procedure also differs geographically.
Despite this, we will highlight the main and important points that any company needs to be aware of regarding such a procedure.
Firstly, changing the director of a company is a fairly complex process that is likely to require legal assistance.
Step 1: Checking the reasons of removal
The director resignation process starts from the reasons we have discussed above. For example, shareholders see problems in the management of the firm, lack of efficiency, and other related problems. At a general meeting of the company, a member or members have the right to bring the question of removing the director from office to the meeting for consideration.
Step 2: Director’s notification, preparing for appointment
Prior to this, due to legal provisions, the executive must be notified of the changes. In addition, an important aspect when excluding a director in companies with 1 director is the replacement. The company must necessarily have at least 1 director and as such exclusion may become more problematic.
This means that when an executive is removed, a new one must be appointed by the general meeting.
Step 3: Notification of Governmental bodies
The next stage in the removal of a director is the completion of forms and the notification of all state authorities and the company register. It is also necessary to notify the contractors with whom the firm does business of the change of director.
The bureaucratic process in some countries is as short as possible and involves notifying the registry by completing 1 form. (e.g. in the UK – TM01 – termination of director’s appointment) and sending a copy of the company’s general meeting resolution.
The register is then amended by canceling the appointment of a director. If necessary, the entry of this new one in connection with his or her appointment rises as well.
Step 4: Receiving updated documents
Also, the firm receives new documents confirming the removal or change of director (e.g. Certificate of Directors).
Thus, the procedure for a change of director depends directly on the next factors:
- the jurisdiction of the company;
- its legal form;
- the conditions and reasons for the change of director.
But the main points are:
- the decision of the shareholders’ meeting;
- notification of the register of companies and other bodies and counterparties;
- change company data in the documents and register.
This requires a resolution of a meeting of the members of the company and a completed form TM-01. This form should be used to notify Companies House about the termination of a director’s appointment. Companies House will then be notified of the removal or replacement of a director. After verification of the relevant information and decision, the information in the register, as well as in the company records, will then be changed.
Yes, there are many cases of removal of a director without his or her consent. This is due to dissatisfaction of the participants in the management of the firm or other factors. It also requires a resolution of the general meeting.
The process of changing an executive in a limited company can be initiated on the same grounds as described above, i.e. on the basis of mistrust or wrongdoing by the director for example. The important steps, in this case, are:
- resolving the general meeting,
- notifying the company house of the removal of the director, and
- obtaining an update on the firm’s documents.
The procedure for excluding a director who is also a shareholder of a company is slightly different. This is because the main issue here is not the ‘exclusion of director’ but the ‘exclusion of shareholder’. Accordingly, a shareholder can be excluded by a resolution of the general meeting with at least 75% of the votes. A shareholder must have no more than 25% of the vote. But, on the other hand, if the issue is only the removal of a shareholder as a director – the procedure would be similar to the one described above – i.e. a decision by more than half of the meeting.