The removal of a director from a company board is a significant event that can have major implications for an organisation's governance and strategic direction. This article explores the key considerations and processes involved in removing a director from their position.
Key Points
- Director removal processes differ for public and proprietary companies
- Shareholders have the power to remove directors in public companies
- Company constitutions often outline specific procedures for director removal
- Directors can be disqualified from managing corporations under certain circumstances
- Removal of an underperforming director can be a challenging process
How can a director be removed from office?
There are several ways in which a director can be removed from office, including:
- Resignation
- Rotation of directors in listed companies
- Invalid appointment
- Removal by members (or directors in proprietary companies)
- Breach of provisions set out in the company's constitution, for example:
- Not attending meetings for a prescribed period (commonly three to six months)
- Becoming of unsound mind
- Failing to declare an interest in a contract with the company
- Disqualification from managing a corporation
- Undischarged bankruptcy or failing to comply with insolvency procedures
- Death
As a general rule, a company's constitution will deal with resignations and removal of directors, as well as the procedures for filling casual vacancies caused by a director leaving the company. Reading the constitution is always an excellent starting point for a director or board faced with this situation.
How is a director removed in a public company?
In a public company, members (shareholders) can remove a director by resolution (s 203D (1) of the Corporations Act 2001 (Cth)). This is despite anything in the company's constitution, an agreement between the company and the director, or an agreement between any or all members of the company and the director.
The board or other directors of a public company cannot remove a director. This prevents a majority of public company directors from removing a director without the agreement of shareholders. Any resolution, request or notice of any of the directors of a public company which purports to remove another director is void (s 203E).
Notice of intention to move the resolution must be given to the company by shareholders at least two months before the meeting is to be held. The director in question must be given a copy of the notice as soon as practicable after it is received.
The director is entitled to put his or her case to members. This can be done by:
a) Giving the company a written statement which the company must circulate to members
b) Speaking to the motion at the meeting.
How is a director removed in a proprietary company?
A proprietary company may by resolution of the members remove a director from office and may by resolution appoint another person as a director instead (s 203C, Corporations Act). This is a replaceable rule and a proprietary limited company may have other requirements.
A director may also be removed by a majority of directors, if the constitution allows it. In doing this, and if the person is an executive director, the company needs to be mindful of the terms of employment for that director, unfair dismissal laws and natural justice requirements.
What is the effect of disqualification from managing a corporation?
A person ceases to be a director of a company if the person becomes disqualified from managing corporations under Part 2D.6 of the Corporations Act unless ASIC or the court allows them to manage the company (s 203B). There are three kinds of disqualification:
- Automatic disqualification – where a person is convicted of certain serious offences
- ASIC disqualification – ASIC can disqualify a person for up to seven years
- Court disqualification – a court may disqualify a person for any period it considers appropriate
What are the challenges in removing an underperforming director?
The removal of a director who is not performing is a difficult task and can be damaging to the organisation. In general, it will be the chair's task to ask that director to consider their position on the board. However, there have been high profile cases of a director refusing to leave a board even though this was the wish of the remaining directors.
In some of those cases, large shareholders have become involved and the director has left. In the end, if there can be no resolution reached on the board, then it is a decision for the shareholders and a general meeting must be called.
Board evaluations can be a useful tool in addressing underperformance. Peer evaluations of each director by all other directors can provide a structured methodology for the chair to discuss performance with each director and, when necessary, recommend to a director that they may wish to resign or that they will not be supported by the board in any future election.
By understanding the legal requirements and following proper procedures, boards can navigate the challenging process of director removal while minimising disruption to the organisation.
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