Firing a director is a complex procedure and the smallest mistake can leave a big dent in your bottom line. Here, Michael Shroot examines the main issues.
Why it’s wise to consider ‘the worst that can happen?’
When businesses are set up directors are keen to work together and no one wants to bother with written agreements setting out what happens if relationships turn sour.
Two or three years down the line, the business may have grown and directors’ roles changed. Some board members may have become disenchanted and relationships deteriorated. The problem is that getting rid of a director is much more difficult than sacking an employee.
Start off by treating directors as employees
Senior management team members are often employees as well as directors, so you need to follow the employment law process just as you would with any other underperforming employee.
This involves following your disciplinary process, which can be even more challenging if the director/employee has more than two years’ continuous employment and has unfair dismissal rights. So strong focus on employment law provisions is crucial at all stages.
The importance of directors’ service contracts
Service contracts govern the relationship between the company and the director and may also spell out the circumstances in which the business can sack a director. These typically set out reasons for dismissal as well as any pre-determined costs, such as notice pay and pay-offs, also known as ‘golden goodbyes’.
The risks of not sticking to the letter of the law
If you decide to proceed with dismissing a director, great care must be taken to implement the appropriate procedures of the Companies Act 2006. These mean any resolution to remove a director must be passed at a meeting and special notice of the resolution have to be given at least 28 working days ahead of the meeting. If you do not follow the legal requirements, any resolution is likely to be invalid.
There are, however, ways round this, such as having a carefully drafted service agreement that requires the director to resign on termination of his or her employment. An application for a relevant order may have to be made to the court.
Particular problems of sacking shareholding directors
Firing a director who is also a shareholder in the company is especially challenging. Without a written shareholders’ agreement that outlines what will happen on termination, you will be faced with having to negotiate the purchase of the departing director’s shares.
Shareholding directors’ additional rights means that if the removal is done unfairly, you could end up with a major claim against the other directors and/or shareholders personally, as well as the company itself.
The issues of directorship and shareholder are separate, although they are usually linked and handled through a compromise agreement because few companies want to have dismissed directors continuing as shareholders, and vice versa.
Consider the full implications of any action
Before taking any action to remove an underperforming director, you need to consider the current director-level arrangement for the management of the company, whether the business is legally able to dismiss an underperforming director, as well as the financial liabilities the firm might face.
Examine the underlying causes of underperformance
It is also well worth considering the options of keeping a problematic director on board. The individual presumably added substantial value to the business at some stage. Ask yourself if he or she could do so again. Sometimes a frank discussion can resolve issues that seemed insurmountable, saving time, money and stress. But before you do, make sure you know your rights to ensure you adopt the correct strategy when required.
For further advice on dismissing directors, call Michael Shroot on 0161 761 8087 or email him at michael.shroot@whnsolicitors.co.uk
