This article does not consider the employment law aspects of removal, which most HR professionals will be experts in, but looks at the associated legal requirements to consider when the director level employee is a statutory director and/or a shareholder.
An individual's role as an employee and their role as a statutory director are legally separate. This means that their removal from statutory office will need to be considered at the outset, as removing a director from employment does not remove them from their office as a statutory director automatically. However, it is possible to include a provision in the individual's service agreement (or in rarer cases the company's articles of association or other constitutional documents) which provides that their directorship terminates in the event that the individual ceases to be an employee.
If the individual's employment contract does not provide for automatic resignation, you should initially look at the company's articles of association and other constitutional documents. A company's constitution includes its articles of association and any shareholders' agreement or investment agreement. Sometimes it can be difficult to obtain all relevant documents, as only the articles are publically available. For some companies, their constitutional documents may have provisions which allow for a director to be removed by a simpler process than under the Companies Act (for example by a director's decision or simple shareholder decision). In absence of any provisions in the constitution however, a director can be removed before the expiration of his period of office by an ordinary resolution of the members in accordance with a special process set out in the Companies Act.
This procedure is very technical and so legal advice should be obtained on its use. In particular, the company must convene a meeting of the shareholders for which 28 "clear days'" notice must be given and the director must be given the opportunity to put forward their objections to the shareholders, both ahead of the meeting in writing and also in person. Before calling the shareholders' meeting to initiate the removal, however, you must consider how votes are allocated at an ordinary resolution and what voting rights the shareholders have, as this may affect the outcome of the resolution. If over 50% of the votes are in favour of removing the individual from his position as a director, the individual ceases to be a director. You then have 14 days to submit a form TM01 to Companies House, and must also update the company's register of directors to reflect the end of the director's tenure.
Dismissing an individual from their role as director and employee won't usually affect their position as a shareholder, unless the company's constitutional documents or shareholders' agreement (if there is one) contain "leaver provisions" which mean that the departure of the director or employee is a "trigger event" for the sale of their shares. It is important, therefore, to check the company's constitution and any share option agreement to see whether this is the case. This clause will usually include the price the shares will be bought for and whether the individual is entitled to any dividends. This often depends on the nature of the termination and may be in the form of provisions which determine whether the individual is a "good leaver" or a "bad leaver", and the share price that they receive. This can make the handling of the employment termination very important because the way in which the individual is dismissed can affect the amount paid for their shares (for example unfair dismissal versus redundancy).
In absence of such transfer provisions, however, you will have to negotiate the sale of the shares with the director. This again can be tied up in the individual's compromise agreement, with the sale price of the shares being part of the compensation package. It is therefore important to look at the overall picture as to directorship, employment and shareholding before starting a negotiation. For example, if you need to negotiate a purchase for shares but have a strong position in respect of the employment position.
Ultimately when negotiating the exit of a senior employee, it is important to capture a balance between ensuring the director's swift exit from the business with giving consideration to ensuring a clean break for all concerned.
This article has been drafted on esphr’s behalf by Ward Hadaway Law Firm. Ward Hadaway Law Firm are one of esphr’s strategic legal advisory partners and provide certain services to our customers through a range of different Legal and HR support services offered by ourselves to the Corporate market. The content of this article does not constitute legal advice and it should not be relied upon. Specific legal advice may be required to address your specific circumstance.