This article forms part of a short series of four articles on the process of removing a director and the practical considerations for any company. We strongly recommend that, if you are considering the removal of a director, you consider each part of this series as the themes of the parts are linked.
Within part 2 of this series, the role of a director who is also a shareholder was previously touched upon in respect of potential claims that a director may have as a shareholder. In this part 3, we will discuss the director's role as shareholder and/or creditor in more detail and considerations for the company's overall shareholding and liquid funds.
It is often the case that a director will hold shares in the company. Given the potential value contained within company shares from not only a monetary but also voting perspective, this is an extremely important consideration for any company looking to remove a director.
The first step in this process would be to check the percentage shareholding that the director being removed has. Legislatively there is no automatic right for a director who is removed to be forced to sell his or her majority or minority shareholding. It is therefore important to check the Articles of Association (AoA) and any shareholders' agreement which should provide details of what will happen to the director's shares once he has been removed. In most cases this will result in a share sale amongst the relevant shareholders, however, this process can become complicated depending on the individual circumstances of each case.
An example of when the share sale process can become complicated are instances where the director is an original founder of the company. This issue highlights the need to consider this part with the three other parts in this series. Specifically, the shareholding of a founder/director may be large enough to block the necessary ordinary resolution of more than 50% required to remove a director.
The AoA or shareholders' agreement may contain provisions relating to "vested shares". Vested shares allow for an original investor to hold onto some of their shares depending on the length of time that they have held those shares. Typically, such provisions regarding the sale of a director's shares will be connected to methods for valuation of those shares based on fair value if the director was leaving on good terms or, more likely in the case of removal, nominal value for leaving on bad terms.
In addition to money tied up in share capital, the company should also consider whether the director is a creditor or debtor of the company. Are there any directors' loans that have been provided and require to be paid back by the individual? Or has the director loaned money to the company and such debts will be repayable in the event of their exit? The company will need to ensure that they have accounted for this and are able to pay off any debts due upon removal.
These are just some of the considerations that any company should investigate when considering whether or not to remove a director. If you are considering removing a director who is also a shareholder, it is highly advised that you seek legal advice to ensure that the control and value of the company is not negatively impacted. If you would like to discuss the issues raised in this series in more detail or in connection with your business, please contact a member of the Brodies corporate team who would be happy to assist.
In our fourth and final part of this series, we will explore the implications of removing a director who is also an employee of the company.