How to Remove a Director From a Company

 

Removing a director depends on whether the company is a proprietary or public company, its constitution, and the requirements of the Corporations Act 2001 (Cth) (‘Corporations Act’).

Before taking steps to remove a director, the company should review its constitution, any applicable replaceable rules, and any relevant shareholders’ agreement, together with the Corporations Act.

It is also important to distinguish between removing someone as a director and removing their interest as a shareholder. A person may be both a director and a shareholder, but removing them from the board does not automatically take away their shares in the company.

 

How do you remove a director from a proprietary company?

 

For a proprietary company, the starting point is usually the company’s constitution and the replaceable rules that apply to it.

Section 203C of the Corporations Act provides a replaceable rule under which a proprietary company may, by resolution, remove a director from office and may appoint another person as a director instead.

However, replaceable rules do not necessarily apply to every proprietary company. A company constitution can modify or displace them.

Accordingly, the constitution should be checked before a meeting is called or a resolution proposed. It may contain its own provisions governing the removal of directors, including requirements concerning voting, notice or particular rights associated with the appointment of a director.

A shareholders’ agreement should also be reviewed where one exists. While it operates differently from the company’s constitution, it may contain contractual provisions concerning board composition, appointment rights and what happens when a director leaves office.

 

How do you remove a director from a public company?

 

Different statutory requirements apply to public companies.

Under section 203D of the Corporations Act, a public company may generally remove a director by resolution at a general meeting, despite anything in the company’s constitution or an agreement between the company and the director.

There are specific notice and procedural requirements associated with such a resolution. These include giving the director notice of the proposed resolution and providing the director with an opportunity to put their position to members, subject to the requirements of the legislation.

Because the statutory process is prescriptive, care should be taken to ensure the necessary notices, meeting procedures and voting requirements are followed.

 

Can the other directors remove a director?

 

There is an important difference between a decision of the board and a decision of the company’s members.

For public companies, section 203E of the Corporations Act prevents the other directors from removing a director from office. Removal is a matter for members through the statutory process.

For proprietary companies, the position will depend on the applicable governance rules, including the constitution and any replaceable rules.

 

Can shareholders remove a director?

 

Shareholders may have the ability to remove a director, but holding shares does not mean that an individual shareholder can unilaterally dismiss someone from the board.

A valid company resolution requires the appropriate process to be followed. The voting outcome will also depend on matters including the company’s shareholding and voting rights.

This can become particularly contentious in closely held businesses where two shareholders each hold 50 per cent of the voting power. If they are also the company’s directors and their relationship breaks down, neither may have sufficient voting power to achieve the outcome they want.

The dispute can extend beyond the question of removing a director and may require consideration of the constitution, shareholders’ agreement and broader remedies available under the Corporations Act.

 

Does removing a director also remove them as a shareholder?

 

No. A directorship is an office within the company. Share ownership is a separate legal interest.

Removing a person as a director does not ordinarily cancel, transfer or otherwise remove shares they own. A former director may therefore remain a shareholder after leaving the board and retain the rights attached to those shares.

This distinction is particularly important in shareholder disputes. Removing a director may change who participates in management at board level without resolving the underlying ownership dispute.

If the parties intend to separate their business interests entirely, the transfer or acquisition of shares may need to be addressed separately.

 

Can a director be removed without their consent?

 

A director does not necessarily need to agree to their removal.

Where the Corporations Act and the company’s governing documents permit removal by resolution, the director’s refusal to resign will not necessarily prevent that process from occurring.

However, the fact that consent is not required does not mean procedural requirements can be ignored.

A director may have rights to receive notice, make representations or otherwise participate in the process. There may also be contractual consequences associated with removing them from office.

 

What happens to a director’s employment after removal?

 

A director may also be an employee of the company.

Removing the person from office as a director does not necessarily terminate their employment, just as terminating their employment does not necessarily remove them as a director.

Employment contracts, service agreements and applicable employment law obligations must be considered separately.

There may also be financial consequences if removal as a director breaches a service agreement or other contractual arrangement.

This is one reason companies should consider the person’s complete legal relationship with the business before taking action.

 

Does ASIC need to be notified when a director is removed?

 

Changes to company officeholders generally need to be notified to the Australian Securities and Investments Commission (ASIC) within the applicable timeframe.

ASIC’s records should accurately record the company’s current directors. However, notifying ASIC is not a substitute for following the correct legal process to remove the director in the first place.

Companies should retain appropriate records of the resolution and meeting at which the change occurred.

The company must also continue to satisfy the statutory requirements concerning the minimum number and residency of directors applicable to its company type.

 

What if there is a dispute about removing a director?

 

Director removal frequently occurs against the background of a broader shareholder or business dispute.

The issues may extend to control of the company, access to records, alleged breaches of directors’ duties, employment, share ownership and the future operation of the business.

In some cases, the oppression provisions of the Corporations Act may also become relevant. The Court has broad powers where the affairs of a company are conducted, or an act or proposed act is or would be, oppressive to, unfairly prejudicial to or unfairly discriminatory against a member or members.

The appropriate response will depend on the company’s structure and the circumstances giving rise to the dispute.

 

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