Solving the perils of an unwanted director and/or shareholder

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Recently, retail billionaire Sir Philip Green was named in Parliament as the leading businessman accused by a newspaper of sexual and racial harassment. Peter Hain, who identified him in the House of Lords, said it was his duty to name him, given the “serious and repeated” nature of the allegations. Whilst Sir Philip Green has vehemently denied the allegations that have been made, Sir Philip Green’s presence is such that, whether true or not, other directors want him out.

It is not just Sir Philip Green who has found himself in hot water either. Carlos Ghosn, the former chairman and CEO of Nissan, has been reported to have under-reported his salary and used company assets for personal use. Worse still for Carlos Ghosn is that he is also being held in custody in Tokyo whilst the matter is being investigated.

What does this mean for business?

Scandals within business can have devastating effects – and the way in which those scandals are dealt with by a company becomes important.  News travels fast with social media. This means that companies can almost instantly suffer losses through damage to goodwill. Or, disputes may arise between the directors and/or shareholders of a company which impact on the way in which the company is managed, causing a loss of strategy or direction. There could be a potential rift between other key stakeholders in the company, such as that created between Nissan and Renault following Carlos Ghosn’s arrest. These rifts threaten the successful continuation of a business. You have to act expeditiously following news of a scandal these days.

What have companies done so far?

Sir Philip Green is a shareholder and director of many companies and some of those companies have not wasted much time in distancing themselves from him. Sir Philip Green is no longer a shareholder in Simon Cowell’s company, Syco Holdings Limited, following the sale of shares for a reported £10m. Beyoncé was quick to distance herself from him by buying the 50% shareholding that he held in Ivy Park, a joint venture she and Sir Philip Green created.

Nissan wasted no time following Carlos Ghosn’s arrest. Within days he was no longer employed.  Likely to remain speculation is whether Carlos Ghosn was sacked for gross misconduct. If he was, Nissan’s financial liability in respect of his removal may have been kept to a minimum. If, however, Nissan preferred to pay him off without terminating his employment for gross misconduct, there was probably a hefty payoff.  Nissan would no doubt want various gagging orders which would have steered them towards a pay off.

What are the steps required to remove a shareholder?

Assuming that the disgraced shareholder does not sell voluntarily the company will have to find a way to compulsorily acquire the shares assuming they can manage sufficient shareholder approval.

Compulsory buy back of shares by the company

Compulsory purchasers are usually dealt with by a company share buy back. The structure, process and considerations in connection with a company share buyback differ depending on whether the company is a public (a market purchase) or private (an off market purchase) limited company.

For example, a company must ensure its compliance with the City Code on Takeovers and Mergers, the Listing Rules and the Disclosure Guidance and Transparency Rules. Also, a particular investor may have specific guidelines that it requires a company to follow. It is essential that following any share buyback in a public company, a sufficient number of shares must remain in the hands of the public following a share buyback. A market purchase must be approved by a resolution of the company and an announcement must be made via a Regulatory Information Service as soon as possible of any decision by the board to submit to its members a resolution authorising to buy back its own equity shares. The buyback must also be approved at a general meeting.

But what if the shareholder doesn’t want to sell his shares?

Just because a party may be refusing to sell his shares doesn’t necessarily mean that you are stuck. Check the articles of association of the company and any shareholders’ agreements that are in place. Are there any provisions which require shares to be compulsorily transferred following the occurrence of a particular event? For example, a shareholder being required to transfer his shareholding in a company if he has brought the company into disrepute or is being currently investigated for criminal wrongdoing. These provisions could provide the other shareholders with some assistance.

Removal as a director

But what if he is also a director on the board? How can he be removed?

There are ways to remove directors

There are several ways in which a director can be removed, such as:

  • by his resignation;
  • under the company’s articles of association;
  • by resolution of the shareholders;
  • by a court order; or
  • by his death.

Forcing removal of a director

The Companies Act 2006 provides recourse for a company so that a director may be removed before the expiration of his period of office. This right applies regardless of any agreement between the director and the company (for example, the terms of a director’s service agreement). It is worth noting that whilst this may be the case, this does not preclude the director from being paid or from bringing a claim for unfair dismissal.

You need to follow a process for successful removal of a director

The process for shareholders to remove a director is prescriptive:

1. A resolution must be passed at a meeting (and cannot be passed with a written resolution); and

2. Special notice is required of a resolution to remove a director or to appoint somebody instead of a director at the meeting at which he is removed.

Not adhering to the timeframes required will render any resolution ineffective. It is therefore essential that the correct procedures are followed to ensure that the problematic director is removed.

Regulatory notices

A company with a premium listing of equity shares must also notify a Regulatory Information Service as soon as possible (and in any event by the end of the business day following the decision or receipt of notice of the change) of any change to the board including removals, retirements, resignations or important changes to the role, functions or responsibilities of directors.

What if you are embroiled in a scandal and are in trouble? Come and speak to us. We help troubled directors and shareholders who are in a crisis. We are also able help companies looking to oust a troublesome director or shareholder guiding you through the troubled waters.You can reach us on 0207 438 1060.