Australia: You’re Fired! - Dealing With The Removal Of Directors From The Board

Last Updated: 17 December 2008
Article by Alistair Jaque and Leila Golchin

Swaab was recently named winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' and at the 2008 BRW- Client Choice Awards.

Differences of opinion or loss of confidence in the boardroom can cause troublesome disputes between board members. In these circumstances it may be necessary to consider how to remove a director from the board.

The ultimate shareholder control is the power to remove directors. The main statutory rules dealing with the removal of directors are located in the Corporations Act 2001 (Act). A person will cease to be a director of a company if he or she resigns or is disqualified from acting in his or her capacity as director by the Australian Securities and Investments Commission (ASIC) or a court1 . Other triggers for the removal of a director may exist under the company's constitution. The triggers available will differ depending on the type of company. The situation is more straightforward for proprietary companies than public companies.

Removal of a proprietary company director

In a proprietary company the members in general meeting cannot by majority remove a director unless the constitution confers that power or if the company is one to which replaceable rules apply then under, section 203C of the Act, which provides that a proprietary company may by ordinary resolution remove a director from office. To remove a director without that power would be an attempt to vary the contract as between members and between the director and the company that the directors shall hold office for the period contemplated by the constitution.

A director may also be removed by a majority of directors if the constitution empowers the board to do so. If the director is an executive director, the company should be mindful of the terms of employment of that director, as executive directors are company employees and their dismissal is governed by employment law.

There are no statutory restrictions on procedures that a proprietary company can include in its constitution relating to the removal of directors. Although such matters may be governed by a shareholders' agreement, the members of a proprietary company, in theory, have free rein to determine the circumstances in which directors of that company may be removed.

Removal of a public company director by members

To remove a public company director is more complex. Section 203D of the Act provides that a public company may by resolution remove a director from office at any time despite anything that may be found in the company's constitution, an agreement between the company and the director, and an agreement between the members and the company2 .

The Act sets out the procedure that must be followed to remove a director3:

  • a notice of intention to move the resolution must be given to the company at least two months before the general meeting to pass the resolution is to be held
  • a copy of the notice must be given to the director who is to be removed as soon as practicable after it is received by the company
  • the director is entitled to put his case to the members by giving the company a written statement for circulation to members (unless it is defamatory or over 1000 words long) and to speak to the motion at the meeting.

The Act requires that members of a public company receive at least 21 days' notice of the meeting at which a resolution to remove a director will be moved4 .

If a director is representative of a particular class of shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement representative has been appointed5.

Is compliance with section 203D mandatory?

Sections 203D(2)-(7) outline procedures for the removal of a director of a public company. An important issue is whether compliance with section 203D(2)-(7) is mandatory or whether a company can have an alternative mechanism in its constitution for removing a director. Until Scottish & Colonial Ltd -v- Australian Power and Gas Co Ltd6 (Scottish & Colonial Ltd), it had always been considered that the statutory power in section 203D did not replace any other power of removal possessed by the company. The two conflicting views that now exist are set out below.

Section 203D is not mandatory

The majority of the courts have taken the view that the statutory power in section 203D does not replace any other power of removal possessed by the company. For example, provisions may be included in a constitution to require a director to vacate office without the need for a vote of shareholders (in defined circumstances).

Other self-executing provisions in a company's constitution could provide for the removal of a director as a consequence of failing to meet certain quantitative performance measures or losing certain qualifications. An example of such a self-executing provision is one which provides that a director will cease to hold office if that director does not attend board meetings for a certain number of months without the board's permission. Another example, is where directors will only continue to hold office so long as they remain employed by the company.

Where a public company has a provision in its constitution providing for the removal of a director by shareholders and the requirements in the constitution are different to those in section 203D, it is a matter for the shareholders whether they proceed to use the provision in the constitution or section 203D7 .

Section 203D is mandatory

In Scottish & Colonial Ltd, Bryson AJ held that compliance with section 203D(2)-(7) is mandatory. He based this conclusion on several factors, including that section 203D is different from its predecessors in the emphatic language used and is also different in terms of its procedural requirements.

There are now conflicting decisions of the Supreme Court of New South Wales8 in relation to whether compliance with section 203D(2)-(7) is mandatory. There are also decisions of the Federal Court of Australia9 and the Supreme Court of Western Australia10 that interpret section 203D differently to Scottish & Colonial Ltd.

The statutory removal power has the principal purpose of ensuring that public company directors are not entrenched. Any limitation on members of a public company who would otherwise have the right to remove directors in any way provided in the constitution, seems to move against the intentions of the section.

These inconsistent interpretations of section 203D warrant consideration of this matter by an appellate court.

Removal of a public company director by the board

The prohibition on the discretion of public companies to provide for the removal of a director by the board is found in section 203E of the Act. Attempts by the board to remove a director from office are void. ASIC has interpreted the provision to mean that it is ultimately the members who decide whether a director is to remain in office. This means that any agreement or other arrangement that says that a director can be removed from office if the other directors decide to do so is ineffective. The Australian Institute of Company Directors (AICD) has backed the view that only members of the public company may remove a director. The AICD believes that to allow the board of a public company to remove a director could compromise the independence of mind of members, which is a fundamental principle of corporate governance.

Conclusion

Removal of a director is usually the last resort to end a dispute between board members, or the board and the company.

A company considering to amend its constitution to include mechanisms to remove a director should seek further advice before proceeding.

Footnotes

1 Section 206A(2) Corporations Act

2 Section 203D(1) Corporations Act

3 Section 203D(2)-(6) Corporations Act

4 Section 249H(3) Corporations Act

5 Section 203D(1) Corporations Act

6 (2007) 215 FLR 100; 65 ACSR 313; [2007]NSWSC 1266; BC200709565

7 Shanahan -v- Pivot Pty Ltd (1988) 26 ACSR 740; 16 ACLC 859 affirmed Link Agricultural Pty Ltd -v- Shanahan (1998) 28 ACSR 498

8 Scottish & Colonial Ltd and by Barrett J in Gosford Christian School Ltd -v- Totonjian (2006) 201 FLR 424

9 Central Exchange Ltd -v- Rivkin Financial Services Ltd (2004) 213 ALR 771

10 Allied Mining & Processing Ltd -v- Boldbow Pty Ltd (2002) 26 WAR 355; [2002] WASC 195; BC200204511

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Alistair Jaque
 
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