Corporate Law Update You're Fired! - dealing with the removal of

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Corporate Law Update
You’re Fired! - dealing with the removal of directors from the board
by Alistair Jaque (Partner) and Leila Golchin (Solicitor)
December 2008

Differences of opinion or loss of confidence in the boardroom                          proprietary company can include in its constitution relating
can cause troublesome disputes between board members. In                               to the removal of directors. Although such matters may be
these circumstances it may be necessary to consider how to                             governed by a shareholders’ agreement, the members of a
remove a director from the board.                                                      proprietary company, in theory, have free rein to determine
The ultimate shareholder control is the power to remove                                the circumstances in which directors of that company may be
directors. The main statutory rules dealing with the removal                           removed.
of directors are located in the Corporations Act 2001
(Act). A person will cease to be a director of a company                               Removal of a public company director by members
if he or she resigns or is disqualified from acting in his or                          To remove a public company director is more complex.
her capacity as director by the Australian Securities and                              Section 203D of the Act provides that a public company may
Investments Commission (ASIC) or a court1 . Other triggers                             by resolution remove a director from office at any time despite
for the removal of a director may exist under the company’s                            anything that may be found in the company’s constitution,
constitution. The triggers available will differ depending on                          an agreement between the company and the director, and an
the type of company. The situation is more straightforward                             agreement between the members and the company2 .
for proprietary companies than public companies.                                       The Act sets out the procedure that must be followed to remove
                                                                                       a director3 :
Removal of a proprietary company director                                              • a notice of intention to move the resolution must be given to
In a proprietary company the members in general meeting                                      the company at least two months before the general meeting
cannot by majority remove a director unless the constitution                                 to pass the resolution is to be held
confers that power or if the company is one to which                                   • a copy of the notice must be given to the director who
replaceable rules apply then under, section 203C of the Act,                                 is to be removed as soon as practicable after it is received
which provides that a proprietary company may by ordinary                                    by the company
resolution remove a director from office. To remove a                                  • the director is entitled to put his case to the members by
director without that power would be an attempt to vary the                                  giving the company a written statement for circulation to
contract as between members and between the director and                                     members (unless it is defamatory or over 1000 words long)
the company that the directors shall hold office for the period                              and to speak to the motion at the meeting.
contemplated by the constitution.                                                      The Act requires that members of a public company receive at
A director may also be removed by a majority of directors if                           least 21 days’ notice of the meeting at which a resolution to
the constitution empowers the board to do so. If the director                          remove a director will be moved4 .
is an executive director, the company should be mindful                                If a director is representative of a particular class of shareholders
of the terms of employment of that director, as executive                              or debenture holders, the resolution to remove the director
directors are company employees and their dismissal is                                 does not take effect until a replacement representative has been
governed by employment law.                                                            appointed5.
There are no statutory restrictions on procedures that a




        Level 1, 20 Hunter Street, Sydney NSW 2000               GPO Box 35 Sydney NSW 2001              T: 9233 5544 F: 9233 5400 E: mail@swaab.com.au
                                                                         www.swaab.com.au
This newsletter is not legal advice and the views and comments are of general nature only. This document is not to be relied upon in substitution for detailed legal advice.
Is compliance with section 203D mandatory?                                                 different from its predecessors in the emphatic language used and
Sections 203D(2)-(7) outline procedures for the removal                                    is also different in terms of its procedural requirements.
of a director of a public company. An important issue is                                   There are now conflicting decisions of the Supreme Court of New
whether compliance with section 203D(2)-(7) is mandatory or                                South Wales8 in relation to whether compliance with section
whether a company can have an alternative mechanism in its                                 203D(2)-(7) is mandatory. There are also decisions of the Federal
constitution for removing a director. Until Scottish & Colonial                            Court of Australia9 and the Supreme Court of Western Australia10
Ltd -v- Australian Power and Gas Co Ltd6 (Scottish & Colonial                              that interpret section 203D differently to Scottish & Colonial Ltd.
Ltd), it had always been considered that the statutory power                               The statutory removal power has the principal purpose of ensuring
in section 203D did not replace any other power of removal                                 that public company directors are not entrenched. Any limitation
possessed by the company. The two conflicting views that                                   on members of a public company who would otherwise have the
now exist are set out below.                                                               right to remove directors in any way provided in the constitution,
                                                                                           seems to move against the intentions of the section.
Section 203D is not mandatory                                                              These inconsistent interpretations of section 203D warrant
The majority of the courts have taken the view that the                                    consideration of this matter by an appellate court.
statutory power in section 203D does not replace any other
power of removal possessed by the company. For example,                                    Removal of a public company director by the board
provisions may be included in a constitution to require                                    The prohibition on the discretion of public companies to provide
a director to vacate office without the need for a vote of                                 for the removal of a director by the board is found in section
shareholders (in defined circumstances).                                                   203E of the Act. Attempts by the board to remove a director
Other self-executing provisions in a company’s constitution                                from office are void. ASIC has interpreted the provision to mean
could provide for the removal of a director as a consequence                               that it is ultimately the members who decide whether a director
of failing to meet certain quantitative performance measures                               is to remain in office. This means that any agreement or other
or losing certain qualifications. An example of such a self-                               arrangement that says that a director can be removed from office
executing provision is one which provides that a director will                             if the other directors decide to do so is ineffective. The Australian
cease to hold office if that director does not attend board                                Institute of Company Directors (AICD) has backed the view that
meetings for a certain number of months without the board’s                                only members of the public company may remove a director.
permission. Another example, is where directors will only                                  The AICD believes that to allow the board of a public company
continue to hold office so long as they remain employed by the                             to remove a director could compromise the independence of
company.                                                                                   mind of members, which is a fundamental principle of corporate
Where a public company has a provision in its constitution                                 governance.
providing for the removal of a director by shareholders and
the requirements in the constitution are different to those in                             Conclusion
section 203D, it is a matter for the shareholders whether they                             Removal of a director is usually the last resort to end a dispute
proceed to use the provision in the constitution or section                                between board members, or the board and the company.
203D7 .                                                                                    A company considering to amend its constitution to include
                                                                                           mechanisms to remove a director should seek further advice
Section 203D is mandatory                                                                  before proceeding. For further information to discuss your
In Scottish & Colonial Ltd, Bryson AJ held that compliance                                 specific needs, please contact Alistair Jaque on 02 9233 5544
with section 203D(2)-(7) is mandatory. He based this                                       or email afj@swaab.com.au.
conclusion on several factors, including that section 203D is

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


            Level 1, 20 Hunter Street, Sydney NSW 2000               GPO Box 35 Sydney NSW 2001              T: 9233 5544 F: 9233 5400 E: mail@swaab.com.au
                                                                             www.swaab.com.au
    This newsletter is not legal advice and the views and comments are of general nature only. This document is not to be relied upon in substitution for detailed legal advice.