30/11/2017

When relationships between directors of private companies who are family members or business partners break down, how easy is it to get rid of them?

Private companies are set up for a number of reasons including to operate a business or act as trustee of a trust.  

Typically, for self managed superannuation funds or discretionary trusts, the corporate trustee is set up with husband and wife as directors.  

The directors of a company set up to run a business could also be a number of family members, friends or business partners.  

Whether the relationships between directors of a company are family, personal or business-related the relations between these people can turn sour, leaving the directors wanting to get rid of an individual from the company.

Sometimes a director will resign from the company voluntarily, but what can the directors of a company do when one of their own will not leave the company cooperatively?

First place to start, the company’s constitution.

A company’s constitution sets out the rules which govern the company, including the process for the appointment and removal of directors.

If a company does not have a constitution, then the replaceable rules under the Corporations Act 2001 (“Act”) will apply to the company.  The replaceable rules (section 203C of the Act) state that the members of a company can remove a director from office by resolution.  An ordinary resolution requires a simple majority (ie, more than 50% of the votes in favour of) to pass.

Typically, the directors of a company are also shareholders of the company.  For example, if you have a company where husband, wife and son are all directors and shareholders then a resolution to remove the son as a director of the company may be passed by the husband and wife voting in favour of the removal.  This vote is on the assumption that all shareholders hold the same number of ordinary shares with equal voting rights.

Any special rights attaching to the shares of a particular shareholder, whether the chair of a meeting has a casting vote or whether shares are held jointly (in which case generally only the first-registered of the joint owners can vote the shares) may impact the outcome of the vote in question.

If the vote on the removal came to a deadlock and the resolution does not pass, are there any other alternatives for the company?
    
The directors of a company may be able to propose an offer to the director they wish to remove by providing an incentive to cooperate.  This incentive may for example be an offer of a sum of money and can be properly drawn up as an agreement between all directors.  

Following the removal of a director, the remaining directors may also wish to have that same person removed as a shareholder of a company.  A shareholder has a stake in the company itself and generally cannot be forced to sell or transfer their shares.  However, a shareholders agreement may exist which contains specific provisions on buying/selling shares of existing shareholders.

It is far more convenient for a director to voluntarily resign. However, in reality, sometimes people don’t want to leave without a fight.  The directors of a company where possible should try and reach a negotiated agreement between themselves even if it involves some sort of monetary incentive.  

Whatever the situation, it is wise for directors to seek legal advice, have any negotiated agreements drawn up formally and, in particular, seek advice relating to decisions affecting shareholders, particularly where the actions of directors may be seen as shareholder oppression.

Also, the trust deed of the relevant trust should be considered.  That deed may provide for the trustee company to be removed by an appointor or, in the case of a unit trust, perhaps by a majority vote of unitholders.

If you require assistance with advice on an existing constitution, trust deed, shareholders agreement or particular situation, and whether any documents need to be drawn up, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.