Removing the chief executive: legal dilemma

Q I am an HR manager at a private company and I have been asked by the majority shareholder to carry out the removal of the chief executive, who as well as being an employee is also a board director and a minority shareholder. The reason I have been given is poor performance, but I am not sure how to go about it nor whether the majority shareholder has the authority. What should I do?

A You are right to question the shareholder’s authority. The articles of association will normally help – expect to see authority for hiring and firing to lie with the board, but you should check. You need to be anticipating a challenge to the validity of the dismissal.

Assuming that authority lies with the board, both you and the majority shareholder must be sure that you are acting with the backing of a clear majority of the board and ideally have a board resolution beforehand. That is not always feasible but at the very least the dismissal should be ratified promptly afterwards by the board. Watch out for provisions in the articles on holding board meetings.

There is case law that suggests that when dealing with unfair dismissal claims tribunal are more sympathetic to companies when dealing with boardroom disputes. The case law predates the statutory dismissal procedures but became more relevant again from 6 April 2009. But with most boardroom disputes, unfair dismissal will not be a key concern – the significant liabilities under the contract of employment will be of greater concern.

The contract of employment may have provisions for automatic resignation from the board when employment ends. If so, take advice on its enforceability. The chief executive may in fact choose to resign to avoid retaining fiduciary duties for no financial gain. Otherwise, the shareholders can force removal but it takes time.

Also look out for provisions in the articles and any shareholders agreement relating to the compulsory sale and/or purchase of shares or any other liabilities and obligations that may be triggered when someone leaves. These need to be considered at the outset as they could lead to a significant expense for individual shareholders and the company.

It is often difficult to distinguish between acting on the needs of the company and the wishes of individuals. Your diplomacy skills will be tested.

Adam Lambert, partner, Barlow Lyde & Lambert

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