How to give a private director ‘the boot’

By Lucy Dean

January 15 2018
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SMSFs and discretionary trusts often feature family members in positions of corporate trustees and directors, so kicking a director out can be a sensitive matter.

However, there are steps that can be taken, says Townsends Business & Corporate Lawyers solicitor, Natasha Ng.

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

“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?”

The first step is to consult the company’s constitution, Ms Ng advised.

The constitution will detail the company’s governing rules and the process for a director’s appointment and removal.

If the company doesn’t have a constitution, the Corporations Act 2001 replaceable rules will apply instead. These rules, section 203C of the Act, explain that a director can be removed from office by a resolution.

“An ordinary resolution requires a simple majority (more than 50 per cent of the votes in favour of) to pass,” Ms Ng said.

She continued: “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.”

However, she added that special rights attached to a particular shareholder’s shares may impact the vote’s outcome, regardless of whether the chair of the meeting possesses a casting vote or the shares are held jointly.

What if the vote comes to a deadlock?

Ms Ng said that in this instance, the company’s directors may be able to propose an incentive to the director to co-operate.

“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.”

Once the director has been removed, Ms Ng said remaining directors might also want to have the same person removed as a shareholder.

Explaining that a shareholder cannot be forced to sell or shift their shares, the solicitor said a shareholder’s agreement which includes provisions on buying and selling existing shareholders’ shares could provide some guidance.

She added that, in the case of a trust, the trust’s deed should also be considered as it may allow for an appointor to remove the trustee company. Alternatively, a trustee company could be removed through a majority vote of unitholders if it is a unit trust.

However: “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.”

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