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Introduction

This article briefly sets out the various circumstances in which a company may wish to terminate the appointment of a director, and the relevant procedural requirements.  A director’s appointment may be terminated:

  • By resignation.
  • Under the company’s articles.
  • By operation of law. 
  • By ordinary resolution under section 168 of the Companies Act 2006 (CA 2006).
  • Under contract, such as a provision in a service agreement requiring the director to resign.
  • By court order. 
  • By the death of the director.

We will provide a brief overview of all of these.

Resignation

A director may resign his or her office at any time by proper notice to the company and unless the articles provide otherwise, no period of notice is required. A resignation will be effective even where it is in breach of the director’s service agreement (although the director may then be liable to the company for damages).

Vacation of office under the Articles

Where the articles of a company provide that a director vacates office on the happening of some event or the doing of some act, the director automatically vacates his or her office on the happening of the event or on the act being done; no resolution is required and the board cannot waive the event or condone the act.

A board will have no power to remove a director from office unless such a power is set out in the company’s articles i.e. the office will be vacated on the termination of the director’s service agreement, or the office will be vacated if the director is convicted of certain offences.If a director loses their office under an article because they have a protected characteristic covered by the Equality Act 2010 (such as age or disability, including mental impairment), they might have a claim against the company under that Act thus it is important to draft and amend articles to make sure they are in compliance with this Act. 

Vacation of office by Law

The CA 2006 provides that a person may not be appointed as a director unless they are at least 16 years old when the appointment takes effect. There is no maximum age for directors prescribed by the CA2006.

A person is prohibited from acting as a director or directly or indirectly taking part in, or being concerned in the promotion, formation or management of, a company, except with the leave of the court, if the person is an undischarged bankrupt and subject to an order made under the Insolvency Act 1986.

Removal under Section 168 of the Companies Act

Under section 168 of the CA 2006, a company may by ordinary resolution at a meeting remove a director before the expiration of his or her period of office.

The right applies notwithstanding anything in any service agreement between the director and the company (although the director’s right to compensation or damages payable is expressly preserved).

There are detailed procedural requirements for the protection of the director including:

The resolution must be passed at a meeting: a written resolution will not suffice.

Special notice is required, i.e. the resolution will not be effective unless notice of the intention to move it has been given to the company at least 28 clear days before the meeting at which it is moved. Where this is impractical for the company, it must give notice by newspaper advert (or as otherwise permitted by articles) at least 14 clear days before the meeting.

If these procedures are not followed, the resolution is likely to be invalid.

Vacation of office under a Service Agreement

A director may continue to be an officer even after their employment has been terminated. Many service agreements therefore provide for the termination of the director’s appointment on the termination of employment, such as by requiring them to resign as a director.

 Vacation of office under a Court Order

In theory the court could order the removal of directors, via an application for unfair prejudice under the CA 2006 which gives the court wide discretion to make such order as it thinks fit to remedy any unfair prejudice that the petitioner is able to establish. Courts have, however, traditionally been reluctant to exercise their power in this way.

The information provided in this article is intended as a general guide only. It is not exhaustive or tailored to your individual circumstances.

 

    1.  

Where shareholders are looking to receive a tax-efficient payment, perhaps linked to a reduced role or a management team taking more responsibility, a solution is on hand. In the current climate, many shareholders are finding it increasingly difficult to manage a successful exit on acceptable terms if a trade sale is not possible or the business is not appropriate for private equity investment.

Prior to the current economic climate, businesses were more likely to sell the company for a good price or attract debt finance in order to help the next generation (whether family or second-tier management) buy a stake in the business. With the lack of availability of bank finance, this is often no longer an option.

So what are the alternatives?

Businesses with shareholder(s) who wish to de-risk have some options to structure transactions with no (or minimal) external finance. As another incentive, these Owner Managed Businesses may also be able to take advantage of the current tax legislation which permits a 10% tax rate on capital gains (Entrepreneurs’ Relief).

An option:

  • current shareholder(s) receive a cash-out from any cash reserves in the company (or spare cash introduced as part of the transaction);
  • a new shareholder structure is put in place to include the current shareholder(s) plus any current or incoming management (Newco);
  • the new shareholders will pay nominal amounts for their stake in the business with no adverse tax consequences;
  • an acceptable payment profile is agreed with Newco and its stakeholders to pay deferred consideration to the selling shareholder(s); and
  • a partial exit may enable a business owner to focus on growth with an incentivised management team taking on more responsibility. Ultimately this could drive the business forward and increase its value.

There are some additional points to consider:

To ensure the selling shareholder(s) obtain Entrepreneurs Relief, certain conditions must be met which include ensuring the transaction is undertaken for genuine commercial reasons and tax clearances should be obtained. Capital Gains Tax will be paid on the total consideration (initial and deferred) but if appropriate documentation is used:

  1. the tax charge can be deferred until all the deferred consideration is received; and/or
  2. any tax which has been paid on the deferred consideration (which is then not paid by Newco) can be reclaimed.

If finance is available, the above structure can be accommodated alongside any debt finance or private equity investment.

The information provided in this article is intended as a general guide only. It is not exhaustive or tailored to your individual circumstances.

If you would like to discuss a potential deal or other employee share ownership options please do not hesitate to contact richardunderwood@legalclarity.co.uk
or call him on 08456 800 727.

Whoop, Legal Clarity Awarded the coveted Corporate Solicitors of the Year.

“First and foremost, I hope this email finds you and the team at Legal Clarity in good health. 

I am writing to inform you that we have now commenced through our judging process and the results have been finalised for the sixth annual Legal Awards, proudly hosted by Acquisition International. 

On behalf of the team at Acquisition International, I am delighted to confirm that Legal Clarity has been awarded:

Corporate Solicitors of the Year – Birmingham

It is great to be the bearer of good news as your award stands as a testament to your excellence, commitment and dedication.”

Businesses are always looking for different ways to encourage a culture of commitment within their organisations and the Enterprise Management Incentive Scheme (EMI Scheme) is a popular means of doing so. Under the EMI Scheme, companies granted share options to their employees which will allow shares to be received at a later date without ant tax bill arising until the shares are sold.

Unfortunately, many organisations have suffered a downturn in business because of the ongoing Covid-19 pandemic and as a result, earlier this year, the UK government introduced the temporary Coronavirus Job Retention Scheme.

However, for EMI Schemes already in place, this had the unintentional possibility of organisations falling foul of the rules, meaning that staff who were furloughed could lose the associated tax benefits. To comply with the EMI rules, an employee must work for the employer company (or a company within a group) for a minimum of 25 hours per week (or if less, 75% of their working time).

The Covid-19 pandemic has made it difficult for some employees to continue meeting this test because of furlough, unpaid leave or reduced working hours. However, HMRC has announced that where (after 19 March 2020) an employee is unable to meet the full-time working requirements because of Covid-19 related factors, the time that the employee could have spent working for the organisation will count towards their working time, thus allowing the share options to continue to benefit from their advantageous tax treatment, providing both employers and employees keep evidence showing that there is a link to Covid-19.

HMRC has announced that these new rules (unless further extended) will apply for a limited period between 19 March 2020 and 5 April 2021 in respect to options issued before 19 March 2020 and any since that date.

If you would like to discuss this further around your individual circumstances, you can speak to our specialist EMI department.

Legal Clarity experts have help award-winning tech group Microlise acquire TruTac Ltd, the UK’s leading supplier of fleet compliance software for heavy goods and public service vehicles. Our experts helped these two companies turn their shared ethos into a business partnership set to deliver exciting new products and services to international markets.

We’re proud to be taking our place in the Legal 500 rankings alongside Birmingham’s top commercial corporate and commercial law firms.