APPOINTMENT AND REMOVAL OF COMPANY DIRECTORS FROM OFFICE
Is it a simple process or a complex procedure that requires a careful process?
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The Companies Act 2012 which is the principal legislation on company law in Uganda requires every company (private or public) to have a director or directors. Directors are responsible for management of the company affairs.
A company director can be appointed at any time after incorporation, and may be removed from office or resign at will at anytime provided such actions are in compliance with the Companies Act, the articles of association of the company or the director’s service agreement. Appointment or removal of a director from office must comply with the required legal formalities to ensure that the process of appointment or removal is in accordance with the law.
Who is a company director?
A director means any person occupying the position of a director by whatever name called, so it may be any person either appointed as such (de jure director) or that who is not appointed but acts as one (de facto director) and also includes a shadow director.
A public company must have at least two directors and a private company must have at least one director. Where a private company has one director, such director cannot also act as secretary. A single member company is required to have two nominee directors, one who is a nominee director and the other an alternate nominee director. A nominee director’s role is to act as director in the event of death of a single member and an alternate nominee director’s role is to act as director in the absence of or in case of non availability of the nominee director.
There are different categories of directors, there are statutory directors, who are the company directors appointed in accordance with the Companies Act and regulated by company law provisions. There are also the non statutory directors that have a title of directors given to them for example departmental heads. If such persons have not been appointed to the board, they do not possess the same legal rights as those of statutory directors and are not subjected to the duties of the directors under the companies Act.
Among the statutory directors we have the executive and non executive directors. There is a greater consensus that legally speaking, there is no distinction between an executive and a non executive director. I agree that there is no legal distinction because they both have the same fiduciary duties they owe the company and they have the same liabilities as directors, and must act in the best interests of the company. However, there is a distinction in their roles in the company which cannot be looked at with a closed eye.
An executive director is usually company employee, usually as a senior executive and board member, so on top of a full time executive position, that person is also a board member. An executive director has management responsibilities; a non executive board member on the other hand is a board member without responsibilities for daily management of the operations of the company.
A good board should have at least half of it constituted of independent non executive directors. Non executive director’s role can be seen as balancing that of the executive directors so as to ensure the board as a whole functions effectively. Non executive directors are appointed for their personal qualities, experience and expertise. Good corporate governance mandates that before a non executive director is appointed, the nominations committee if any will have assessed the skills, experienceand expertise missing on the board prior to appointing a new non executive director.
Non executive directors are not employed by the company but are appointed by a letter of appointment. They challenge, question and monitor the Chief Executive Officer and senior management, they bring independent perspective to decision making. They hold senior management to account; they also support and mentor the Chief Executive Officer and senior management. The non executive directors attend board meetings and provide independent oversight of the company’s strategy, ethics and integrity. The managing director is appointed to head implementation of board strategy. There are also the nominee and alternate directors. Then there is a shadow director who is that person in accordance with whose directions or instructions the directors of the company are accustomed to act. A holder of controlling or majority shares of a private company who is not technically a director and does not openly participate in the firms governance, but whose directions or instructions are routinely complied with by the employees or other directors is a shadow director, and therefore a defacto director together with other defacto and dejure directors. All directors have the same legal rights and duties. The board of directors
The board of directors is constituted of individual directors who are elected by the shareholders. Many companies operate on a rotating system so that only a fraction of the directors are up for election each year to make it much difficult for a complete board change to take place due to hostile takeover. The board is the highest governing authority within the management structure of the company.
The board is appointed to act on behalf of the shareholders to run the day to day affairs of the company and is accountable to the shareholders and each year the company will hold the annual general meeting at which the directors must provide a report to shareholders on the performance of the company, its future plans and strategies and also submit themselves for re-election to the board.
Sometimes a corporate board may not be responsible for the day to day running of the company and such powers may be exercised by the company’s executives and managers while the board carries out an oversight role and makes over all policy decisions.
The primary duty of the board members is the fiduciary responsibili ty to take care for the finances and legal requirements of the compa ny, they must act in good faith and with reasonable care and they m ust not have any conflict of interest. That is the interests of the comp any must take precedence over personal interests of individual boar d members.
Company law and judicial precedent have not revealed precisely what directors’ role or functions are, and any attempt would not precisely and exhaustively capture what they do or do not do when “they manage”. However, there are well known roles of the board, for example; selecting top executives; determining policy; measuring results; dealing with business and financial issues; dealing with matters relating to corporate governance, social responsibility and corporate ethics, monitoring the exercise of delegated authority so that individual directors can report on their particular areas of responsibility among others. Qualifications of directors
A person wishing to act as a director must be 18 years and above and any person wishing to act as a director in case of a company having a share capital except a private company must consent in writing and register such consent with the registry of companies. It is an offence to submit company documents for registration without the consent of a person named in the documents as direct or of the company.
Where a company by its articles requires a director to acquire qualification shares, a person shall not serve as director without holding a specified share qualification. It is an offence to occupy and continue occupying the office of director without acquiring such qualifi cation shares.
The following persons are also disqualified from acting as directors of a company. A person who has been declared bankrupt cannot act as director unless he has been discharged from such bankruptcy. A person who has been previously convicted of any offence in relation to promotion, formation, management and winding up of a company is disqualified from acting as director for a period of 5 years. A person is disqualified from acting as a director for a period of three years where he or she has failed to; keep proper accounting records; prepare and file accounts; send returns to registrar; file tax returns and pay tax; or has allowed a company to trade while insolvent. If any of the above disqualified persons acts as director, that person commits an offence and is liable to penal sanctions on conviction.
Where a person acts as director without meeting the above qualifications, the acts he does are not invalid because he was not qualified to act as such. The law recognises both a dejure director (one that is properly appointed as such) and a defacto director (one who is not properly or formally appointed but acts as director). The law clearly provides that the acts of a director shall not be called into question because of defects that may afterwards be discovered in his or her appointment or qualifications. In the case of R V Camps, the company’s articles required any person acting as director to have at least one fully paid up share in the company; Camps did not meet this requirement but acted as director. When he was charged with several offences relating to mismanagement of the company i.e. failure to hold an annual general meeting, to keep proper books of accounts etc, he argued that he could not be held responsible for failing to perform the duties of a director because he was, after all, not qualified to act as one. Court held that Camps could be held liable since he was all along acting as a defacto director.
The process of appointment of a director
(a) Appointment by shareholders
A company’s shareholders can appoint directors and such appointments are done at the annual general meeting and in extreme cases at an extra ordinary general meeting of the company. A resolution for the appointment is put to vote. The company’s Act specifically provides that at an annual general meeting for the appointment of a director in a public company, a motion for the appointment of two or more persons as directors of the company by a single resolution can only be made with a unanimous resolution of the shareholders.
Where the number of directors in the company is limited by the articles of association, appointment of a new director will only take place only if a vacancy arises.
(b) Appointment by the board of directors
The company’s board of directors may appoint (but not dismiss) a director into office where that power is given under the Articles of Association of the company. This may happen where a vacancy arises unexpectedly in the company either through sudden removal, resignation or death of a director. The board powers to appoint a
director are usually given with limitations that such appointment must subsequently be confirmed by the shareholders in a general meeting within a prescribed period. This process is usually prescribed in the articles of association and it is not the same for all companies.
Appointment of a director must also comply with the articles of association which contain the internal rules that the shareholders have agreed upon for example a limitation may be put on the number of family relatives that can serve as directors at one time. Appointment of a director(s) must be registered with the company registry.
Removal of a director from office
The Company’s Act provides for statutory provisions on removal of directors. A company may by ordinary resolution remove a director from office before the expiration of his or her period of service, notwithstanding anything in its articles of association or in any agreement between the company and the director. This however does not apply to directors holding office in a private company. The law requires that special notice of the resolution to remove a director is given by the company. Where special notice is required of a resolution, the resolution is only effective where notice of intention to move it has been given to the company not less than twenty eight days before the meeting at which it is moved. The company is required to give its members this same notice of the resolution at the same time and in the same manner as it gives notice of the meeting. Where that is not practicable, the company is required to give its members notice either through advertisement in a newspaper of wide circulation or in any other mode allowed by the articles not less than twenty one days before the meeting.
The law also requires that the company serves the same notice on the director to be so removed whether he or she is a member or not and such director is entitled to be heard on the resolution at the meeting.This is in accordance with the principal of a fair hearing as granted by the constitution as a human right.
A company’s articles of association may also invariably provide for reasons and procedure for removal of a director from office. However, provisions in the articles that limit or exclude the applicability of the Company’s Act provisions on removal of directors from office are illegal, null and void and cannot therefore be enforceable in the courts of law.
Therefore, a company’s shareholders can always remove a director from office following a formal process set by law. A director holds office at the wish of the shareholders. He can be removed by a 50% vote at a company’s general meeting of shareholders. The articles of association of the company or the director’s service agreement might give the director rights but this cannot stop that director from being removed. Shareholders have the right to remove a director from office and this right cannot be taken away by any provision in the articles of association or the director service agree ment.