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July 18, 2023

Forcing a Director to Resign but Remain as Shareholder

Forcing a Director to Resign but Remain as Shareholder


Boards of directors, both public and private, are viewed as corporate power centers. As a result, it is typical to see corporate disputes arise from and center around a certain group of shareholders wanting to capture directorship positions that benefit the opposing group of owners. The board of directors and the stockholders are the same people. Even if a director is removed from his position, he is still regarded a shareholder in the company.

Forcing out a director in a commercial dispute

In the midst of major turmoil, removing a director is usually the final option. It will inevitably cause disturbance for everyone involved.

As business dispute solicitors, we would advise taking professional advice to ensure there isn’t a better appropriate resolution approach before proceeding.

Some of the primary reasons a director can be asked to surrender their post include:

  • Bankruptcy, or a situation that compromises the integrity of the business
  • Ill health or a change in mental capacity, leading to being unable to fulfil the role
  • Legal factors, such as disqualification
  • Breaches of the service contract
  • Absence from company board meetings for six months without permission

That list isn’t exhaustive, but many of the reasons a board might decide to take action arise from scenarios where it isn’t tenable for the directorship to continue.

In Bangladesh, forcing a director to retire but allowing them to remain a shareholder usually entails a number of actions and legal issues. Here’s a comprehensive overview of the procedure:

Examine the Articles of Association of the Company:

The first step is to thoroughly review the Articles of Association of the company. This document describes the internal rules and regulations that govern the company’s activities, including provisions for director resignation and removal.

Obtain Enough Shareholder Support:

A strong majority of shareholders is usually required to force a director’s resignation. This can be accomplished by engaging with other shareholders and convincing them to vote in favor of the removal of the director.

Call a General Meeting:

After obtaining sufficient shareholder support, you must formally call a general meeting of the corporation. The particular requirements for calling a meeting are outlined in the Articles of Association and the Bangladesh Companies Act.

Pass the following Special Resolution:

During the general meeting, a special resolution addressing the removal of the director must be introduced and passed. The resolution should say unequivocally that it intends to accept the director’s departure while retaining their shares.

Notify the Director:

Following the passage of the special resolution, the corporation must officially notify the director of the decision. This can be accomplished through a formal notice, preferably in writing, indicating the outcome of the general meeting and the consequent resignation of the director.

Modify the Director’s Status:

The resignation of a director should be documented in the company’s statutory registers, including the Register of Directors. It is also critical to notify any relevant government agencies and regulatory bodies of the change in directorship.

Shareholder Contract:

A legal practitioner should be consulted to draft a shareholder agreement that clearly explains the director’s rights and obligations as a shareholder, enabling their continuous involvement in the company’s business while abandoning their directing role.

It is strongly advised to seek legal assistance throughout the process to ensure compliance with Bangladesh’s Companies Act, Articles of Association, and any other relevant laws and regulations.

Directors may be forced to resign from their positions owing to disqualification or circumstances necessitating a vacation of office, or they may be dismissed by passing the extraordinary and ordinary resolutions in the annual general meeting through other directors.

There are three primary methods for removing a director:

Using the legislative procedures of the Companies Act, 1994, and the company’s Articles of Association (AoA),
By a third-party disqualification, such as a court.
Disqualification:

A director is disqualified under the Companies Act of 1994 if-

Unsound mind by a competent court or other authority, undischarged insolvent, applied to be adjudicated as insolvent and his application is pending, has not paid any calls in respect of shares of the firm held by him, a minor.
In its articles of incorporation, the company may provide further grounds for disqualifying a director.
Removal:

A director is removed under the Companies Act of 1994 if-

Extraordinary Resolution:

Using the extraordinary resolution, the corporation can dismiss any share-holder director before his term expires.

Ordinary Resolution:

The company can appoint another person in his/her stead through ordinary resolution, and the person so appointed is subject to retirement at the same time as if he/she had become a director on the day the director in whose place he/she is appointed was last elected director.

Re-appointment:

A director who has been removed from office may not be re-appointed as “a director” by the Board of Directors.

Office Vacation:

A director may be dismissed by relinquishing the office of director under the Companies Act of 1994 for the following grounds:

(a) She or he fails to attain or loses the credentials,

(b) A competent court finds her/him to be of unsound mind,

(c) She/he is declared bankrupt.

(d) She/he fails to pay calls made on her/him in relation to shares held by her/him within six months of such calls being made,

(e) She/he or any firm in which she/he is a partner, or any private company in which she/he is a director, accepts or holds any profit-making office under the company without the approval of the company in general meeting.

(f) She/he is absent from three consecutive director meetings or from all director meetings for a continuous period of three months, whichever is longer, without leave of absence from the Board of Directors.

(g) She/he receives a loan or guarantee from the company, or any firm in which she/he is a partner, or any private company in which he is a director.

(h) She/he engages into any deal with the corporation for the sale, purchase, or supply of products and supplies.

(i) A corporation’s articles of incorporation may require that the office of director be abandoned for reasons other than those listed above.

Finally, the director is a firm shareholder. The other directors can force a director to resign for the reasons stated above, but this does not terminate the director’s right as a shareholder. Because the director is also a shareholder, they can contest the decision to remove them under the terms of the Companies Act.

For example, the director may assert that they are a vital component of the company’s management, particularly if the organization is a partnership. As a result, any attempt to remove them may jeopardize their rights as shareholders.

rtahmiddewey

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