The apparently rapid decline of House of Fraser is another painful episode for our high streets. The latest headlines such as “Sports Direct sacks all top House of Fraser directors” create huge interest. Putting aside the emotive reporting in the press, lawyers will have looked closely at the arrangements that the company has with its directors and the speed with which their appointments can be terminated.
What is the starting point, in law, for removing directors?
The first place to look is the contract (if any) with the director. In appropriate cases, the company will have a service contract with its directors setting out key terms, including notice provisions. In order to protect itself, the company will be keen to see that there are confidentiality and post termination covenants in the service agreement.
It is not inconceivable that a shareholders agreement will be relevant, particularly if the director in question is also a shareholder in the company. If there is a shareholders agreement, it should be considered.
The articles of association of the company will always be relevant
The articles of association will determine how directors are appointed and removed from office. The current default articles of a company (the Model Articles) for a private company limited by shares set out the circumstances in which a director ceases to remain in office. These include operation of law, bankruptcy, prohibition, mental incapacity and resignation. Model articles will not be appropriate for all companies; properly tailored articles of association to suit the specific circumstances of the company and its shareholders will be a good investment.
Model Articles do not expressly allow a director to be removed
The Model Articles do not expressly allow a director to be removed by the shareholders. The Companies Act 2006 provides a solution. Under the Act, a company has power by majority resolution of the shareholders to remove a director from office. There are procedural requirements set out in the Act that need to be followed, involving the shareholders and the board. If the procedures are not followed, the resolution to remove a director may be invalid.
Unfair prejudice claims
Finally, a court can order removal from office under an unfair prejudice claim, brought by the shareholders.
The House of Fraser articles are remarkably short. The company adopted new articles long before it fell into the more recent difficulties experienced by the group. The articles of the company (now in administration) give power to the holders of a majority of the ordinary shares to remove any director. Under the articles, the removal can be carried out in writing, signed by such majority and takes effect when lodged at the registered office or produced to any meeting of the directors. This is a relatively straightforward process that is simpler than the procedures set out in the Companies Act. Therefore the mechanism laid out in the articles of association allows the company to take action expeditiously when required.
Gavin Poole is a partner in the corporate team at Stephens Scown. If you would like to talk about this article or any other corporate law matter then please do contact Gavin on 01872 265100, or by email firstname.lastname@example.org.