How to fire a director of a company

One of the directors of your company needs to go. Just fire them, right? Be careful to follow the correct legal process when removing a director. It is not as simple as firing them and showing them the door! A director removed may have rights to claim for compensation or damages if the company has failed to follow the correct process.

Giving a director the chop? Make sure the blade is sharpened.

A director is appointed and removed subject to the will of the shareholders of the company. There is also provision for the board of directors to remove a director.

But removing a director is not as simple as passing an ordinary resolution. Failing to follow the correct process could result in financial loss to the company.

The Companies Act recognises the critical role of a director and how damaging it can be to a company to keep an underperforming director in the driving seat. It therefore provides for a company to cut a director’s career short. However, although directorship is a unique position, case law confirms that directors are not exempt from application of labour law. In SA Post Office Ltd v Mampeule (2010) 31 ILJ 2051 (LAC), the Court observed that a director acts in two different capacities – they are a director of a Company, and is governed by the Companies Act - but are also an employee of the company, and that relationship falls under the ambit of the Labour Relations Act.

Companies should therefore be mindful that, in removing a director, they may also be dismissing an employee. Removal from directorship need not necessarily result in termination of the employment relationship with the company – the outgoing director could be redeployed to another position. But even then, companies should bear in mind that such a decision constitutes a change in the person’s working conditions under labour law.

The solution? If you need to remove a director, do so without fear or hesitation – but do ensure that the director’s rights under labour law are not infringed. Ensure that the termination is conducted in compliance with both company law and labour law.

Ensure you follow the correct process in firing the director:

·       Review and understand their contract especially with regard to payouts (“golden handshakes”)

·       Have KPIs against which the director’s performance can be measured

·       Constitute a proper meeting

·       Give director sufficient notice of meeting

·       Give director sufficient opportunity to make representations at meeting

·       Confirm the removal by communicating the decision to them

·       Follow correct labour process

·       File the appropriate paperwork with CIPC.

Neglecting to draft a suitable directorship contract could see your company paying a fat golden handshake to get rid of a bad director. It can be avoided.

SUMMARY:

Can a director hire another director?

Yes, but usually only when there’s a vacancy. Shareholders appoint directors.

Can a director fire another director? 

Yes, the board of directors can resolve to remove a director, but it is usually shareholders who pass such resolutions.

How do you fire a director? 

Follow the correct procedure, including notice, evidence, representation and other labour processes.

What are the potential pitfalls of removing a director incorrectly? A director may also be an employee, which gives them protection under labour law. Failure to follow proper processes can result in a claim for compensation by the outgoing director.

Contact us for bespoke advice in corporate law including directorship and shareholding issues, contracts, labour and corporate governance.

Now read: Hold your director to KPIs - here.