Procedures for Removing a Director
Introduction
In many cases, a company will consider the dismissal of a director, such as when there is a disagreement with the representative director on management policy, when the number of directors needs to be reduced due to downsizing of the company’s business, or when a director causes damage to the company by committing a misconduct. Therefore, this paper will explain when a director can actually be dismissed, what procedures should be followed in the case of dismissal, and whether there are any risks involved if the dismissal procedure is taken.
Difference from Resignation or Resignation
Dismissal” of a director means that the company, by a resolution of the shareholders’ meeting, terminates the director’s term of office regardless of the director’s intention. On the other hand, “resignation” means that a director voluntarily resigns from the office of director in the middle of his/her term of office. On the other hand, “resignation” means that a director resigns from the office of director after the expiration of his/her term of office to the end. Thus, if a company wishes to have a director resign in the middle of his/her term of office, regardless of the director’s intention, it is necessary to go through the dismissal procedure.
When a director is dismissed, the fact of the dismissal will be entered in the company’s register. Financial institutions and business partners may be concerned that the company is involved in a dispute that cannot be resolved through discussion. Therefore, before dismissing a director, it is advisable to first set up a meeting to discuss the matter with the director in question and negotiate with him or her to stop in the form of resignation.
When a director may be removed
A director can be removed from office at any time, for any reason, by a resolution of a general shareholders meeting (Article 339, Paragraph 1 of the Companies Act). The contractual relationship between a director and the company is subject to the provisions regarding delegation (Article 330 of the Companies Act), and the delegation contract may be terminated by each party at any time (Article 651 of the Civil Code). In addition, since directors have a delegated relationship with the company, they are not considered workers, and labor-related laws and regulations do not apply to the dismissal of directors. However, as described below (“5.1 Claim for Compensation for Damages by Dismissed Director”), it is important to note that the dismissal of a director is governed by the Companies Act.
Procedures for Removing Directors
There are two ways to dismiss a director: by resolution of dismissal at a general shareholders meeting or by filing a suit for dismissal. Each of these procedures is explained below.
In a company with a board of directors, it is necessary to convene a meeting of the board of directors and pass a resolution to convene a general shareholders’ meeting to pass a resolution for dismissal. Unless otherwise stipulated in the Articles of Incorporation, a resolution of the Board of Directors may be adopted by a majority of the votes cast by a majority of the directors present at the meeting who are entitled to participate in the voting (Article 369, Paragraph 1). After the Board of Directors resolution is passed, minutes of the Board of Directors meeting must be prepared (Article 369, Paragraphs 3 and 4 of the Companies Act). Please note that the director to be dismissed cannot be excluded from the above procedures.
Next, the director convenes a general meeting of shareholders to pass a resolution for dismissal. In principle, the convocation procedure is carried out by the directors (Article 299, Paragraph 1 of the Companies Act). The convocation procedure differs depending on the type of company (public or private, with or without a board of directors). In addition, if the Articles of Incorporation of the company stipulate different convocation procedures, those procedures must be followed. Specifically, if the deadline for convening the meeting is missed, if there is an omission in the notice of convocation, or if there is an error in the description of the notice of convocation, the resolution may be invalidated as if the convocation procedure for the shareholders’ meeting was flawed.
Once a general meeting of shareholders is held, a resolution to dismiss directors must be passed. Unless otherwise provided for in the Articles of Incorporation, a resolution to dismiss a director may be adopted by a majority of the voting rights of the shareholders present at the meeting (Article 341 of the Companies Act) and a majority of the voting rights of the shareholders present at the meeting are affirmative (Article 339, Paragraph 1 and Article 309, Paragraph 1 of the Companies Act). In addition, minutes of the shareholders’ meeting must be prepared after the shareholders’ meeting (Article 318, Paragraph 1). The minutes of the shareholders’ meeting are necessary for registering the dismissal of a director, as described below (“6.1 Registration of Dismissal”), and must be accurately prepared in accordance with the statutory requirements (Article 72, Paragraph 3 of the Enforcement Regulations of the Companies Act).
Method by appeal for dismissal
Another way to dismiss a director is for a shareholder to file an action for dismissal of the director with the court and win the case (Article 854 of the Companies Act). This action can be filed within 30 days from the date of the shareholders’ meeting when a proposal to dismiss a director is rejected at the shareholders’ meeting despite the director’s misconduct or violation of laws, regulations, or the Articles of Incorporation in the performance of his/her duties. The shareholders who can file this action are limited to those who have held shares representing at least 3% of the total voting rights or the total number of shares issued and outstanding for six months prior to the filing of the action (in the case of a privately held company, the holding period is not a requirement).
This action is a right granted to minority shareholders to prevent the rights of minority shareholders from being prejudiced by the continued rejection by majority shareholders of resolutions to dismiss directors who have committed misconduct, etc.
In an action for dismissal, not only the director to be dismissed but also the company becomes a defendant (Companies Act, Article 855). The company must respond to the dismissal of the director if it loses the lawsuit.
Risks of dismissing a director
Claims for damages from dismissed directors
As mentioned above, a company may dismiss a director at any time by a resolution of a general meeting of shareholders. However, if there was no “justifiable reason” for such dismissal, the dismissed director may claim compensation from the company for damages caused by the dismissal (Article 339, Paragraph 2 of the Companies Act) As a general rule, a claim may be made for the amount of remuneration that should have been earned during the remaining term of office (Osaka High Court decision, January 30, 1981).
Examples of cases in which ” justifiable reason ” was recognized include: a case in which a director became unable to perform his duties due to physical or mental disability (Supreme Court, January 21, 1982); a case in which a director acted in violation of laws and the articles of incorporation (Tokyo District Court, March 29, 2008); a case in which a representative director caused confusion in the company through his arbitrary management (Osaka District Court, January 28, 1998); a case in which a director’s ability to manage his own business was impaired by his own actions (Osaka District Court, January 29, 1998), and a case in which the director’s lack of managerial ability was obvious (Yokohama District Court, July 20, 2012).
On the other hand, cases in which “justifiable reason” was denied include a case in which a director had not performed well in recent years due to disagreements with other directors (Tokyo District Court, December 23, 1982) and a case in which a director lost the trust of major shareholders (Tokyo District Court, June 22, 2015).
In light of the above court cases, whether or not ” justifiable reason ” is recognized is based on whether or not there are objective circumstances that make it unavoidable to determine that the director cannot be entrusted with the execution of duties, and whether or not such objective circumstances are caused by the director in question. When considering the dismissal of a director, whether the reason for dismissal constitutes ” justifiable reason ” is an important point in avoiding the risk of claims for damages from the director to be dismissed.
Countermeasures against a director to be dismissed
A director who is about to be removed from office is expected to try to persuade other directors not to vote in favor of the resolution of the board of directors calling a shareholders’ meeting, or to persuade shareholders not to vote in favor of the resolution of removal and to obtain a proxy for the exercise of voting rights. Therefore, if a director is expected to attempt to manipulate the majority by obtaining proxies from shareholders, the company should collect proxies for voting from shareholders in advance.
Procedures after dismissing a director
Registration of dismissal
When a resolution to dismiss a director is passed, an application for registration of change of officers must be filed within two weeks after the dismissal. When applying for registration of the dismissal of a director, (1) an application form for registration of change of directors, (2) minutes of the shareholders’ meeting, (3) a list of shareholders, and (4) a letter of proxy (if the application is filed by a proxy) will be required.
When registering the appointment of a successor director at the same time, the following documents are also required in addition to the above: (1) application form for registration of change of director, (2) minutes of shareholders’ meeting (resolution for appointment), (3) list of shareholders, (4) letter of acceptance of appointment, (5) letter of attorney, (6) certificate of identification (in the case of a company with a board of directors).
Failure to register the change during the application period may result in a fine being imposed on the representative director, so the change registration procedure must be completed. However, as mentioned above, there are many documents that must be submitted for the application, and the application for registration will not be accepted if there are any minor deficiencies in the submitted documents.
Notice of Dismissal
When a director is dismissed, a notice of dismissal must be given to the director. The notice of dismissal informs the director of the decision to dismiss him or her. Although not legally required to do so, it is considered advisable to give notice of removal to prevent the removed director from continuing to act as a director in the company after his or her removal.
Retirement Benefits to Terminated Directors (Severance Pay)
In order for retirement benefits to be paid, a resolution of a general shareholders meeting is required unless otherwise stipulated in the articles of incorporation (Article 361, Paragraph 1 of the Companies Act). Therefore, a company is not obligated to pay retirement benefits to a dismissed director unless a resolution to pay retirement benefits to the director was passed at a previous general meeting of shareholders.
However, even in the absence of a resolution at a general meeting of shareholders, if there is a practice of paying retirement benefits to directors, if there is an agreement with directors to pay retirement benefits, or if the articles of incorporation provide for the payment of retirement benefits to directors, the company is liable for damages if it fails to pay retirement benefits to directors.
If a dismissed director owns shares in the company, he/she may exercise his/her rights as a shareholder even after his/her dismissal, which may hinder the operation of the company. Therefore, it is possible to purchase the shares from the dismissed director. In purchasing the shares, the company will negotiate with the directors regarding the purchase price and other matters.
If negotiations are successful and the shares are transferred, it is advisable to draw up a share transfer agreement to prevent problems later on. When drafting a share transfer agreement, it is necessary to pay attention to the existence of transfer restrictions, whether or not share certificates will be issued, and other matters that should be included in the agreement.
Services our firm can provide
Our firm can provide consultation at the pre-dismissal stage, support for dismissal procedures, and support for post-dismissal procedures.
In the pre-dismissal consultation, we will ask about the circumstances leading to the dismissal and consider whether there is a “justifiable reason” for the dismissal in preparation for a claim for damages from the director in the event that the dismissal is made. If it is determined that there is no “justifiable reason” for the dismissal, the company will in principle be liable to compensate the director for the amount of compensation that would have been earned during the remainder of his/her term of office.
In the dismissal procedure, we provide support for the overall procedure, including preparation of the minutes of the board of directors meeting, support for the convocation procedure of the shareholders’ meeting, support for the operation of the shareholders’ meeting, attendance of attorneys at the shareholders’ meeting, and preparation of the minutes of the shareholders’ meeting.
For procedures after dismissal, we provide support for registration procedures related to dismissal, procedures related to retirement benefits, and procedures for purchasing shares from directors.
If you have any questions or concerns regarding the dismissal of directors, please feel free to contact us by phone at 03-5357-1750 (office hours: 9:00-18:00(JST)) or by e-mail at info@kslaw.jp.
