How do you dismiss an underperforming director?

SME Publications/ SME XPO 2024

By Chris Cook, Partner and Head of Employment and Data Protection, and Vincent Billings, Partner and Head of Corporate & Commercial at SA Law

The furore recently caused by Sam Altman’s sacking from OpenAI and subsequent reinstatement was a timely reminder of how carefully businesses have to handle senior exits. In this case, the board at OpenAI had decided to remove Altman, who is a co-founder of the company. This decision caused five days of chaos, with more than 700 of OpenAI’s staff soon signing an open letter threatening to leave unless the board resigned. Altman was eventually offered his job back and it has been reported the company’s board will be changed. Nevertheless, some have suggested this incident has been damaging to OpenAI’s reputation – Nick Patience of S&P Global Market Intelligence told the BBC that “OpenAI can’t be the same company it was up until Friday night. That has implications not only for potential investors but also for recruitment.”

This is surely an example of a mishandled director exit, but what lessons can be learned here, and what options are available to businesses considering the dismissal of a director?

It is important to remember that the dismissal of a director is much more difficult compared to an employee, and the procedure to be followed is more onerous. The process can be fraught with difficulty and can come at great legal risk, so caution must be given.

Firstly,  consideration should be given to why you want to dismiss the director.  Presumably, for that individual to hold a position of director in the business, it is likely that they offered value at some point and whilst circumstances may have changed, it is worth having a frank and honest conversation about any issues that have arisen. A conversation could alleviate concerns and help pave a better understanding of expectations, avoiding the need to remove the director and have a better working relationship.  It is possible that the conversation could also lead to the director agreeing that the working relationship is no longer working and wants to leave amicably allowing for an agreed exit plan. Needless to say, it is imperative to take legal advice before such a conversation is held – but this can be an important first step in the process.

Ultimately, the process of removing an underperforming director depends on the company and its structure. In most companies, this power rests with the board of directors or with the shareholder majority and this is laid out in the company’s articles of association and the Companies Act 2006.

Even when special provisions are laid out in the company’s articles of association, Sections 168 of the Companies Act 2006 provides a statutory procedure to remove a director at a shareholders meeting. Once the company has decided to propose a resolution to remove the director, the director subject to the resolution must be informed. The director has the right to make written representations and they can also attend, and speak at, the shareholders’ meeting in order to defend themselves against their proposed removal. The detailed procedures set out in the Companies Act 2006 must be followed to ensure that the shareholder meeting and resolutions are valid.

It’s also important to consider the director’s employment status alongside this process. Although the provisions for director dismissal in the Companies Act 2006 apply, the employment status and how the relationship is structured could create further issues in the employment tribunal or the county court. For example, depending on the specific circumstances, a former director could potentially bring a claim for unfair dismissal and/or wrongful dismissal against the company.

Make no mistake, an underperforming director can spell bad news for a company, but mishandling the removal of a director could make the problems worse, impacting the company’s reputation and the future performance. Careful consideration of all options and taking legal advice at the earliest possible opportunity is advisable, to avoid an OpenAI situation.

Chris Cook, Partner and Head of Employment and Data Protection, and Vincent Billings, Partner and Head of Corporate & Commercial at SA Law

 

SME Publications/ SME XPO 2024