Directors hold office subject to removal or retirement by rotation. Section 259 of the Companies and Allied Matters Act 1990 (“CAMA”) requires all the directors of a company to retire at the first AGM, while one- third of the directors are obliged to retire at subsequent AGMs (unless otherwise provided in the Articles). With increasing corporate governance awareness and shareholder interest in the affairs of companies, re-election of retiring directors can no longer be taken for granted.
CAMA does not make a distinction between Executive Directors and Non-Executive Directors and therefore it is safe to say that both types of Directors (except as otherwise provided by the Company’s Articles) are required to retire by rotation. In practice, while several companies include a provision in their Articles which replicates section 259 of CAMA, some by their Articles exempt Executive Directors from retirement by rotation.
What then happens where an Executive Director is not re-elected at the AGM?
It is established that once a Director is removed in accordance with the strict provisions of CAMA, he ceases to be a Director. It therefore follows that an Executive Director who is not re-elected at an AGM ceases to be a Director. His continued employment with the company would however depend on the terms of his employment contract. The Executive Director is in the first instance an employee of the Company and then a Director. The two roles must clearly be distinguished. Thus, where his employment contract is silent on this, an Executive Director who is not re- elected by members at the AGM, though he ceases to be a Director, remains an employee of the Company. The question arises as to the subsequent designation of such an Executive Director. Although some would argue that titles are a matter of nomenclature, the point must be made that the position a Director occupies is one which comes with responsibilities and rights.
It is instructive to note that under the UK Companies Act, when an Executive Director is not re-elected at the AGM, he ceases to be both a Director and an employee of the Company forthwith. Any subsisting service contract with the Company is automatically determined.
The removal of (or failure to re-elect) a Director must be distinguished from dismissal as an employee of a company. An Executive Director has the same protection available to any dismissed employee under the law, as was decided in Longe v. FBN Plc.
The fact that CAMA does not define an “Executive Director”, or make a distinction between Executive and Non-Executive Directors, leaves room for subjective interpretation. It is advisable for companies to have provisions in the Articles which would conclusively exclude (if that is the intention) or otherwise determine the eligibility of Executive Directors from retirement by rotation.
The rationale behind retirement by rotation is to ensure that Boards remain accountable to their shareholders and do not become self- perpetuating. In practice the retirement provision may not by itself achieve the original intention.