Directors are required to hold office subject to retirement by rotation or removal. Section 259 of the Companies and Allied Matters Act, Cap C20, LFN, 2004 (CAMA) provides that unless there is a contrary provision in the Articles, all the directors shall at the first Annual General Meeting retire from office and at subsequent AGMs, one third of them, or if their number is not three or a multiple of three, the number nearest to one-third shall retire.
In addition to the power to remove directors under Section 262 of CAMA, the retirement by rotation process affords members of a company the opportunity to refrain from re-electing a Director at the expiration of her period of office.
Directors are oftentimes also employees of the company – Executive Directors. Executive Directors are charged with the management of the company on a day-to-day basis. However, their legal position remains the same as any other director of the company. The standard of care required of Executive Directors is however higher than that required of Non-Executive Directors even though all directors owe fiduciary duties to the company and must act in utmost good faith at all times.
In practice, many companies include a provision in their Articles which replicates Section 259 of CAMA and requires one third of the Directors to retire in turn each year. Directors up for retirement by rotation are those who have been longest in office since the date of their last election. As between persons who became directors on the same day, those to retire shall unless they otherwise agreed, be determined by a lot. Some companies use the alphabetic order of Directors’ surnames to determine the order of retirement by rotation. A retiring director is eligible for re-election and may present herself for re-election at the meeting at which she retires.
Some companies by their Articles exempt the Managing Director and other Executive Directors from retirement by rotation. Where the Articles of a company are silent, the provisions of CAMA apply by default.
Under the UK Model Articles for private companies, Directors need not retire by rotation except the company’s articles expressly contain provisions to this effect. CAMA does not make this distinction, and until otherwise amended, directors of both private and public companies (except as otherwise provided by the company’s Articles) are required to retire by rotation.
Where a Director is not re-elected at an AGM or is removed by the members at a general meeting, he ceases to be a Director forthwith. What CAMA does not clearly address is the consequence of removing or not re-electing a Director who happens to be an Executive Director. It however specifically provides that where a Managing Director is removed for any reason whatsoever, he shall have a claim for breach of contract (where there is a Contract) or where a contract could be inferred from the terms of the Articles and such a director has performed some services without a contract, he shall be entitled to payment on a quantum meriut basis.
What happens where an Executive Director who is not exempt from retirement by rotation under the Articles fails to be re-elected by the members in general meeting? It can be argued that this is an uncommon occurrence as Executive Directors are usually re-elected by the members in general meeting. With increasing corporate governance awareness and shareholder interest in the affairs of companies , re-election of retiring directors (including Executive Directors) can no longer be taken for granted.
An Executive Director who is not re-elected by the members at an Annual General meeting or is removed in accordance with the provisions of Section 262 of CAMA ceases to be a director. CAMA is however not clear as to what effect the non-re-election of an Executive Director would have on the subsisting service contract or contract of employment between the Company and the Executive-Director in his capacity as an employee. Logical reasoning would suggest that an Executive Director who is not re-elected by members at the AGM, though ceases to be a Director, remains an employee of the Company in accordance with 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, one from the other.
The point has also been made that by the principle of pacta sunt servanda (agreements must be kep), the Company is bound by the terms of the contract between it and an employee and would therefore need to take active steps to determine an employee’s contract in accordance with the terms contained therein should it desire to do so.
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.
On the contrary, an Executive Director whose appointment is terminated by the Board in accordance with the terms of his service remains a Director (albeit Non-Executive) until removed by members at a general meeting in accordance with the provisions of section 262 of CAMA. It is important to state here that the procedure for the removal of a director under this section is very clear and must be strictly complied with to give effect to the removal of such a Director from the Board (Longe Vs First Bank is the locus classicus in this regard).
The rationale behind retirement by rotation is to ensure that Boards are accountable to shareholders and should not become self-perpetuating. However, one is more inclined to take the view that Executive Directors should not be subject to retirement by rotation as they have dual status as employees of the Company and Directors on the Board. By being subject to retirement by rotation, their status as key functionaries of the Company is jeopardized and this may in turn negatively impact on the Company.
It would be best for companies to have provisions in the Articles which exclude Executive Directors from retirement by rotation so that the relationship between both the Company and the Director is governed solely by the Director’s service contract or other relevant agreement and determined by either party at their discretion and in accordance with the terms set forth in the agreement.