“At 8:30 a.m. he was CEO. By lunchtime his email had been switched off.”
Few corporate disputes escalate as quickly as an attempt to remove a founder-director from the management of a company.
A director can arrive at work believing they remain in control of the business only to discover that access to company email, banking facilities and management systems has been disabled, staff have been told they are no longer involved and steps are underway to remove them from the board.
But removing a director of an Irish company is not necessarily as simple as announcing that the director has been removed.
The Companies Act 2014 contains a statutory procedure for the removal of directors. At the same time, a founder-director may have separate rights as a shareholder, employee or executive under the company’s constitution, shareholders’ agreement and service contract.
Where valuable company assets or an important transaction are at stake, the legal position may need to be addressed urgently.
Consider the following scenario.
Two founders each own 40% of an Irish company. An outside investor owns the remaining 20%.
One of the founders is both the company’s CEO and a director.
The relationship between the founders deteriorates.
Unknown to the CEO, the other founder reaches an agreement with the investor concerning his removal from the board.
On Monday morning, the CEO receives correspondence notifying him that steps are being taken to remove him as a director.
Shortly afterwards, his access to company email is disabled.
His access to banking information and internal management systems is also removed.
Employees are informed that he is “no longer involved in management.”
There is one significant problem.
The statutory process for removing him as a director has not yet been completed.
The timing could hardly be more commercially sensitive.
The company owns valuable intellectual property and is in the middle of negotiations with a potential purchaser.
The founder fears that, unless he acts immediately, important decisions could be taken concerning the company’s assets, management or proposed sale before his legal position can be determined.
He also remains the owner of 40% of the company.
What initially appears to be a director-removal issue has therefore developed into a potentially serious founder, director and shareholder dispute.
The removal of a director is governed principally by Section 146 of the Companies Act 2014.
Subject to the statutory provisions and the particular circumstances of the company, the legislation provides a mechanism under which a company may remove a director by ordinary resolution before the expiration of that director’s period of office.
However, the existence of that power does not mean that a director can simply be removed informally without regard to the required procedure.
A proposed removal may involve issues concerning:
Where a director removal dispute arises, the precise sequence of events can therefore be extremely important.
One of the most important distinctions in a boardroom dispute is between a person’s different legal capacities.
A founder may simultaneously be:
a director, a shareholder, an employee and the chief executive of the company.
Those positions are not necessarily interchangeable.
Removing somebody from the board does not automatically determine all of their other legal rights.
Likewise, terminating a person’s executive authority or employment does not necessarily mean that they have ceased to be a director or shareholder.
A founder-director dispute may therefore require separate consideration of:
This distinction is particularly important where a company attempts to exclude a founder from the business before the formal director-removal process has concluded.
Removing a founder as a director does not, by itself, necessarily remove their ownership of shares.
In this scenario, the founder continues to own 40% of the company.
That can create a complicated position.
He may have lost—or be in the process of losing—his board position while continuing to hold a substantial economic interest in the company.
The company’s constitution and shareholders’ agreement may contain provisions dealing with matters such as director appointment rights, reserved matters, compulsory share transfers, good-leaver and bad-leaver provisions, valuation and shareholder exits.
Those provisions need to be examined carefully.
A dispute that begins with the removal of a director can therefore rapidly become a wider shareholder dispute concerning control and the value of the founder’s interest in the company.
Timing can be critical in a boardroom dispute.
Here, the company owns valuable intellectual property and is negotiating a potentially significant transaction with a purchaser.
The ousted founder believes important or irreversible decisions could be taken before the dispute is resolved.
Waiting several months for the underlying dispute to progress may therefore provide little practical protection.
Depending on the circumstances, urgent legal advice may be required on whether interim or interlocutory injunctive relief should be considered.
An injunction is not automatically available simply because a director disputes their removal. The legal requirements for obtaining injunctive relief must be established and will depend on the facts.
However, urgent court intervention can become relevant where there is a genuine concern that actions may occur before the underlying legal dispute can be determined.
Examples might include concerns relating to:
In disputes of this nature, the difference between acting on Monday morning and Friday afternoon can be commercially significant.
Another difficult issue is what happens immediately after the dispute erupts.
Companies naturally need to protect confidential information, banking systems, data and intellectual property.
However, abruptly disabling a director’s access while their legal status remains disputed can create further questions about corporate authority, governance and the exercise of directors’ powers.
The legal analysis will depend on the particular circumstances.
That is why both the company and the director should obtain advice before taking steps that may later become central evidence in litigation.
The first communications sent to employees, customers, investors and potential purchasers can also matter.
Once statements have been made externally about who controls the company, they may be difficult to reverse.
When a boardroom removal is challenged, solicitors may need to establish exactly what happened and when.
Important evidence can include:
A clear chronology can be particularly important where events have unfolded over only a few hours or days.
When a founder-director suddenly discovers that steps are being taken to remove them, instinctive reactions can make the dispute worse.
Before taking irreversible action, it is important to establish the legal and commercial position.
Key questions may include:
Has the statutory director-removal procedure actually been followed?
What does the company’s constitution provide?
Is there a shareholders’ agreement?
Does the founder have contractual rights to appoint or remain a director?
What does the service or employment agreement provide?
Who currently has authority over the company’s bank accounts and assets?
Are any significant transactions about to occur?
Does the founder remain entitled to company information?
Could urgent court relief be necessary to preserve the position?
What happens to the founder’s shares if they cease to be a director or employee?
These questions should ideally be answered before either side takes steps that materially change the company’s position.
In a boardroom dispute, the first 24–48 hours can matter enormously.
For shareholders seeking to remove a director, procedural shortcuts can create unnecessary legal risk.
For the director being removed, delaying legal advice can allow important decisions to be taken before their rights have been properly assessed.
Both sides should understand the Companies Act 2014, company constitution, shareholders’ agreement, director’s service agreement and current control of company assets and information before taking irreversible action.
This is particularly important where the dispute involves a founder who remains a substantial shareholder.
What appears initially to be a disagreement about a board seat can quickly develop into a much wider dispute about company control, employment, shareholder rights, intellectual property and the value of the business itself.
Sherwin O’Riordan Solicitors advises directors, founders, shareholders and companies in Dublin and throughout Ireland on complex director, shareholder and boardroom disputes.
Our work includes disputes concerning director removal, founder disputes, shareholder rights, company control, shareholders’ agreements, directors’ duties, shareholder exits and urgent injunction applications arising from corporate disputes.
Where a director removal is threatened or has already begun, obtaining advice quickly can be particularly important.
The legal strategy may need to address not only whether the proposed removal complies with the Companies Act 2014, but also the individual’s separate rights as a shareholder, executive or employee and whether immediate steps are necessary to protect the company or shareholding while the dispute is resolved.
If you are facing an attempted removal as a director of an Irish company, or your company is considering removing a director in circumstances where a dispute is likely, early legal advice can help identify the correct procedure and reduce the risk of an already difficult boardroom dispute escalating further.
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