Thursday 14 December 2017

Nuclear option of firing a director is fraught with hidden traps

Stephen
Pearson was
jailed for three
years for
fraudulently
converting
£4.5m of clients
funds between
November 1995
and April 2001
while he was a
junior partner
in W&R
Morrogh
stockbrokers. A
dishonest
director is a
tricky problem
for fellow
directors
Stephen Pearson was jailed for three years for fraudulently converting £4.5m of clients funds between November 1995 and April 2001 while he was a junior partner in W&R Morrogh stockbrokers. A dishonest director is a tricky problem for fellow directors

Shane Healy

Did you watch 'Mad Men' the other night? Poor Lane, one of the partners in the fictional US advertising firm Sterling Cooper Draper Pryce got into a spot of financial difficulty with the Inland Revenue.

To surmount this he awarded himself an "11-day loan". Unfortunately, to avail of his own short-term financing model he felt compelled to forge the signature of the anti-hero Don Draper on a cheque made out to himself.

Draper found out, but rather than fire him on the spot Draper asked Lane to think of a dignified exit. Well, I'm not going to tell you what happened next.

This reminded me of the real life sorrowful tale of W and R Morrogh, a once proud Cork stockbroking firm which had served the people of Cork for over 100 years.

One of the partners, Stephen Pearson, lost millions by gambling on futures and options. And, surprise, surprise, to cover these losses he dipped into the client account to cover these losses. Mr Pearson went to prison.

The sting in the tail here, though, is that in 1993, on a considerably smaller scale, Mr Pearson used client monies to buy stocks without client authorisation.

They didn't fire him then? Nope. His father made good the losses and he was allowed to continue -- eventually bringing the firm crashing down less than 10 years later.

I'm not going to deal with the obvious moral hazard here of giving someone a second chance, but rather the nuclear option of firing someone and more particularly when that someone is a director of a company.

A director can be automatically removed if they are the subject of a disqualification order; they become bankrupt; or go insane. They can also be removed by their former buddies on the board by resolution.

This must be done in the interests of the board and not because he never gets his shout in at the 19th hole. Of course, the errant director may still have rights under a contract of employment, so be careful.

Now for the fun bit. Say the company's finances are in the toilet and the shareholders want to remove a director or maybe all the directors. Start thinking Gordon Gecko here in 'Wall Street'.

It is a basic principle of company law that the shareholders of a company can dismiss or remove a director by passing an ordinary resolution (a simple majority) at a general meeting.

The implications of this are enormous. It gives Gordon the power to sack the board of directors and take over the company if he can influence 51pc of the shareholders.

So how does the director shore up his position? Well, he could invoke a special clause in the articles of association (the rules of the company) to load his voting rights.

Or this clause may be contained in a shareholders agreement which would deal with how the company is run. Alternatively, the director might ensure that he retained enough shares to keep control.

So we got rid of that director. What happens next? Sadly, he may be entitled to compensation.

Or worse still, he may say that he was oppressed and seek an injunction preventing his dismissal.

Shane Healy is head of Commercial, Employment and Insolvency at Healy O'Connor Solicitors, Cork and Dublin. www.hoc.ie

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