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June, 2010
Legal Alert –
Directors: Appointment, Duties & Removal To read this Alert in pdf format, please go to
http://oseroghoassociates.com/pdf/2010_06.pdf
In this Issue:-
- Legal Alert for June 2010 – Directors:
Appointment, Duties & Removal
- Subscribe & Unsubscribe to Legal Alerts.
- Disclaimer Notice.
LEGAL ALERT—Directors:
Appointment, Duties & Removal
The very important roles that the Directors of
a company play in a company’s success or
failure, which in turn affects national
development, are often not seriously
appreciated, understood or highlighted by
both the directors themselves and or by the
other parties related to a company. Also,
the failure or inability of the board of
directors of a company to direct and manage
a company in a responsible manner has
contributed enormously to corporate
governance failures and the current global
economic crises..
It is a trite principle of law that a
company, even though recognised under the
law to be an artificial, separate and
distinct legal entity from its owners,
cannot manage or direct her own affairs
because a company is an “abstract” person.
This is the reason why the law requires that
every company in Nigeria must have at least,
at all times, two directors and two
shareholders.
Who is a Director?
The Companies and Allied Matters
Act (“CAMA”) describes a Director as any
person appointed by a company to direct and
manage the business affairs of the company.
The Companies and Allied Matters Act further
describes a Director to include any person
on whose instructions and direction the
Board of Directors of a company is
accustomed to act despite the fact that such
a person is not officially appointed or
listed as one of the Directors of the
company.
Directors have also been described as “the
directing mind and will of a company”. The
role of a Director of a company is therefore
a very important one.
Appointment of
Directors?
The methods of appointing the Directors of a
company are usually dictated by the
provisions of the Articles of Association of
each company. The specific qualities that a
Director must possess, though generally
common, are dictated by the peculiarities of
the industry in which such a company
operates.
The first Directors of a company are
appointed by the subscribers to the
Memorandum and Articles of Association of
the company at the time of its
incorporation. Subsequent directorship
appointments are undertaken by the
Shareholders of the company at the company’s
annual general meeting(s). The shareholders
also undertake the re-election and removal
of a Director or Directors at their Annual
General Meeting.
Not every person can be appointed as a
Director of a company. Persons who are
insolvent or bankrupt, persons who are
fraudulent, persons under the age of 18
years old, persons of unsound mind,
Directors that have been absent from Board
of Directors meetings for a consecutive
period of six months, and persons of like
characteristic, cannot be appointed as a
Director of a company. Also, any person that
is 70 years old and above can only be
appointed or re-appointed as a Director of a
public company in Nigeria if he/she informs
the shareholders of the company, at an
Annual General Meeting of the company of the
fact that he or she is now 70 years old or
more than 70 years old.
Subject to conflict of interest rules or the
internal regulations of each company, a
Director of a company could also be an
employee of the company. Despite a Director
being an employee of a company, he can only
be appointed and removed as a Director in
accordance with the provisions of the
Articles of Association of such a company
and the Companies and Allied Matters Act.
A company could also have executive and
non-executive directors. In practice, both
the executive and non-executive Directors
are appointed to bring their wealth of
experience, expertise and network to the
benefit of the company. The non-executive
directors play the critical role of
providing strong, balanced and independent
counsel to the Board of Directors.
Common Duties of a
Director?
The primary duty of a Director of a company
is to exercise due care, skill and diligence
in the discharge of his or her duties as a
reasonable and prudent Director would
exercise such duties in comparable
circumstances. The failure by a Director to
exercise reasonable care could be a ground
for an action in negligence and breach of
fiduciary duty of care owed by such a
Director to the company.
Directors of a company also owe the company
a duty of utmost good faith, i.e. fiduciary
duty of care. This fiduciary duty of care is
owed to the company alone. As fiduciaries of
the company, Directors must not place
themselves in a position where there is a
conflict of interest between their duties to
the company and their personal interest.
Thus, any secret profits made by a Director
of a company from the company are
accountable to the company. The fact that
the company is unable or unwillingly to take
the benefit of such profits for itself will
not be a defence to such a Director in any
legal action for breach of this duty in
which the Director did not disclose to the
company the secret dealing and profit.
The other statutory duties that a Director
of a company owes to a company include
attending the board of directors and
shareholders’ meetings of the company,
disclosure of the director’s direct or
indirect equity interest in the company,
giving of Directors particulars on all trade
circulars, show cards, business letter
headed papers, etc; and providing oversight
assistance to the management team of the
company.
Removal of
Directors
The most common method of
removing a Director of a company is either
through voluntary resignation or by
rotation. Where a company decides to remove
one or some of its Directors, whether or not
they are employees of the company, the
company must serve a special notice of the
removal on all the Directors of the company
including the Director that is proposed to
be removed.
The Director that is proposed to be removed
is in turn entitled to make written
representations concerning the circumstances
of his proposed removal. Such written
representation may however not be read at an
Annual General Meeting of the company if the
company is able to convince a Federal High
Court Judge that the Director’s written
representation is intended to create
unnecessary adverse publicity and or are
defamatory in nature, and therefore an abuse
of the statutory right to be heard conferred
on such a Director by Section 262 of the
Companies and Allied Matters Act. Where a
notice of removal is not served on all the
Directors including the Director or
Directors proposed to be removed, such
removal will be declared by a properly
constituted court of law to be null and
void.
Bernard Longe v.
First Bank of Nigeria Plc
The recent decision by the
Supreme Court of Nigeria in the matter of
Bernard Longe v. First Bank of Nigeria Plc
(2010) 2-3 SC (part III) 67 @ 86 and 94 has
brought to the forefront the legal position
that a Director, whether also an employee of
a company, cannot be removed as a Director
of a company at the whim or caprice of his
or her company.
The central issue in this matter was whether
a Managing Director/Chief Executive Officer
could be removed without prior notice of
such a removal being first served on the
Managing Director/Chief Executive Officer in
accordance with Section 262 of the Companies
and Allied Matters Act?
The Supreme Court held in this matter that
the failure of the Respondent Bank to serve
notice of removal on the Appellant Managing
Director/Chief Executive Officer invalidated
all the resolutions, concerning his alleged
removal as a Managing Director, reached by
the Respondent company. The Appellant was
therefore deemed to still be the Managing
Director/Chief Executive Officer of the
Respondent Bank with all his entitlements
and privileges retrospectively restored
eight (8) years after his purported removal.
It is the view of the Supreme Court in this
matter that the essence of the notice of
removal is to allow the Managing Director of
the Respondent company to respond to the
grounds under which he is being proposed to
be removed. The suspension of the Appellant
did not according to the Supreme Court
diminish the necessity to serve this notice
of removal because once Nigerian law vest a
right on a person, a court of law will
resolutely resist any attempt, by whatever
method employed, to wrestle such a right
from such a person.
The Supreme Court also in this matter
reiterated that Nigerian law on employment
contracts recognised three categorises of
contracts of employment namely purely master
and servant relationships, servant’s
contracts which are held at the pleasure of
the master or employer and employment with
statutory flavour. The first two categories
of contracts may only be terminated in
accordance with the procedure prescribed
under the contract of employment while the
third category must only be terminated in
accordance with the relevant statutory
provisions regulating the operation of the
contract.
Conclusion
The roles or duties of the Directors of a
company need to be taken more seriously.
Some Directors should be encouraged to
obtain more education on the significance of
their roles as Directors, to both their
companies and to national, global
development.
Contract of engagement are sacrosanct, and
their breach attracts punitive damages.
Parties to these contracts should therefore
abide by the terms and conditions of the
contracts that they have freely and
willingly entered into. The perception that
employers or principals have the power to
hire and fire at will without adherence to
the applicable contract attracts punitive
damages and costs.
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DISCLAIMER NOTICE: This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm.
Recipients are therefore advised to seek professional legal
counseling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
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EHIJEAGBON O. OSEROGHO
June, 2010.
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