The Gazette 1974

The Fifth EEC Company Law Directive and Removal of Directors LEGAL EUROPE

by J OHN T EMP LE LANG

The draft Fifth EEC Directive on Company Law would require Irish and British public companies and the equivalent types of company in the other member States to adopt a two tier management structure. The draft Directive specifies that the members of the Manage- ment Board, normally full-time executives, shall be appointed by the Supervisory Board. Subject to any national law under which the appointment or removal of any member of the Management Board cannot be carried out against the wishes of the workers' represen- tatives, or the shareholders representatives, on the Supervisory Board, it is the function of the Supervisory Board to remove members of the Management Board from office (Article 13 of the draft directive). Assuming for the purposes of argument that the Fifth Directive was to be adopted in due course in its present form, the relationship between these provisions and Section 182 of the Companies Act, 1963 (or the corres- ponding provisions of the Companies Act (Northern Ireland) 1960), Section 175), requires consideration. These sections provide that a company may at any time by an ordinary resolution approved by 51 per cent of the shareholders present and voting remove any director from his office, irrespective of anything in his service agreement or in the Articles of Association of the company. Section 182 of the Companies Act, 1963, is based on Section 184 of the U.K. Companies Act, 1948, which for the first time introduced into British company law the principle that shareholders can remove a director from office at any time without giving a reason for doing so, at the risk, at worst, of the company having to pay compensation. This section resulted from a recommen- dation of the Cohen Committee (Report of the Com- mittee on Company Law Amendment, C m d. 6659 of 1945, par. 130). Although these provisions are therefore not of very long standing of Irish or English Company- Law, they are justifiably regarded as the basis of share- holders' democratic control over the directors of their company, and where there is no provision corresponding to Regulation 80 of the Irish Table A, it is effectively the only basis for that control. It may well be that not many resolutions are passed under these sections, but the possibility of such resolutions presumably has a salutary effect in circumstances when it is needed. It is therefore clear that the proposal in the draft Fifth Directive is a novel change in Irish and British company law and that it involves a reduction in share- holder democracy, because powers which since the 1948 and 1963 Acts had belonged to the shareholders (whether they exercised them often in practice or not)

are now being given to part-time directors. It is, course, important to remember that this change would affect only public companies and would have no applica- tion at all to Irish private companies, which presumably would remain subject to the provisions of Section 182- It should also be remembered that under the Directive it will become the duty of part-time Directors to meet at least once every three months to receive reports from the full-time Executive Directors and to supervise their activities and to decide on questions of policy. Under such a regime part-time Directors will have a much clearer role and more clearly-defined powers and re- sponsibilities than they have under the existing prac- tice in most companies, and they can therefore be expected to be in a better position than they are at present, and in any case in a better position than the shareholders, to judge when a full-time Executive Direc- tor should be removed from office. The draft Fifth Directive does not expressly say that powers such as those given under Section 182 could not continue to be given to the shareholders. However, the spirit of the Directive is certainly against such powers being given. The principle behind the idea of worker representation is that a company is at least in some sense a partnership between its employees and its share- holders. Through the principle of worker representation on a two-tier board of directors, the employees of the company (the Fifth Directive requires employee repre- sentation only on companies with over 500 employees) are given a voice in the management of the company» or at least in the supervisory and policy-making aspects of management. It would be inconsistent with this prin- ciple, which is, of course, totally novel in Irish company law, that the shareholders should be able, without refer- ence to the supervisory board or to the workers repre- sentatives on it, to remove one or all of the full-time executive directors from office. An example may illustrate the thinking behind the Directive. Under the Fifth Directive the Supervisory Board must designate one member of the Executive Board to be responsible for personnel and labour rela- tions. Such a director from the nature of his work might well tend to be more sympathetic to the views and the interests of workers than his colleagues on the executive board. It would quite clearly be contrary to the policy and spirit of the Fifth Directive that the shareholders should be free unilaterally to remove the personnel director from his position, without reference to the Supervisory Board which appointed him, and against the wishes of the workers' representatives on the Supervisory Board. 100