A director relinquishing their mandate is, in principle, a straightforward procedure. In practice care is required. A poorly planned resignation can have a negative impact on the reputations of the entity and the director, as well as affecting the ability of the company to function. ILA has just published a guide to help members think through these implications. Robert Deed, the co-author and member of the ILA Legal & Regulatory Committee, explained.
In purely legal terms, a director just needs to send a registered letter to the company to put their resignation into effect. Perceptions matter, though, with regulators, executive management and staff, clients, partners, shareholders, the press, and other directors liable to put their own interpretations on the decision. Most often, directors resign to pursue a fresh professional or personal direction. However, it is quite common for directors to step away from a company whose values no longer align with their own.
These perceptions can have severe practical implications. “The regulator will often ask questions of the company as to why one or more directors have resigned,” said Robert. Ideally the future ex-director and the company will work together to ensure smooth communications.
“Yet, if we take an extreme example, a director resigning for ethical reasons may cause other directors to also consider their positions,” Robert noted. This could result in the board (and with it the entity) no longer being able to function. “Not only would this be a serious problem for the company, but it could create liabilities for the directors themselves,” he added.
Potential legal implications
There are also legal implications to consider. “Sending a registered resignation letter might not always end the director-company relationship with immediate effect,” Robert noted. “There will often be director service contract which imposes, for example, notice periods. There may also be a shareholder agreement with specific provisions on the composition of the board or the way directors are appointed.” A worst-case scenario could be a legal requirement for an individual to sign documents on behalf of a company, even some months after they have formally resigned.
There might be strong reasons why a director can break director service agreements. The company might have radically changed strategy in a direction board members can no longer support. There could be a clear breach of laws or important corporate governance norms. More often, though, the decision to resign will not be clear cut. In these grey areas, the director might feel obliged to work to manage the resignation process with care, not least because resignation can have implications for one’s own reputation.
Guidance note for directors
The new publication “Getting off board - A Guide to Ending a Company Director’s Mandate” helps ILA members better understand these challenges, and spells out the broader potential implications of a resignation. It is a two-parter, with Pierre-Alexandre Degehet, a partner with law firm Kleyr Grasso, having written the legal section. This is followed by some FAQs written in layman’s language by Robert to discuss practical challenges.
“This is just a guidance note, not a legal opinion,” Robert said. “Directors should probably seek legal advice if they find themselves in a unique situation they find particularly challenging. This guide is intended to give ILA members a framework in which they can structure their thoughts and actions as they consider resignation.”
Non-Executive Director and Independent Advisor