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Resigning as a director can sometimes be complex due to your level of involvement within the company. In addition to decoupling from the company, there may be other factors to consider, such as the sale of shares, confidentiality obligations, and non-compete restrictions. Whatever the reason for resignation, you, as the director, must follow proper procedures. This is to protect both parties from lost revenue and potential disputes. This article will provide a high-level overview of the director resignation process for directors, board members, and anyone interested in corporate governance.
Key Obligations
If you are planning to resign, you must first clarify your legal obligations and the process of resignation. The exact process and obligations will differ from director to director depending on their relationship to the company and its corporate governance documents, such as the articles of association. You may find your obligations in the:
- Companies Act 2006;
- articles of association;
- service contract or employment agreement that you are under, if applicable; and
- relevant shareholders agreements.
Articles of Association
The articles of association are the written rules for running a company, agreed upon by:
- shareholders or guarantors;
- directors; and
- the company secretary.
They will contain rules and procedures for how a director can resign from the board of the company. When resigning, you must check the company’s articles and follow the relevant procedures.
Director’s Service Contract
If you are also an employee of your business, you must check your director’s service contract or employment agreement. This will likely contain a notice period, often up to six months, and provisions for handing over your daily work and responsibilities.
There will likely be post-termination restrictions in this agreement, such as duties to:
- protect the company’s confidential information;
- not set up a directly competing business for a set amount of time; and
- not poach customers of the company.
Shareholders Agreements
If you are a shareholder, you are bound by the articles of association and the shareholders agreement that you have entered into.
It is common for a shareholder who is an employee to sell some or all of their shares back to the company when they cease to be employed. It is essential for directors who hold shares to follow the proper resignation procedure correctly. If you display poor conduct during the leaving process, the company may have the right to purchase the shares for the price you originally paid, or even less, depending on what is set out in the articles of association or the shareholders agreement.
Additionally, shareholders agreements may contain post-termination provisions.
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Starting the Procedure
Before formally starting the procedure, it is good practice to notify the company that you intend to resign. This fosters good relations between the parties, and the extra notice can help the company prepare for your departure. If you are retiring, you can inform the company well in advance and only need to trigger the formal procedure nearer the time. In some cases, giving early informal notice may not be sufficient; you should assess your individual circumstances.
To begin the formal procedure, you will need to send a resignation letter to the company board. This letter should contain all key information associated with a resignation letter, such as:
- the final day that you will be a director;
- the final day of your employment, if applicable;
- a reason for resignation; and
- any key issues that will need to be addressed before your resignation.
It is also good practice to offer to assist the board in ensuring a smooth transition.
Generally, upon or shortly after the date of termination, the company will pass a board resolution acknowledging and accepting your resignation unless otherwise set out in the articles. Following this, the company director or the secretary will inform Companies House, and you will be listed as a former director on the register. The company will also update its internal registers to reflect your resignation.
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Key Takeaways
Resigning as a company director requires careful consideration and adherence to legal procedures. By following the steps outlined above, you can ensure a smooth transition, minimise potential liabilities, and maintain a positive relationship with the company and its stakeholders. These steps include understanding your key obligations, providing a letter of resignation and maintaining records of all correspondence between you and the company.
If you are considering resigning as director, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Some post-termination restrictions include confidentiality obligations and non-compete clauses. If you breach these, you may be liable for damages or other financial penalties. Additionally, a court may issue an injunction against you. Therefore, it is vital that you understand and comply with your post-termination obligations.
When you resign, the company must inform Companies House to update the public register. Ensuring timely and accurate updates with Companies House helps maintain transparency and compliance with legal obligations.
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