Dismissal of a statutory director: this is how you arrange it carefully

The dismissal of a statutory director is rarely a matter of ordinary dismissal. This is because the director often holds two roles: he is a director in the corporate law sense and also works on the basis of an employment contract or management agreement.

This dual position makes the case legally sensitive. An error in the notice of meeting, decision-making, or contractual settlement can lead to the annulment of the dismissal decision, claims for damages, or a costly settlement. Moreover, in the case of a director-shareholder, a third layer often comes into play: the shareholders' agreement.

A well-prepared dismissal process prevents a management problem from escalating into a shareholder conflict, employment proceedings, or a dispute over share value.

Dismissal of a statutory director: first determine the legal position

When dismissing a statutory director, it must first be clear which legal relationships exist. Was the director appointed solely as a statutory director? Does he also have an employment contract? Or does he work through a personal holding company based on a management agreement or a contract for services?

That classification determines the procedure. In the case of an employment contract employment law, the notice period, transition payment, and possible equitable compensation play a role. In the case of a management agreement, it primarily concerns contractual termination, notice periods, liability, and potentially a termination payment.

Therefore, the dismissal of a director does not begin with a shareholders' meeting. First, the articles of association, employment contract, management agreement, and shareholders' agreement must be compared.

The termination under corporate law

In principle, a statutory director of a private limited company (BV) can be dismissed by the body authorized to appoint them. Usually, this is the general meeting of shareholders. The articles of association may contain additional rules, such as a reinforced majority, quorum, or a special notice period.

The preparation of the dismissal meeting requires due care. The director must be summoned in a timely and proper manner. As a director, he must also be able to cast his advisory vote on the proposed dismissal. If this step is skipped, the dismissal decision can be challenged at a later stage.

In addition, the agenda must be clear. Shareholders must know that the dismissal of the director is being discussed and that a decision may be made regarding it. A general discussion of “cooperation” or “future” is usually insufficient.

Following the decision, the change must be processed promptly in the Trade Register. This prevents disputes regarding the authority of representation towards banks, suppliers, employees, and contracting parties.

The April 15 judgments: one decision with dual effect

In the well-known 15 April rulings, determined that a legally valid dismissal under corporate law in principle also has consequences for the employment contract of the statutory director.

This does not mean that employment law is disappearing. The company must still take into account the notice period, wage settlement, vacation days, bonus agreements, and the transition payment. Disputes may also arise regarding fair compensation if the dismissal was prepared or executed in a manner that was seriously culpable.

However, a different route applies to statutory directors than to ordinary employees. The company usually does not first need to request permission from the UWV or petition the subdistrict court for dissolution. Precisely because of this, extra weight is placed on a correct General Meeting of Shareholders resolution and careful documentation.

Employment contract or management agreement

Many statutory directors do not work on the basis of an employment contract. They invoice through a personal holding company. The operating company then enters into a management agreement with that holding company.

In that case, the emphasis is not on dismissal law, but on contract law. The question then is what the parties have agreed upon regarding duration, termination, grounds for termination, compensation, confidentiality, non-competition, and liability.

The rule from the 15 April judgments does not automatically apply in the same way to a management agreement. Therefore, it must be explicitly verified whether the dismissal under corporate law also terminates the management agreement. If the documents are silent on this matter, a second conflict may arise.

In case of doubt, it is advisable to have the management agreement reviewed in advance. This certainly applies if the director is also a shareholder or if the agreement contains provisions regarding bonuses, earn-outs, non-compete clauses, or liability.

Director and shareholder: good leaver or bad leaver

In the case of a statutory director who is also a shareholder, the case file does not end with the dismissal. The shares must then also be examined.

Many shareholders' agreements contain an obligation to offer shares upon loss of directorship. The director must then offer his shares to the other shareholders or to the company. The price often depends on whether he leaves as a good leaver or a bad leaver.

That distinction can be financially significant. For a good leaver, market value or a pre-agreed valuation formula often applies. For a bad leaver, a discount may apply. Consider dismissal due to fraud, serious misconduct, violation of a non-compete clause, or seriously culpable conduct.

The text of the shareholders' agreement is then decisive. However, the discussion does not always end there. Parties often debate the classification, the reference date, the valuation method, and the reasonableness of a discount. This makes the combination of corporate law, employment law, and contract law complex.

Pitfalls when dismissing a statutory director

The biggest mistake is moving too quickly to the dismissal decision. A shareholders' meeting seems straightforward, but a careless decision can damage the entire process.

Many risks arise from practical errors. The notice of meeting was sent too late. The agenda is unclear. The director is not given a fair opportunity to respond. The articles of association are not properly followed. Or the employment contract is terminated without proper settlement of wages, notice period, and compensation.

Communication also requires attention. A director often has access to customers, staff, financial information, and strategic documents. Therefore, make agreements in advance regarding transfer, powers, accounts, communication, and confidentiality.

If there are indications of improper management, fraud, or a conflict of interest, directors' liability. In that case, the file must be prepared not only for dismissal but also for evidence, damages, and possible precautionary measures.

When negotiating is wiser than litigating

Not every director dismissal needs to end in a harsh legal process. In many cases, a controlled settlement is better for the company.

An arrangement may include agreements regarding the departure date, compensation, transfer of shares, confidentiality, non-competition, communication, final discharge, and transfer of duties. These agreements may be recorded in a settlement agreement or a broader exit agreement.

Negotiating is particularly advisable if the director remains a shareholder, possesses commercial knowledge, or still has influence over customers, staff, or financiers. In such cases, a settlement can yield more value than winning legal proceedings.

However, negotiations must also be approached with strict legal rigor. A weak litigation position often leads to an expensive settlement. Conversely, a well-prepared case file increases the likelihood of a successful business exit.

Need help with the dismissal of a statutory director?

Are you involved in the dismissal of a statutory director? Or are you a director yourself and is your position under pressure?

The lawyers and legal experts at MKB Juristen quickly assess the sensible course of action. We analyze the articles of association, employment contract, management agreement, and shareholders' agreement. We then determine the best strategy together with you.

We assist with the preparation of the General Meeting of Shareholders resolution, the negotiation of severance terms, the share settlement, and any potential legal proceedings. In doing so, we combine employment termination law with corporate strategy.

A well-prepared dismissal of a statutory director is usually considerably cheaper than repair work afterwards.