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How can a board member be removed from office?

On 2 April 2019, iTiesibas published an answer to the reader’s question by Zane Eglīte-Fogele, partner of PRIMUS DERLING and Alise Veide, Associate of PRIMUS DERLING.

The board of a company consists of three owners holding equal equity interest. One of the owners is producing a negative impact on the company’s image and disregards the opinion of the others. Is it possible to dismiss this board member or alienate his/her shares otherwise?

In reply to this specific question, it is assumed that the company described in this situation is SIA (a limited liability company), which is owned by three shareholders holding equal equity interest (33.33% each), and they are also members of the company’s board. Please note that this reply should be viewed as general information about the existing legislation rather than legal advice. Each particular situation should be analysed individually, taking account of circumstances surrounding the case, the articles of association of a specific company, other applicable documents, etc.

First, although shareholders often act also as board members, a distinction should be made between “shareholder” and “board member”, namely: a shareholder is the owner of a company’s shares, while the board is the executive body of a company, which manages and represents the company. Legislative provisions dealing with the removal of board members and shareholders are also different.

Removal of a board member from office

Given that being a board member presumes trust, a board member may be removed from office by a decision adopted by the general shareholders’ meeting at any time and without specific reasons, unless the articles of association provide for any special rules in this respect (Article 224 of the Commercial Law). The adoption of a shareholders’ decision dismissing a board member requires more than half of the votes represented at the shareholders’ meeting cast in favour, unless the articles of association provide for a greater number of votes.

Consequently, if the articles of association of the company concerned do not contain any special rules or do not provide for a greater number of votes to be cast for removal of a board member from office, two of the three shareholders (i.e., 66.66% of the votes represented at the meeting) may change the composition of the board at any time. Moreover, the dismissal of a board member does not require conformity with the procedure adopted for the termination of employment, such as notice period, reason or severance pay; the board member so removed may not take legal action to dispute the shareholders’ decision and seek reinstatement.

Removal of a shareholder

Where a shareholder fails to perform his/her obligations without valid reason or has otherwise caused substantial harm to the interests of a company, other shareholders of the company may take legal action to remove the shareholder from the company (Article 195 of the Commercial Law). Such an action can be brought by shareholders representing at least one half of the company’s share capital.

In the event of a favourable ruling, the shares of the shareholder so removed are transferred to the company, which must pay out the investment to the shareholder concerned.

However, account should be taken of the fact that proceedings may be long and complicated and that sufficient evidence must be provided for substantial harm caused by the shareholder to the company’s interests. Substantial harm is not defined by law; it will be analysed in each specific case and will largely depend on evidence supplied.

It should be added in conclusion that an act or omission by a shareholder who was also acting in the capacity as a board member may also be grounds for removal. Moreover, substantial harm is not limited to monetary value (it may take the form of substantial harm caused to the company’s reputation). It has been determined in the case law in this respect that simple disputes or controversies among shareholders may not be grounds for removal of a shareholder; instead, there must be specific activities causing harm (such as undermining of reputation, discrediting of a company in the eyes of partners and customers, with the result that further cooperation is refused, failure to carry out duties, provided it hinders normal operations of a company, etc.).

The full version in Latvian is available here.