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The usual mechanism for the removal of a director or an auditor is by ordinary resolution of members at a general meeting. Dr Davy Wu, Senior Lecturer, Hong Kong Baptist University, looks at whether the board of directors can do the same without a resolution by members under the Companies Ordinance.

There is no question about the central role played by the board of directors and external auditor in the corporate governance of a company. According to the Hong Kong Corporate Governance Code, an effective board ‘should assume responsibility for the company’s leadership and control and be collectively responsible for promoting its success by directing and supervising its affairs. Directors should take decisions objectively in the best interests of the company.’ (Principle A.1) External auditors, on their part, need to provide a professional judgement on whether the company’s financial statements show a true and fair view of its financial position and performance to its members, based on which the members can assess the directors’ stewardship of the company.

Removal is a mechanism by which a company can get rid of incompetent directors or external auditors but the mechanism could be abused if it is used to remove a director who relentlessly makes constructive but unwelcome challenges to the board or an external auditor who refuses to yield to unethical pressure from the company. While members in general meeting can remove a director or an auditor, this article discusses whether the board of directors can do the same without a resolution by members under the Companies Ordinance.

Appointment of directors

The Companies Ordinance does not prescribe for any mechanism for appointing directors, therefore it is the articles of association that determine how a director should be appointed. For instance, Schedule 2 provides that a person may be appointed as a director by ordinary resolution for an unlimited period unless otherwise stated in the appointment. (Article 22(1)(a) and (2)) If a person is appointed to the board by the directors to fill up a causal vacancy, this director must retire from office at the next annual general meeting but can seek appointment. (Articles 22(4) and 23)

This arrangement is based on the premise that members should have the final say on who should be running the company for them. But this arrangement does not preclude the articles from prescribing other ways of appointing directors. For example, Hong Kong’s Financial Secretary may appoint up to six directors representing the public interest to the board of directors of Hong Kong Exchanges and Clearing Ltd (HKEX) (Article 88(4) of HKEX’s Articles of Association). Hong Kong’s Chief Executive may appoint any persons as directors of the MTR Corporation Ltd (MTR) provided that the number of such directors shall not exceed three. (Article 90 of MTR’s Articles of Association)

Removal of directors under the Companies Ordinance

In relation to the removal of a director, the Companies Ordinance provides that a company ‘may by an ordinary resolution passed at a general meeting remove a director before the end of the director’s term of office, despite anything in its articles or in any agreement between it and the director.’ (Section 462(1)) This in effect reproduces Section 157B(1) of the former Companies Ordinance. Undoubtedly, a director can be removed by members with an ordinary resolution. However, is this the only way or just one way of removing a director? Can the articles give the board of directors a power to remove a director? Or, in an extreme case, can the articles empower any third party, such as a majority shareholder, to remove a director?

The former Companies Ordinance stated that Section 157B was not to be taken ‘as derogating from any power to remove a director which may exist apart from this section.’ (Section 157B(8)) It is settled law that under Section 157B the board could be given by the articles a power to remove or disqualify a director by written notice (Lee v Chou [1984] WLR 1201). One could argue that this can enable the board to swiftly remove a director involved in culpable conduct without the delay involved in convening a general meeting. Under the articles of HKEX and MTR, a director elected by shareholders can be removed from office by giving him notice to that effect signed by all the other directors (HKEX: Article 92(2); MTR: Article 97(c). Such articles were undoubtedly valid under the former Companies Ordinance. The question is, are they still valid under the ‘new’ Companies Ordinance, where there is no equivalent of Section 157B(8)?

The Australian experience

In Australia, before the Corporations Act 1989 was replaced by Corporations Act 2001, Section 227(1) and (11) of the former mirrored Section 157B(1) and (8) of the former Companies Ordinance with the only difference that Section 227 applied only to public companies. While Section 203D(1) of the Corporations Act 2001 (applying only to public companies) replaced Section 227(1) of the former statute, there was no equivalent of Section 227(11) in the new law. However, Section 203E states that ‘a resolution, request or notice of any or all of the directors of a public company is void to the extent that it purports to (a) remove a director from their office; or (b) require a director to vacate their office’. It is logical that the mechanism under Section 203D(1), which is equivalent to our Section 462(1), is not the only way that a director can be removed otherwise Section 203E would be redundant.

Recently, in State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] 113 ACSR 483, the Australian Federal Court held that Section 203D(1) does not provide an exhaustive codification of the mechanism for removal. The Federal Court considered that ‘the language of Section 203D(1) uses the phrase “[a] public company may …”. The word “may” is empowering. Significantly, the phrase is not “may only …”. The text suggests that Section 203D(1) provides a mechanism rather than the mechanism.’ (original emphasis)

Can the board remove a director under the ‘new’ Companies Ordinance? In Hong Kong, Section 462(3) provides that other subsections of Section 462, such as the one requiring the director proposed to be removed to be served with special notice, ‘apply in relation to a removal of a director by resolution, irrespective of whether the removal by resolution is under subsection (1) or otherwise.’ It is noted that if a provision of any ordinance (including the Companies Ordinance) requires or otherwise provides for a resolution of a company and does not specify what kind of resolution is required, what is required is an ordinary resolution unless the company’s articles require a higher majority. (Section 562(3))

Considering the above, it is submitted that one way to interpret Section 462 is that, by not rewriting Section 157B(8) into the new law, the legislative intention must be that a director can only be removed by members under Section 462. But Section 462(1) does not lay down the only way for members to remove a director, therefore the articles can designate other ways for members to remove a director such as by way of a special resolution or even a unanimous resolution at a general meeting as implied by Section 462(3). As a note of digression, this interpretation means that Section 462 is at odds with the amendment to Section 157B(1) brought about by the Companies (Amendment) Ordinance 2003 which required removal of directors be made by ordinary resolution instead of special resolution in order to avoid entrenchment of directors. Another possible interpretation is that Section 462(1) allows the members of a company to remove a director but does not exclude removal by the board of directors or any third party as authorised by the articles, with Section 462(3) only specifying the procedural requirements in the event of removal by members’ resolution. This interpretation is supported by the State Street Australia Ltd case and explains that it is not necessary to put an equivalent of Section 157B(8) into the ‘new’ Companies Ordinance. It remains to be seen how the Hong Kong court is to interpret Section 462.

Removal of an auditor

The Companies Ordinance provides that a company ‘may by an ordinary resolution passed at a general meeting remove a person from the office of auditor despite any agreement between the person and the company; or anything in the company’s articles’ (Section 419(1)). Since the provisions on removal of director and removal of auditor have a similar structure, it is arguable that Section 419(1) just lays down a mechanism rather than the mechanism of removing an auditor. It also means that the articles of a company can give its board of directors a power to remove an auditor by notice, or cause the auditor’s term of office to expire by notice. Although Section 416 lists out the cases in which the appointment of auditor is terminated, it does not state that those are the only cases. Comparison can be made with Section 329(1) of the Corporations Act 2001 that an auditor ‘may be removed from office by resolution of the company at a general meeting of which [special notice] has been given, but not otherwise’; and Section 510(2)(a) of the Companies Act 2006 of the UK that the power to remove an auditor is ‘exercisable only by an ordinary resolution at a meeting’ of which special notice has been given. For the avoidance of doubt, it would be advisable to add a provision that the board of directors must not do anything that has the effect of removing its auditors or requiring them to vacate their office.

Conclusion

This article proposes that there are at least two ways to interpret the statutory provision on the removal of directors – one allows only the members to exercise the power to remove and the other one does not. On the other hand, it also explores whether the wording of the statutory provision regarding the removal of an auditor could allow such a power to be given to people other than the members.

Regarding removal of directors, it is suggested that in future the Hong Kong government may consider if there is a case to follow the Australian law that in a public company (which is usually listed) only the shareholders can remove directors as this can certainly give greater protection to independent non-executive directors.

Dr Davy Wu
Senior Lecturer, Department of Accountancy and Law, School of Business
Hong Kong Baptist University

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