Friday, 16 March 2012

UK: England and Wales: managing director lacked authority to remove the company chairman

The Court of Appeal gave judgment yesterday in Smith v Butler [2012] EWCA Civ 314. The case concerned a company with two shareholders: Mr Butler and Mr Smith, owning, respectively, 31.2% and 68.8% of the shares. Mr Butler was the managing director and Mr Smith was chairman. Relying on his authority as managing director, Mr Butler suspended Mr Smith as chairman. Mr Smith then applied to the court for a declaration that Mr Butler had acted outside his powers as managing director and for an order under section 306 of the Companies Act 2006 convening a shareholders meeting in order to remove Mr Butler under section 178 of the 2006 Act.

At first instance ([2011] EWHC 2301 (Ch)), the trial judge granted Mr Smith's applications, holding, amongst other things, that Mr Butler's implied powers as managing director did not extend to the suspension of the company's chairman, Mr Smith. The Court of Appeal agreed, Arden LJ observing (paras. [30] to [31]):

The holder of the office of managing director might today more usually be called a chief executive officer in (at least) a public company. He or she has generally to work on the basis that his appointment does not supplant that of the role of the board and that he will have to refer back to the board for authority on matters on which the board has not clearly laid out the company's strategy. He or she would thus be expected to work within the strategy the board had actually set.

In this case, however, it was clear that the strategy of the board was that Mr Smith should be executive chairman. Therefore, his suspension was clearly a matter for the board, and not for Mr Butler acting alone. To my mind it is inconceivable that Mr Butler did not need the instructions of the board on the question of the suspension of the chairman of the board. The fact that Mr Smith has special rights as a director and shareholder under the quorum provisions in the Company's articles reinforces this conclusion, but my conclusion does not rest on those provisions".

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