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Carlos Ghosn arrest: What shareholders should be thinking

James Morgan QC, an associate member of Radcliffe Chambers, offers a view on how shareholders should consider director misconduct in light of the Carlos Ghosn case.

Carlos Ghosn – the fallen former Renault-Nissan CEO – has spent the last month in prison on allegations of misusing funds and hiding over $40 million of income, only to be re-arrested on new charges for aggravated breach of trust. As a result, any likelihood of him being granted bail is slim.

Days after Ghosn’s initial arrest in November, Nissan’s seven-member board voted unanimously to dismiss him as its chairman, a decision that was supported by Renault appointees on the Nissan board. However, Renault’s board decided that he should stay in office as chairman and CEO of that company. With Ghosn having been accused of enjoying “too much authority”, Nissan and Renault are attempting to mitigate the damage from, and navigate, the biggest scandal they have ever had to face.

While the news of Mr Ghosn’s initial arrest was met with great surprise among the business world, unfortunately, a top company director being accused by the authorities of financial impropriety by misusing company funds is not an altogether unfamiliar scenario.

Where such serious allegations are made, shareholders naturally become deeply concerned as to the director’s conduct and what it means for their investment in the company. Minority shareholders without control of the board are in a particularly vulnerable position.

Assume the scenario arose in relation to an English company without a bespoke shareholders’ agreement: what could a minority shareholder do to procure the removal of the director?

The starting point is that a director owes the company the core fiduciary duty to promote its success for the benefit of its members as a whole and in so doing to have regard to matters including “the desirability of the company maintaining a reputation for high standards of business conduct”: s.172(1), Companies Act 2006 (“CA 2006”).

The director in question may well be in breach of this provision and his or her fellow board members ought to have strong regard to such considerations when discharging their own duties. But assume that the director is showing no sign of being pushed out by the board or, indeed, voluntarily leaving.

Powers of removal

Under s.168, CA 2006 shareholders have the power to remove a director by way of ordinary resolution at a meeting. While this may sound simple, in reality there are significant potential delays and impediments that can occur along the way:

(1) The power to call a meeting rests initially in the hands of the directors (s.302, CA 2006). Whilst shareholders representing at least 5% of the membership can require the directors to call a meeting, they have 21 days to so do (s.303, CA 2006). It is only if they then fail to so do that the requesting members (or any of them representing more than 50% of the voting rights) can call a meeting (s.305, CA 2006);

(2) Assuming a meeting is called, the company is required first to give 28 clear days of the resolution to the members and also to the director in question;

(3) Then, at the meeting itself, the director is entitled to be heard on the resolution of the meeting and it will then only be passed by a majority of those voting. So if the minority shareholder does not have the support of other significant shareholders, or the director’s representations sway the meeting in his favour, the ordinary resolution will not be passed.

Given the law as set out above, in reality the minority shareholder will not find themselves in a strong position. If the board holds firm and there is insufficient support from other shareholders, then the director is likely to remain.

Claims of serious misconduct among company directors are increasingly making their way into the news, and as such, it may be that a relentless tide of damaging publicity for the company in question eventually results in the director’s position being untenable. But that will be a matter of optics rather than strict company law.


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