Dismissal of a statutory director: why company law and employment law are not the same

When a statutory director is dismissed, two legal relationships are intertwined. On the one hand, there is the corporate appointment as a director. On the other hand, there is often also an employment contract, so that the same person is an employee at the same time.

It is precisely this dual function that makes the dismissal of a statutory director legally different from the dismissal of an ordinary employee. This is an important point for founders, investors and boards. Anyone who only looks at shareholders' decisions and governance quickly overlooks the fact that the employment law consequences have their own test, with their own financial risk.

At Startup-Recht, we see that this topic is particularly relevant in fast-growing companies where governance, shareholder relations and leadership come under pressure. Think of a CFO who no longer fits into the next growth phase, a CEO who clashes with the investor, or a director whose expectations have changed tacitly without being sharply expressed. Then the idea often arises that a shareholder decision is sufficient. So that's only half true.

Why dismissing a director works differently from a legal point of view

The crux is simple: corporate dismissal and employment dismissal are closely linked but do not completely coincide.

In principle, the company who is authorized to appoint a director is also authorized to dismiss that director. At the B.V. and the N.V., this is the general meeting as a starting point. In the case of a B.V. the statutes may differ from this, for example by granting the appointment authority to holders of a certain type of shares. The statutes of a B.V. may also stipulate that, in addition to the appointing body, another body is authorized to dismiss.

This corporate dismissal is spaciously arranged. In principle, this does not require a ground for dismissal. There is therefore no system where it must first be substantively demonstrated that the director is not functioning properly before the competent body can decide to dismiss. But that doesn't mean that the rest is optional. The procedure must be correct, and that is where things often go wrong.

At the same time, a different starting point applies to a director's employment contract. In principle, the employment contract ends with the corporate dismissal, unless a legal ban on dismissal precludes or the parties have made different agreements about this. This link makes the process sensitive. The dismissal decision is therefore not only a governance decision, but often has direct consequences for the employment relationship.

For tech companies, this is important because the director is often not only a formal director, but is also operationally deep in the organization. He or she is involved in strategy, fundraising, product decisions, commercial agreements and managing teams. An abrupt dismissal then not only has a legal impact, but also an impact on continuity, communication and trust within the company.

The corporate dismissal: procedure is not a formality

The fact that a director can be fired at any time in a corporate law sense does not mean that the decision can be made without careful preparation. The law and statutes remain predominant. In addition, procedural safeguards resulting from reasonableness and fairness must be taken into account.

One of the most important safeguards is that the director must be heard before the dismissal decision is made. That right to hear must have content. It is therefore not enough to let the director say something briefly just before a vote, if, in fact, what the outcome will be and there is no real room left to influence decision-making. The hearing can take place in the general meeting, but also in a separate hearing, after which the decision is made in writing.

In addition, the director has an advisory vote in the general meeting on the proposed dismissal. In the case of written decision-making within a B.V., directors, and supervisory directors, if any, must also be given the opportunity to provide advice beforehand. This is not about whether advice has actually been given, but whether that opportunity has actually been offered.

The convocation and agenda also deserve a lot of attention. The meeting must be properly called and the topics to be addressed must be correctly on the agenda. In practice, that sometimes seems like a detail, but it is not. An unclear agenda or an error in the convocation may undermine the legality of the decision. This can cause surprises, especially in startups and scale-ups, where statutes were often drawn up at an early stage and were not closely reviewed later.

An additional practical issue is who is authorized to call the general meeting. Many statutes place that authority on the board as a body. Once a director's dismissal is on the table, it can delay decision-making. The director concerned will not automatically cooperate in a board decision to convocate. In such situations, we often work with a separate hearing and a decision outside a meeting.

Furthermore, it is wise to explicitly put dismissal on the agenda. Sometimes a more general description may be sufficient, but that depends a lot on the circumstances. Those who want certainty would do well to name the subject as concretely as possible.

The importance of this procedural side is great. If the requirements are not met, the dismissal order may be voidable. Then the director is still formally in office. And as long as the corporate dismissal is not legally valid, the link with the employment contract can also become problematic.

Employment law dismissal: a reasonable basis is also needed among directors

Many entrepreneurs think that a statutory director has less employment law protection and is therefore easier to dismiss than an ordinary employee. That image is too crude.

In principle, the ordinary employment law principles still apply to terminating the employment contract. This means, among other things, that there must be a reasonable ground for dismissal and that relocation should be considered if appropriate. The well-known grounds for dismissal therefore also play a role here, such as insufficient performance, culpable actions, a disrupted employment relationship or other circumstances that prevent the employer from continuing the employment contract.

There is, however, a special regime for the director. No prior permission from the UWV or the subdistrict court is required. In addition, the dismissal of the director cannot be reinstated under employment law in the way that other employees sometimes do. But that is precisely why the risk is shifting to the reimbursement sphere. If there is no reasonable ground or the employer acts seriously culpably, equitable compensation may follow, in addition to the transition payment.

That risk is certainly not theoretical. Judges make it clear that even among directors, there is no lighter substantive measure for whether there is a reasonable basis. In other words: the mere fact that someone is a statutory director does not mean that employment law can be dealt with less carefully.

For startups and scale-ups, this is a crucial insight. A founder or investor can lose faith in a director and want to switch quickly under corporate law. But if that loss of trust cannot be translated into a sufficient ground for dismissal, a serious financial risk arises. This is especially true when the director has a long term of employment, receives a substantial salary or has difficulty returning to work at a comparable level.

Malfunction must be identified in good time

A common thread in the case law is that dissatisfaction with the performance of a director must be expressed in a timely, clear and concrete manner. A director must know what the company believes is not going well and, in principle, should also be given a serious opportunity to show improvement.

This also applies in situations where tensions are high. A difference of opinion about policy or implementation is not automatically a full ground for dismissal. The fact that shareholder and director look differently at strategy, pace or decision-making does not necessarily mean that the employment contract can be terminated carefully under employment law.

Especially with scale-ups, things often go wrong here. In an early growth phase, there is often a lot of informal communication. Feedback is given orally, expectations are changing rapidly and not everything is recorded. As soon as the company becomes more professional, these informal patterns suddenly prove to be a weakness. If a director is later called upon for points that were never clearly identified, this can cost the company dearly.

Even a director with a higher risk of failure should not be attacked with dismissal without warning. The fact that it is a top position does not mean that signaling and communication are unnecessary. Judges, on the other hand, are looking closely at whether the director knew where he or she stood, what criticism existed and whether there was room to improve behavior or performance.

This also includes the fact that an employer should not construct a reason for dismissal afterwards. The test of whether there is a reasonable basis concerns the facts and circumstances underlying the dismissal decision. A reorganization, breach of trust or other reason that is only later set up to justify the decision is legally vulnerable. In practice, this means that the reason for dismissal must be clearly formulated beforehand and properly recorded in the documents surrounding the intended decision.

Sickness, relocation and benefits: where the financial risk lies

The special position of a statutory director does not mean that statutory dismissal bans disappear. A director who is ill can be fired as a director, but the employment contract will in principle continue as long as the ban on termination during illness prevents this. In practice, this may mean that the company loses the director by statute, but remains stuck with the employment law relationship for a longer period of time.

In addition, a director is in principle entitled to the transition payment upon termination. If the employer acts seriously culpably or cancels without reasonable grounds, equitable compensation can also be awarded. The case law shows that such fees can be substantial.

The stacking of dismissal grounds can also be relevant. If the employment contract ends on the basis of a combination of grounds, the court can increase the transition payment with an additional cumulation payment. This further increases the financial picture.

For venture backed companies and other fast-growing companies, this is no detail. A conflict with a director often comes at a time when the company is already in a complex phase, for example during a funding round, reorganization or international expansion. Then a costly and careless dismissal is not only a legal issue, but also an issue for runway, governance and investor relations.

The works council is not a check mark

When there is a works council, the right to advise about the proposed dismissal must also be considered. This includes a personal understanding of director. It is not automatically about the statutory director within the meaning of Book 2, but about the person who directly exercises supreme control in the management of work within the company.

This right to advise is sometimes underestimated, because in this context, the works council has no right to appeal to the Enterprise Chamber. However, it is unwise to treat this as a formality. Failure to consult the works council can raise questions about the accuracy of decision-making and, in a broader sense, cause problems within the company's governance.

In practice, there is often tension here. Shareholders first want to try regularly to reach an arrangement with the director in a small circle. That is understandable. But as soon as it becomes clear that an amicable solution is not forthcoming and a formal dismissal decision comes into view, the works council must be involved in good time if the advisory right applies.

This is extra relevant for scale-ups with an organization that is becoming more professional. As the company grows, employee participation obligations increase and is less suitable for an approach that relies entirely on informal founder dynamics.

Not every director works under an employment contract

Not every director has an employment contract. Sometimes there is an assignment agreement. This is even the starting point for directors of a listed company.

This distinction is important because an assignment agreement does not automatically end due to corporate dismissal. Only if it has been explicitly agreed that way will both terminations run the same. If this is not laid down, the assignment agreement must still be terminated separately.

Here, too, contractual sharpness is needed. In practice, a notice period will usually have been agreed. If this is missing, the agreement can in principle be terminated immediately, although it remains to be assessed whether compensation is appropriate.

For startups that work with Management-B.V. ' s or hybrid governance structures, this is a point that easily stays under the radar. A shareholder decision alone is then not enough. The contractual layer must also be properly sealed.

Think about severance pay and tax limits beforehand

When a director leaves, contractual agreements about compensation often play a major role. This is logical, because a director can be fired without a preventive dismissal test and therefore, in practice, regularly makes agreements in advance about what happens in the event of termination.

But there are limits here too. The amount of compensation can be influenced by a current remuneration policy, sector-specific rules or standards. In the financial sector, for example, statutory ceilings may apply to severance pay. It is also necessary to consider which body is competent to decide on remuneration and any deviations from it.

In addition, high severance payments can be a fiscal barrier. A high test salary and a severance allowance above that level may result in excessive severance pay, with a heavy tax levy on the excess part. This includes not only salary components, but also bonuses and the settlement of stock and option agreements.

This is particularly relevant for tech companies. Especially in this sector, directors are regularly rewarded with a mix of cash, bonus and equity. If you only look at the headline fee when you leave, you can therefore underestimate the tax consequences.

Don't forget the follow-up

A practical but essential point is the question of what happens after dismissal. The statutes may prescribe a minimum number of directors. It is also possible that the director to be fired is the only appointed director.

In these cases, it should be carefully considered whether a new director should be appointed at the same time as, or prior to, the dismissal. Otherwise, there is a risk that the company will temporarily be without a director or will no longer comply with the statutory structure.

In addition, if the appointment of the new director is also subject to an advisory right from the works council, that advice must be sought before the decision is taken. This is sometimes forgotten, especially in crisis situations.

For startups and scale-ups, this is more than an administrative point. Without a clear follow-up, bank relationships, contract signing, internal control and external communication can immediately crash.

What does this mean in concrete terms for founders, investors and boards?

The most important lesson is that the dismissal of a statutory director is not only a matter of control, but also of timing, documentation and process discipline.

Anyone who wants to replace a director must first understand what hats that person is active in. Is there only a statutory role, or also an employment contract? Is there a ban on termination? Is there a works council that should provide advice? Are there any agreements about remuneration, severance or equity that need to be taken into account? And do the statutes leave room for a smooth decision, or is there just a procedural bump?

Then comes the substantive side. What exactly is the reason for leaving? Is that reason concrete, previously mentioned and sufficient? Has the driver received signals and, where necessary, had a real chance to show improvement? Is decision-making organized in such a way that hearing and advisory rights really have meaning?

At Startup-Recht, we see that it is precisely this combination of governance and employment law that is complex for young growth companies. There is a tendency to move forward quickly as soon as trust is lost. Sometimes that is operationally understandable. Legally, it requires more peace of mind and more precision.

Conclusion

In principle, a statutory director can be fired at any time under corporate law. But that does not mean that the entire process has been completed legally safely.

The employment law side remains independently relevant. Without reasonable grounds, without timely communication about performance, without a correct procedure or without regard for participation and compensation agreements, the company runs a serious risk of voidable decisions, procedures and high fees.

For startups and scale-ups, the message is therefore clear: those who want to fire a director should not only think as a shareholder, but also as an employer and as a responsible person for governance. It is precisely this combination that determines whether a necessary departure is also legally sustainable.

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