Can a Director Resign Voluntarily?

Mr. Wang was the director of Company A, a limited liability company. Because Wang had a different view on the theory of the business with the other directors, he wanted to resign. Unexpectedly, the shareholders of Company A were afraid that Wang would compete with the company after his resignation, so the shareholders rejected his resignation application. Wang was in the dilemma.

The ‘Company Law’ has prescribed the provisions on the selection and change of the director of a limited liability company, however, it fails to prescribe the procedures on the resignation of the director. Then, where the Articles of Association fails to stipulate such procedures, whether the director shall obtain the approval from the board of shareholders for the resignation?

In practice, there are many opinions. Generally speaking, in the judicial practice, many civil judgments have not required such approval from the board of shareholders.

There is a typical case, (2011) No. 88 Dong Zhong Fa Min Er Zhong Zi civil judgments, which is published in the Gazette of the Supreme People’s Court. The judgment states, “X Company’s Articles of Association has not stipulated the procedures on the resignation of the director, so the director shall resign in accordance with the ‘Company Law’. According to the ‘Company Law’ ……, the directors shall be elected and replaced by the board of shareholders, however, this shall not be deemed as the approval of the board of the shareholders is a necessary condition for the resignation of a director. The board of directors is an important organ for a company, and the directors are the members of the board of directors, who implement an important function. But the core of such function shall be making decision and voting, which are related to the management issues, and shall be distinguished from other employees hired by the company. The directors use their management or operation ability to manage the company, and they are the core of the company’s structure. However, once any director does not want to be the director of the company, which means that he would not provide any useful suggestions and advice, then he would not contribute to the company as a director, so it shall be acceptable to allow a director to resign by notifying the board of shareholders.”

Thus, in the opening of this article, the director Wang shall be entitled to resign voluntarily without the approval of the board of shareholders.

It shall be noted that , Article 46 of the ‘Company Law’ has prescribed, if no new director is elected in time upon expiration of the term of office of a director, or if a director resigns during his term of office, resulting in the number of members of the board of directors falling below the statutory number, the original director shall perform his duties as director according to the provisions of laws, administrative regulations and the Articles of Association before a newly elected director takes office. In view of this, while a director plans to resign, he shall take this into consideration. If the director’s resignation might cause the number of members of the board of directors falling below the statutory number, this director shall keep performing his duties as director before a newly elected director takes office in principle.

Then, here comes another problem. If the company refuses to elect a new director consistently, whether the director who plans to resign has to perform his duties as director continually? In another case related to the dispute in the resignation of the director, which has been held by the Jianghan District People’s Court in Wuhan city. The court states that, after the director Sun has told the company on the resignation intention, the company shall notify the board of directors to re-elect the director in time; but the company fails to do so, it shall undertake such consequence. The court has stated that if the board of directors has accomplished the re-election in a reasonable period, then Sun shall perform the duties as director during this period.

The reasonable period shall be decided in accordance with the Articles of Association. The normal practical procedure on the resignation of a director shall include, (1) the director shall notify the board of shareholders; (2) the board of shareholders shall notify the board of directors; (3) the board of directors organize the meeting and make an proposal on replacing the director from the current director to a new director, and submit the proposal to the board of shareholders; (4) the board of shareholders shall make the decision on the replacement of the director. In addition, in consideration of other factors, such as the shareholders have to find the candidate, and the notice on organizing the meetings, normally, it is reasonable to reserve 2 months for such procedure.