Remove a company director – the potential risks and pitfalls

Last Updated: August 3rd, 2022

Although the process to remove a director appears straightforward, it is actually quite intricate with strict notice requirements and time scales set down in the Companies Act, if none have been set out in the Articles.

The first thing to do is to check your company articles of association. If they have been modified, the process for removal of a director may be simpler than the statutory process described below.

As many company directors are employees and/or shareholders the implications of removal can, where managed badly, easily result in a shareholder dispute or employment law claim. This is a key reason why planning and experienced advice are highly recommended.

We are highly experienced in advising on director removals, whether advising the company or the director. Please do get in contact to discuss.

Companies Act – director removals

The Companies Act 2006 grants shareholders a powerful right to remove and replace directors for any reason (or for no reason at all) by majority vote under an ordinary resolution.

Your company Articles of Association  might include provisions that make it easier to remove a director, but these Companies Act rules cannot be excluded by the Articles, so this procedure will work for any Company.

The Companies Act procedure will apply to the removal of any director registered at Companies House. Those who are held out as directors but not registered at Companies House are not subject to the Companies Act (but there may be other contractual considerations to consider in removing them from office as we explain below).

What’s the process to remove a director?

The process commences by the shareholder(s) giving “Special Notice” to the company of their intention to remove a director – this simply means that notice is given at least 28 clear days before the proposed shareholder’s meeting to remove the director. In business 28 days can seem like a long time. That is why many companies tailor their articlesshareholders’ agreement and director service contracts to provide work arounds taking them outside of the rigours of the Companies House and making it easier to remove directors. Once the Notice procedure is under way :-

  • The company will be under and obligation to forward a copy of the proposed resolution to the director concerned.
  • At least 14 days before the shareholders’ meeting, the directors must give notice to all shareholders of the meeting.
  • The director being removed is entitled to make representations to the company and speak at the meeting about his/her removal. The board is also entitled to make representations to the shareholders.
  • At the meeting the vote may be conducted on a simple show of hands or (more likely) a poll vote. The resolution to remove a director will succeed if more than 50% of shareholders in attendance vote in favour of removal.

The process outlined above assumes that a shareholders’ meeting is on the horizon, or can be called easily when special notice is received. However, what if the board fails to call a shareholders’ meeting? Board intransigence is quite likely considering the resolution is to remove some, or all, of their number.

Take for example a two person board, where one of the directors is to be removed. A clear majority of shareholders may desire his removal, but he will not vote in favour of a shareholders’ meeting, and the other director has no authority to call the meeting on his own.

What happens if the directors refuse to call a shareholder meeting?

The Companies Act includes a procedure whereby the shareholders can hold a vote to remove directors even if the board refuses or is unable to call a shareholders meeting itself. Only 5% of shareholders are required to call a meeting under this procedure. As a resolution to remove directors can be passed by a simple majority of shareholders voting at a meeting, it is theoretically possible for a very small number of shareholders to hold and pass a vote to remove directors.

What if there isn’t a majority of shareholders who agree a director should be removed?

Many small businesses operate with 2 directors who are both 50:50 shareholders. Setting a business up like this may appear top eb a good idea as on the face of it it prevents 1 party dominating, but when things go wrong, you end up in a deadlock situation. With standard articles and no shareholder agreement, or a shareholder agreement which doesn’t cover situations where a shareholder director can be removed, there is no easy way to remove a co-director. 

What if a removed director is also an employee?

The Companies Act will not prevent any other claims that the director may have. For instance, a director who is also an employee may have protections against unfair dismissal . A director who is also a shareholder may be able to issue an unfair prejudice petition if the Company’s affairs are being or have been conducted in a manner that causes unfair prejudice to the interests of shareholders generally or of some group of shareholders (including at least himself). We always say get your ducks in a row and check the company’s articles of association, as well as any employment agreements or other contractual rights the director might have before launching.

What if the removed director is also a shareholder?

It is not uncommon for directors to also be shareholders. You need to plan for what will happen to those shares once the director concerned has been removed. Often a significant part of removing a director will be negotiating the purchase of their shares and applying an appropriate minority discount and any consequential tax treatment . This is an area where we do provide guidance.

Normally our clients come to us when they have exhausted all avenues of negotiation or something bad has happened. Our specialist team can help get your business back running smoothly. 

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

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