Remove a company director - the potential risks and pitfalls

Removing a company director

As many company directors are employees and/or shareholders, a poorly managed removal can lead to a shareholder dispute or employment law claim. Planning the process and obtaining appropriate advice can help reduce these risks.

We have extensive experience advising companies and directors on director removals. Please contact us to discuss your circumstances.

How to remove a director

There are four common routes for removing a director:

• Removed by other directors using powers in amended articles -  the company’s articles may contain provisions allowing a director to be removed, subject to the terms and procedure specified.
• Shareholder vote - shareholders may remove a director by ordinary resolution under the statutory procedure in the Companies Act 2006.
• Court proceedings - a director's removal may arise as part of a court order in an unfair prejudice claim.
• Resignation - a director may agree to resign as part of a negotiated exit.

Start by reviewing the company’s articles of association and any shareholders’ agreement. These may provide a contractual route to removal, although the statutory right of shareholders to remove a director cannot generally be excluded by the articles. The statutory process has strict notice requirements and timescales.

Companies Act – director removals

The Companies Act 2006 grants shareholders the right to remove a director by ordinary resolution, regardless of the reason, subject to the statutory procedure.

The articles may provide additional or alternative removal mechanisms, but they cannot exclude the statutory procedure under section 168.

The statutory procedure applies to directors within the scope of section 168; Companies House registration is not, by itself, the test of whether someone is legally a director. Removing someone who is a de facto or shadow director may raise different issues.

The statutory process to remove a director

The process begins when shareholders give the company special notice of their intention to propose a resolution to remove the director. This notice must generally be given at least 28 days before the meeting. This can be a lengthy process, which is why companies may tailor their articles, shareholders’ agreement and director service contracts to provide other removal mechanisms where appropriate.

Once the statutory procedure begins:

• The company must promptly send a copy of the proposed resolution to the director concerned.
• The company must notify shareholders of the meeting in accordance with the applicable statutory notice requirements.
• The director has the right to make written representations and to be heard at the meeting.
• The resolution is decided by an ordinary resolution. It requires a simple majority of votes cast, subject to the applicable voting rights and statutory requirements.

What if the directors refuse to call a meeting?

Section 303 of the Companies Act 2006 allows shareholders meeting the statutory threshold to require the directors to call a general meeting. The threshold is generally 5% of the voting rights, although the applicable statutory conditions must be checked. If the directors fail to call the meeting as required, section 305 may allow the requesting shareholders to call it themselves. A removal resolution still requires the necessary majority of votes cast.

What if the director is also a shareholder?

It is common for directors to also be shareholders. Whether a departing director must transfer their shares will depend on the company’s articles, any shareholders’ agreement and the circumstances of the departure.

Review these documents alongside the director’s employment contract or service agreement. If there is no applicable compulsory transfer provision, the parties may need to negotiate an exit or share buyout.

This is an area where we provide experienced guidance.

What happens if there are 2 directors and 50:50 shares?

Many small businesses have two directors who each own 50% of the shares. Although this arrangement may appear balanced, disagreements can create a deadlock.

Without suitable provisions in the articles or a shareholders’ agreement, neither shareholder may have sufficient voting power to resolve the dispute or remove the other director.

Don’t have the votes?

The basic principle in English company law is that shareholders have powers to appoint and remove directors, subject to the company’s constitution and applicable law. Where a majority uses its powers in a way that unfairly prejudices a minority shareholder’s interests, the minority may be able to bring an unfair prejudice petition. A court may grant a range of remedies, including an order requiring shares to be purchased at a fair value.

What if the director is also an employee?

A director who is also an employee may have employment rights that are separate from their position as a director. Eligibility to claim ordinary unfair dismissal generally requires two years’ continuous employment, subject to exceptions. A director may also consider a constructive dismissal claim where the legal requirements are met. A director who is also a shareholder may have grounds to bring an unfair prejudice petition.

Planning is therefore important: removing someone as a director does not automatically terminate their employment or determine what happens to their shares.

Our team can advise on the removal process, help manage negotiations and work towards a practical outcome that minimises disruption to the business.