In recent weeks, we’ve watched events unfold that forced Boris Johnson to resign as Prime Minister. If you’re unhappy with the leadership of your private company, how can you go about removing a director? Perhaps a director isn’t performing well, or they’ve acted in a way that’s grossly negligent or irresponsible. Here, we look at the procedure of removing a director if you’re a shareholder, or a director (or both) in a company limited by shares.
How to remove a director from office
There are two main ways in which directors tend to be ousted from office against their wishes.
Removal by the board of directors
The other directors can decide to remove a director in the company. This option is only available if it’s expressly provided for in the articles of association. If the right exists, then the directors call a board meeting to vote on the director’s fate, and if the majority are in favour, then the directorship will cease.
But it’s not entirely straightforward.
Directors can only be removed by the board in limited circumstances. That’s because all the other directors must be satisfied that they are upholding their primary duty to the company, and acting in the company’s best interest. Removing a director may be in the company’s best interest if that director has been grossly negligent, or he / she has failed to perform their duties satisfactorily over a long period of time. But it may not be so if you’ve just had a falling out, or the director made a small mistake.
Removal by shareholders
The shareholders also have the power to take a director out of office. They can pass an ordinary resolution to remove a director, so long as at least 50% of the shareholders are in favour.
This process begins by a shareholder proposing the resolution. It’s quite a serious proposition, so the shareholder has to give the company ‘special notice’ of their intention. That means they need to submit the resolution to the company at least 28 clear days before a general meeting. The company will give all the other members notice of the resolution and shareholders vote on it at a meeting.
If all the procedures have been followed, and at least 50% of shareholders approve, then the director will be removed from office.
With either of these routes, make sure you record the minutes of your meeting accurately and file them at Companies House, with the notice of termination form (TM01).
Double check key documents first
The removal of a director is a draconian measure so most companies will provide some protection for their directors against unwilling removal from office. If you’re a shareholder, you should double check the company’s key documents (articles and shareholders’ agreement) before you propose the removal of a director. Look for:
Weighted voting rights: The company’s articles may give directors who are also shareholders weighted voting rights on a resolution for their removal. i.e. their vote may count for 10 normal shareholder votes. This can often prevent the shareholders’ resolution reaching 50% approval.
Prior agreement: The shareholders’ agreement may have a clause by which the directors who are also shareholders agree not to vote against specified directors on a resolution to dismiss them.
Watch out for unintended consequences
If the director is removed following a shareholders’ resolution, that director retains the right to claim compensation or damages. The director may have a claim in wrongful or unfair dismissal if they were also employed by the company. If there’s a fixed-term service contract of long duration without a break clause, the director could be entitled to significant compensation.
It could also amount to unfairly prejudicial conduct, for which the director (who is also a shareholder) may have a claim against the company.
Other ways in which a director’s appointment terminates
If you think the risk factors in your circumstances are too high to remove the directors by the board or the shareholders, what are the other ways in which the appointment terminates?
These are the other ways in which the office ends:
- Resignation: the director voluntarily steps down from their role
- Under contract, such as a provision in a service agreement requiring a director to resign
- Certain circumstances provided for in the articles of association. These circumstances might include; bankruptcy, admission to hospital under the Mental Health Act 1983, or absences for more than 6 months without permission.
- By court order or disqualification by court
If you’d like to speak to a legal adviser about the removal of a director in your company, please contact us. Or, if you’re on the receiving end of a resolution which seeks to remove you as a director, we can advise you on the ways in which to protect your position. Get in touch for a free, no-obligation discussion.