Law in the Spotlight: Removing a Director from office and navigating the pitfalls

In this edition of ‘Law in the Spotlight’ Rooks Rider Solicitors’ Chief Executive Walter Cha talks to Gemma Newing, Head of Dispute Resolution, about removing a Director from office and the various aspects which should be taken into consideration.

In what circumstances might you want to remove a Director from office?

This can arise for a number of reasons. Being a Director brings with it a number of statutory obligations that the individual must fulfil which, on occasion, the individual may not be able to undertake. This can cause tension amongst other Directors and shareholders of a company, resulting in a view being formed that the Director in question should be removed from their position.  The most frequent reasons I see tend to centre around the Director failing to act in the best interest of the company, or failing to promote the company for the benefit of the shareholders; also a clash of personalities.

What are the first steps in looking to remove a Director?

The starting point will be looking at the company’s Articles of Association. Sometimes a Shareholders Agreement will also be in place, which may stipulate a process for removing a Director. This is the starting point for considering the mechanism for removing a Director.

Frequently, the Articles will give the board of directors or the majority of the company’s shareholders the power to remove a Director, so it is important to look at this carefully.

Who can remove a Director from office?

The members of a company (its shareholders) can look to remove a Director from office. To do so, the members will need to give the company special notice of 28 clear days of the proposed ordinary resolution to remove the Director. Upon receipt of the notice, the company is then required to provide a copy of the notice of the Director in question.

The company will call a general meeting where the proposed resolution will be voted upon.  At the general meeting the members will be asked to vote on the resolution. At least 50% or more of the vote will be required to pass the resolution. Once the resolution is passed, the Director is removed from office and notification should be given to Companies House to record the change.

Can a Director oppose the resolution to be removed from office?

Yes. Once the Director has been given notice of the proposed ordinary resolution, the Director can make representations to the company setting out any objections they may have to the proposal.  The representations will be sent to the shareholders prior to the general meeting being held.

Will that be the end of the matter?

If the Director accepts the decision of the majority, they may well go quietly from their position. However, I have certainly seen situations where Directors are aggrieved at their removal. Their removal can become protracted and special legal advice sought particularly in situations where the Director is also a shareholder, and also if they are an employee of the company concerned.

One such situation will be where a Director was also a shareholder, with less than 50% of the shares, with attached voting rights, meaning they do not have sufficient shares to block any ordinary resolutions. Here, they would be classed as a minority member. If the individual were to have less than 25% shares in the company, with attached voting rights, they would be unable to block any special resolutions.

A common claim brought by minority members, especially those who have been removed from a position as a Director of a company, will be to claim unfair prejudice.

What is unfair prejudice?

This is a claim under s.994 of the Companies Act 2006 where a minority member claims unfairly prejudicial conduct and seeks relief from the Court. The typical ground for bringing such action is that the company’s affairs are being, or have been, conducted in a prejudicial way against the interests of the members.

What examples are there of unfairly prejudicial conduct?

There are a variety of grounds upon which a claim can be brought. For example, an allegation of exclusion of minority members from the management of the company. Diluting the minority members interest in the company. Directors colluding with the majority shareholders, and thereby acting in breach of their duties to the company. It is important to access the allegations on a case by case basis, with regards to the factual background.

Are there any other considerations when looking to remove a Director?

You should also establish whether the individual is an employee of the company. Frequently, an individual will hold the title of Director, employee and shareholder. If so, all rights that individual holds under those three heads will need to be carefully considered. As an employee the individual is likely to have acquired a number of employment rights associated with their employment, and if the desire is to remove the individual completely from the company, it is imperative that specific advice is obtained to ensure the company does not land itself in difficulties.

What should you do before removing a Director?

Whilst the process of removing a Director is relatively straight forward, before taking these steps it is advisable to review in detail the interest the individual has in the company; be that Director, shareholder and employee. If they are a shareholder and/or an employee as well as a Director, specific advice should be sought on the best way to go about their removal as a Director, so as to minimise any claims the Director may look to bring.

For more information or advice on this matter, please contact Gemma Newing or a member of our Rooks Rider Solicitors’ Dispute Resolution team.

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Written by Elizabeth Sam, Conveyancing Paralegal in the Real Estate team at Rooks Rider Solicitors….