Removing a director from a company is much more complicated than removing an employee and is usually a sticky subject and if not done correctly, could invalidate the entire process.
Below is a summary on the process.
A director’s appointment may be terminated:
under the company's articles;
by operation of law;
by ordinary resolution under section 168(1) of the Companies Act 2006 (“Act”);
under contract, such as a provision in a service agreement requiring the director to resign;
by court order; or by the death of the director.
This article focuses on the removal of directors from their office by ordinary resolution under the Act. Where shareholders feel that a director has not acted in accordance with their statutory and/or fiduciary duties, and the relevant director does not intend to leave voluntarily, the shareholders may wish to consider removing them. The starting point, however, should always be the company’s constitutional documents including any shareholder or investment agreements. If there is nothing contained with them, then the Act provides a mechanism.
Under section 168(1) of the Act, the shareholders of the company can remove a director before the expiration of their period of office by passing an ordinary resolution at a meeting of the company. The right applies notwithstanding anything in any agreement between the director and the company, it will therefore override anything to the contrary in the director's service contract. If the below steps (which is somewhat a complicated process) are not followed, the resolution is likely to be invalid.
The resolution must be passed at a meeting, a written resolution will not suffice.
The shareholders must serve special notice on the company of any resolution to remove a director under the provisions of the Act. The notice must be given to the company at least 28 clear days before the meeting.
On receipt of the shareholders’ notice the company must without delay send a copy to the director. The director is entitled to be heard to make their case on the resolution to remove them at the meeting.
Where the director concerned wishes to make representations in writing to the company and requests their notification to the shareholders of the company, the company shall, unless the representations are received by it too late, inform all shareholders of the representations having been made and send a copy of the representations to all the shareholders.
If a copy of the representations is not sent as required because they were received too late or because of the company's default, the director may require that the representations be read out at the meeting. However, copies of the representations need not be sent and the representations need not be read out if the court is satisfied that the rights conferred by section 168 are being abused.
At the meeting, for the resolution to pass, it must be supported by more than 50% of the shareholders who are eligible to vote.
No two situations are the same and it can be dangerous to remove a director without considering your legal position and tactics to employ.
Removing a director from their office can be a complicated process and in order to mitigate the risk of a claim, it is important to seek legal advice to ensure that any removal of a director is carried out lawfully.
There are many legal issues to consider, but it is important to note that whilst a director may be removed from their office in compliance with the Act or the company’s constitutional documents, the director may also be an employee and could therefore still have rights and a potential claim against the company in their capacity as an employee. Therefore, before you invoke any procedures under a director’ service agreement, the company’s constitutional documents or the Act, we recommend that you take legal advice.