How Can Shareholders Remove Directors?

The Companies Act 2006 provides a statutory mechanism for shareholders to remove a director by ordinary resolution. Before deciding to remove a director through this mechanism, one should consider the company’s constitutional documents as they may provide for a simpler instrument for the director’s removal.

An important consideration that may be relevant is that the director is often a shareholder and an employee of the company. Where a director is also a shareholder of the company and if the company has a shareholders’ agreement, it is vital that its provisions are consulted prior to taking any steps towards the director’s removal.

The shareholders’ agreement may itself impose contractual obligations on the director to resign in specific circumstances such as breach of duty, failure to attend a specific number of board meetings etc. Though more common to be included in the company’s articles, the shareholders’ agreement also permits directors to have special weighted voting rights. Bushell v Faith [1970] AC 1099 was the landmark case where the House of Lords held that such a provision was valid, as Parliament never sought to fetter the right of any company to issue a share with such rights or restrictions as it may think fit. Consequently, in practical terms, if the company’s articles or the shareholder’s agreement provided for the director’s shares to carry more weight than an ordinary share, say 3 votes to one, then in effect, depending on that director’s shareholding, they can block any ordinary resolution passed to remove them under section 168.

In cases where the director is also an employee of the company, terminating the director’s service contract might give rise to an employment claim. Redundant directors might be entitled to protection from unfair or discriminatory dismissal, redundancy pay etc. Those rights are separate and beyond the scope of this article.

Sections 168 and 169 of the 2006 Act provides the statutory mechanism for the removal of a director which overrides any contrary provisions in the shareholders’ agreement and director’s service agreements. All that is required is that the shareholders pass an ordinary resolution i.e. a majority vote of more than 50% and that the director is given special notice of the intention of the shareholders to terminate the director’s appointment. It is important to note that the ordinary resolution must be passed at a meeting rather than by written resolution.

Removing the director without their consent under the 2006 Act requires compliance with a timetable and procedure. For the ordinary resolution to be effective, the shareholders seeking the removal must send a special notice setting out the proposed resolution to the company. This notice requires the company to call the shareholders meeting. The notice needs to be sent to the company at least 28 clear days before the proposed date of the shareholder’s meeting where the resolution will be decided upon.

The company is then required to issue a notice of the meeting within 21 days of the date the notice of the resolution was deemed to be received from the shareholders. If practical, the notice of such a resolution should be given to the shareholders in the same manner and at the same time of giving notice of the meeting itself. If notice of the meeting has already been given to the shareholders, the company must give notice of the resolution 14 clear days before the meeting. Where actual service is not possible, this can be substituted with the placement of an advertisement in a newspaper or following the requirements outlined in the company’s articles.

The director must be given a copy of the resolution for their removal and notice of the meeting at least 28 days before the meeting. The director has a right to respond both orally at the meeting and in writing prior to the meeting. If the director submits their response in writing, the company should send their response to the shareholders ideally before the meeting in the notice of the resolution given to the shareholders. If the director’s written response is not sent with the notice, the director may demand that the written response is read out during the meeting. During such representations the director may claim damages and demand compensation from the company by alleging that the process was mishandled. However, if the company applies to the Court which decides that this right to be heard is being abused by the director, then such written response need not be circulated to the shareholders nor read out during the meeting.

It is possible to attend the meeting by proxy. To do so, a formal proxy needs to be prepared and lodged with the company. However, as stated above, no director can be removed from the company by passing a written resolution. The ordinary resolution removing the director must be passed at a general meeting.

Disputes at the board level can often spiral out of hand, leading to a breakdown of trust and confidence and possible deadlock situation. If overlooked, these disputes can result in significant legal and financial liabilities and can be hugely damaging to the reputation of the company. It is therefore important for companies to seek legal advice in good time, so that the processes are followed correctly to avoid complications and mitigate potential risks and exposure to claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.