Removal of Company Directors by Ordinary Resolution

Directors must act in accordance with their statutory and fiduciary duties, including the duty to promote the success of the company for the benefit of its shareholders. Where shareholders feel this is not the case and the relevant director(s) refuse to leave voluntarily, shareholders may wish to consider removing them.

The position can be complicated if the director in question is also a shareholder or employee of the company, as this may give rise to arguments of unfair prejudice or unfair dismissal.  Extra care should be taken in these circumstances to mitigate either the risk of claims against the company or separate shareholder claims.

As ever, the starting point is the company’s constitutional documents, including any investment or shareholder agreements. These should be reviewed carefully, and may contain a number of options for removal of a director, for example by way of shareholders giving written notice to the company.

If there are no simpler options available, the Companies Act 2006 (the Act) provides a mechanism for shareholders to remove a director who refuses to step aside by passing an ordinary resolution. Although it is possible for a company’s articles to add additional provisions or conditions, the right itself cannot be overridden by the articles or any other agreement, though as noted below it can effectively be negated by some shareholders having been granted weighted voting rights or rights to re-appoint directors.

Initial Steps

Section 168(1) of the Act states that the shareholders can remove a director by passing an ordinary resolution at a meeting of the company. This process is complicated somewhat by the notice requirements set out in statute.

The relevant shareholders must serve special notice on the company of any resolution to remove a director under the provisions of the Act.  This must be given to the company at least 28 clear days before the meeting at which the resolution will be moved. An obstructive director may hope to hold on to their office by, having received the 28 day notice of the meeting, calling a meeting within that 28 day period. However, the Act provides that, in such a scenario, the special notice to the company of the resolution to remove the director is effective even if the full 28 day period has not elapsed.

The Company’s Obligations

Once the company receives the shareholders’ notice, it must then issue notice of the meeting within 21 days of the date of deemed receipt. Further, under section 312 of the Act, when a company calls the meeting, it must, so far as is possible, also give the shareholders notice of the resolution to remove the director at the same time and in the same manner as it gives notice of the meeting itself. If this is not practicable, members must be given at least 14 clear days’ notice of the resolution before the meeting.

Although the courts have not ruled specifically on the point, the conservative view is that this 14 day notice period must always be satisfied, meaning the company cannot hold the meeting using the short notice procedure.

Upon receiving the shareholders’ initial notice, the Act provides that company must also, without delay, send a copy of that notice to the relevant director. The director is entitled to make his or her case against their removal, both at the meeting at which the resolution is ultimately heard, and in the form of written representations to be circulated by the company before the meeting.

If the director wishes representations to be circulated, they must be provided to the company in writing and not be of an unreasonable length. The company must inform all shareholders notified of the meeting that these representations have been received and, where it is possible to do so before the meeting is held, also send the shareholders a copy of the representations. If the company fails to complete this process or there is insufficient time for the representations to be circulated, the representations should instead be read out at the shareholder meeting. This is in addition to the relevant director’s right to speak at that meeting on the subject.

The Meeting

At the meeting, for the resolution to pass, it must be supported by more than 50% of the shareholders who are eligible to vote. If all of the above notice periods are extended to their limit, the meeting may not be held until over two months after the shareholders serve their initial notice. This means that if multiple subsidiaries are involved, or if time is of the essence, it should be considered whether more time and cost effective alternative methods are available.

Potential Limitations of the Statutory Procedure

As well as the need to comply with the intricacies of the procedure itself, it is possible that weighted voting or re-appointment rights in the company’s constitution effectively negate the ordinary resolution option. For example, where a director is appointed by a particular shareholder, that shareholder could be granted additional voting rights on a resolution to remove the director so that, in practice, the resolution cannot be passed. Alternatively, that shareholder may be given the right to immediately re-appoint him or her.  In addition, parties may agree, contractually, in a Shareholders’ Agreement not to exercise their statutory powers of removal. 

Conclusion

It is important to seek legal advice to ensure that any removal of a director is carried out lawfully and in a way which mitigates the risk of a claim against the company. The procedure to remove a director deals only with his or her position as such. Whilst a director may be removed from the office of director in compliance with the company’s constitutional documents or the Act, the director in question may, for example, still have rights and a potential claim against the company in his or her capacity as an employee (if applicable).  The question of any shareholding held by the director should also be addressed, and the circumstances may give the removed director a right to bring an unfair prejudice claim against the company.

This article was written by Stephen Burns. For more information please contact Stephen on +44 (0) 1483 252 618 stephen.burns@crsblaw.com.