A director’s role in the company is to promote the success and enhance the efficiency of the company, as well as ensuring that the day to day business is conducted within the laws of the land. It is obviously therefore important that a director does not under perform or fail to perform his role or else the performance of the company may suffer. In such circumstances there may be a need to remove the director. How can this be done?
1. Resolution to remove a director
A director may be removed from office by an ordinary resolution of the shareholders passed at a general meeting of the company.
The shareholder proposing the removal must give 28 clear days notice to the company that he wishes for the director to be removed. This notice must be sent to the director to be removed to give him the opportunity to make written representations to the other shareholders.
Notice to convene a meeting must then be sent out along with the director’s written representations. At the meeting the director can also make further representations as well as have his written representations read out.
A majority vote in favour of the resolution to remove the director must obtained (i.e. 51% of the shareholdings).
It should be noted that there may be difficulties with following this procedures as follows:-
(i) The directors may not be willing to co-operate, and refuse to convene a general meeting. This would force the shareholders to do so, provided the shareholders have at least 5% of the shares.
(ii) If the director in question is also a shareholder, which is often the case in small businesses, he may have sufficient voting power to block the resolution (i.e. if he has 50% or more of the shares, or in combination with other shareholders who support him).
(iii) Even if the director is a minority shareholder, the company’s Articles of Association (“the Articles”) may give him enhanced voting rights in such circumstances.
(b) In accordance with the Articles
In certain circumstances as prescribed in the Articles, a director can “automatically” lose his office such as bankruptcy, mental incapacity or retirement. Other provisions in the Articles may state that a person ceases to be a director if without the permission of the other directors he is absent from directors’ meetings for six consecutive months and the other directors resolve that his office is vacated or if he is removed from office by a notice to him signed by and on behalf of all the other directors.
The Court has the power to disqualify someone from holding the office of a director for a period of time, for example if a director has been guilty of general misconduct in the running of a company or because he has personally failed to comply with the filing requirements of the company.
There may be certain consequences if a director is removed from office that need to be addressed.
Firstly what if the director is also a shareholder? Unless there is a “buy back” clause in the shareholders’ agreement or in the Articles then removing him as a director will not stop him from being a shareholder. It is therefore often appropriate to do a deal with the director for him to sell his shares.
Secondly the director, if a minority shareholder, can apply to the Court to claim that he has been “unfairly prejudiced”. If this is found to be the case by the Court it may order the director sells his shares at a value set by the Court or alternatively the Court may order other remedies.
Thirdly the director may also have a service contract and be an employee. Removing the director from his office does not end his employment contract, and he will either be entitled to continue to be paid under his service contract or he will have to be dismissed. This may lead to a claim for compensation for unfair dismissal or wrongful dismissal.
Hence it can be difficult to remove a director in the first place, and even if the company manage it then there may still be issues to be resolved relating to the director’s shares and employment contract.
For advice, whether you are a company wanting to remove a director, or a director facing removal, then please contact either Daven Naghen on 01775 722261 or email email@example.com or contact Gemma Mayer on 01775 722261 or email firstname.lastname@example.org or contact James Turner on 01775 722261 or email email@example.com.