Potential Pitfalls And Risks Of Removing A Company Director

24 Nov 2021

There are times in any company when removing one of the directors appears to be the best course of action for all of the parties involved. However, knowing how to go about it can be challenging. There are a number of pitfalls and risks associated with attempting to do this. 

It may appear to be straightforward to remove directors from a company, but in fact that is rarely the case. The process can actually be quite intricate. Strict timescales and notice requirements have been laid out under the Companies Act, even if none were set out within the Articles. Should you fail to correctly follow the process as prescribed, you could face a claim from any director that you have failed to remove. 

Fortunately, we have considerable experience and expertise in offering advice about director removals, both from the point of view of advising the director and the company themselves. Therefore, don’t hesitate to get in touch with us to discuss your issues and questions. 

Director Removals Under The Companies Act

The 2006 Companies Act gives the right to shareholders to remove directors and replace them for any given reason (or even without a reason) as long as there is a majority vote in favour. This is a very powerful right. There may be provisions included within the Articles that will make it even simpler to remove directors, however the Companies Act legislation is unable to be superseded by the Articles, therefore this procedure works for all companies. 

Any director that is registered with Companies House that needs to be removed will be subject to the procedure as laid out in the Companies Act. Any director who is not registered with Companies House will not be subject to the Act’s procedure, however other contractual considerations may exist that need to be considered when attempting to remove them from their office. 

Requirements Under The Companies Act

The Companies Act requires the process to commence by the giving of “Special Notice” by the shareholders to the company outlining their intent to remove the director. In practice, this means simply that notice must be given to the company a minimum of 28 full days before the date of a proposed shareholders’ meeting for the purpose of removing the director. 

28 days often seems a very long time in business. Therefore, many companies decide to tailor their shareholders’ agreements, service contracts for their directors and their articles to include the provision of workarounds which take them outside the Companies House rigours in order to make removing directors simpler. The company is obliged by law to forward to the relevant director copies of that proposed resolution. 

A minimum of fourteen days before the date of the shareholders’ meeting, notice must be given to all of the shareholders by the directors of the meeting. During the meeting, the director who is being removed has an entitlement to make their own representation to the company about their removal, but the board, too, can make a representation to shareholders. 

During the meeting, a vote can be carried out in the form of a poll vote or (less likely) a basic show of hands. The director will be removed if over half of the attending shareholders vote for the removal. 

This process assumes a shareholders’ meeting will soon be held or can easily be called on the receipt of special notice. So, what happens if no shareholders’ meeting is called by the board? It is fairly likely that board intransigence will occur since the resolution centres around the removal of all or some of the members. As an example, if there are two people on the board and only one director faces removal, even if most of the shareholders want their removal, the director won’t vote for a shareholders’ meeting to be held, leaving the remaining director with no authority to independently call a meeting.

Can This Deadlock Be Reconciled? 

Fortunately, although this is a complicated situation and may appear on the surface to be irreconcilable, there is a procedure included within the Companies Act that means shareholders are able to hold their own vote for the removal of directors even when the board cannot or refuses to call the shareholders’ meeting. 

To make use of this procedure, just 5% of the shareholders need to call the meeting. Since it’s possible to pass the resolution for the removal of directors by the majority of shareholders who vote at the meeting, in theory, it’s possible for only a few shareholders to hold the vote and pass it so that the directors can be removed. 

Yet, there is no provision within the Companies Act to prevent other claims which the director could have. So, as an example, directors who are also employees could have protection from unfair dismissal. 

Directors who are also shareholders can potentially issue a petition for unfair prejudice should the affairs of the company be (or have been in the past) conducted in such a way that unfair prejudice has been caused to the shareholders’ interests, either generally or of a certain group (including themselves at least). 

It’s therefore vital to check all of the articles of association, employment agreements and contractual rights a director could have before you launch a resolution.

It is relatively common for a director to be a shareholder too, so a plan needs to be in place for what happens to their shares after their removal from the company. Often, a large part of the director’s removal involves the negotiation of purchasing their shares as well as the application of any relevant minority discount and tax treatment. 

Fortunately, we can provide guidance and advice regarding this aspect of handling the removal of a company director. 

Often, clients only arrange an appointment with us after exhausting every avenue of negotiation. Luckily, we have a specialist team on hand who can help you to get your company back up and running smoothly without any ongoing long-term issues.