When a company’s director is unwilling to resign, and no articles of association or shareholders’ agreement offer provision for their removal, a statutory procedure in sections 168 and 169 of the Companies Act 2006 allows the shareholders to remove the director from office.
Such a procedure should be available regardless of any provision in the director’s service contract or the company’s articles of association.
There is nothing to prevent a company’s articles of association including an additional removal process which is simpler than the statutory procedure and so this is an advisable consideration when considering updating a company’s articles of association.
Possible pitfalls of removal
A strict procedure must be followed or the removal could be void. The Companies Act 2006 provides that:
- a general meeting of the shareholders must be held (the more straightforward written resolution procedure cannot be used) at which the shareholders must pass the proposed resolution as an ordinary resolution. Shareholders representing at least 5% of the voting shares of a company can requisition a general meeting;
- special notice (of at least 28 clear days) is required of a resolution to remove a director;
- the director in question must be notified, and provided a copy, of the intended resolution, is entitled to be heard on the resolution at the general meeting (even if not a shareholder), and may make representations in writing which should be circulated to the shareholders.
There are specific timeframes to be met in terms of the required board and shareholder meetings needed to complete this procedure.
The articles of association and any shareholders’ agreement in place should be checked, as they may contain provisions which limit the ability to make use of the statutory procedure to remove a director. These may apply, in particular, where a director is also a shareholder of the company, and may include:
- weighted voting rights for particular shareholders on a certain type of resolution (known as a Bushell v Faith clause) which may prevent the necessary majority being reached and allow a shareholder to block their removal as a director;
- an entrenched right for a shareholder to appoint themselves as a director;
- certain matters (for example, the removal of a director) may be classed as a ‘reserved matter’ which requires the consent of a certain percentage of the total voting rights, thereby possibly increasing the ordinary resolution threshold in effect, which may prevent the necessary majority being reached;
- quorum requirements for a general meeting which may be such that attendance by the director being sought to be removed is needed.
Beware unfair dismissal or unfair prejudice
Removal of a director using the statutory procedure will not affect that director’s rights to compensation for termination of the appointment. Depending on the employment status of the director, they may have the right to bring a claim for wrongful or unfair dismissal, for example.
A director (who is also a shareholder of the company) being removed using this statutory process, may seek to make an application to the court to challenge the removal on the grounds that the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the individual’s interests as a shareholder. This is a real risk where a shareholder has been appointed as a director to protect their interests as a shareholder.
The statutory process for removing a director can be an important tool for a company. However, suitable legal advice must be taken to ensure the correct process is followed and possible pitfalls are avoided.