Disagreements about a company’s leadership happen. As a company grows, strategic visions can diverge and tensions can arise. A shareholder (or shareholders) may feel that a director’s action or inaction threatens the company’s success and that they have no choice but to act in removing the director.
The legal power
Under Section 168 of the Companies Act 2006, shareholders have a statutory right to remove a director by passing an ordinary resolution at a general meeting.
Such a decision requires more than 50% of the shareholders entitled to vote to vote in favour of the director’s removal. Importantly, this right exists regardless of anything stated in the company’s articles of association or in a director’s service contract and cannot be contracted out of (although these may give rise to additional contractual claims).
This is a powerful provision to assist a shareholder in regaining control at board level, particularly when paired with the shareholders’ power to appoint additional directors at a general meeting.
More than just a vote
Although the voting threshold may seem low, the process requires strict procedural steps to be followed. There are stringent notice requirements which must be adhered to. The director in question will also be entitled to make written representations and may choose to speak at the general meeting at which their removal is tabled.
Key considerations for business owners
Removing a director is sensitive, and careful consideration should be given to such a decision. Shareholders should consider in particular:
- the company’s articles of association and any shareholders’ agreement in place, as either document may contain provisions around the removal of directors;
- the operational impact of removing a director;
- the risk of an unfair prejudice claim from the outgoing director;
- contractual or employment claims from the outgoing director;
- how the decision might affect long-term governance.
Proper planning and professional advice can help minimise risks and avoid unnecessary disputes.
Unfair Prejudice and other claims
The shareholders contemplating the removal should carefully consider whether it might result in the director bringing claims against the company or its shareholders. If the director is also a minority shareholder, such actions may be detrimental to their interests. The articles or shareholder agreement might also include provisions that devalue the shareholding of the exiting director in certain circumstances.
Employment claims
Where the director is also an employee, there are likely to be additional considerations before removing the director. An employee who has the statutory qualifying service has the right not to be unfairly dismissed. There would need to be a potentially fair reason for dismissing them, and a fair procedure must be followed prior to any dismissal. The dismissal of an employee can be unlawful, even where a director was lawfully removed under the provisions of section 168 of the Companies Act 2006.
Importantly, even if the employee is not dismissed, their removal as a director could, in certain circumstances, risk legal action for constructive unfair dismissal if the employee were to resign in response to the decision to remove them as a director.
It is therefore important to comprehensively consider all relevant circumstances before taking a decision to remove a director.
Need advice? We can help
Removing a director is complex and must be handled with care. If you are considering initiating the removal process, professional guidance can help you to navigate the legal and strategic implications smoothly.
If you would like tailored advice on removing or replacing a director, please get in touch.
This article was jointly written by Eliot Quevedo, Solicitor in our Corporate team and Joe Nicholls, Partner in our Employment team.