Removing a director from a company can be a necessary step for various reasons, including poor performance, breach of duties, conflicts of interest, or irreconcilable differences with other board members or shareholders.
The process of removing a director must be handled with care. It is important that any removal process complies with both the Companies Act 2006, applicable to all companies incorporated in England and Wales, and the company in question's Articles of Association to avoid potential disputes.
This article provides a comprehensive guide on how to remove a director from a company, outlining the procedures and considerations involved.
Step 1 - Understand the Legal Grounds for Removal
Before initiating the removal process, it's essential to understand the grounds on which a director is being removed. The driver behind a removal can influence which avenue of removal is available.
Common reasons for removing a director include:
- Breach of Fiduciary Duties: If a director fails to act in the best interests of the company, misuses company assets, or acts in a way that benefits themselves over the company, they can be removed.
- Poor Performance: A director who consistently fails to perform their duties or contributes to poor business performance may be subject to removal.
- Conflict of Interest: If a director has a conflict of interest that is not properly disclosed or managed, this could justify their removal.
- Absenteeism: Regular absence from board meetings without a valid reason may also be grounds for removal.
- Insolvency or Criminal Conviction: A director who becomes bankrupt, is disqualified, or is convicted of a crime may be removed according to the Articles of Association or statutory requirements.
Step 2 - Check the Company’s Articles of Association
The Articles of Association (Articles) are the company’s internal constitution, setting out rules and procedures for the running of the company. These therefore are the first port of call for review. They may contain specific provisions regarding the appointment and removal of directors, and it is crucial to review the Articles to understand:
- The Procedure for Removal: The Articles may outline a specific procedure for removing a director, in which case this procedure must be followed. Some Articles may include special provisions such as automatic removal in certain circumstances, the requirement for an enhanced majority vote or certain notice periods that need to be adhered to when removing a director.
- Any Protection Clauses: Some directors might also have the benefit of clauses that protect them from removal without a justified cause, particularly if they are also shareholders or founders.
Step 3 - Procedure for Removing a Director under the Companies Act 2006
Under the Companies Act 2006, a director can, subject to anything further detailed in the Articles (as discussed above), be removed by an ordinary resolution of the shareholders.
The following steps outline the standard procedure for removing a director using this method:
A. Convene a General Meeting
- Request by Shareholders: Shareholders holding at least 5% of the company’s paid-up share capital can request the board to call a general meeting to propose a resolution for the director's removal.
- Notice of General Meeting: The company must provide at least 28 days’ notice to all shareholders and the director in question about the general meeting. The notice must include the intention to propose a resolution to remove the director.
B. Director’s Right to Make Representations
- Written Representations: The director facing removal has the right to make written representations to the shareholders before the general meeting. These representations must be sent to all shareholders unless the court orders otherwise.
- Opportunity to Be Heard: The director also has the right to speak at the general meeting where the resolution for their removal is proposed, allowing them to present their case and defend their position.
C. Passing the Resolution
- Ordinary Resolution: The resolution to remove the director must be passed by a simple majority of the votes cast by the shareholders present (either in person or by proxy) at the general meeting.
- Voting Procedure: The voting can be conducted via a show of hands or a poll vote, depending on the company's Articles and the nature of the general meeting.
D. Notify Companies House
- Form TM01 Submission: If the resolution to remove the director is passed, the company must file a Form TM01 with Companies House within 14 days of the director's removal. This form officially notifies Companies House of the termination of the director's appointment.
Other Considerations When Removing a Director
Removing a director can have significant implications for the company, and it is essential to consider the following:
A. Employment Rights and Contracts
- Directorship vs Employment: If the director is also an employee of the company, removing them from the board does not automatically terminate their employment. Employment contracts and statutory employment rights need to be considered, including notice periods, redundancy rights, and potential claims for unfair dismissal.
- Severance and Compensation: Review any severance packages or compensation agreements that may apply. Some directors may be entitled to compensation or benefits upon removal.
B. Shareholder Agreements
- Check Shareholder Agreements: If there are shareholder agreements in place, these may contain additional specific provisions regarding the removal of a director, especially if the director is a significant shareholder or founder. These provisions may effect the ability of the shareholders to remove the director by simple resolution.
- Minority Shareholder Protections: Removing a director who is a minority shareholder could trigger protections or rights under shareholder agreements or the Companies Act 2006, such as the right to petition for unfair prejudice.
C. Potential Legal Challenges
- Risk of Litigation: A director facing removal might challenge the decision on the grounds of unfair dismissal, breach of contract, or if the proper procedures were not followed. It is crucial to ensure that the removal process complies with all legal requirements to minimize the risk of litigation.
- Seek Legal Advice: Given the potential complexities and risks, it is advisable to seek legal advice before proceeding with the removal of a director, particularly in contentious situations.
Alternative Methods for Removing a Director
While the ordinary resolution process is the most common method, other options may be available depending on the circumstances:
- Resignation: The director may choose to resign voluntarily if approached diplomatically or if they recognise the issues leading to their potential removal.
- Board Resolution: In some cases, the Articles may allow the board of directors to remove a director through a board resolution, particularly if the director has breached their fiduciary duties or has become incapacitated.
- Automatic Termination Provisions: As discussed above, some Articles or employment contracts may include automatic termination provisions, such as reaching a mandatory retirement age or failing to attend a certain number of board meetings.
Conclusion
It is vital to follow the proper procedures under the Companies Act 2006 and any specific provisions in the company's Articles to ensure a smooth and legally compliant process. Engaging with legal professionals early in the process can help prevent disputes and ensure that all actions taken are in the best interests of the company and its shareholders.
Here to help
Our Corporate team are here to help with any queries in relation to the removal of directors or wider corporate governance or reporting requirements. Please do reach out if we can assist.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
