How to Remove a Director

We are highly experienced in advising where other directors and/or some of the shareholders believe it is necessary to remove a director. We also advise company directors who are facing a situation where they face forced removal.

It is always worth remembering that in many cases, once relationships and trust have broken down, a negotiated outcome can be best for all, which may mean the director resigning on suitably agreed terms.

We are experienced in negotiating director exits including any employment law and shareholding issues.

Please do get in contact to discuss how we can help.

First things to consider if you need to remove a director

Under English law, limited companies are generally free to set their own rules and procedures. This means that the starting point for removing a director will depend on whether the company has set it's own rules about removal of directors.

The starting point is :-

• check any shareholder agreement you have in place.

• check whether you have standard (in which case this will not really help you unless you have a clear shareholder majority) or amended company articles of association; and

• check the terms of any director service agreement or employment contract for the director.

Even if you have express power from 1 of the above documents to remove the director, you should carefully consider whether this might create legal risks under employment law and whether the director might still have the right to remain as a shareholder.

Statutory process to remove

If you have standard articles and no shareholder agreement or a shareholder agreement which doesn't deal with removal of directors, under section 168 of the Companies Act, an ordinary resolution will need to be passed to remove the director. An ordinary resolution requires over 50% of the shares to pass.

Standard Articles of Association do provide that directors can be relieved of their duties when they are :-

• disqualified

• declared bankrupt, or

• experiencing significant mental or physical incapacity.

Removing a director for breach of duty

If you have sufficient shares to force through a resolution to remove, you do not need to have a good underlying reason to do so under Company law. However, is often important to have a clear reason before director removal due to employment law implications and other reasons.

Examples of potential grounds for removal based on breach of director duty include :-

• Conflict of Interest.

• Misappropriation of Company Assets

• Failing to act in good faith or in the Company’s best interests - Directors have a duty to act for shareholders as a whole. If a director makes decisions that primarily benefit a specific group of shareholders or themselves, rather than the company as a whole, such as with dividend policies, may be a breach, as can bringing the company into disrepute, for example on social media

• Fraud.

Some of the above examples, where supported by evidence, are generally solid grounds for removal for breach of duty. Other reasons may not be so clear cut, so involve risk.

Potential risks of removing a director

In most small private companies, the directors are also shareholders.

The starting point is that you can still remove a director even if they are shareholder as long as you have the backing of the majority of shareholders.

Whilst a director being also a shareholder does not impact the underlying ability to or process to remove a director, unless you have made specific provisions in the company articles or a shareholder agreement, you cannot force a removed director to give up their shares.

This is why many companies include good leaver and bad leaver provisions in their articles or shareholder agreement.

Where a director has been removed and he/she believes this has been done as part of a strategy to generally oust him/her as a minority shareholder, the options include an unfair prejudice claim.

This type of claim can be made under section 994 of the Companies Act 2006. The basis of this claim is that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to its shareholders or some part of them.

The removed director shareholder’s potential unfair prejudice claim will often be strengthened where the company is a quasi-partnership.

If the director is also an employee and is either dismissed or resigns, this can also mean the risk of an unfair dismissal or wrongful dismissal employment law claim.