Removing a director from your company

Thu 12 October 2023

Solicitors to advise on removing a director

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

In addition to the grounds for, legal issues and potential complications with removing a director, 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.

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.

So, first check any shareholder agreement you have in place, check your company articles of association and any director service agreement or employment contract for the director.

Even if you have clear power to remove a director, you should carefully consider whether this might create legal risks under employment and law and whether the director might be able to still have the rights to remain as a shareholder.

What do standard articles of association say about removing a director?

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

Disqualified
declared bankrupt, or
experiencing significant mental or physical incapacity.

Standard articles do not say anything about whether a shareholder resolution to remove a director needs to be an ordinary or special resolution. This gap is covered under 168 of the Companies Act 2006 which provides that an ordinary resolution is needed. An ordinary resolution requires over 50% of the shares to pass.

So, if your company articles are standard and you or you and other shareholders amounting to over 50% of the shares, want to remove a director, you can do so.

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 good underlying reason to do so under Company law. However, is often important to have a clear reason before director removal. There can be employment law and other reasons.

If you have standard articles, no shareholder agreement and only a very basic employment contract, you may need to fall back on removal for breach of director duties. Examples of breach of director duty include :-

Conflict of Interest - if a director uses company resources or information for their personal gain without proper authorization profits from a business opportunity that should have been offered to the company first.
Misappropriation of Company Assets - using or misappropriating company assets for personal gain or purposes unrelated to the company's business.
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 pretty clear cut grounds for removal for breach of duty, many others are not so clear cut, so involve risk.

What if the removed director is also a shareholder?

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

What is a quasi partnership and why is that relevant?

A quasi-partnership is a legal and business concept used to describe a business relationship that resembles a partnership but lacks some of the formal characteristics of a traditional partnership. Key characteristics of a quasi-partnership may include:-

Shared Management and Decision-Making - the business is run by the individuals or entities involved, with decisions made jointly or in a collaborative manner.
Shared Profits and Losses - the parties involved typically share in the profits and losses of the business, much like traditional partners.