How to remove a director

Removing a director from a company can be a sensitive and legally complex process. Whether due to misconduct, loss of confidence, or a change in business direction, it's vital to follow the correct procedures to avoid disputes or liability.

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, so :-

• 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, and/or you have sufficient shares to force through an ordinary shareholder resolution to remove, 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 director

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

To remove a UK company director for breach of duty:

• Board Review - board of directors need to assess the allegations and gather evidence.

• Shareholder Resolution - a general meeting is called, and shareholders vote on an ordinary resolution to remove the director (per Companies Act 2006, s168).

• Notice - at least 28 days’ notice of the meeting must be given to shareholders and the director.

• Right to Be Heard - the director has a right to make representations.

• Vote - if the resolution passes by a simple majority, the director is removed.

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.

Potential risks of removing a director

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 also oust him/her as a minority shareholder, the options include an unfair prejudice claim.

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.