Removing a director from a company can be a complex issue. There is legislation in place to protect a company's right to remove a director if the circumstances arise.
There are two principal ways in which a board can remove a director from a company.
Section 168(1) of the Companies Act 2006 (Act) provides that:
“A company may by ordinary resolution at a meeting, remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.”
This essentially provides the majority (anything over 50%) of a company’s shareholders the ability to immediately remove a director.
For such removal to be valid, there are rules which must be adhered to:
While section168 allows a company to remove a director, it will not deprive the removed director of compensation payable as a result of their removal.
The section168 power to remove a director cannot be taken away from the members. However, it is possible to make a removal more difficult by inserting a weighted voting rights clause in the company’s articles. Such a clause provides that, in the event of removing a director by resolution, the voting majority of the director being removed will be increased.
A note that the model articles for private limited companies do not provide for weighted voting rights.
Notably, section168 does not derogate from any other power that may exist to remove a director, and the company can, via its articles, provide for other methods to remove a director.
The second method of removing a director from a company derives from a power of removal contained in the articles. The articles are the rules or contracts between a company and its members.
The model articles (the standard provisions that control how a company is run) do not contain any other removal methods.
However, many companies insert a provision in their company articles, stating that a director will be required to vacate the office provided all the other directors so require. Where a director is removed via such an article, there is no requirement to adhere to the procedural rules stated in section168 of the Act.
Where the removed director is also a shareholder, then circumstances may give rise to a claim for unfair prejudice against the remaining shareholders who have acted to remove a director, which may constitute an abuse of their powers under the company’s articles or shareholders agreement.
It is important to remember that removing a director by the company’s constitutional documents or the Act deals only with their removal from that office.
The removed director may still have a potential claim against the company in their capacity as an employee (if applicable), where working alongside employment lawyers can also be beneficial.
If a director has been removed from the company unlawfully, depending on the circumstances and whether they are a shareholder in the company, they may also have a right to present a petition to the Court for unfair prejudice.
The question of what constitutes unfair prejudice has been the subject of much deliberation and has been applied in various scenarios by the Courts.
One such scenario is where a director has been removed from a company that the Court has deemed a “quasi-partnership”.
A quasi-partnership is a limited company with characteristics that make it similar to a partnership and is established based on mutual trust and confidence between the founding members.
Suppose the Court accepts that a company is a quasi-partnership. In that case, it has the power to decide that any director removed from office, and thereby excluded from the company’s management, has been subjected to unfairly prejudicial conduct in their capacity as a shareholder (presuming they are a shareholder as well as a director).
In such circumstances, the Court has wide powers and can order that the director be reinstated or, more commonly, order that the shares held by the removed director be purchased by the remaining shareholders at market value.
When confronted with a scenario involving the removal of a director from a private company, you should seek legal advice. There are key steps by which you must adhere to ensure that any removal of a director is lawful and minimises the risk of a potential claim and loss against the company.
We also have an extensive guide if you require more information on potential shareholder remedies.
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The litigation experts at Myerson are happy to discuss your situation in a no-obligation telephone call to assess your claim, give preliminary advice and suggest a way forward. We can also suggest innovative funding solutions where available to assist with the costs of the litigation.