Can a director be removed from a company?
It is not unusual for the directors of a company to fall out from time to time, but what happens when a disagreement becomes more serious? Can a director be removed from a company?
As a director himself and Head of Commercial Disputes at GL Law, Richard Gore, explains the situations and rules that govern the termination of a director’s role, primarily in a private listed company.
First, it is important to consider any employment contract the director might have, and the rights set out under that contract. I will not go into the employment issues in this article, but I would recommend seeking specialist employment law advice to understand the consequences that might arise under the contract. The Employment team at GL Law will be happy to help.
Removing a director
Normally, the removal of a director is governed by the company’s Articles of Association but in the absence of clear provision, there are statutory options available.
The following situations result in the director being removed:
- Under the articles
Typically, the company’s articles of association (effectively the rule book which governs how the company will operate) will set out situations where the director’s role will terminate. For example, a bankruptcy order, long term illness, age, criminal offence and termination of a service agreement could be grounds for the director to vacate the office.
Close attention should be paid to the articles as this is the starting point for considering whether there is a power, particularly for the board of directors, to compel the director to vacate office.
- By law
A person who is subject to a bankruptcy order or has been disqualified as a director, cannot hold the role of director.
- Companies Act 2006
The shareholders of a company can remove a director from office with a majority (e.g., more than 50%) vote of shareholders.
Such a right takes precedence over any service agreement provisions (note though that compensation may be payable under the agreement) and the right cannot be avoided by an article trying to exclude it.
There are various criteria that need to be met, not least that the resolution needs to take place at a meeting (a written resolution is not sufficient) and special notice to all shareholders will be required , with notice also being given to the director in question who will be entitled to speak at the meeting.
If the correct procedures are not followed, the resolution may well be invalid.
- Court order
Unfair prejudice petitions are available to minority shareholders who consider that they have been unfairly dealt with by the other shareholders. The court has a wide discretion when dealing with a petition, including ordering a director to be removed from office, although this does not happen very often. Read more about unfair prejudice here.
A director can resign at any time.
The resignation notice should be as clear as possible to avoid argument but will normally be effective, although it is important to check that the resignation is not in breach of any service agreement which, if it is, may give rise to a claim by the company
If a director dies, the appointment terminates automatically.
There are several ways to remove directors from office, but each option justifies careful consideration of the implications and risks involved.
If the position with the director is confrontational then it is highly likely that there will be repercussions (either in relation to service agreement breaches or otherwise) that may well have a financial impact on the company, even after the director has been removed so it is sensible to consider what claims the company may have against the director, and vice versa.
Contact our Commercial Dispute Resolution solicitors in Bristol or London
Let’s talk. If you would like a confidential conversation about removing a director from your company, please contact Richard Gore by calling 0117 906 9400 or email email@example.com Alternatively, please complete our contact form