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Removing a director from a company is much more complicated than removing an employee. Before this is done, there are several things to consider and tactics to employ.

The first thing to bear in mind is that, in SMEs, directors usually have 3 different legal roles and the legal position of each is different. The roles are director, employee and shareholder.

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The Role of Director

The first thing to do is to look at the company’s Articles. In some companies, these may say that a director can be removed by the Board of Directors; otherwise it is the shareholders who can remove a director.

In all cases, a director can be removed at a meeting of shareholders. The procedure is set out in sections 168 and 169 of the Companies Act 2006. 28 days’ notice to call a meeting must be given and the director will be given the opportunity to put their objections in writing and attend the meeting to put forward their point of view.

To remove a director, more that 50% of votes are needed. This obviously causes real problems in companies where there are just two shareholders each with 50% of the voting power.

Before calling a shareholders’ meeting, there are a number of things to consider.

1. Are you certain who the shareholders actually are? To vote at a shareholders’ meeting, a shareholder must be listed in the company’s Register of Members. Frequently, a new shareholder might not have been formally added to the Register. If this is the case, they might not be able to vote at a shareholders’ meeting.
   
2. Check how many shareholders must be present at a shareholders’ meeting to form a quorum and therefore be able to pass resolutions. The default position is two but this might have been changed in the Articles.
   
3. Also check whether the Articles have changed anyone’s voting powers from the usual position that their voting power is in accordance with their shareholding.
   
4. Another important thing to check is to see whether the Chairman has a casting vote at a shareholders’ meeting. Article 50 of the old Table A (effective for companies that formed before 1st October 2007) says that a Chairman has a casting vote if there is deadlock. Clearly, this is something to watch out for in a 50:50 company where there are two shareholders each with 50% of the voting power.

The Role of Employee

 

Removing a director using the above procedure does not terminate their employment. If a director is also an employee (which will be the case if they have a service agreement, an employment contract or are paid under the PAYE scheme), then they will also have to be dismissed. This can be done by the Board of Directors. In companies where there are only two directors, the board will not be able to dismiss one of them.

You don’t have to wait for the shareholders’ meeting before dismissing the director as an employee but beware that a director who has been dismissed could also have a claim for unfair dismissal if unfair procedures are followed.

As part of any agreement removing a director, it might be best to have a formal compromise agreement drafted to prevent the director from going to a tribunal.

The Role of Shareholder

 

Unless the company has a ‘Buy-Back’ clause in a shareholders’ agreement or in the Articles, then removing them as a director and dismissing them as an employee will not stop them from being a shareholder. They must still be invited to shareholders’ meetings and be entitled to a share of dividends.

It is therefore usually best for the company to reach an agreement for the leaving director to sell his shares. Shares in SMEs are very difficult to value and this will need to be done by an accountant. It is often the case that, in an SME, a minority shareholding is worth less than the percentage of shares owned. Often the Articles or shareholders’ agreements (if you have one) will set out how a valuation is to be undertaken and what principles should be applied.

There are some court procedures that the director/shareholder who has been removed can employ.

As a minority shareholder, he could apply to the court claiming he has been ‘unfairly prejudiced’. If the court is of the view that the company runs in effect as a partnership (the courts call this a ‘quasi partnership’), then removing a director would generally amount to unfair prejudice. The court will usually order that the leaving director’s shares are sold and can set a value but has many other powers it can use as well.

If the company consists of two equal shareholders, then the leaving director could apply to the court to wind up the company.

These court procedures can be expensive and usually the costs would have to be paid for by the shareholders as individuals rather than the company. However, as tactical tools available to the director removed, they can be very useful.

Another tactic the company could use when agreeing on any settlement is to see whether the director it wants to remove has been in breach of any of his director’s duties. If so, this might mean the company could make a claim against the director for him to pay back money to the company. But watch out that the other directors have not also been breaching their duties in the same way!

Act Now and Take Advice

 

No two situations are the same and it can be dangerous to remove a director without considering your legal position and tactics to employ.

There are also many tactics that the director being removed can employ to obtain a better exit settlement.

For advice, whether you’re a company wanting to remove a director, or a director threatened with removal, contact Gary Cousins or by phone on 0845 003 5639.

For free advice on this topic please call us on 0845 003 5639.