In the second of two articles, Katie Bewick examines the process for removing a director from a limited company, a move which should be exercised with caution…

Directors must act in accordance with their statutory and fiduciary duties, which include a duty to promote the success of the company for the benefit of its shareholders. Where shareholders feel this is not the case and the relevant director(s) refuse to leave voluntarily, shareholders may wish to consider removing them.

However, caution should be exercised to ensure that the procedure is correctly followed. Internal changes to the structure of a business can happen and disputes can arise, therefore understanding and adopting the correct procedure for the removal of directors from the board is important, as the repercussions of failing to do so are often severe.

The position can be complicated if the director in question is also a shareholder or employee of the company, as this may give rise to arguments of unfair prejudice or unfair dismissal. Extra care should be taken in these circumstances to mitigate either the risk of claims against the company or separate shareholder claims.

Initial steps

As ever, the starting point is the company’s constitutional documents, including any investment or shareholder agreements. These should be reviewed carefully as they may contain options for removing a director, for example by way of shareholders giving written notice to the company.

If there are no simpler options available, the Companies Act 2006 (CA) provides a mechanism for removing a director. Section 168(1) states that the shareholders can remove a director by passing an ordinary resolution at a meeting of the company (requiring at least 50 per cent of eligible votes).

The relevant shareholders must serve special notice on the company of any resolution to remove a director under the provisions of the CA. This must be given to the company at least 28 clear days before the meeting at which the resolution will be moved.

Company obligations

Once the company receives the shareholders’ notice, it must then issue notice of the meeting within 21 days of the date of deemed receipt. Further, under section 312 of the CA, when a company calls the meeting, it must, so far as is possible, also give the shareholders notice of the resolution to remove the director at the same time and in the same manner as it gives notice of the meeting itself.

Although the courts have not ruled specifically on the point, the conservative view is that a 14-day notice period must always be satisfied, meaning the company cannot hold the meeting using the short notice procedure.

Upon receiving the shareholders’ initial notice, the CA provides that company must also, without delay, send a copy of that notice to the relevant director. The director is entitled to make his or her case against their removal, both at the meeting at which the resolution is ultimately heard, and in the form of written representations to be circulated by the company before the meeting.

At the meeting, for the resolution to pass, it must be supported by more than 50 per cent of the shareholders who are eligible to vote.

If all the above notice periods are extended to their limit, the meeting may not be held until over two months after the shareholders serve their initial notice. This means that if multiple subsidiaries are involved, or if time is of the essence, it should be considered whether more time and cost-effective alternative methods are available.

Failure to adopt the correct procedure for the removal of a director to the board can be detrimental for a company.

Where a director - with the exception of non-executive directors - is removed without due procedure, this may result in an unfair prejudice claim being brought against majority shareholders, which can carry severe cost consequences.

It is clear therefore, that the appropriate procedure should be followed for the removal of directors to the board and early advice should be sought if the process is unclear.

The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. For more information contact Katie Bewick, a solicitor at Charles Russell Speechlys LLP on katie.bewick@crsblaw.com.